TIDMBD49
RNS Number : 8075A
Electricity North West Limited
31 May 2019
Electricity North West Limited (the "Company") is pleased to
announce its Annual Financial Report for the year ended 31 March
2019.
The Annual Financial Report is available to view on the
Company's website: www.enwl.co.uk.
In accordance with the requirements of Listing Rule 17.3.1, a
copy of the annual financial report has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at: http://www.hemscott.com/nsm.do.
In accordance with Disclosure and Transparency Rule 6.3.5 the
Annual Financial Report is here reproduced in full unedited text
(the Company has not taken advantage of the exemption afforded in
6.3.5 (2)).
For further information please contact Electricity North West's
press office on 0844 209 1957 or email pressoffice@enwl.co.uk
For the year ended 31 March 2019
Electricity North West Limited
Registered number 02366949
Introduction
Electricity North West Limited (ENWL or "the Company") is the
electricity distributor for the North West of England. We own,
invest in, operate and maintain the network of poles, wires,
transformers and cables which now carry electricity both from the
national grid to 2.4 million premises and five million customers
and, as generation becomes more local and widespread, around the
network. Our job is to keep electricity flowing safely to our
customers' homes and businesses, keeping the power on 24 hours a
day, seven days a week.
We are proud of who we are, the essential role we play for our
customers and the investment we make locally.
North West - We are champions of the North West and proud that
it is our network that connects communities and will support the
success of the Northern Powerhouse.
Service - We invest in our people and they are experts who
ensure we provide exceptional service.
Innovation - We believe in continuous improvement, leading in
energy innovation.
We recognise the role that electricity, and the electricity
distribution networks such as ourselves, play in leading and
facilitating the switch of the UK to a low carbon economy in an
efficient manner, cost effective for customers.
We are pleased to present the Annual Report and Consolidated
Financial Statements of the Company and its subsidiaries (together
referred to as "the Group") to shareholders for the year ended 31
March 2019. Further information on the Company can be found by
visiting our website: www.enwl.co.uk. The Company is limited by
shares and incorporated in the United Kingdom under the Companies
Act 2006.
Notice regarding limitations on directors' liability under
English law
The information supplied in the Strategic Report and Directors'
Report has been drawn up and presented in accordance with English
law. The liabilities of the Directors in connection with these
reports shall be subject to the limitations and restrictions
provided by such law.
Strategic Report
In preparing the Strategic Report, the Directors have complied
with s414 of the Companies Act 2006. The Strategic Report has been
prepared for the Electricity North West Group as a whole comprising
Electricity North West Limited ("the Company") and its non-trading
subsidiaries ("the Group").
Cautionary statement regarding forward-looking statements
The Chairman's Statement, Chief Executive Officer's Statement
and Strategic Report section of the Annual Report and Consolidated
Financial Statements ("the Annual Report") have been prepared
solely to provide additional information to the shareholders to
assess the Group strategies and the potential for those to succeed.
These sections and other sections of the Annual Report contain
certain forward looking statements that are subject to factors
associated with, amongst other matters, the economic and business
circumstances occurring within the region and country in which the
Group operates. It is believed that the expectations reflected in
these statements are reasonable but they may be affected by a wide
range of variables which could cause actual results to differ
materially from those anticipated at the date of the Annual Report.
The Group does not undertake any obligation to update or revise
these forward-looking statements, except as may be required by law
or regulation.
Regulatory reporting and regulatory audits for the year ended 31
March 2019
Certain regulatory performance data contained in this Annual
Report remain subject to regulatory audit by the Office of Gas and
Electricity Markets ("Ofgem"). The final regulatory reporting pack
and regulatory financial statements for the year ended 31 March
2019 are not due for submission to Ofgem until July 2019, and will
be reviewed by Ofgem after their submission.
Website and investor relations
The Company's website, www.enwl.co.uk, gives additional
information on the Company and Group. Notwithstanding the
references we make in this Annual Report to the website, none of
the information made available on the website constitutes part of
this Annual Report or shall be deemed to be incorporated by
reference herein. Interested institutional debt investors can also
gain access to additional financial information by visiting our
website www.enwl.co.uk/about-us/investor-relations.
Contents
Chairman's
Statement............................................................................................................................................
1
Chief Executive Officer's
Statement.......................................................................................................................
2
Strategic
Report......................................................................................................................................................
4
- Company Background...................................................................................................................................... 4
- Corporate Social Responsibility....................................................................................................................... 12
- Key Performance Indicators............................................................................................................................ 16
- Financial Performance..................................................................................................................................... 20
- Risk Management............................................................................................................................................ 27
Corporate Governance
Report...............................................................................................................................
32
- The Board......................................................................................................................................................... 32
- Board Committees........................................................................................................................................... 39
- Report of the Audit Committee....................................................................................................................... 40
- Report of the Nominations Committee........................................................................................................... 43
- Report of the Remuneration Committee......................................................................................................... 43
- Report of the Health, Safety and Environment Committee............................................................................ 45
Directors'
Report.....................................................................................................................................................
46
Directors' Responsibilities
Statement.....................................................................................................................
48
Independent Auditor's
Report................................................................................................................................
49
Consolidated and Company Statement of Comprehensive
Income......................................................................
60
Consolidated and Company Statement of Financial
Position................................................................................
61
Consolidated Statement of Changes in
Equity.......................................................................................................
62
Company Statement of Changes in
Equity.............................................................................................................
63
Consolidated and Company Statement of Cash
Flows..........................................................................................
64
Notes to the Financial
Statements.........................................................................................................................
65
Glossary..................................................................................................................................................................
125
Chairman's Statement
I am pleased to present the Annual Report and Consolidated
Financial Statements of the Electricity North West Limited (ENWL)
Group for the year ended 31 March 2019, the mid-point of the
current eight year regulatory period.
I am pleased to report that we have continued to make progress
in our operational performance, including improving the reliability
of the network and also customer satisfaction performance. The
continued focus on the safety culture has resulted in a further
reduction in lost time incidents. The operational performance is
discussed further in the Chief Executive Officer's Statement that
follows.
Strategic direction
The move to a low-carbon economy continues to gather momentum,
with wide social and political support. Decarbonisation through
electrification is central to achieving the UK's carbon reduction
target and is a fundamental element of the Company's strategic
plans.
The Company is well placed to respond to the evolving regulatory
framework and is focused on developing its network to support the
transition to a low carbon economy. The significant investment in
next generation network management systems will enable rapid
automated control of the network and position the business for
transition to a Distribution System Operator.
Legitimacy of returns
The legitimacy of the returns made in the energy networks sector
continues to be an area of focus. The Company continues to promote
transparency of performance and returns. Last year, the typical
domestic customer paid GBP80 from their total electricity bill for
the services we provided.
Ofgem presents the results of the networks as a Return on
Regulated Equity (RoRE). This year they have increased the
transparency of returns by disclosing under or out performance
against tax and debt allowances. We welcome this improvement and
continue to press for improvement in the methodologies of
calculating these returns to ensure consistency across
networks.
The Company has been set a base return of 6% p.a. real across
the RIIO-ED1 period, being the cost of capital invested in the
networks. Additional returns are generated through output
incentives, which reward improved customer performance, and cost
efficiency incentives, for lowering cost of delivery, where the
benefit is also shared with customers. After debt and tax costs the
Company has made a real return for the first four years of the
price control of 6.2%, which recognises the improved performance of
the business, offset by low debt allowances. Further details are in
the Strategic report.
The Company continues to strive to maintain the balance in
reducing costs to customers, whilst improving the service quality
that they value.
Board membership
I would like to take the opportunity to thank Mike Nagle for his
contribution to the Board over his 8 years of service, following
his resignation from the Board in September 2018. I would also like
to formally welcome Anne Baldock, Alistair Buchanan and Susan
Cooklin, who were all appointed to Board during the year. The new
appointments serve to strengthen the diversity of the Board as well
as bringing additional expertise in regulatory and cyber
security.
The ultimate shareholders of the Group are currently undertaking
a strategic review of their investment and we continue to assist
them in this process. I would like to thank my Board colleagues and
Executive team for their support during the year and finally, I
would like to thank all employees of the Company for their
continued commitment in delivering the vital services it
provides.
Dr John Roberts CBE
Chairman
Chief Executive Officer's Statement
I am pleased to introduce my third annual report as Chief
Executive Officer. In the year ended 31 March 2019, we have
continued to build on the significant progress we have made in
improving our performance in the key areas of safety, customer
service and reliability. We have put strong foundations in place to
ensure that the Company is well positioned to deliver strong
performance for the remainder of RIIO ED1, is well placed to
achieve a successful RIIO ED2 outcome and provide the leadership
and support necessary to help the North West transition to the zero
carbon economy.
Leading the transition to the zero carbon economy
Our leadership role in the region's transition to zero carbon is
becoming very apparent. Our regional stakeholders are setting
ambitious targets and in response we have created our 'Leading the
North West to Zero Carbon' plan. Part of our new Responsibility
Framework, the plan demonstrates our commitment to ensuring that we
can take a significant step to achieving rapid decarbonisation. We
have the energy and commitment to transform our communities and our
plans show how we will lead and encourage businesses, our customers
and our colleagues on the decarbonisation journey.
Our ongoing development of Distribution System Operator (DSO)
services is an essential part of this transition. We continue to
lead the Open Networks project, which is the national coordination
of the electricity networks' DSO transition, and have developed and
offered flexibility services and capacity trading services to
customers. We have published our first 'Distribution Future Energy
Scenarios and Regional Insights' document and have committed to
invest in strategic infrastructure to support Manchester's low
carbon growth. We are developing our Network Management System
(NMS) which will provide us with new and innovative ways to better
manage our network and further enhance our service to our
customers.
Performance overview
In 2018, we launched our new 'Purpose and Principles'
accompanied by our strategic framework with its four objectives of
maximising our performance in RIIO ED1, getting closer to our
customers, managing risk in all its forms and preparing for RIIO
ED2. These are now well understood and embedded and are helping us
to create a culture of continuous improvement across all areas of
business.
Key to maximising our overall performance in RIIO ED1 has been
our good financial performance. Higher than targeted profits in our
Energy Solutions business, network investment efficiencies and some
overhead savings have offset the impact of upward cost pressures.
Our Business Connections business in particular, has increased
turnover and profitability this year.
Incentives revenues have also been reflective of our improving
service to our customers. Our network is one of the most reliable
in the country and Customer Interruptions (CIs) performance
continues to be in the upper quartile with Customer Minutes Lost
(CMLs) performance mid-pack. The winter was windy but not
particularly cold, but the extreme warm weather experienced last
summer caused many, significant network faults. Reliability remains
a priority for our stakeholders so we will continue to invest in
improving performance through our Quality of Supply programme
during ED1 and by improving field practices and risk
management.
Chief Executive Officer's Statement (continued)
In 2017, we embarked on a Company-wide initiative to create an
enhanced safety culture, key to managing risk. I am pleased by the
way our colleagues have responded to this and we have completed the
year with a lost time injury frequency rate 0.047 and a total
recordable injury rate of 0.13. We sustained four lost time
injuries during a year in which we worked over 4,000-person years
in total. The total recordable injury rate is a new record for the
Company. We are never complacent but this demonstrates that we have
delivered a step change in our safety performance and sustained it
for a 2-year period.
I am pleased to note that our consistent high level of
performance is evidenced in Ofgem's Annual Report of network
companies where we continue to be the only Distributor Network
Operator (DNO) group to achieve 'green' assessments for all output
categories. We have done so now for two consecutive years.
Future outlook
Our commitment to innovation continues to define our business
and its application is both diverse and industry-leading. We are
rolling-out smart fuse technology to multi-occupancy buildings in
the North West, providing an improved level of risk management to
residents living in high rise blocks. This Queen's Award for
Innovation winning technology provides vital peace of mind to
residents after the Grenfell Tower disaster.
We are also utilising our innovative Customer Load Active System
Services (CLASS) and are successfully bidding into National Grid's
balancing services markets - known as the Fast Reserve Market. This
technology is meeting the need, identified by Ofgem and BEIS, to
solve peak demand problems on distribution and transmission
networks, doing so in a low carbon way. We are the only network
business in the UK to provide this service.
Our leading national and regional role in delivering
decarbonisation, our strong business performance and our recognised
leadership in innovation provide a strong platform for securing the
best outcome for our RIIO-ED2 plan. We also value the independent
oversight and challenge to this plan that our stakeholder and
customer engagement activity provides. I am pleased therefore that
we are one of the first DNOs to create an independent Customer
Engagement Group. Our independent Chair, Jeff Halliwell, was
appointed in December 2018 and appointed his group members in March
2019. I would like to take this opportunity to welcome him to this
role.
Our Purpose commits that 'Together we have the energy to
transform our communities' and the service to the communities we
serve defines our approach. We are making good progress and are
working closely with our customers and stakeholders to ensure that
we are successfully meeting their needs for today and their
expectations for tomorrow.
Peter Emery
Chief Executive Officer
Strategic Report
Electricity North West Limited is a private limited company
registered in England and Wales, ultimately owned by two
shareholders, each being long-term infrastructure funds as shown in
Note 29.
Company Background
Electricity North West Limited (ENWL) is the electricity network
operator for the North West of England.
The Company serves approximately 5 million customers at 2.4
million domestic and industrial locations, has circa 1,900
employees and provides a safe and reliable electricity supply, 24
hours a day, seven days a week.
We own, invest in, operate and maintain the network of poles,
wires, transformers and cables which carry electricity from the
national grid to homes and business across the North West, together
with the telecommunications network that controls the operations
remotely.
The role we play in serving our communities continues to evolve
as we seek to transition to a low carbon economy and electricity
generation becomes more distributed across our network.
Network operators are critical to the evolution of the
electricity market and will need to play a more sophisticated role
in managing our network in an environment of multi-directional
electricity flow, as well as allowing for the integration of new
technologies such as electric vehicles, heat pumps and distributed
generation.
How we charge customers
We charge our customers through their electricity suppliers, in
the case of domestic and small customers, or directly for larger
customers.
The prices that we charge our customers for distributing
electricity are regulated by the Gas and Electricity Markets
Authority (GEMA) which operates through Ofgem, but we recognise
that ultimately it is our customers that fund the business and its
investments in the network. ENWL's costs are around 15% of the
typical domestic electricity bill charged by suppliers to North
West customers, equivalent to GBP80 per home last year; this
compares to an average customer bill impact of GBP87 per home
across Great Britain.
Strategic Report (continued)
Regulatory framework
Charges are regulated by Ofgem through the RIIO model, which
stands for Revenue = Incentives + Innovation + Outputs. This model
determines how much the Company is allowed to charge its customers
to fund network investment and operating costs in the period from
2015 to 2023 and is designed to drive real benefits for customers
through incentives for good performance. Ofgem has started
consulting on RIIO-2 which will govern the next price control
period.
The RIIO price controls have been developed to ensure that the
revenues collected from customers are linked to company
performance. The base income in each year is largely fixed, being
essentially a return to investors for the capital invested in the
Company. However, income increases or decreases depending on the
Company's performance against the outputs set through a number of
incentive mechanisms.
These mechanisms incentivise good customer service and network
reliability, the latter based upon minimising the number of
interruptions that customers suffer (CIS) and the average length of
those interruptions (CMLS). Performance is assessed each year and
any positive or negative adjustments are fed annually into a
process which will modify revenues for subsequent years.
The RIIO price control model also incentivises cost reductions,
delivering a well maintained and efficiently invested network for
the long term, but at a lower cost, through innovation as well as
efficiency. These are shared between customers and shareholders,
again after an annual review.
The Company also charges separately for new connections to, and
diversions of, the network. This activity is also closely regulated
by Ofgem.
The Company is committed to ensuring the sustainability of the
network for our customers now and in the future. We routinely
inspect the network and these inspections inform our maintenance
and asset replacement programmes taking electrical load and
customer numbers into account.
Investment and innovation continues to ensure the development
and availability of the appropriate technology to meet the changing
demands of electricity supply and meet the challenge of a low
carbon future, at a price our customers can afford.
External environment
Ofgem consultation on the RIIO 2 framework has already started.
Ofgem's initial statements in relation to RIIO-2 make it clear that
enabling the transition to the low carbon economy is important to
the strategic regulatory agenda, and that to do deliver this change
in a way that is affordable to customers will require innovative
solutions. The RIIO 2 framework will also consider cost of debt and
cost of equity allowances. While the RIIO 2 consultation has
started, sector specific discussions to Electricity Distribution
remain some way off. As a consequence it is too early to draw solid
assumptions for RIIO-ED2 but we continue to engage in the process
and influence the process to meet the needs of our
stakeholders.
We continue to monitor the continuing environment of political
and economic uncertainty, including Brexit which is expected to
have a modest direct impact aside from a modest increase in stock
levels to manage supply chain risk.
Having considered the factors noted above there are no material
impacts on either the going concern statement or the period covered
by the viability statement.
Strategic Report (continued)
Purpose, principles and corporate goals
ENWL is operating in a dynamic, rapidly changing environment.
Customers in the North West rely on the services we provide to keep
them connected with friends, family and the wider world, keep their
electric cars running, ensure their homes are heated and enable
them to work smarter and more flexibly. The Company aims to provide
customers with an excellent service at an affordable price through
a safe and reliable electricity network. The Company balances the
priorities of maintaining a reliable network in the near term,
investing to ensure this is sustainable in the long term, whilst
keeping costs as low as reasonably practicable to meet the
affordability challenge for our customers.
Our Purpose 'Together we have the energy to transform our
communities' articulates the contribution we make and the ambition
we have for the communities we serve in our region. Developed by
our colleagues in 2017, the Purpose is now embedded within our
business, along with the behaviours that the Company identified
would be required to enable us to effectively deliver our plan. Our
Principles capture the mindsets, heartsets and skills required for
us to deliver the Purpose and they have played a vital role in the
delivery of our improved business performance.
These are now a well-established touchstone for behaviour within
the Company and will continue to be key as we seek to consolidate
and continuously improve the progress we have made.
We report on our performance against corporate goals that span
these multiple priorities.
-- Safety and Environment
-- Customer
-- Affordability
-- Reliability
-- People
Our Responsibility Framework
As the Company's Purpose was embraced and progress was made
towards delivering our role in the future low carbon economy, it is
vital to demonstrate that this is done in a manner that is
recognised to be responsible, acknowledging the impact and the
transformative role we have in our communities.
Following the approval of our Purpose and Principles in 2017, a
Purpose-Led Responsibility Framework has been implemented, which
articulates the Company's Corporate Social Responsibility Strategy.
Our strategy demonstrates that we consider the social, environment
and economic impact in our decision-making and that our activity
delivers a wide positive, societal impact.
Strategic Report (continued)
Our Responsibility Framework (continued)
Aligned to our Purpose, the delivery of our Responsibility
Framework further consolidates and embeds our Purpose and
Principles. The framework is structured to deliver responsible
business practices for our people and partners, our communities and
our environment. Highlights from the strategy include:
In our people and partners section, we are developing our
colleague diversity policy to ensure we are working towards having
a workforce which reflects the community which we serve and
tackling modern slavery at home and abroad.
In our communities section, we are introducing a colleague-led
approach to fundraising and volunteering and continuing to develop
effective mechanisms to support consumer vulnerability.
In our environment section, we are tackling our operational
carbon footprint, engaging with local schools to help them to
better understand and manage their carbon impact and developing our
approach to managing and developing bio-diversity.
Responsibility Benchmarks
We have benchmarked our Responsibility approach against the
Business in the Community (BITC) Corporate Responsibility Index.
This year the Company has participated in the final Index and has
achieved a score of 92% (2018: 85%). BITC are currently updating
this benchmark and we are continuing to work with them to influence
and shape their approach.
For the second year, we assessed our responsibility performance
against the Global Real Estate Sustainability Benchmark
(GRESB).
This assesses and benchmarks the Environmental, Social and
Governance performance of real asset investments, and in 2018,
GRESB assessed 904 real estate funds and property companies, 75
infrastructure funds, 280 infrastructure assets and 25 debt
portfolios. Our overall score is 81%, which is an improvement of
21%. We're proud that we hold 4th position for global network
companies benchmarked.
Safety and Environment
The Company operates in a high hazard industry and the safety of
its people and customers and protection of the environment will
always be a priority.
Operational safety
The Company ensures that all people are well trained and able to
operate safely, backed by policy driven procedures and compliance
assurance, alongside a behavioural approach that seeks to ensure
that all staff and contractors approach any task with a strong
behavioural attitude to safety.
In 2017, we embarked on a company-wide initiative to create an
enhanced safety culture, key to managing risk. In the year ended 31
March 2019, we have continued to review our safety management
system and to improve safety performance in our day-to-day
operations.
We finished the year ended 31 March 2019 with a lost time injury
frequency rate 0.047 (2018: 0.036) having had 4 lost time injuries
in the year (2018:3). This contrasts to 2017 when we had 7 lost
time injuries and reflects the sustained improvement since we
embarked on our safety initiative. The total recordable injury rate
was 0.13 (2018: 0.14).
In the year to 31 March 2020 we will continue to embed the
changes introduced as well as improving our arrangements for the
selection and management of contractors.
There is a continued focus on the valuable learning obtained
through the safety observations and near miss reports, a leading
indicator of safety performance with a sustained high level of near
miss reports. As our safety journey continues we are increasingly
focused on the quality of, and learning from, near miss reports,
rather than pure volumes. Near misses in the year were recorded at
12,250 (2018: 14,293).
Strategic Report (continued)
Safety and Environment (continued)
Asset safety
The safety of the Company's employees, contractors and the
public from the inherent risks of electrical assets is assured
through the Company's ongoing asset safety investment
programmes.
In the year ended 31 March 2019 the Company made significant
progress in further reducing the risks associated with link boxes,
site security and asbestos remediation as well as developing the
approaches for the management of rising and lateral mains in multi
occupancy premises.
Environmental performance
The Company is dedicated to achieving the highest standards of
environmental performance, not only by minimising the risks created
by our activities, but also through targeted investment in outputs
that deliver a positive environmental impact, including the removal
of fluid filled cables, the undergrounding of overhead lines and
operations such as CLASS.
In terms of our own direct operational impact on the
environment, our principal performance indicator is the level of
carbon dioxide emissions equivalent (tCO(2) e).
This measure covers the environmental impact both from the use
of fossil fuels in vehicles and generators and of energy in
buildings, as well as the impact of Sulphur Hexafluoride (SF6),
which is a strong greenhouse gas historically used as insulation in
electrical equipment.
At the start of the current regulatory period we made a
commitment to our customers to reduce carbon emissions, in tCO(2)
e, by 10% from a 2014/2015 base year by 2020. Through targeted
investment in the efficiency of our buildings and other efficiency
measures, the level of emissions reduction has exceeded this level
already, having been reduced by 16% from 2015 levels to 20,417
tCO(2) e in the year ended 31 March 2019.
Even given this performance, we recognise we need to deliver
carbon reduction at a faster rate than our original targets. Our
leadership role in the region's transition to zero carbon is
becoming clearer. Our regional stakeholders are setting ambitious
targets and our recently launched carbon reduction plan 'Leading
the North West to Zero Carbon' sets out our own ambitious targets
to support this change.
The Company undergrounded, for Visual Amenity, and connected
7.3km of overhead lines in the year through the completion of three
schemes.
Strategic Report (continued)
Reliability
Customers say that "keeping the lights on" is their top
priority: this is achieved by targeted investment in the network
both to limit the number of faults and also to limit the number of
customers affected by those faults that do occur. Performance is
tracked using a variety of metrics including: delivery of the
capital programme outputs, delivery against guaranteed standards of
performance and network reliability measures, including customer
interruptions (CIs) and customer minutes lost (CMLs).
In the year ended 31 March 2019, the average number of
interruptions per 100 customers (CIs) continues to be industry
leading and was 33.7, (2018: 33.2) outperforming the target of 47.2
set by Ofgem.
The average number of minutes for which customers were without
supply during the year (CMLs) to 31 March 2019 was 33.0 (2018:
34.6), which outperformed the target of 43.0 set by Ofgem and was
the second best performance ever.
The reliability of the network has been sustained though
proactive investment in the use of network automation and
innovative solutions, and an ongoing focus on operational response
when incidents do occur. Network reliability continued to be high
with a network availability of 99.994%. CI and CML performance was
marginally behind the prior year, with a larger impact from planned
supply interruptions which allow the capital investment programme
to be delivered. We continue to focus on improving network
reliability and this is an area in which we have committed
additional funds to further increase the level of automation and
thereby reliability of the network.
Most customers enjoy excellent levels of reliability but we
recognise that there is variability in the level of service
experienced. A few customers experience a level of service
significantly worse than average, usually by virtue of their
location or due to localised network issues. We have continued to
invest in the year in schemes to reduce the numbers of worst served
customers, with the number of customers meeting this definition
being 135 in the year ended 31 March 2019 (2018: 48).
Key to delivering reliability to customers is proactive
investment to improve the resilience of the network to storm and
flood conditions.
We continue to invest significant funds in flood defences and
interconnectivity at key sites to provide protection to a 1 in
1,000 year flood risk.
Investment in an affordable and sustainable network
In the year ended 31 March 2019, a total network investment
programme of GBP104.7m was delivered (2018: GBP97.3m). The current
network has been installed over many decades and a significant
proportion of the programme relates to replacing existing equipment
at, or approaching, the end of its life with modern
equivalents.
Innovation is essential to maintain network performance and
reliability levels and to meet the increasing demands on
electricity from the decarbonisation of energy, at an affordable
cost. Innovation is a core competence of ENWL, recognising the
increasing reliance on electricity for not only light and power but
for electric cars and heat. The Company deploys the latest
innovative solutions to develop an optimised investment programme
and deliver considerable cost benefits and efficiencies that are
shared with customers.
Strategic Report (continued)
Customer
Delivering excellent customer service is a priority for the
Company. Customer satisfaction levels have improved during the
year, achieving an overall score of 86.5% (2018: 84.7%), which was
much closer to our target level and a best ever performance for the
Company. The relative ranking among the DNOs was 12th out of 14
(2018: 13th) and significantly reduced the gap to the mean DNO
score. The improvements made during the year are reflected in the
score in the last quarter of the year of 88%, our best ever
performance in a quarter.
The Company is committed to further improve customer
satisfaction levels, with clear actions in place that are monitored
regularly by the Executive Leadership team. The actions focus
around simplification, compliance with the customer journey,
improvement in IT systems and resourcing strategies.
We maintain a Priority Service Register (PSR) to identify those
customers who are most dependent on our services. In the year ended
31 March 2019 we have continued to promote our PSR and have
developed our strategy to offer more targeted services to higher
risk customers, for example those who are medically dependant on
electricity. Investment in staff training has also been a focus in
order to help facilitate this.
In delivering for our priority customers we have managed to
reach out to over 520,000 customers this year which exceeds our
target. The communications were carried out through various
channels including letters, email and telephony.
We recognise our role in helping to tackle fuel poverty and the
particular challenges this brings in our region. During the year we
have engaged with a variety of partners in a bid to offer extra
support to the customers in our region who are impacted by fuel
poverty. Through the introduction of referral partnerships, we are
now helping to provide our customers with advice on issues such as
energy saving and income maximisation, as well as offering
installation of free energy efficiency measures and referral to
other relevant services.
We track the time taken to resolve complaints when we do receive
them. The overall complaints performance within the year continued
to outperform the Ofgem penalty incentive and a significant year on
year reduction, with a complaint metric of 2.16 (2018: 2.45), with
82.1% of complaints resolved in 24 hours (2018: 82.4%), forecasting
us to be 8th position in the DNO league table. The complaint metric
reflects the percentage of complaints resolved within 24 hours,
combined with the percentage of complaints resolved within 31
days.
We have continued to focus on our Guaranteed Standards of
Performance for connections during the year. Whilst we have reduced
the number of failures this year we are still not at the level of
service that we want to give to our customers and will be
continuing to focus on making improvements next year.
Strategic Report (continued)
People
The Company is a major employer in the North West of England and
employs circa 1,900 people in the region. The Company also works
with a carefully chosen contractor workforce providing even greater
levels of employment for the region. We are committed to providing
secure, long-term employment and career development opportunities
for employees.
We look to balance the right skills and people resources to
support the business in the long term.
The new Purpose and Principles were developed with our employees
and set out the required behaviours to deliver our Purpose and
achieve sustained high performance.
These Principles are underpinned by a continued commitment to
our management philosophy encompassing fundamentals of leadership,
ethical standards and securing competitive advantage.
Together, the Purpose and Principles and the 'Management
Philosophy' produce our corporate culture.
Climate is the measure the Company uses to quantify how people
feel about working for the business and, in turn, makes the link
between this 'feeling' and how the Company performs.
The Company continues to make significant investment in training
and developing employees and in developing managers into leaders to
achieve the desired culture. Half yearly surveys are undertaken to
measure both colleague engagement and levels of agreement with the
Company's identified climate priorities. Time is provided between
each survey to allow leadership teams to reflect on what they have
learnt through the survey and then act to address issues
identified.
Levels of colleague engagement are high, with a survey
completion rate of almost 1,500 colleagues. The last survey in
September 2018 had an overall agreement rate of 69.4%, a marginal
decrease from the 72.2% in February 2018. We have set a target of
75% employee agreement and the latest scores received in April 2019
show an overall agreement rate of 74.9%.
The Group sets policies and encourages a working culture that
recognises, respects, values and harnesses diversity for the
benefit of the Group and the individual, and we are committed to
integrating equality and diversity into all that the Group
does.
We are committed to rewarding our colleagues equally, regardless
of gender. During the year we published our gender pay gap
information. More information is available at www.enwl.co.uk.
The Group is committed to fulfilling its obligations in
accordance with the Disability Discrimination Act 1995 and best
practice. As an equal opportunities employer, equal consideration
is given to applicants with disabilities in the Group's employment
criteria. The business will modify equipment and practices wherever
it is safe and practical to do so, both for new employees and for
those employees that become disabled during the course of their
employment.
Strategic Report (continued)
Corporate Social Responsibility
Stakeholder engagement
Electricity North West is committed to ongoing stakeholder
engagement and recognises that such engagement enhances the
Company's ability to achieve its aims and objectives and to provide
the highest level of service at a price customers can afford. The
importance of demonstrating strong stakeholder engagement and
addressing vulnerable customer needs has increased during RIIO-ED1
and the focus is expected to be even stronger for developing and
operating in RIIO-ED2.
Ofgem has stated that it is committed to giving consumers a
stronger voice in setting outputs and shaping and assessing
business plans. They say 'Each company will be responsible for
designing and running its own programme for engagement with their
stakeholders and demonstrating that they have done it well'
We welcome the opportuntity that such engagement provides and
Electricity North West has led the DNOs in an early appointment of
Jeff Halliwell to Chair our Customer Engagment Group to provide
oversight and challenge to this engagement programme. Jeff has now
also appointed the members of the Group and it will hold its
inauguaration meeting in May 2019.
The role of the Customer Engagement Group is to independently
scrutinise our stakeholder engagement work. In doing so, the Group
will have access to the Board and the Executive Leadership Team and
will be able to question them about how stakeholder engagement
insight is being used to inform our RIIO-ED2 Business Plan. The CEG
will also fulfil the oversight function for all reinforcement
decions in line with the requirements of the Department for
Business, Environment and Industrial Strategy.
We must continue to develop and enhance our stakeholder
engagement approach. We have delivered an improvement plan this
year which included reviews of:
-- Our stakeholder engagement and consumer vulnerability
strategy, our procedures and processes to ensure we become more
stakeholder focused as an organisation and to respond, measure and
learn as this is an embedded and continuous process;
-- The presentation of our activity in the SECV submission, and
-- Preparation for the Panel assessment.
This year, a third Strategic Stakeholder Advisory Panel was held
in June 2018 and outputs from that session and other stakeholder
and consumer insights inform our business decision-making. Company
understanding of stakeholder requirements was further enhanced by
hosting similar events on Lancashire and Cumbria.
Central to these events was a consultation of their priorities
to inform the 'shaping' phase of our RIIO-ED2 plan development. The
transition to the low carbon economy and support for vulnerable
consumers are emerging priorities for our stakeholders.
We further enhanced our approach through the creation of a Chief
Executive Panel. The Board and the Executive Leadership are
committed to improving the Company's stakeholder engagement
approach and the Chief Executive Panel provides stakeholders with
an effecive and direct route for ongoing dialogue with the Board
and the Executive Team. This work of the Chief Executive Panel is
supported by our Sustainability and Consumer Vulnerability Advisory
Panels.
Strategic Report (continued)
Corporate Social Responsibility (continued)
Stakeholder engagement (continued)
To support adherence to these initiatives, for the 8th year
running the Company has engaged auditors for a non-financial
assurance of its Stakeholder Engagement and Customer Vulnerability
Submission and its commitment to AA1000APS.
Human rights
The Company operates exclusively in the UK and, as such, is
subject to the European Convention on Human Rights and the UK Human
Rights Act 1998 and the Modern Slavery Act 2015.
The Company seeks to anticipate, prevent and mitigate any
potential negative human rights impacts as well as enhance positive
impacts through policies and procedures, in particular, regarding
employment, equality and diversity, treating customers fairly and
information security.
This year the Company has strengthened the approach to Modern
Slavery, working with suppliers and charities to raise awareness
and provide solutions if it is identified in the course of our
operations. The Company's Modern Slavery Act statement is available
on its website:
https://www.enwl.co.uk/misc/modern-slavery-act-compliance-statement/
Anti-corruption and anti-bribery
At Electricity North West we are proud of our strong commitment
to high ethical standards in the way that we work. The business
takes a zero-tolerance approach to bribery and corruption, and is
committed to acting professionally, fairly and with integrity in
all our business dealings and relationships wherever we operate,
implementing and enforcing effective systems to counter bribery. It
is important that our regulator and other stakeholders have
confidence in the arrangements and integrity of the
organisation.
The Company operates a number of policies governing the
anti-bribery and anti-corruption matters: Anti-Corruption and
Bribery policy, Disclosure (Whistleblowing) policy, Ethics policy
and Conflict of Interest policy.
These policies apply to all employees and officers of ENWL and
form part of the employee Code of Conduct. Other individuals
performing functions for the Company, such as agency workers and
contractors, are also required to adhere to our anti-bribery and
anti-corruption policies.
To support our whistleblowing policy we have in place a
confidential independent reporting line called Safecall.
Strategic Report (continued)
Gender and diversity
Information on the composition of the workforce at the year end
is summarised below:
Turnover
2019 - 178 leavers (2018: 117 leavers)
Training courses delivered
2019 - 316* (2018: 303*)
Training course attendees
2019 - 9,012 (2018: 7,974)
*These figures include e-learning courses, operational and
non-operational training.
Workforce composition at the year end 31 March:
Total
employees 1,420 482 1,400 480
75% 25% 74% 26%
Senior
managers 35 15 32 15
70% 30% 68% 32%
Executive
leadership
team* 7 1 7 1
87% 13% 87% 13%
Directors 9 2 9 -
82% 18% 100% -
* The Executive leadership team figure includes the two
Executive Directors, who are also included in the Directors'
figure.
Environment
We take our responsibility for the protection of the environment
affected by our activities very seriously. To this end, we are
committed to achieving the highest possible standards of
environmental performance. We aim to minimise emissions and spills,
and we are investing to remove potentially damaging equipment,
enhance the environment by undergrounding overhead cables, and
supporting the UK in its move to a low carbon economy.
As examples of what we are doing, during the year:
-- 17.5 km of fluid filled cable was removed and replaced with
modern equivalent. Overall leakage of oil from underground cables
was 55,829 litres which, whilst an improvement over the previous
year's performance of 65,788 litres, reflected the continued
necessity to rely on leaking cables which could not be switched out
without causing huge disruption to customers. We aim to reduce this
further to 30,000 litres by the end of RIIO-ED1 and have increased
our planned fluid filled cable replacement volumes for the next 4
years.
-- 7.3 km of overhead line in National Parks and Areas of
Outstanding Natural Beauty were replaced with underground
cable.
In addition to this, we've launched our 'Leading the North West
to Zero Carbon' plan, which sets out how, over the next four years,
we will spend GBP63.5m decarbonising our own operations and lead
businesses, colleagues and customers to do the same.
Our RIIO-ED1 business plan and the supporting health, safety and
environment strategy, sets out our plans for delivery of our
environmental objectives. All this is supported though an
environmental management system that is certified to ISO 14001
standard and an energy management system certified to ISO
50001.
Strategic Report (continued)
Business carbon footprint
The Company's business carbon footprint (excluding losses) for
the year was 20,417 tCO2e, a 1% reduction on of 20,599 tCO2e and
16% reduction over the current regulatory period.
The Company continued during the year to implement energy
efficiency measures through the refurbishment of its buildings and
the replacement of fleet vehicles and company cars with more
efficient vehicles. There has been an increase in fuel combustion
owing to the increased use of temporary diesel generation to
maintain customer supplies during both planned and unplanned supply
interruptions, supporting our customer service strategy.
Electricity losses are measured as the difference between energy
entering the network (generation) and energy exiting the network
(demand). Whilst it is impossible to eliminate these losses, we do
take steps to minimise them. This is done through installing more
efficient assets in our network, particularly low loss transformers
and cables and through our revenue protection unit, addressing the
issue of theft.
Scope 1
Operational transport 7,870 6,977
Business transport
- road 1,319 1,254
Fugitive emissions 954 1,254
Fuel combustion 4,435 3,763
--------- ---------
14,578 13,248
--------- ---------
Scope 2
--------- ---------
Buildings energy
usage 5,773 7,262
--------- ---------
Scope 3
Business transport
- rail 22 21
Business transport
- air 44 68
--------- ---------
66 89
--------- ---------
Business Carbon
Footprint (excl.
losses) 20,417 20,599
--------- ---------
Electrical losses 347,010 520,176
Business Carbon
Footprint (incl.
losses) 367,427 540,775
========= =========
Strategic Report (continued)
Key Performance Indicators
KPI Definition and comment Performance
Definition: The total number of
reportable incidents in the period
divided by the number of hours
worked in that period by employees
and contractors' employees, multiplied
by 100,000 hours.
Performance: During the year the
Company had four lost time incidents
Lost time involving employees and contractor
incident employees (2018: three). The corresponding
frequency lost time incident frequency rate
Safety rate was 0.047 (2018: 0.036). 0.047
--------------- --------------------------------------------- ---------------------------
Safety Definition: Safety observations 12,250 safety observations
observation including near miss reports are
reporting collected to provide valuable
information on hazards and behavioural
attitude. Safety observations
reporting is actively encouraged
to promote a safety culture.
Performance: In the year, the
number of safety observations
reported was 12,250 (2018: 14,293),
well above the target of 8,000.
Having seen an increase in the
volume of safety observations
over the last two years, focus
is now on improving the quality
and level of 'behavioural challenge',
rather than simply overall volumes.
--------------- --------------------------------------------- ---------------------------
Definition: The overall customer
satisfaction score is a composite
score from an Ofgem survey, assessing
levels of customer satisfaction
for connections quotations and
delivery, interruptions and general
enquiries.
Performance: Performance this
year has improved to 86.5%, an
all time high and up from 84.7%
Overall in the prior year. It reflects
customer the ongoing focus on improvement
Customer satisfaction actions. 86.5%
--------------- --------------------------------------------- ---------------------------
People Employee Definition: Employee engagement 69.4% Climate score
engagement is measured via an employee survey
which through a series of questions
provides details of overall employee
engagement and how employees feel
about the 'working climate'.
Performance: Overall employee
engagement was 69.4% for the year.
--------------- --------------------------------------------- ---------------------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Reliability Customer Definition: CIs represent the 33.7 CIs
interruptions number of interruptions our
(CIs)3 customers experience. It is
calculated by taking the total
number of customers affected
divided by the total number
of customers connected to the
network, multiplied by 100,
and is adjusted for exceptional
events.
Performance: The result of 33.7
for the year outperforms the
Ofgem target of 47.2 Performance
in the year was impacted by
a third party cable damage incident
but remains close to internal
targets, reflecting the ongoing
investment in network automation
and interconnection, to secure
supplies to our customers.
----------------- --------------------------------------- -------------
Customer Definition: CMLs represent the 33.0 CMLs
minutes lost time customers are without power
(CMLs) in the event of an interruption.
It is calculated by taking the
sum of the customer minutes
lost for all restoration stages
for all incidents, excluding
exceptional events, and dividing
by the number of connected customers
as at 30 September each year.
Performance: The result of 33.0
for the year has improved from
the prior year result of 34.6
and also outperforms the Ofgem
target of 43.0.
----------------- --------------------------------------- -------------
Sustainability Carbon footprint Definition: Carbon footprint 20,417 tCO2e
(excluding measures the impact of our operations
electrical on the environment and is calculated
losses) in line with Ofgem guidance.
The calculation excludes electrical
losses arising from the operation
of the network which cannot
be directly controlled or accurately
measured.
Performance: Our carbon footprint
has reduced by 1% from the prior
year reflecting the ongoing
focus in energy usage. There
may be some year-on-year volatility
in emissions dependant on levels
of generation deployed on the
network as a result of interruptions
or exceptional events.
----------------- --------------------------------------- -------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Affordability Total Expenditure Definition: Totex is a key financial GBP271.4m
measure for the business. It is an
abbreviation which stands for total
expenditure. It includes the money
we spend on running our business day-to-day,
and the amount we invest in new assets
through our network investment programme.
We aim to deliver efficiencies in
Totex which we share with our customers
and that helps reduce customers' bills.
Performance: Totex for the year ending
31 March 2019 was GBP271.4m compared
to an Ofgem allowance of GBP260.8m
in outturn prices. Expenditure was
higher than the allowance as we have
made proactive investment to improve
cost and incentives performance in
the second half of ED1.
------------------ ---------------------------------------------- ------------
Financial Revenue Definition: Revenue is largely fixed GBP458.3m
KPIs over time, but can vary through over/under
recovery as demand varies against
the forecasts used to set tariffs,
and other adjustments for, for example,
incentive revenues. It is determined
by Ofgem to allow recovery of efficient
costs to maintain the network. This
revenue is profiled over RIIO-ED1.
Additional revenue is generated through
charges for new connections to the
network, along with an opportunity
to earn incentive revenue for delivering
improved performance.
Performance: Revenues have increased
from the prior year reflecting inflation
and adjustments through the regulatory
price setting mechanism. The revenue
over recovery for the year was GBP0.4m
(2018: GBP3.7m) and it will be corrected
through adjustments in pricing in
two years' time.
------------------ ---------------------------------------------- ------------
Profit Definition: PBTFV is the profit before GBP135.4m
before tax of GBP87m (2018: GBP141m) adding
tax and back the GBP47m FV loss (2018: 30m
fair value gain), per Note 9.
movements Performance: PBTFV has increased to
('PBTFV') GBP135m (2018: GBP111m), mainly as
a result of higher revenues. PBTFV
excludes the significant capital investment
that we make in the network each year.
Financial performance is better understood
through the Totex measure.
------------------ ---------------------------------------------- ------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Financial Net debt Definition: Net debt includes the GBP1,146m
KPIs total borrowings of GBP1,169m (2018:
GBP1,237m) per Note 19, net of
cash and cash equivalents and money
market deposits of GBP23m (2018:
GBP87m) per Note 17.
Performance: Net debt has decreased
over the year by GBP4m, the net
effect of GBP68m lower debt and
GBP64m reduction in cash balances.
The decrease in debt is primarily
due to the change in accounting
treatment of the GBP250m 8.875%
2026 bond under IFRS9, which is
now stated at amortised cost.
-------------- ------------------------------------------ ------------
Definition: RAV gearing is measured
as borrowings at nominal value,
plus accretion where applicable,
net of cash and short-term deposits
divided by the estimated RAV of
GBP1,820m at March 2019 (2018:
GBP1,758m), as defined by the Financing
Agreements.
Performance: The RAV gearing is
within the required maximum level
RAV gearing of 65%. 64%
-------------- ------------------------------------------------------ ------------
Interest Definition: Interest cover is the 4.2 times
cover number of times the net interest
expense, adjusted for indexation
and capitalisation of borrowing
costs, is covered by operating
profit from continuing operations,
as defined by the Financing Agreements.
Performance: Interest cover has
increased due to the GBP7m increase
in Operating Profit, with the interest
expense (excluding inflation movements
on inflation-linked instruments
and FV movements) being lower than
prior year.
-------------- ------------------------------------------------------ ------------
Capital Definition: This represents investment GBP241.3m
expenditure in the network to maintain its
reliability and resilience for
future customers. The figure includes
total additions to property, plant
and equipment and software.
Performance: We continue to invest
to improve the quality and reliability
of the network. During the year
we invested GBP23m more than the
previous year, including additional
investment in network automation.
-------------- ------------------------------------------------------ ------------
Strategic Report (continued)
Financial Performance
Overall performance reporting
Base revenue is fixed across a price review period. It is set at
a level that should meet our efficient operating costs and expenses
over that period, as well as funding efficient investment, interest
on necessary loan funding and taxes. In order to encourage
investment, it allows for a return to shareholders at a level that
rewards past investment and encourages future investment. This
return level has been set by Ofgem at 6% pa real for the current
regulatory period.
Actual expenditures, both capital and operating (referred to by
Ofgem as totex), vary in any given year from the original
regulatory settlement agreed to be funded by Ofgem, as changes in
customer needs, new innovations, and changes in network investment
delivery priorities change over time. Allowed revenues are a
function of the original allowance and expenditure plans, adjusted
for under and over expenditures against allowances in earlier
years, including incentives or penalties earned for penalties.
Actual revenues in any given year reflect these allowed revenues,
although as these are collected based upon forecasts of demand over
the network set two years earlier, demand experience means actual
revenues vary from allowed revenues based upon demand in the year,
as well as the impact of forecast variations in earlier years.
Actual revenues are allowed by Ofgem, not on the profiles of
costs in the period, but based on the long term cash requirements
of the business. Revenues are therefore the cash funding mechanism
for the business, including current investment requirements as well
as the repayment of past investment, rather than the reflection of
income resulting from activities that financial statements usually
reflect.
In these financial statements, operating profit is therefore the
combination of revenues that are only partly related to actual
activity during the year, less those operating costs actually
incurred and excluding capital expenditure.
Consequently the profit earned in any given period does not
reflect the return to shareholders, which is more accurately
represented by the Return on Regulated Equity (see section
below).
Whilst the statutory measure that is most closely aligned to the
return to shareholders, is cash flow before financing activities
(see page 64), this has a limited correlation to actual returns as
a result of the factors noted above.
Return on Regulated Equity
Ofgem has been working with the network operators, consumer and
other interested stakeholders, to develop performance reporting
measures that more accurately reflect the return to investors.
Ofgem presents the results of the networks as a Return on
Regulated Equity (RoRE).
Strategic Report (continued)
Financial Performance (continued)
Return on Regulated Equity (continued)
The Regulated Equity is a percentage of the RAV which is
essentially equivalent to the net book value of the fixed assets of
the business, calculated in regulatory terms. Ofgem assume that
this RAV is financed, 65% by debt and 35% by shareholders in the
Company, hence they calculate the return to shareholders based upon
35% of the RAV. The Company operates at a lower gearing ratio than
this notional level, so returns based upon actual gearing levels
are also shown.
The Company is allowed to make a return of 6.0% pa real (i.e.
before RPI inflation) across the RIIO-ED1 period, on this
element.
Returns above this rate are delivered through above target
performance, in line with the incentive structure set out within
RIIO. This may be, for example, through efficiencies in the
delivery of our services which result in lower totex (which savings
are shared at a rate of 42% with customers).
Profit after tax 71.8 116.3 71.0 117.0
Adjustments:
RAV (57.2) (55.8) (49.6) (60.9)
Deferred Taxation (6.9) 5.9 (26.1) (25.6)
Indexation and Fair Value Movements 70.0 6.0 136.8 50.9
Movement in Other Regulatory Balances (14.7) (24.2) (97.5) (54.5)
---------------------------------------- -------- ------- ------- -------
Post - financing return 63.0 48.2 34.6 26.9
---------------------------------------- -------- ------- ------- -------
Average return for the RIIO-ED1
period 43.2
Average RAV balance 1,710.7
Average debt balance 1,010.7
RoRE (actual regulatory equity) 6.2%
======== ======= ======= =======
*A prior year comparator of RoRE is not provided in the table
above as 2019 represents a four year trailing average and 2018
represents three year trailing average (2018: 5.5%).
Returns may also be above this rate through better than target
service to customers. For example, Ofgem has incentivised the
networks to make investments to improve network reliability, and
allow the networks to recover their investments by charging 50% of
the value to customers (as calculated by Ofgem) of the improvement
in reliability.
After taking into account the timing of expenditures against the
timing of allowances and outputs (enduring value calculation), our
average post financing RoRE for the first four years of RIIO-ED1 is
at an annual rate of 6.2% on an actual equity basis.
In broad terms, this figure reflects the 6.0% allowed return,
with incentives for improved performance adding an additional 2.1%
and 1.2% through totex cost efficiencies. However, the costs of
servicing our debt are higher than Ofgem allow us, with these
actual debt service costs reflecting the prices in the debt markets
at the time our debt was issued. This is the principal element
reducing our performance to the overall 6.2% per annum, real, after
tax and interest.
Prior year regulatory performance has been restated to reflect
the refinement of the methodology to calculate regulatory returns.
Reporting is consistent with the methodology used to report to
Ofgem in the Regulatory Financial Performance Report (RFPR).
Strategic Report (continued)
Financial Performance (continued)
Reconciliation of statutory profit to regulatory performance
The alternative financial performance calculation used to derive
RoRE provides a measure of the performance of operations within the
price control, including the impacts of interest and taxation but
excludes operations outside the price control. It adjusts reported
profit under IFRS to reflect the impact of the regulatory
framework, outlined above, when presenting financial performance.
The post-financing return generated reflects the actual regulatory
return made in each year and is used to derive RoRE.
Adjustments in calculating regulatory financial performance
The principal adjustments from reported profit after tax to
regulated financial performance are:
RAV: The regulatory composition of costs incurred is split
between in-year revenue allowances (fast money) and the creation of
additional RAV (slow money). This does not align with the
classification of costs as operating costs and fixed asset
additions under IFRS accounting principles. This adjustment
reflects the impact of the fast and slow money concept in the
regulatory settlement and the impact of regulatory depreciation
which does not form part of the statutory profit.
Deferred taxation: Future revenues are expected to recover cash
taxation costs, including the unwinding of deferred taxation
balances created in the current year (Note 10).
Indexation and fair value movements: Fair value movements on
debt and derivative financial instruments included within statutory
profit are excluded from the regulatory performance calculation and
an adjustment made to remove the inflation component of actual
interest costs.
Movement in other regulatory balances: Regulatory performance
reflects performance on an earned basis, with revenue being
adjusted for this performance in future years. IFRS recognises
these revenues when they flow through bills to customers and not in
the period to which they relate. The principal adjustments are for
incentive revenues earned in the year, under or over recoveries of
allowed revenue in the period, differences in timing of the funding
of pension deficit repair payments and the adjustments for enduring
value. Enduring value adjusts regulatory performance for the impact
of timing differences between the receipt of allowed revenue and
actual expenditure incurred i.e. timing differences that will
unwind over the regulatory period.
The enduring value adjustment has been calculated by considering
the cumulative expenditure variance by regulatory category and uses
approved Company business plans to assess the extent to which these
timing differences will unwind. The enduring value adjustment
requires a high level of management judgement. Methodologies for
calculating enduring value are evolving as we work with Ofgem and
other network operators to develop a standardised approach.
Equity component:
RoRE performance has been presented on a real equity basis,
representing the balance of the RAV that is not debt funded.
Average equity for the period is 41%, higher than the assumed 35%
notional equity funding. The difference between the actual and
notional equity has the effect of reducing the allowed equity
return from 6.7% to an actual equity return of 6.2%.
Strategic Report (continued)
Financial Performance (continued)
Financial reporting measures
Revenue
Revenue has increased to GBP458m (2018: GBP430m) during the
year, in line with the allowed Distribution Use of System (DUoS)
revenue under the RIIO price control.
For the year 31 March 2019 there was an over recovery of DUoS
revenue of GBP0.4m against plan (2018: GBP3.7m under-recovery),
reflecting variability against forecast in consumption volumes year
on year. This over recovery will be corrected through adjustments
in revenues in two years' time, in accordance with Ofgem's
methodology.
Operating profit
Operating profit has increased to GBP191m (2018: GBP183m)
primarily as a result of the increased revenue detailed above, net
of a smaller increase in costs.
Profit before tax and fair value movements
Profit before tax and fair value movements has increased to
GBP134m (2018: GBP111m), mainly as a result of the increased
operating profit detailed above.
Taxation
Corporation tax is calculated at 19% (2018: 19%) of the
estimated assessable profit for the period. The rate will be
reduced to 17% on 1 April 2020. The deferred tax is calculated
based on the expected future tax rates.
The overall taxation charge for the year has decreased from
GBP25m in 2018 to GBP15m in 2019, mainly as a result of the
deferred tax impact of fair value movements on swaps disregarded
for tax purposes and the impact of transition to IFRS 9 (see Note
1).
Dividends and dividend policy
The Group's dividend policy is to distribute the maximum amount
of available cash, maintaining its gearing level, in each financial
year at semi-annual intervals, with reference to the forecast
business needs, the Group's treasury policy on liquidity, financing
restrictions, applicable law in any given financial year and the
Company's licence obligations.
During the year ended 31 March 2019, the Company proposed and
paid a final dividend for the year ended 31 March 2018 of GBP16m,
paid in June 2018, and an interim dividend of GBP30m that was paid
in December 2018. In the year ended 31 March 2018 the Company
declared a final dividend for the year ended 31 March 2017 of
GBP12m, paid in June 2017, and an interim dividend of GBP64m that
was paid in December 2017. The Directors have proposed a final
dividend of GBP17m for the year ended 31 March 2019.
Property, plant and equipment and software
The Group's business is asset-intensive. The Group allocates
significant financial resources in the renewal of its network to
maintain services, improve reliability and customer service and to
invest to meet the changing demands of the UK energy sector.
The total original cost of the Group's property, plant and
equipment at 31 March 2019 was GBP5,014m (2018: GBP4,788m), with a
net book value of GBP3,260m (2018: GBP3,138m). In the year ended 31
March 2019, the Group invested GBP232m (2018: GBP209m) in property,
plant and equipment in a large number of projects to reinforce and
improve the network, and GBP9m (2018: GBP10m) on new computer
software platforms. New investment is financed through a
combination of operating cash flows and increased borrowing
capacity against the RAV.
Pension obligations
The Group's pension scheme under IAS 19, is a net surplus at 31
March 2019 of GBP33m (2018: GBP18m deficit). The main reason for
the decrease in the deficit is due to the reductions in the future
mortality assumptions, and the payment of deficit repair
contributions by the Company.
Strategic Report (continued)
Financial Performance (continued)
Pension obligations (continued)
The most recent triennial valuation of the scheme was carried
out as at 31 March 2016 and identified a shortfall of GBP142.6m
against the Trustee Board's statutory funding objective. In
addition to the timing of the two valuations including
contributions made in the period and return on assets, the main
difference is due to the different assumptions between the IAS 19
and the funding valuation basis. In the event of underfunding, the
Group must agree a deficit recovery plan with the Trustee Board
within statutory deadlines. As part of the 2016 actuarial
valuation, the Group agreed to eliminate the shortfall by paying
additional annual contributions from April 2016 to December 2023.
The next funding valuation, as at March 2019, is currently being
prepared.
Cash flow before financing activities
Cash generated before financing in the year was GBP2m (2018:
GBP12m), reflecting the increased asset investment.
Net debt
Cash and deposits 23 87
Borrowings (1,169) (1,237)
Net debt (1,146) (1,150)
======== ========
Included within the total borrowings figure are GBP75m of loans
from the parent company North West Electricity Networks plc (NWEN
plc), due to mature in March 2023 (2018: GBP74m) and a GBP199m loan
from an affiliated company ENW Finance plc, maturing in 2021 (2018:
GBP198m).
Of the borrowings, GBP6.8m (2018: GBP6.6m) is due to be repaid
within the next year, under European Investment Bank ('EIB') loans
that have an amortising repayment profile.
All other borrowings are repayable after more than one year and
include bonds with long-term maturities of GBP635m (2018: GBP706m)
and EIB loans of GBP253m (2018: GBP253m). Note 19 provides more
details on the borrowings.
Liquidity
The Group's primary source of liquidity is from Group operations
and from funding raised through external borrowings.
Short-term liquidity
Short-term liquidity requirements are met from the Group's
operating cash flows. Further liquidity is provided from short-term
deposit balances and unutilised committed borrowing facilities.
As at 31 March 2019, the unutilised committed facilities were
GBP50m (2018: GBP25m) and together with GBP23m (2018: GBP87m) of
cash and short-term deposits these provide short-term liquidity for
the Group.
Utilisation of undrawn facilities remains subject to limits
based on gearing levels determined against the RAV.
Long-term liquidity
The Group's long-term debt is comprised of a combination of
fixed, floating and index-linked debt, with a range of maturities
and interest rates reflective of prevailing market rates at
issue.
The Group issues debt in the public bond markets and maintains
credit ratings with a number of leading credit rating agencies.
During the period, the Group's credit ratings have been formally
reviewed and affirmed on a stable outlook basis. Long-term debt
ratings have also remained stable. Currently the Group is rated
BBB+ with stable outlook by Standard and Poor's, Baa1 with negative
outlook by Moody's Investors Service and BBB+ with stable outlook
by Fitch Ratings.
Our short-term debt ratings are A-2 and F2 with Standard and
Poor's and Fitch Ratings respectively. Further details are
available to credit investors on the Companies' website
www.enwl.co.uk.
Strategic Report (continued)
Financial Performance (continued)
Treasury policy
The Group's treasury function operates with the delegated
authority of, and under policies approved by, the Board. The
treasury function does not undertake any speculative trading
activity and seeks to ensure that sufficient funding is available
in line with policy and to maintain the agreed targeted headroom on
key financial ratios. Long-term borrowings are mainly at fixed
rates to provide certainty or are indexed to inflation to match the
Group's inflation-linked (RPI) accretion to the RAV and to cash
flows.
The Group's use of derivative instruments relates directly to
underlying indebtedness. The proportion of borrowings at effective
fixed rates of interest for a period greater than one year is set
in conjunction with the level of floating rate borrowings and
projected regulatory revenues that are exposed to inflationary
adjustments (index-linked).
Going concern
When considering whether to continue to adopt the going concern
basis in preparing the Annual Report and Consolidated Financial
Statements, the Directors have taken into account a number of
factors, including the following:
-- The Company's electricity distribution licence includes the
obligation in standard licence condition 40 to maintain an
investment grade issuer credit rating, which has been met.
-- Under section 3A of the Electricity Act 1989, the Gas and
Electricity Markets Authority has a duty, in carrying out its
functions, to have regard to the need to secure that licence
holders are able to finance their activities, which are the subject
of obligations imposed by or under Part 1 of the Electricity Act
1989 or the Utilities Act 2000.
-- Management has prepared, and the Directors have reviewed,
Group budgets for the year ending 31 March 2020 and forecasts
covering the period to the end of the current price review in 2023.
These forecasts include projections and cash flow forecasts,
including covenant compliance considerations. Inherent in
forecasting is an element of uncertainty and our forecasts have
been sensitised for possible changes in the key assumptions,
including RPI and under recoveries of allowed revenue. This
analysis demonstrates that there is sufficient headroom on key
covenants and that there are sufficient resources available to the
Group within the forecast period.
-- Short-term liquidity requirements are forecast to be met from
the Group's operating cash and short-term deposit balances. A
further GBP50m of committed undrawn bank facilities are available
from lenders; these have a maturity of more than one year.
-- Whilst the utilisation of these facilities is subject to
gearing covenant restrictions, 12 month projections to 31 May 2020
indicate there is sufficient headroom on these covenants.
Consequently, after making appropriate enquiries, the Directors
have a reasonable expectation that the Company and Group have
adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and Consolidated
Financial Statements.
The going concern basis has been adopted by the Directors, with
consideration of the guidance given in 'Going Concern and Liquidity
Risk: Guidance for Directors of UK Companies 2009' published by the
Financial Reporting Council in October 2009.
Strategic Report (continued)
Viability statement
In accordance with the provision of C.2.2 of the 2018 UK
Corporate Governance Code the Directors have assessed viability
over a period longer than that required for going concern and have
chosen the duration to the end of the regulatory period in
2023.
Whilst the Board has no reason to believe the Group will not be
viable over a longer period, the period over which the Board
considers it possible to form a reasonable expectation as to the
Group's longer-term viability, based on the risk and sensitivity
analysis undertaken, is the period to 31 March 2023, the end of the
current Regulatory period. The Board has considered whether it is
aware of any specific relevant factors and notes, in particular,
the Ofgem's RIIO-ED2 consultation document, which indicates lower
equity returns and possibly a changed incentive environment for
RIIO-ED2. The Board has also considered the current political
environment, including potential changes in future government
policy as well as the impact from a potential Brexit, in making the
viability assessment. In reaching its conclusion, the Board has
taken into account OFGEM's statutory duty to secure that companies
can finance their functions and has assumed that there will be no
changes to the regulatory framework or Government policy that will
affect the Company's viability.
The Directors have conducted a robust assessment of the
principal risks facing the Company and believe that the Company is
in a position to manage these risks.
In arriving at their conclusion, the Directors have considered
the Company's forecast financial performance and cash flow over the
viability period to 2023. Headroom to compliance ratios over the
viability period is considered and the extent to which deviations
in financial performance from the business plan may impact that
headroom. The Directors have considered this headroom in assessing
the Company's long term viability. The Directors have also
considered the potential impact from a range of possible outcomes
from the ongoing strategic review by the ultimate shareholders of
the Group, including the impact on liquidity from change of control
clauses on the Company's and Group's debt.
On the basis of this assessment, and assuming that the principal
risks are managed or mitigated as expected, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the four
year period of their assessment.
Fair, balanced & understandable
The Directors have reviewed the thorough assurance process in
place within the Group with regards to the preparation,
verification and approval of financial reports. This process
includes:
-- Detailed review and appropriate challenge from key internal
Group functions, such as Risk, Control and Assurance, senior
managers and the Chief Financial Officer;
-- Formal sign-offs from the business area senior managers, the
finance managers and Chief Financial Officer;
-- Group Audit Committee oversight, involving a review of key
financial reporting judgements, review and appropriate challenge on
matters such as any changes to significant accounting policies and
practices during the year, significant adjustments and the going
concern assumption;
-- The involvement of qualified, professional employees with an
appropriate level of expertise and experience throughout the
business; and
-- Engagement of a professional and experienced external
auditor, a framework for full transparent disclosure of information
during the audit process and post audit evaluation.
Strategic Report (continued)
Financial Performance (continued)
Risk Management
The Board is responsible for the alignment of strategy and risk,
and for maintaining a sound system of risk management and internal
controls. Our processes and systems are always evolving with the
needs of our business and have been developed in accordance with
the Financial Reporting Council's (FRC's) Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting.
Our Corporate Risk Register currently details a wide range of
risks. These risks are considered in the context of the corporate
goals - Safety, Customer, Affordability, Reliability,
Sustainability and People and monitored by a business wide network
of Risk Co-ordinators.
The electricity industry is undergoing unprecedented change as
we transition to the low carbon economy and demand increases. As
with any business, the achievement of our goals necessitates a
certain level of risk being taken. The key is ensuring that such a
scale of change is managed with a good understanding of the risks
involved, in a manner consistent with our strategy, and importantly
making sure that these risks are managed within our agreed risk
appetite. Risks should only be accepted where appropriate reward is
achievable given the level of resources employed to manage
them.
Our appetite for risk is defined using a framework which is
reviewed annually by the Board, framing the risks within the
business plan. The framework enables our Board to demonstrate its
risk appetite for the overall strategic direction of the business,
and maps appetite for risk taking in the pursuit of each of our
company goals at a tactical and operational level.
In line with the framework that provides descriptors on a scale
of 'averse' to 'bold', the Company generally operates within a
'cautious' risk range, given that the achievement of the stretching
business plan would not be possible without a level of measured
risk taking. The areas where a 'very cautious' risk appetite is
adopted relate to Sustainability, given our desire to ensure that
the Company maintains its reputation for compliance and an ethical
way of doing business, and most notably our Safety goal, on the
basis that sound working practices that protect our employees and
the general public are the number one priority for the
business.
The key features of the risk management system include:
-- Clear risk management strategy approved by the Board.
-- Risk appetite framework, approved annually by the Board, in
place that forms a key driver of the strategic business plan.
-- Board oversight in identifying and understanding significant
risks (and opportunities) to the Group in achieving strategic
objectives.
-- Dedicated Board and Executive Committees to oversee the management of risks for the Group.
-- Appropriate operational and non-operational risks being
managed within a corporate risk system.
-- Target risk scores are in place for corporate risks, forming
the basis for the production of work plans by risk owners to show
how the target risk scores will be achieved.
Strategic Report (continued)
Risk Management (continued)
-- The underpinning of the corporate register by a number of
local risk registers across the business with a network of Risk
Co-ordinators which enhance the local monitoring process.
Principal risks and uncertainties
The Group considers the following to be the principal risks that
it faces.
Risk Mitigations
Safety Health, Safety and
the Environment: * Board Health, Safety and Environment Committee
Risk associated with oversee this area.
unsafe working practices,
man-made or naturally
occurring hazards that * Extensive policy and procedures to ensure a safe
could cause harm to system of work and environmental management.
people or the environment.
* Behavioural safety training programme across all
areas of the organisation.
* Simple 'Golden Rules' to ensure strong safety
approach throughout the Company's operations.
* Robust 'lessons learned' exercises conducted to
identify root causes when safety or environmental
issues occur.
* Robust authorisation process to control who works on
the network and the activities that they can perform.
* Annual programme of audits and an inspection regime.
* Well-established hazard and safety observation
(including near miss) reporting in place.
----------------------------- -------------------------------------------------------------
Customer Meeting our customers'
expectations: * A programme of improvement activities described in
Failure to meet the more detail on page 10 is being co-ordinated by the
required level of customer Executive Leadership Team to optimise the Company's
satisfaction performance position against all elements of the customer
and to achieve costs satisfaction measure.
and efficiencies against
the commitments made
to our customers in * Robust plans in place to achieve other commitment
the RIIO-ED1 period. targets, or outperform where possible.
* Controls in place regarding the ongoing reporting of
performance against targets.
----------------------------- -------------------------------------------------------------
People Developing our people:
Resource and succession * Succession plans are in place, that are subject to
planning for the business. periodic executive level review.
* Training delivered throughout the Company to ensure
employees are equipped to do their roles competently
and effectively.
----------------------------- -------------------------------------------------------------
Ethical Behaviour:
Inappropriate behaviour * Extensive policies in place regarding ethical conduct
by Board members, executive within the business, including Anti-Bribery and
or senior management Corruption; Conflict of Interests; Ethics; Equality;
bringing the company Internal Control & Governance; Modern Slavery and
into disrepute Whilstleblowing/Disclosure.
* We continue to review and enhance the mitigations in
this area in line with emerging best practice and are
corporate members of the Institute of Business
Ethics.
----------------------------- -------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Risk Mitigations
Reliability Cyber and physical
security threat: * Dedicated qualified personnel allocated to Cyber and
Breach of our security IT security.
regime and access to
key network security
systems by an * A training programme in place to inform all users of
internal/external the risks of email and social engineering attacks.
party.
* A cyber risk assessment methodology implemented
within the Group.
* Pre-employment screening for critical roles such as
System Administrators.
* A strong governance and inspection regime to protect
infrastructure assets and operational capacity.
* Physical and technological security measures,
including encryption of key laptops, preventing the
loss of data.
* Data Centre infrastructure providing enhanced
security monitoring and management tools, 'next
generation' firewalls and network traffic analysis.
* Ongoing security patching of critical systems.
* Periodic internal and external security reviews.
* Key systems IT disaster recovery testing.
* Physical security measures are in place to limit
access to sites.
-------------------------- ----------------------------------------------------------------------------
Personal data:
Breach of regulations * We continue to review and enhance the mitigations in
relating to data this area, in particular to do with the General Data
protection Protection Regulation (GDPR) requirements.
and privacy Mitigations include:
o Appropriate technological controls
as noted above.
o Identification of all Personal Information
assets (both computer-based and paper
records) to ensure appropriate controls
in place.
o Appointment of dedicated manager
to drive programme to achieve compliance
with GDPR.
-------------------------- ----------------------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Sustainability Government and regulator
policy: * The Company has dedicated Regulation, Legal and
The Company is subject Compliance departments that provide advice and
to a high degree of guidance regarding the interpretation of political,
political, regulatory regulatory and legislative change.
and legislative intervention,
which can impact both
the current RIIO-ED1 * There is ongoing engagement by the Company with the
period, and the settlement Regulator and Government.
for RIIO-ED2. The legal
and compliance framework
can change, leading * Parliament, in framing the Electricity Act, imposed
to additional compliance certain duties on Ofgem/GEMA to ensure that the
obligations, market networks remain financeable for the long term benefit
conditions, and reporting of customers.
requirements. A changing
political focus on
the sector can have * There is regular engagement with the Board on
a significant effect political and regulatory developments which may
on profitability. impact the Company.
Business resilience:
Events outside of our * The Company has comprehensive contingency plans for
control, for example network emergencies, including key contract resources
extreme weather or such as mobile generators and overhead line teams.
medical emergencies,
affecting large areas,
may negatively impact * Business continuity testing on a regular basis.
the business.
* Reciprocal arrangements with other network operators.
------------------------------- -------------------------------------------------------------
Regulation and compliance
risk: * Overall governance and control framework in place,
Compliance failure including established compliance routines and
leading to an adverse accountabilities, owned by the Executive Leadership
effect on the business. Team and ultimately the Board.
* Specialist teams in place to ensure compliance and
assurance is carried out.
* An internal audit programme focusing on the Group's
key risk area, including fraud, regulatory compliance
and business processes.
* Established controls in place, including segregation
of duties and restricted access to systems.
------------------------------- -------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Principal risks and uncertainties (continued)
Risk Mitigations
Affordability Financial risks:
The business is subject * A formal treasury policy is in place to manage
to treasury, tax and exposure to counterparty, liquidity and market risk,
liquidity risk exposures, overseen by the Audit Committee.
and under performance
of the pension scheme
investments, market * A well established monthly banking covenant
impacts and/ or an monitoring process.
increase in the scheme
liabilities which would
give rise to higher * Tax risk scoring.
contributions.
* Active monitoring of the pension scheme's investments
carried out on a quarterly basis.
* The pension scheme Trustee engages professional legal,
actuarial and investment advice for all decisions
taken and regularly consults with the Company.
------------------------------ ----------------------------------------------------------------------
Programme delivery
including change programmes: * Established governance controls in place to oversee
Delays in the investment the delivery of business change.
programme or major
business change activity
leading to an adverse * Processes in place to support delivery of change
impact on the Company, programmes, management of risks and achievement of
particularly relating business benefits.
to customer interruptions
(CIs) and customer
minutes lost performance * For activity impacting CIs and CMLs performance, th
(CMLs). e
following mitigation measures are in place:
o Fault response times and team performance
are closely monitored.
o Supply interruptions planned to minimise
customer impact.
o Network automation to minimise the
effect of faults.
o Significant expenditure on routine
maintenance to reduce the causes of
network interruption.
o Initiatives to improve dispatch and
mobilisation of response teams.
------------------------------ ----------------------------------------------------------------------
Macro economic factors:
Factors, such as Retail * Monitoring the potential exposure to fluctuating
Price Index (RPI), factors through forecasts from a range of financial
may impact negatively institutions.
on the business.
* Inflation sensitivities reported quarterly through
the business valuation process.
* A significant proportion of our Group debt is
RPI-linked to provide an economic hedge between
allowed revenues and some of our financing costs.
------------------------------ ----------------------------------------------------------------------
The Strategic Report, outlined on pages 4 to 31, has been
approved by the Board of Directors and signed on behalf of the
Board on 30 May 2019.
D Brocksom
Director
Corporate Governance Report
As is required by the Company's regulator, Ofgem, the Company
reports on how the principles and provisions of the UK Corporate
Governance Code ("the Code") have been applied during the year.
There are some limited areas of non-compliance, all of which are
considered appropriate to the privately owned status of the Company
and are explained on page 38.
The Board
Board Members at 31 March 2019
John Roberts
Independent Non-Executive Chairman
Appointed on 1 March 2014
John Roberts was Chief Executive of United Utilities plc from
1999 to 2006. He has a wealth of experience and knowledge,
particularly in the utilities sector, having also been Chief
Executive of Manweb from 1992 until 1995. He has also sat on
Ofgem's Environmental Advisory Panel and has chaired the North West
Energy Council.
Anne Baldock
Non-Executive Director
Appointed on 26 September 2018
Anne Baldock was previously a partner and global head of the
Projects, Energy and Infrastructure Group at the international law
firm Allen & Overy LLP. Now retired as a solicitor, she now has
a portfolio of Non-Executive Director positions. As well as being
one of the JP Morgan Infrastructure Investments Fund Non-Executive
Directors on this Board, she is also on the Board of Low Carbon
Contracts Company Limited, East West Rail Limited and Bazalgette
Tunnel Limited.
Alistair Buchanan
Independent Non-Executive Director
Appointed on 25 July 2018
Alistair Buchanan has over 25 years experience in the energy
industry, including 10 years as Chief Executive of Ofgem. In 2013
he joined KPMG as Partner and UK Chairman of Power & Utilities,
returning to the firm where he trained as a Chartered Accountant.
During his career, Alistair became an award winning energy sector
analyst and head of research for banks in New York and London. With
experience at Board level on various companies, he currently also
serves as an Independent Non-Executive on the Board of Thames Water
Utilities Limited.
Susan Cooklin
Independent Non-Executive Director
Appointed on 25 July 2018
Susan Cooklin is the Managing Director of Route Services at
Network Rail. She has worked at Board level for over 8 years with
Non-Executive Director positions on the Board of Leeds Beckett
University and Leeds Building Society. Susan was listed by Computer
Weekly as the seventh most influential woman in UK IT. In 2013 she
launched the Could IT Be You campaign to raise awareness of IT as a
career for young women
Chris Dowling
Independent Non-Executive Director
Appointed on 1 May 2014
Chris Dowling was, until December 2013, Chairman of Challenger -
Europe with particular responsibility for Challenger's European
Infrastructure investments. Prior to that, he was Managing Partner
of Rutland Partners LLP, the Private Equity fund, and a founding
director of Rutland Trust plc. He has a degree in Economics and
qualified as a Chartered Accountant with Deloitte Haskins &
Sells (now PricewaterhouseCoopers LLP 'PwC'). Chris is also a
non-executive director of Stirling Industries plc.
Corporate Governance Report (continued)
The Board (continued)
Rob Holden
Independent Non-Executive Director
Appointed on 1 January 2016
Rob Holden combines a portfolio of Non-Executive Directorships
with consultancy roles. He has board roles with the Submarine
Delivery Authority, London City Airport, EdF and the Nuclear
Decommissioning Authority. His advisory assignments in the UK have
included work with HS2, Thames Tideway Tunnel, the Type 26 Frigate
and the QE Carrier programmes. Overseas he has worked in the USA
and Singapore on High Speed Rail projects and in Australia on a
regional rail project.
Hamish Lea-Wilson
Non-Executive Director
Appointed on 23 November 2015
Hamish Lea-Wilson is employed by First State Investments
Management (UK) Limited where he is a Director in the Direct
Infrastructure Investment business. He is also a director of
several other fund investments across Europe including New Finerge
SA (Portuguese operator of wind farms with gross installed capacity
of 843MW). He holds a B.Sc. (Hons) Economics degree from Durham
University.
John Lynch
Non-Executive Director
Appointed on 31 January 2017
John Lynch is an investment principal in the Infrastructure
Investments Fund of J.P. Morgan Asset Management, based in London.
Prior to joining the firm, he had a twenty year global career in
investment banking, including the role of head of EMEA Power at
Bank of America Merrill Lynch where he led the bank's advisory and
lending efforts in utilities, conventional power generation,
renewables and energy/utility related infrastructure. He is a dual
citizen of the United States and Ireland. He graduated from
Dartmouth College and holds a Masters of Business Administration
from the University of Chicago Booth School of Business.
Niall Mills
Non-Executive Director
Appointed on 12 June 2009
Niall Mills is employed by First State Investments Management
(UK) Limited where he is a Partner in the Direct Infrastructure
Investment business. He has extensive infrastructure experience
gained in senior industry roles across a variety of sectors,
including utility companies, rail and airports. He is also a
director of several other fund investments across Europe. He has
been a Non-Executive Director of Anglian Water Group plc since
September 2008. He is a Fellow of the Institution of Civil
Engineers and holds a Masters of Business Administration from the
London Business School and an Institute of Directors' Diploma in
Company Directorship.
Corporate Governance Report (continued)
The Board (continued)
Peter Emery
Chief Executive Officer
Appointed on 27 May 2016
Peter Emery has over thirty years' experience in the Energy
Sector. He spent twenty years working for ExxonMobil in corporate
planning, distribution operations, refining and supply with
experience in Europe, North America and the Far East. His final
assignment was as Operations Manager for Fawley Refinery having
full operational responsibility for the UK's largest refinery. On
leaving ExxonMobil, he became the Executive Director of Production
at Drax Power Limited and was a member of the executive team which
completed the IPO of Drax Group plc in 2005, working with the Group
until 2016, in which year he joined the Company. He is also a
Non-Executive Director of N.G. Bailey Limited, having been
appointed in September 2012 and a Board member of the York, North
Yorkshire and East Riding Local Enterprise Partnership and the
Sheffield University 2050 Advisory Board. He is a fellow of the
Institute of Materials, Minerals and Mining.
David Brocksom
Chief Finance Officer
Appointed on 5 October 2015
David Brocksom joined the Company as interim Chief Financial
Officer in September 2013 and has, with a short break at the start
of 2015, been with the Company since then, becoming a Director in
October 2015. Previously he has held a number of Chief Financial
Officer roles including at UK Coal plc and Pace plc. He qualified
as a chartered accountant with Price Waterhouse (now
PricewaterhouseCoopers LLP 'PwC') and is also a member of the
Institute for Turnaround.
Shareholder appointed directors
Niall Mills, Hamish Lea-Wilson and John Lynch and Anne Baldock
are shareholder appointed directors and have appointed alternate
Directors during their time as Board members, Hamish and Niall's
alternate is Tomas Pedraza. John's alternate is Mark Scarsella.
Attendance at Board meetings
The Company Secretary attended all Board meetings during the
year.
At the discretion of the Board, senior management were invited
to attend meetings when appropriate to specific items subject to
discussions.
Where a Director was unable to attend a Board meeting, their
views were canvassed by the Chairman prior to the meeting.
Corporate Governance Report (continued)
The Board (continued)
The table below shows Board and Board Committee attendance
during the year, for committee members only. Informal meetings to
discuss board member replacements are not included nor are
attendances by Directors at committee meetings where they are not
formal members.
Board Member ENWL Board Audit Committee Remuneration Nominations Health,
Committee Committee Safety and
Attended / Environment
Scheduled Committee
=================== =========== ================ ============= ============ =============
John Roberts 7/7 3/3 3/3 1/1 -
------------------- ----------- ---------------- ------------- ------------ -------------
Alistair Buchanan 5/5 - - - -
------------------- ----------- ---------------- ------------- ------------ -------------
Anne Baldock* 3/4 - 2/2 - 2/2
------------------- ----------- ---------------- ------------- ------------ -------------
Chris Dowling 7/7 3/3 - 1/1 -
------------------- ----------- ---------------- ------------- ------------ -------------
David Brocksom 7/7 - - -
------------------- ----------- ---------------- ------------- ------------ -------------
Hamish Lea-Wilson 6/7 3/3 3/3 -
------------------- ----------- ---------------- ------------- ------------ -------------
John Lynch 7/7 3/3 3/3 1/1 -
------------------- ----------- ---------------- ------------- ------------ -------------
Mike Nagle 3/3 0/1 1/1 - 1/1
------------------- ----------- ---------------- ------------- ------------ -------------
Niall Mills** 7/7 - 233 1/1 3/3
------------------- ----------- ---------------- ------------- ------------ -------------
Peter Emery 7/7 - - - 3/3
------------------- ----------- ---------------- ------------- ------------ -------------
Rob Holden 6/7 - - - 3/3
------------------- ----------- ---------------- ------------- ------------ -------------
Susan Cooklin 5/5 2/2 - - -
=================== =========== ================ ============= ============ =============
*At the 18(th) October 2018 Health, Safety and Environment
Committee meeting Mark Scarsella attended as an alternate Director
in place of Anne Baldock.
**At two Health, Safety and Environment Committee meetings
Hamish Lea-Wilson attended as an alternate Director in place of
Niall Mills.
Corporate Governance Report (continued)
The Board (continued)
Diversity
The Board supports diversity in its broadest sense and
accordingly aims to ensure that its number is made up of a diverse
range of experience, independence and expertise appropriate to the
industry in which it operates, its operational business model and
the extensive financial, governance, risk management and legal
expertise required.
Diversity of the Board continues to be assessed on a case by
case basis as vacancies arise. This is principally a matter for the
Nominations Committee.
Composition
The Board comprises five Non-Executive Directors considered
under the Code to be independent, one of whom is the Chairman, four
Non-Executive Directors representing the two shareholders and two
Executive Directors. The Directors' biographies are on pages 32 to
34.
Two of the Independent Non-Executive Directors, Chris Dowling
and John Roberts have been named to Ofgem as fulfilling the role of
Sufficiently Independent Directors as required by Ofgem. The role
of the Sufficiently Independent Director was introduced from 1
April 2014 as part of a range of enhancements made to the
ring-fence conditions in the Company's licence to protect
consumers, should a distribution operator experience financial
distress.
Leadership
The Board provides leadership of the Company, ensuring it
continues to balance the needs of stakeholders while delivering the
Company's strategy. Individually the Directors act in a way that
they consider will promote the long-term success of the
Company.
The role of the Chairman and the Chief Executive Officer is
separate, defined by clear role descriptions set out in writing and
agreed by the Board.
The Chairman is responsible for the leadership and governance of
the Board and the Chief Executive Officer for the operational
management of the Company and implementation of the strategy on the
Board's behalf. The Chief Executive Officer is assisted by his
Executive Leadership Team that comprises the operation unit
directors.
Advice
All Directors are able to consult with the Company Secretary and
the appointment and removal of the Company Secretary is a matter
reserved for the Board.
Any individual Director, or the Board as a whole, may take
independent professional advice relating to any aspect of their
duties at the Company's expense. This is clearly stated in the
Terms of Reference of the Board and of its Committees.
How the Board operates
The Board's role is to promote the long-term success of the
Company and provide leadership within a framework of effective
controls. The Board is responsible for approving the strategy and
for ensuring that there are suitable resources to achieve it. In
doing so, the Board takes into account all stakeholders, including
its shareholders, employees, suppliers and the communities in which
it operates.
The Board has Terms of Reference that detail matters
specifically reserved for its decision, including the approval of
budgets and financial results, assessment of new Board
appointments, dividend decisions, litigation which is material to
the Group and Directors' remuneration.
Corporate Governance Report (continued)
The Board (continued)
Evaluation
The Board participate in an internal questionnaire based
evaluation process conducted by the Company Secretary every
year.
During March 2018, an externally facilitated evaluation was
undertaken by Lintstock Ltd, who had no previous connection with
the Company. The findings were delivered to the Board in May 2018
with largely positive comments. In relation to Board diversity it
was acknowledged that there was a need to develop a wider range of
experience and competency. As such, an executive search agency was
engaged with a view to recruit two additional non-executive
directors; ideally one with regulatory experience and the other
with considerable IT experience. Following this search the
appointments of Alistair Buchanan and Susan Cooklin were
concluded.
Linstock Ltd have been engaged to undertake a second
evaluation.
Training
The Chairman is responsible for ensuring that all Directors
update their skills, knowledge and familiarity of the Company.
Following feedback from Board evaluations, each member of the Board
is enrolled as a member of the Non-Executive Directors Association
who provide regular training to the directors on a range of
topics.
Directors regularly receive reports facilitating greater
awareness and understanding of the Company, its regulatory
environment and the industry. The Board held two workshops and two
strategy meetings during the year aimed at developing a greater
understanding of the Company's operations and to explore strategic
matters in detail.
Committee members received detailed presentations at meetings
focusing on areas of relevance to the Committee and Board members
are invited to workshops with shareholder representatives which are
able to delve into areas of interest in greater detail.
The Chairman is also responsible for ensuring that all new
Directors receive a tailored induction programme that reflects
their experience and position as either an Executive or
Non-Executive Director. This involves meetings with the Board, the
Company Secretary, other members of the Executive and Senior
Leadership Teams and site visits. Additional documentation is
provided as appropriate.
Appointments
The five independent Non-Executive Directors are provided with a
detailed letter of appointment and are appointed for an initial
three-year term, to be reviewed every three years thereafter if
they are reappointed.
The four other Non-Executive Directors are appointed by the
Company's shareholders as their representatives. The minimum
expected time commitment required from Non-Executive Directors is
six to ten days per year and is detailed in their letter of
appointment.
On his appointment, Peter Emery was a Non-Executive Director of
NG Bailey Group Limited, the Board agreed to his remaining a
Non-Executive Director with the proviso that when he is due for
re-election, this again will be discussed with the ENWL Board.
Conflicts of interest
The Board has appropriate processes in place to assess and
manage any potential conflicts of interest. As part of these
procedures the Board:
-- Considers conflicts of interest as part of the agenda for all meetings.
-- Asks Directors annually if there are any changes to their
conflict of interest declarations, including appointments to the
Boards of other entities.
-- Keeps records and Board minutes regarding any decisions made.
-- Maintains a company-wide conflicts of interest register.
Corporate Governance Report (continued)
The Board (continued)
Areas of non-compliance with the UK Corporate Governance
Code
There are some areas where the Company does not comply with the
UK Corporate Governance Code, all of which are due to its privately
owned status and are discussed below. The Company has endeavoured
to comply with the spirit of the Code throughout the accounts;
there are areas where compliance with the provision is either
impractical or inappropriate, outlined below.
Senior independent director
The Board has not appointed a Non-Executive Director as a Senior
Independent Director under the Code. The Board meets the objectives
behind this requirement through its shareholder representation on
the Board (A.4.1).
Details of remuneration to executive directors, released to
serve as non-executive directors
The Company does not disclose in these financial statements the
remuneration paid to those Executive Directors who are released to
serve as Non-Executive Directors elsewhere. This information is
made available to the shareholders through their representation on
the Board (D.1.2).
Constitution of the Board
The Code states that half the Board should be Independent
Non-Executive Directors. As the Company is privately owned and both
shareholders are represented on the Board, it is felt that the
needs of shareholders are met through their presence on the Board
(B.1.2).
In addition to the two Sufficiently Independent Directors
required by Ofgem, there are three further Independent
Non-Executive Directors. The Board considers that the five
Independent Non-Executive Directors offer an appropriate
perspective, allowing for the refreshment of its Committees,
meaningful individual participation and effective collective
decision making.
Annual election of Directors
The Board does not subject its Directors to annual elections as
the shareholder representation on the Board allows the opportunity
to challenge a Director's performance directly rather than at an
Annual General Meeting (B.7.1).
Publication of the terms and conditions of Non-Executive
Directors
As a privately owned company ENWL is not required to provide a
remuneration report in line with the Large and Medium Sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations
2013 (B.3.2).
The purpose of the remuneration report is to enable shareholders
to exercise judgement over directors' remuneration. With the
presence of shareholder representatives on the Remuneration
Committee, this purpose is directly met.
Engagement with stakeholders
As a privately owned company, ENWL does not have a large or
dispersed shareholder base with which to formally communicate, nor
are there any minority shareholders. Therefore Annual General
Meetings are not held (E.2.1 and E.2.4).
Shareholders:
In addition to formal Board meetings and workshop sessions, the
meeting cycle includes quarterly valuation workshops to focus on
financial and treasury matters and detailed periodic workshops to
meet the requirements of strategic planning and more detailed
performance reviews. Board members are invited to attend these
meetings.
Corporate Governance Report (continued)
Engagement with stakeholders (continued)
Shareholders (continued):
The Company works closely with its shareholders and both
shareholders endorse the UK Stewardship Code and see their
stewardship commitments as a key feature of their investment
philosophy. They are committed to maintaining the integrity and
quality of the markets in which they operate and allocate
investment capital to productive purposes, while protecting and
enhancing their clients' capital over the longer term.
Stakeholders:
The Company has strong and open relationships with stakeholders,
including Ofgem, local government, schools, emergency services, MPs
and central government. There are a number of key relationships and
a vast range of public sector stakeholders. The Company also
engages across the industry with electricity suppliers, employees,
contractors and other utilities.
Our stakeholder engagement strategy is outlined on page 12.
The Company has recently appointed Jeff Halliwell to Chair our
Customer Engagement Group (CEG). Jeff has now also appointed the
members of the Group and it will hold its inauguration meeting in
May 2019.
The role of the CEG is to independently scrutinise our
stakeholder engagement work. In doing so, the Group will have
access to the Board and the Executive Leadership Team and will be
able to question them about how stakeholder engagement insight is
being used to inform our RIIO-ED 2 Business Plan. The CEG will also
fulfil the oversight function for all reinforcement decisions in
line with the requirements of the Department for Business,
Environment and Industrial Strategy.
Board Committees
The Board has an extensive workload and therefore has delegated
the detailed oversight of certain items to six standing Committees
and two ad-hoc Committees:
Audit Committee
Remuneration Committee
Nominations Committee
Health, Safety and Environment
Committee
Use of Systems Pricing Committee
Financing Committee
Banking Committee
Retail Property Committee
The minutes of each Committee are made available to the
Board.
The Use of Systems Pricing Committee and the Financing Committee
meet as required to approve detail about system pricing contained
in Licence Condition 14 and financing transactions
respectively.
The Banking and Retail Property Committees meet on an ad hoc
basis to review bank mandates and the Company's residual retail
property portfolio as necessary.
The terms of reference and membership of all those Committees in
green were reviewed and amended during the year to ensure effective
operation.
Corporate Governance Report (continued)
Report of the Audit Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference which are reviewed by the Committee and
approved by the Board annually. The Terms of Reference are
available on the Electricity North West website.
Membership and meetings
The Committee members are all Non-Executive Directors. The Board
is satisfied that the Committee Chair, Chris Dowling, as a
Chartered Accountant, has relevant financial experience. Attendance
by individual members is detailed in the table on page 35.
There were a number of regular attendees, by invitation, at
appropriate Committee meetings in whole or in part, including the
Chief Executive Officer, the Chief Financial Officer, the Head of
Risk, Control and Assurance and the external auditor.
Over the course of the year, the Committee Chair held separate
meetings with both the lead external audit partner at Deloitte LLP
and with the Head of Risk, Control and Assurance.
The Committee also met as a whole with the external auditor
without management present.
The role of the Committee
The key responsibilities of the Audit Committee are to:
-- Monitor the integrity of the financial statements, including
its annual and half-yearly reports and to report to the Board
significant financial reporting issues and judgements which they
contain.
-- Monitor the independence, effectiveness and remuneration of the external auditor.
-- Review the adequacy and effectiveness of the Company's
internal financial controls and internal control and risk
management systems and compliance with the UK Corporate Governance
Code, including an annual review of the Company's risk
register.
-- Monitor the effectiveness of the Company's internal audit function.
-- Ensure that the Group's treasury function is effective and
approve treasury transactions in line with banking activity.
The significant matters considered by the Committee during the
year included:
-- Review of the 31 March 2019 Annual Report and Consolidated
Financial Statements and the September 2018 half-year report.
-- Evaluation of the effectiveness and scope of the internal
audit plan including management response to audit reports.
-- Review of the scope and methodology of the audit work to be
undertaken by the external auditor, their terms of engagement and
fees.
Corporate Governance Report (continued)
In accordance with UK regulations, the Company's auditor adheres
to a mandatory rotation policy and a new Group lead engagement
partner is appointed once their predecessors have completed a term
of five years. A new lead engagement partner was appointed in the
year ended 31 March 2018 due to his predecessor completing her five
year term.
The significant issues considered by the Committee during the
approval of the financial statements to 31 March 2019 were:
-- The adoption of new accounting standards effective during the
year, IFRS 9 and IFRS 15 - and the impact on the financial
statements.
-- Treasury accounting, particularly fair value calculations and
ensuring appropriate disclosures. There is a risk, due to the
complexity of the financial instruments that they are incorrectly
valued, accounted for or disclosed, resulting in a material error
in the financial statements or a material disclosure deficiency.
The Committee noted the specialist advice received in the area and
compliance with appropriate accounting standards in valuation and
disclosure.
-- Management override of controls (In accordance with ISA 240 )
with particular consideration of controls surrounding journal
entries, accounting estimates for bias of material misstatement and
fraud, adjustments made in the preparation of the Group financial
statements and the potential manipulation of any incentive or
performance targets.
-- The risk of material misstatement and fraud in revenue
recognition where considerations included specific testing on
unbilled income and analytical review.
-- The inclusion of RoRE in the Annual Report and Financial
Statements as a key measure of performance under the regulatory
contract.
-- Capital and revenue allocations and ensuring the appropriate
treatment of fixed asset expenditure. The Committee considered the
management's key controls and assumptions applied to the
capitalisation of overhead
costs. The assumptions, policies and procedures in this area were considered reasonable.
External audit
The external auditor is engaged to express an opinion on the
Company and Group financial statements. The audit includes the
review and testing of the data contained in the financial
statements to the extent necessary for expressing an audit opinion
on the truth and fairness of the financial statements. This year's
audit is the seventeenth conducted by Deloitte LLP.
To assess the effectiveness of the previous year's external
audit, the Committee reviewed the audit approach and strategy and
received a report of Deloitte LLP's performance from the
Executives.
Auditor independence and the provision of non-audit services
The Company has a formal policy on the use of the auditor for
non-audit work and the awarding of such work is managed in order to
ensure that the auditor is able to conduct an independent audit and
is perceived to be independent by our stakeholders.
In keeping with professional ethical standards, Deloitte LLP
also confirmed their independence to the Committee and set out the
supporting evidence in their report to the Committee prior to the
publication of the Annual Report and Consolidated Financial
Statements.
The non-audit services provided by Deloitte LLP during the year
were in connection to Ofgem regulatory requirements and consultancy
to the ultimate parent company, NWEN (Jersey).
Corporate Governance Report (continued)
Internal control framework
The Committee, on behalf of the Board, is responsible for
reviewing the Company's internal control framework. This review is
consistent with the Code and covers all material areas of the
Group, including risk management and compliance with controls.
Further details of risk management and internal controls are set
out on pages 27 to 31.
Whistleblowing arrangements
The Committee is responsible for reviewing the Company's
Disclosure (Whistleblowing) policy and any concerns raised through
these channels and management actions taken in response. A revised
policy was approved by the Committee in January 2019. A
confidential service is provided by an external company whereby
employees can raise concerns by email or telephone in confidence.
Any matters reported are investigated and escalated as
appropriate.
Committee effectiveness
The Committee formally reviewed its Terms of Reference and its
membership during the year to ensure both remain fit for purpose
and were considered effective by the Board.
Fair, balanced and understandable
The Audit Committee was requested to assist the Board in
confirming that the Annual Report is fair, balanced and
understandable. As part of its review, the Audit Committee took
into account the preparation process for the Annual Report and
Consolidated Financial Statements:
-- Different sections of the Annual Report are drafted by
appropriate senior management who have visibility of the Company's
performance in these areas.
-- Reviews of the drafts are carried out by the Executive
Directors and other members of the Executive Leadership Team.
-- Feedback is received from the external auditor on the content
of the Annual Report. A final draft is reviewed by the Audit
Committee before being recommended to the Board for approval.
The Directors' statement on a fair, balanced and understandable
Annual Report and Consolidated Financial Statements is set out on
page 46.
Corporate Governance Report (continued)
Report of the Nominations Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference and these are available on the Company
website. The Committee's responsibilities include keeping under
review the composition of the Board and senior executives,
identifying and nominating candidates for approval by the Board to
fill any vacancies and succession planning for Directors and other
senior executives.
Membership and meetings
The Committee Chair is Chris Dowling, Independent Non-Executive
Director. Composition of the Committee and attendance by individual
members at meetings is detailed on page 35.
The Chief Executive Officer and external advisors attend
meetings at the invitation of the Chairman of the Committee.
Diversity
As described in the Corporate Governance report on page 32, the
Board is committed to diversity in its broadest sense and the
Nominations Committee ensures this remains central to recruitment
and succession planning.
Report of the Remuneration Committee
The Committee's role is to determine the remuneration structure
for the Executive Directors to ensure that it balances appropriate
reward with the creation of long-term value and sustainability of
the network. The Terms of Reference for the Committee are available
on the Electricity North West website.
It is also responsible for the review of the remuneration of
other members of the Executive Leadership Team to ensure the
structure and levels of remuneration appropriately incentivise
these individuals to achieve the Company's strategic
objectives.
The Committee has been joined by invitation during the year by
the Chief Executive Officer and the Chief Financial Officer. They
do not attend for any discussions in which they are individually
discussed.
Membership and meetings
The Committee Chair is Niall Mills, Non-Executive Director.
Composition of the Committee and attendance by individual members
is detailed on page 35.
Role of the Committee
The Committee reviews and approves the overall remuneration
levels of employees below senior management level, but does not set
remuneration for these individuals. This oversight role allows the
Committee to take into account pay policies and employment
conditions across the Group.
The Committee is of the opinion that the remuneration structure,
designed for the RIIO-ED1 period, reflects the strategic direction
of the business and will promote the long-term success of the
Company.
Share options are not offered as an incentive to either
Executive or Non-Executive Directors as the Company is privately
owned.
Corporate Governance Report (continued)
The table below sets out the nature of the remuneration of the
Executive Directors:
Basic Salary Basic salary provides the core reward for External advice is taken on all
the role. Salaries are set at a remuneration to ensure that it remains
sufficient level effective and appropriate.
to attract and retain high calibre Levels of basic salary are benchmarked
individuals who can deliver the Group's and will also reflect the Director's
strategic objectives. experience and
time at Director level.
========================================== =========================================
Benefits Other benefits provided are designed, as In addition to basic salary, Directors
with basic salary, to provide a are provided with a car allowance and
competitive but not private medical
excessive reward package. insurance.
========================================== =========================================
Executive Incentive Plan (EIP) Executive Directors are members of the The EIP works on a balanced scorecard
Executive Incentive Plan which was approach, containing short-term metrics
introduced in April to evaluate
2015 to reward both in-year performance in-year performance and longer-term
and incentivise strategic and innovative measures promoting a strategic focus and
behaviours sustainable performance.
over the longer term, aligned to Partial payments are made each year
shareholder objectives. based on achievement against the
balanced scorecard, with
additional payments made following years
4 and 8 of the regulatory period to
ensure the balance
of short and long-term incentivisation
is retained.
Following Health & Safety best practice,
Safety is considered to be an essential
part of any
role and Directors therefore receive no
Health & Safety related incentives.
However a range
of safety performance measures act as a
gateway to earn bonuses.
========================================== =========================================
Pension Directors are offered the same level of No Director is a member of the defined
defined contribution benefits as all benefit scheme which is now closed to
other employees, new members.
or a taxable payment in lieu.
========================================== =========================================
Corporate Governance Report (continued)
Report of the Health, Safety and Environment Committee
The Committee continues to develop the Company's health, safety
and environment strategies, agrees targets and monitors Company
performance in this area. It regularly challenges the executive and
the health, safety and environment team to look at new initiatives
and work with other organisations.
Membership and meetings
The Committee Chair is Rob Holden, Independent Non-Executive
Director. Composition of the Committee and attendance by individual
members is detailed on page 35.
The Committee's terms of reference and membership were revised
in March 2018.
Meetings are also attended by executives in charge of
operationally focused directorates.
The role of the Committee
The Committee has designated authority from the Board set out in
its Terms of Reference which are published on the Company
website.
The primary purpose of the Committee is to:
-- Set the corporate health, safety and environment strategy,
objectives, targets and programmes.
-- Monitor performance in these areas with a view to:
- minimising risk;
- ensuring legal compliance;
- responding to significant events; and
- ensuring significant resources are allocated for the control
of health, safety and environmental risks.
-- Report to the Board developments, trends and or forthcoming
legislation in relation to the health, safety and environmental
matters which may be relevant to the Company's operations, assets
or employees.
-- Review the Company's external reporting in this area and regulatory disclosures.
At every meeting the Committee receives and discusses in detail
a Health, Safety and Environment performance report for the
preceding period, prepared and presented by the Head of Health,
Safety and Environment who attends every meeting.
At each meeting the Committee reviews Health and Safety risks
recorded on the Company's risk register.
Directors' Report
The Directors present their Annual Report and Consolidated
Financial Statements of Electricity North West Limited ('the
Company') and its subsidiaries (together referred to as the
'Group') for the year ended 31 March 2019.
Dividends
During the year ended 31 March 2019, the Company proposed and
paid a final dividend for the year ended 31 March 2018 of GBP16m,
paid in June 2018, and an interim dividend of GBP30m that was paid
in December 2018. In the year ended 31 March 2018 the Company
declared a final dividend for the year ended 31 March 2017 of
GBP12m, paid in June 2017, and an interim dividend of GBP64m that
was paid in December 2017. The Directors have proposed a final
dividend of GBP17m for the year ended 31 March 2019.
Details of the Group's dividend policy can be found in the
Strategic Report.
Directors
The Directors of the Company during the year ended 31 March 2019
and to date are set out below. Directors served for the whole year
except where otherwise indicated.
Executive Directors
D Brocksom
P Emery
Non-executive Directors
Dr J Roberts
C Dowling
R D Holden
J E Lynch
N P Mills
H Lea-Wilson
A Buchanan (appointed 25 July 2018)
S Cooklin (appointed 25 July 2018)
A E Baldock (appointed 26 September 2018)
M A Nagle (resigned 26 September 2018)
Alternate Directors during the year were:
M Scarsella
T Pedraza
At no time during the year did any Director have a material
interest in any contract or arrangement which was significant in
relation to the Group's business.
Directors' and Officers' insurance
The Group maintains an appropriate level of Directors' and
Officers' insurance whereby Directors are indemnified against
liabilities to third parties to the extent permitted by the
Companies Act. The insurance is a group policy, held in the name of
the ultimate parent North West Electricity Networks (Jersey) (NWEN
(Jersey)) and is for the benefit of that company and all its
subsidiaries, including the Company.
People
The Group's policies on employee consultation, the treatment of
disabled employees and on equality and diversity across all areas
of the business are contained within the People section of the
Strategic Report.
Corporate Social Responsibility
Details of the Group's approach to Corporate Social
Responsibility can be found in the Strategic Report.
Research and development
The Group is committed to developing innovative and
cost-effective solutions for providing high quality services and
reliability to our customers, and for the benefit of the wider
community and the development of the network, as further detailed
in the Strategic Report. During the year ended 31 March 2019 the
Group incurred GBP2.9m of expenditure on research and development
(2018: GBP3.4m).
Directors' Report (continued)
Financial instruments
The risk management objectives and policies of the Group in
relation to the use of financial instruments can be found in the
Strategic Report and in Note 20.
Fixed assets
Further details on Property, Plant and Equipment are provided in
the Strategic Report and Note 13.
Capital structure
The Company's capital structure is set out in Note 28.
Commitments
Details of commitments and contractual obligations are provided
in Notes 12, 13, 20 and 32.
Future developments
Details of the future developments of the Group can be found in
the Chief Executive Officer's Statement.
Information given to the auditor
Each of the persons who are a Director at the date of approval
of this Annual Report confirms that:
(1) so far as the Director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
(2) each Director has taken all the steps that they ought to
have taken as a Director in order to make themselves aware of any
relevant audit information
This confirmation is given and should be interpreted within the
provisions of s418 of the Companies Act 2006.
Independent auditor
Deloitte LLP, Statutory Auditor, Manchester, United Kingdom has
expressed its willingness to continue in office as auditor of the
Group. In accordance with section 487 of the Companies Act 2006,
Deloitte LLP is deemed to be re-appointed as auditor of the
Company.
Registered address
The Company is registered in England, the United Kingdom at the
following address:
Electricity North West Limited
304 Bridgewater Place
Birchwood Park
Warrington
England
WA3 6XG
Registered number: 02366949
Approved by the Board on 30 May 2019 and signed on its behalf
by:
D Brocksom
Director
Directors' Responsibilities Statement
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. Under company law the Directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
This responsibility statement was approved by the Board of
Directors on 30 May 2019 and is signed on its behalf by:
D Brocksom
Director
Independent Auditor's Report to the Members of Electricity North
West Limited
Opinion on financial statements of Electricity North West
Ltd
In our opinion:
-- the financial statements of Electricity North West Limited
(the 'parent company') and its subsidiaries (the 'group') give a
true and fair view of the state of the group's and of the parent
company's affairs as at 31 March 2019 and of the group's profit for
the year then ended;
-- the group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
-- the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies
Act 2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as regards the
group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
-- the consolidated income statement;
-- the consolidated statement of comprehensive income;
-- the consolidated and parent company balance sheets;
-- the consolidated and parent company statements of changes in equity;
-- the consolidated cash flow statement; and
-- the related notes 1 to 32.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the parent company financial statements, as
applied in accordance with the provisions of the Companies Act
2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the group and the parent company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the
Financial Reporting Council's (the 'FRC's') Ethical Standard as
applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by
the FRC's Ethical Standard were not provided to the group or the
parent company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Summary of our audit approach
The key audit matters that we identified in the
current year were:
* Treasury - accounting
* Inappropriate capitalisation of costs
Within this report, any new key audit matters
are identified with and any key audit matters
which are the same as the prior year identified
with.
The materiality that we used for the group financial
statements was GBP5.05m which was determined on
the basis of 3.6% of adjusted profit before tax.
=====================================================
All audit work for the group was performed directly
by the group engagement team.
=====================================================
Our audit approach is consistent with the previous
year. It was noted that defined benefit pension
scheme liability assumptions is no longer a key
audit matter and this is discussed within the
key audit matters section below.
=====================================================
Conclusions relating to going concern
We are required by ISAs (UK) to report in We have nothing to
respect of the following matters where: report in respect
* the directors' use of the going concern basis of of these matters.
accounting in preparation of the financial statements
is not appropriate; or
* the directors have not disclosed in the financial
statements any identified material uncertainties that
may cast significant doubt about the group's or the
parent company's ability to continue to adopt the
going concern basis of accounting for a period of at
least twelve months from the date when the financial
statements are authorised for issue.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Last year our report also referred to defined benefit pension
scheme liability assumptions. There have been no significant events
impacting the defined benefit pension scheme in recent years which
require high levels of management judgement. In addition,
management continue to use the same process for determining the
actuarial assumptions and the assumptions adopted previously have
always fallen within our acceptable range. Therefore we do no deem
this a key audit matter for this year's audit.
Key audit matter Treasury is a complex area and includes the accounting
description for material financial instruments including index-linked
swaps and bonds. Due to the complexity of the accounting
there is a risk that these instruments are incorrectly
valued, accounted for or disclosed in the financial
statements which may result in a material error.
As at 31 March 2019 ENWL had GBP632.4m of bonds
in issue (2018: GBP705.6m) as disclosed in note
[19] to the financial statements, and held derivative
financial instruments, being a portfolio of index-linked
swaps, with a fair value of GBP404.6m (2018: GBP357.3m)
as disclosed in note 20. Total fair value movements
in the year were GBP47.3m loss (2018: GBP30.1m
gain) as per note 9 to the financial statements.
See also the Audit Committee's Report on page 40
where treasury accounting is discussed as a significant
issue, the accounting policy on financial instruments
in note 2 to the financial statements and the associated
critical accounting judgement and key sources of
estimation uncertainty in note 3.
================= ===========================================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
How the scope Initially the design and implementation of the
of our audit key control around the inputs used within the calculation
responded to of the fair value of derivatives was assessed.
the key audit Due to the complexity of the financial instruments
matter held in the group our audit team includes financial
instrument specialists.
We tested a sample of valuations in respect of
the index-linked swaps held by the group, including
an assessment of the application of credit risk
under IFRS 13. In addition we recalculated the
carrying value of the bonds held at both amortised
cost and at fair value through profit and loss,
along with the associated amortisation and interest
charges as the bonds unwind to maturity.
We challenged management around the IFRS 9 transitional
adjustments, as well as the ongoing treatment of
the financial instruments and associated debt items
in line with IFRS 9 to ensure debt items were valued
correctly in line with IFRS 9. We challenged management
by discussing the specific inputs into the models
assumed and comparing these to other third party
sources as well as challenging the assumptions
made by management to ensure these were in line
with our expectations.
We have challenged management by reviewing the
inputs into the valuation model and agree that
certain derivatives should be classified as Level
3 as per the fair value hierarchy of IFRS 13. In
addition our review of the financial statements
assessed whether the disclosures made in note [20]
are consistent with the requirements of IFRS 13
and IFRS 7.
Key observations From the work performed we are satisfied that the
valuation of the Group's portfolio of bonds and
index-linked swaps is materially correct. In addition
we note that the index-linked swaps are appropriately
disclosed as Level 2 and Level 3 in the financial
statements as per the fair value hierarchy of IFRS
13. We are also satisfied with the transitional
adjustments and continuing accounting of the group
in respect of IFRS 9.
===========================================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Key audit matter This key audit matter relates to the judgmental
description percentage rates applied to costs initially recorded
as overhead expenditure and subsequently capitalised
into fixed assets. In particular we focus on those
judgmental areas, for example employee costs and
other costs such as faults, where the split between
capital projects and repair and maintenance is
judgemental.
Given the significant level of judgement involved,
we considered this a potential fraud risk area.
The effect of inappropriate capitalisation of costs
from a financial statement perspective is that
items which are capital in nature are expensed,
whilst items which are expenditure in nature are,
conversely, capitalised. Given the magnitude of
overheads capitalised in the business the impact
could be material. Total employee costs are GBP126.3m
in the year (2018: GBP115.6m), of which GBP68.2m
(2018: GBP64.1m) has been capitalised directly
to fixed assets. Fault costs totaled GBP35.7m (2018:
GBP32.8m) of which GBP22.9m (2018: GBP21.3m) had
been capitalised.
See also the Audit Committee's Report on [page
34] where overhead absorption is discussed as a
significant issue, the accounting policy for tangible
fixed assets in note [2] to the financial statements
and the associated critical accounting judgement
and key sources of estimation uncertainty in note
[3].
================================================================
How the scope Initially, we have assessed the design and implementation
of our audit of the key control around the input of the stated
responded to percentages used and the subsequent calculation
the key audit was assessed.
matter We have reviewed the Company's assumptions, policies
and procedures with regards to overhead absorption
and compared these to the balances capitalised.
In respect of overhead absorption we have considered
the relative percentage capitalisation by function/operational
area in the business and challenged the key assumptions
made by management including testing on a sample
basis to appropriate support.
As part of our audit of tangible fixed assets we
tested a sample of additions to consider whether
those items are capital in nature. A sample of
capital projects were reviewed in detail, with
discussions and supporting documentation obtained
from project managers in order to better understand
those projects and determine the specific nature
of the spend and method of overhead absorption.
================================================================
Key observations From the work performed we are satisfied that the
assumptions made in respect of the rates of overhead
absorption applied in the business are reasonable.
================================================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Our application of materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
GBP5.05m GBP5.04m
==================================== =================================
3.6% of adjusted pre-tax Parent company materiality
profit, being profit pre equates to 99% of net assets,
tax and fair value movements. which is capped at 99%
of group materiality.
==================================== =================================
Adjusted pre-tax profit As the parent company contains
is deemed suitable as this almost all net assets,
removes the volatile fair this is deemed a suitable
value movements of the benchmark for the determination
financial derivatives held, of materiality.
for which no formal hedge
accounting is applied,
and therefore creates a
stable basis for the determination
or our materiality.
Adjusted pre-tax profit
is further determined to
be a key metric used by
the users of the financial
statements of regulated
utilities.
==================================== =================================
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP100,000, as well as
differences below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing
the overall presentation of the financial statements.
An overview of the scope of our audit
Given the nature of the group's corporate structure where all
evidence relating to each entity is compiled at the group's head
office and statutory audits are required for the non-dormant entity
within the group, we performed an audit covering 100% of the
group's companies and accordingly our audit work achieved coverage
of 100% of the group's total assets, revenue and profit.
Component materiality level was capped at GBP5.04m.
We have also tested the consolidation process.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Other information
The directors are responsible for the other We have nothing to
information. The other information comprises report in respect
the information included in the annual report, of these matters.
other than the financial statements and
our auditor's report thereon.
Our opinion on the financial statements
does not cover the other information and,
except to the extent otherwise explicitly
stated in our report, we do not express
any form of assurance conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read
the other information and, in doing so,
consider whether the other information is
materially inconsistent with the financial
statements or our knowledge obtained in
the audit or otherwise appears to be materially
misstated.
If we identify such material inconsistencies
or apparent material misstatements, we are
required to determine whether there is a
material misstatement in the financial statements
or a material misstatement of the other
information. If, based on the work we have
performed, we conclude that there is a material
misstatement of this other information,
we are required to report that fact.
Responsibilities of directors
As explained more fully in the directors' responsibilities statement,
the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine
is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, the directors are responsible
for assessing the group's and the parent company's ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have
no realistic alternative but to do so.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council's website at: www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor's report.
Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement
in respect of irregularities, including fraud and non-compliance
with laws and regulations, our procedures included the following:
* enquiring of management, internal audit and the audit
committee, including obtaining and reviewing
supporting documentation, concerning the group's
policies and procedures relating to:
o identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
o detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged fraud;
o the internal controls established to mitigate risks related
to fraud or non-compliance with laws and regulations;
* discussing among the engagement team and involving
relevant internal specialists, including tax,
valuations, pensions, IT and financial instrument
specialists regarding how and where fraud might occur
in the financial statements and any potential
indicators of fraud. As part of this discussion, we
identified potential for fraud in the following area:
inappropriate capitalisation of costs; and
* obtaining an understanding of the legal and
regulatory frameworks that the group operates in,
focusing on those laws and regulations that had a
direct effect on the financial statements or that had
a fundamental effect on the operations of the group.
The key laws and regulations we considered in this
context included the UK Companies Act, pensions
legislation and tax legislation. In addition,
compliance with terms of the group's operating
licence were fundamental to the group's ability to
continue as a going concern.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Audit response to risks identified
As a result of performing the above, we identified inappropriate
capitalisation of costs as a key audit matter. The key audit
matters section of our report explains the matter in more detail
and also describes the specific procedures we performed in response
to the key audit matter.
In addition to the above, our procedures to respond to risks
identified included the following:
* reviewing the financial statement disclosures and
testing to supporting documentation to assess
compliance with relevant laws and regulations
discussed above;
* enquiring of management, the audit committee and
in-house legal counsel concerning actual and
potential litigation and claims;
* performing analytical procedures to identify any
unusual or unexpected relationships that may indicate
risks of material misstatement due to fraud;
* reading minutes of meetings of those charged with
governance, reviewing internal audit reports and
reviewing correspondence with HMRC & Ofgem, the
licensing authority; and
* in addressing the risk of fraud through management
override of controls, testing the appropriateness of
journal entries and other adjustments; assessing
whether the judgements made in making accounting
estimates are indicative of a potential bias; and
evaluating the business rationale of any significant
transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications
of fraud or non-compliance with laws and regulations throughout
the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the strategic report and the
directors' report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
-- the strategic report and the directors' report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and
of the parent company and their environment obtained in the course
of the audit, we have not identified any material misstatements in
the strategic report or the directors' report.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required We have nothing to
to report to you if, in our opinion: report in respect
* we have not received all the information and of these matters.
explanations we require for our audit; or
* adequate accounting records have not been kept by the
parent company, or returns adequate for our audit
have not been received from branches not visited by
us; or
* the parent company financial statement are not in
agreement with the accounting records and returns.
Directors' remuneration
We have nothing to
* Under the Companies Act 2006 we are also required to report in respect
report if in our opinion certain disclosures of of this matter.
directors' remuneration have not been made.
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were
appointed by the Shareholders in 2002 to audit the financial
statements for the year ending 31 March 2003 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is
17 years, covering the years ending 31 March 2003 to 31 March
2019.
Consistency of the audit report with the additional report to
the audit committee
Our audit opinion is consistent with the additional report to
the audit committee we are required to provide in accordance
with ISAs (UK).
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Chris Robertson (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
30 May 2019
Financial Statements
Consolidated and Company Statement of Comprehensive Income
for the year ended 31 March 2019
Group and Company Group and Company
2019 2018
Note
GBPm GBPm
========================================================================== ==== ================= =================
Revenue 4 458.3 430.2
-------------------------------------------------------------------------- ---- ----------------- -----------------
Employee costs 5,6 (58.1) (51.5)
Depreciation and amortisation expense 5 (116.9) (103.3)
Other operating costs (92.8) (92.1)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Total operating expenses (267.8) (246.9)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Operating profit 5 190.5 183.3
Investment income 8 0.4 1.0
Finance expense (net) 9 (103.9) (43.0)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Profit before taxation 87.0 141.3
Taxation 10 (15.2) (25.0)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Profit for the year attributable to equity shareholders 71.8 116.3
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss:
Re-measurement of net defined benefit liability 21 41.4 27.1
Deferred tax on re-measurement of defined benefit liability 23 (7.0) (4.6)
Other comprehensive income/(expense) for the year 34.4 22.5
-------------------------------------------------------------------------- ---- ----------------- -----------------
Total comprehensive income for the period attributable to equity
shareholders 106.2 138.8
========================================================================== ==== ================= =================
The results for the current and prior year are derived from
continuing operations.
Consolidated and Company Statement of Financial Position
as at 31 March 2019
Group Company Group Company
2019 2019 2018 2018
Note GBPm GBPm GBPm GBPm
--------------------------------- ----- --------- --------- --------- ---------
ASSETS
Non-current assets
Intangible assets and goodwill 12 52.3 52.3 49.6 49.6
Property, plant and equipment 13 3,259.7 3,259.7 3,137.9 3,137.9
Retirement benefit surplus 21 32.8 32.8 - -
Investments 14 - 15.4 - 15.4
--------------------------------- ----- --------- --------- --------- ---------
3,344.8 3,360.2 3,187.5 3,202.9
--------------------------------- ----- --------- --------- --------- ---------
Current assets
Inventories 15 12.2 12.2 10.5 10.5
Trade and other receivables 16 57.7 57.7 63.4 63.4
Cash and cash equivalents 17,20 22.7 22.7 87.0 87.0
92.6 92.6 160.9 160.9
--------------------------------- ----- --------- --------- --------- ---------
Total assets 3,437.4 3,452.8 3,348.4 3,363.8
--------------------------------- ----- --------- --------- --------- ---------
LIABILITIES
Current liabilities
Trade and other payables 18 (120.6) (136.3) (142.6) (158.3)
Current income tax liabilities (6.6) (6.6) (13.5) (13.5)
Borrowings 19 (6.8) (6.8) (6.6) (6.6)
Provisions 22 (0.8) (0.8) (0.8) (0.8)
--------------------------------- ----- --------- --------- --------- ---------
(134.8) (150.5) (163.5) (179.2)
--------------------------------- ----- --------- --------- --------- ---------
Net current assets/(liabilities) (42.2) (57.9) (2.6) (18.3)
Non-current liabilities
Borrowings 19 (1,161.8) (1,161.8) (1,230.7) (1,230.7)
Derivative financial instruments 20 (404.6) (404.6) (357.3) (357.3)
Provisions 22 (2.2) (2.2) (2.3) (2.3)
Retirement benefit obligations 21 - - (18.2) (18.2)
Deferred tax 23 (150.1) (150.1) (136.0) (136.0)
Customer contributions 24 (637.2) (637.2) (612.6) (612.6)
--------------------------------- ----- --------- --------- --------- ---------
(2,355.9) (2,355.9) (2,357.1) (2,357.1)
--------------------------------- ----- --------- --------- --------- ---------
Total liabilities (2,490.7) (2,506.4) (2,520.6) (2,536.3)
--------------------------------- ----- --------- --------- --------- ---------
Total net assets 946.7 946.4 827.8 827.5
--------------------------------- ----- --------- --------- --------- ---------
EQUITY
Called up share capital 26,27 238.4 238.4 238.4 238.4
Share premium account 27 4.4 4.4 4.4 4.4
Revaluation reserve 27 88.2 88.2 90.3 90.3
Capital redemption reserve 27 8.6 8.6 8.6 8.6
Retained earnings 27 607.1 606.8 486.1 485.8
--------------------------------- ----- --------- --------- --------- ---------
Total equity 946.7 946.4 827.8 827.5
--------------------------------- ----- --------- --------- --------- ---------
The financial statements of Electricity North West Limited
(registered number 02366949) were authorised for issue and approved
by the Board of Directors on 30 May 2019, signed on its behalf
by:
D Brocksom
Director
Consolidated Statement of Changes in Equity
for the year ended 31 March 2019
Group
Capital
Called up Share premium Revaluation redemption Retained
share capital account reserve reserve earnings Total Equity
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2017 238.4 4.4 92.5 8.6 420.7 764.6
Profit for the
year - - - - 116.3 116.3
Transfer from
revaluation
reserve - - (2.2) - 2.2 -
Other
comprehensive
income for the
year - - - - 22.5 22.5
Total
comprehensive
income for the
year - - (2.2) - 141.0 138.8
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (75.6) (75.6)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2018 238.4 4.4 90.3 8.6 486.1 827.8
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserve
adjustment
on
transition
to IFRS 9
(Note 1) - - - - 71.0 71.0
Tax impact on
opening
reserve
adjustment on
transition to
IFRS 9 (Note
1) - - - - (12.0) (12.0)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserves 545.1 886.8
Profit for the
year - - - - 71.8 71.8
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
Other
comprehensive
income for the
year - - - - 34.4 34.4
Total
comprehensive
income for the
year - - (2.1) - 108.3 106.2
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (46.3) (46.3)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2019 238.4 4.4 88.2 8.6 607.1 946.7
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Company Statement of Changes in Equity
for the year ended 31 March 2019
Company
Capital
Called up Share premium Revaluation redemption Retained
share capital account reserve reserve earnings Total Equity
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
At 31 March 2017 238.4 4.4 92.5 8.6 420.4 764.3
Profit for the
year - - - - 116.3 116.3
Transfer from
revaluation
reserve - - (2.2) - 2.2 -
Other
comprehensive
income for the
year - - - - 27.1 27.1
Tax on components
of comprehensive
income (4.6) (4.6)
Total
comprehensive
income/(expense)
for the year - - (2.2) - 141.0 138.8
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
Transactions with
owners recorded
directly in
equity
Equity dividends
(Note 11) - - - - (75.6) (75.6)
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
At 31 March 2018 238.4 4.4 90.3 8.6 485.8 827.5
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
Opening reserve
adjustment on
transition to
IFRS 9 - - - - 71.0 71.0
Tax impact on
opening reserve
adjustment on
transition to
IFRS 9 - - - - (12.0) (12.0)
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
Opening reserves 544.8 886.5
Profit for the
year - - - - 71.8 71.8
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
Other
comprehensive
income for the
year - - - - 41.4 41.4
Tax on components
of comprehensive
income (7.0) (7.0)
Total
comprehensive
income/(expense)
for the year - - (2.1) - 108.3 106.2
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
Transactions with
owners recorded
directly in
equity
Equity dividends
(Note 11) - - - - (46.3) (46.3)
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
At 31 March 2019 238.4 4.4 88.2 8.6 606.8 946.4
------------------ -------------- --------------- --------------- -------------- --------------- ---------------
Consolidated and Company Statement of Cash Flows
for the year ended 31 March 2019
Group and Group and
Company Company
Note 2019 2018
GBPm GBPm
----------------------------------------------------- ---- --------- ---------
Operating activities
Cash generated from operations 31 267.6 239.0
Interest paid (48.3) (47.2)
Tax paid (27.1) (15.1)
----------------------------------------------------- ---- --------- ---------
Net cash generated from operating activities 192.2 176.7
Investing activities
Interest received and similar income 0.4 1.0
Purchase of property, plant and equipment (224.2) (200.3)
Purchase of intangible assets (8.9) (9.5)
Customer contributions received 37.8 44.0
Proceeds from sale of property, plant and
equipment 0.4 0.2
Net cash used in investing activities (194.5) (164.6)
----------------------------------------------------- ---- --------- ---------
Net cash flow before financing activities (2.3) 12.1
Financing activities
Dividends paid 11 (46.3) (75.6)
Repayment of external borrowings (6.7) (6.5)
Proceeds from borrowings 1.6 2.5
Accretion on index-linked swaps - (8.8)
Movement in cash collateral held (10.6) 10.6
Transfer from money market deposits - 10.0
Net cash used in financing activities (62.0) (67.8)
----------------------------------------------------- ---- --------- ---------
Net increase/(decrease) in cash and cash
equivalents (64.3) (55.7)
----------------------------------------------------- ---- --------- ---------
Cash and cash equivalents at the beginning
of the year 17 87.0 142.7
Cash and cash equivalents at the end of
the year 17 22.7 87.0
----------------------------------------------------- ---- --------- ---------
Notes to the Financial Statements
Electricity North West Limited is a company incorporated in the
United Kingdom under the Companies Act 2006.
The financial statements are presented in sterling, which is the
functional currency of the Company and Group. All values are
rounded to the nearest million pounds (GBP'm) unless otherwise
indicated.
The financial statements are prepared on the going concern
basis. Further detail on the going concern assessment is contained
in the Strategic Report.
1. Adoption of new and revised Standards
New and amended IFRS Standards that are effective for the
current year
IFRS 9: Financial Instruments
The Group has applied IFRS 9 during the year, electing not to
restate comparatives. IFRS 9 introduced new requirements for:
-- classification and measurement of financial assets and financial liabilities,
-- impairment of financial assets, and
-- hedge accounting.
The impact of these new requirements on the Group is outlined
below.
a) Classification and measurement of financial assets
All recognised financial assets within the scope of IFRS 9 are
required to be measured at amortised cost or fair value on the
basis of the entity's business model for managing the financial
assets, and their the contractual cash flow characteristics.
Specifically:
-- Financial assets held within a business model whose objective
is to collect the contractual cash flows, and that have contractual
cash flows that are solely payments of principal and interest on
the principal amount outstanding, are measured at amortised
cost,
-- Financial assets held within a business model whose objective
is to both collect the contractual cash flows and to sell the
financial assets, and that have contractual cash flows that are
solely payments of principal and interest on the principal amount
outstanding, are measured at fair value through other comprehensive
income (FVTOCI),
-- All other financial assets are measured at fair value through profit or loss (FVTPL).
Financial assets that are measured at amortised cost or FVTOCI
are subject to impairment (see c) below).
The financial assets of the Group were reviewed and assessed as
at 1 April 2018, the transition date, based on the facts and
circumstances at that date and it was concluded that the initial
application of IFRS 9 had the following impact on the
classification and measurement of the Group's financial assets:
-- Financial assets classified as loans and receivables under
IAS 39 that were measured at amortised cost continue to be measured
at amortised cost under IFRS 9 as they are held within a business
model to collect contractual cash flows and those cash flows
consist solely of payments of principal and interest on the
principal amount outstanding.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
-- The Group's financial assets measured at FVTPL under IAS 39
continue to be measured at FVTPL under IFRS 9.
b) Classification and measurement of financial liabilities
IFRS 9 does not change the classification and measurement of
financial liabilities, however, on transition the classification
was assessed based on the facts and circumstances at that date. The
initial application of IFRS 9 had the following impact on the
classification and measurement of the Group's financial
liabilities:
-- The borrowings designated at FVTPL under IAS 39 were
re-assessed against the criteria in IFRS 9 and the facts and
circumstances were such that the criteria allowing such designation
were not met at the date of initial application because the swaps
in place when the initial designation was made have since been
closed out and were not in place on transition to IFRS 9.
Consequently, the designation was revoked and the relevant
borrowings measured at amortised cost. Accordingly, the change
introduced by IFRS 9 relating to the accounting for changes in the
fair value of a financial liability designated as at FVTPL
attributable to changes in the credit risk of the issuer, do not
affect the Group.
-- The classification and measurements of other financial liabilities was not impacted.
Note e) below tabulates the change in classification of the
Group's financial liabilities upon application of IFRS 9.
The change in classification of the borrowings previously
designated at FVTPL resulted in a fair value gain of GBP71m being
recognised in the opening retained earnings of the Company with
deferred tax of GBP12m, having a net impact on opening retained
earnings of GBP59m.
c) Impairment of financial assets
IFRS 9 requires an expected credit loss (ECL) model as opposed
to an incurred credit loss model under IAS 39, with changes in
those expected credit losses recognised at each reporting date,
reflecting the change in credit risk since initial recognition of
the financial assets. It is no longer necessary for a credit event
to have occurred before credit losses are recognised.
Financial assets that are measured at amortised cost or FVTOCI
are subject to impairment. The relevant financial assets of the
Group at amortised cost are cash and cash equivalents,
inter-company loans and trade receivables and contract assets. The
Group has no financial assets at FVTOCI.
IFRS 9 requires the Group to measure the loss allowance at an
amount equal to the lifetime ECL if the credit risk on that
financial asset has increased significantly since initial
recognition, or if the financial asset is a purchased or originated
credit-impaired financial asset. However, if the credit risk on a
financial asset has not increased significantly since initial
recognition, the Group is required to measure the loss allowance at
an amount equal to 12-months ECL. IFRS 9 requires a simplified
approach for trade receivables and contract assets, measuring the
loss allowance equal to lifetime ECL.
All inter-company loans have been assessed to have low credit
risk. As such, the Group assumes that the credit risk on these
financial assets has not increased significantly since initial
recognition and recognises 12-month ECLs for these assets.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
For trade receivables and contract assets, the Group applies the
simplified approach and recognises lifetime ECLs for these
assets.
All cash and cash equivalents are assessed to have low credit
risk at each reporting date as they are held with reputable
international banking institutions.
d) Hedge accounting
The new hedge accounting requirements retain the three types of
hedge accounting. However, greater flexibility has been introduced
to the types of transactions eligible for hedge accounting,
specifically broadening the types of instruments that qualify for
hedging instruments and the types of risk components of
non-financial items that are eligible for hedge accounting. In
addition, the effectiveness test has been replaced with the
principle of an 'economic relationship'. Retrospective assessment
of hedge effectiveness is also no longer required.
The Group did not designate any hedging relationships under IAS
39 and has not designated any hedging relationships under IFRS
9.
e) Disclosures in relation to the initial application of IFRS 9
Under IFRS 9, consequential amendments were made to IFRS 7 to
require certain disclosures when an entity first applies IFRS 9.
The disclosures apply regardless of whether an entity restates
comparatives.
The table below shows information relating to those financial
liabilities that have been reclassified as a result of transition
to IFRS 9.
Financial liability from FVTPL to amortised cost
GBPm
---------------------------------------------------- ------------------------------------------------
1 April 2018:
IAS 39 carrying amount at FVTPL 367.2
Remeasurement (71.0)
---------------------------------------------------- ------------------------------------------------
IFRS 9 carrying amount at amortised cost 296.2
Amortisation of premium in year (4.7)
---------------------------------------------------- ------------------------------------------------
31 March 2019:
IFRS 9 carrying amount at amortised cost 291.5
---------------------------------------------------- ------------------------------------------------
The application of IFRS 9 has had no impact on the consolidated
cash flows of the Group.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
IFRS 15: Revenue from Contracts with Customers
The Group has applied IFRS 15 for the first time in the current
year and has adopted the modified retrospective approach without
restatement of comparatives.
IFRS 15 establishes a single comprehensive model for entities to
use in accounting for revenue arising from contracts with
customers. The core principle of IFRS 15 is that an entity should
recognise revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. Under IFRS 15, an entity recognises revenue when
(or as) a performance obligation is transferred to the
customer.
The main impact of IFRS 15 for the Group is with regards to the
customer contributions in respect of connections contracts which
was previously accounted for under IFRIC 18 (see Note 2 'Revenue
Recognition' for details of this change). The impact of adopting
IFRS 15 is not material for the Group.
Amendments to other standards:
Amendments to other IFRS Standards and interpretations issued by
the International Accounting Standards Board (IASB) that are
effective in the year are listed below; their adoption has not had
any material impact on the disclosures or the amounts reported in
these financial statements:
-- IFRS 2 (amendments) Classification and Measurement of Share-based Payment Transactions,
-- IAS 40 (amendments) Transfers of Investment Property,
-- Annual Improvements to IFRS Standards 2014-2016 Cycle,
-- Amendments to IAS 28 Investments in Associates and Joint Ventures
-- IFRIC 22 Foreign Currency Transactions and Advance Consideration.
New and revised IFRS Standards in issue but not yet
effective
At the date of authorisation of these financial statements, the
Group has not applied the following new and revised IFRS Standards
that have been issued but are not yet effective (and, in some
cases, had not yet been adopted by the EU):
-- IFRS 16 Leases,
-- IFRS 17 Insurance Contracts,
-- Amendments to IFRS 9: Prepayment Features with Negative Compensation,
-- Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures,
-- Annual Improvements to IFRS Standards 2015-2017 Cycle:
Amendments to IFRS 3 Business Combinations, IFRS 11 Joint
Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs,
-- Amendments to IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement,
-- IFRS 10 Consolidated Financial Statements and IAS 28
(amendments): Sale or Contribution of Assets between an Investor
and its Associate or Joint Venture, and
-- IFRIC 23 Uncertainty over Income Tax Treatments.
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the financial
statements of the Group in future periods, except as noted
below.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
IFRS 16: Leases
The effective date of IFRS 16 is for accounting periods
beginning on or after 1 January 2019; the Group will, therefore,
apply IFRS 16 in the year ending 31 March 2020. The Group intends
to adopt the modified retrospective approach without restatement of
comparatives.
Impact of the new definition of a lease:
The Group will make use of the practical expedient available on
transition to IFRS 16 not to reassess whether a contract is or
contains a lease. Accordingly, the definition of a lease in
accordance with IAS 17 and IFRIC 4 will continue to apply to those
leases entered or modified before 31 March 2019.
The change in definition of a lease mainly relates to the
concept of control. IFRS 16 distinguishes between leases and
service contracts on the basis of whether the use of an identified
asset is controlled by the customer. Control is considered to exist
if the customer has:
-- The right to obtain substantially all of the economic
benefits from the use of an identified asset; and
-- The right to direct the use of that asset.
The Group will apply the definition of a lease and related
guidance set out in IFRS 16 to all lease contracts entered into or
modified on or after 1 April 2019 (whether it is a lessor or a
lessee in the lease contract). In preparation for the first--time
application of IFRS 16, the Group has carried out an implementation
project. The project has shown that the new definition in IFRS 16
will not change significantly the scope of contracts that meet the
definition of a lease for the Group.
The Group expects to recognise incremental lease liabilities of
approximately GBP10m and associated right-of-use assets of
approximately GBP9m at 1 April 2019.
There is no deferred tax impact on initial application.
The Group does not expect a material earnings impact to arise as
a result of application however, as all future cash flows will be
treated as financing there will be an annual improvement to
operating cash flows (and consequently, adjusted operating cash
flow) in the region of GBP2m.
2. Significant accounting policies
The principal accounting policies adopted in the preparation of
these financial statements are set out below. These policies have
been applied consistently in the current year and the prior
year.
Basis of accounting
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) adopted by the
European Union (EU) and therefore comply with Article 4 of the EU
IAS Regulation.
The financial statements have been prepared on the historical
cost basis, except for financial instruments that are measured at
fair value, and certain property, plant and equipment that were
revalued in 1997. Historical cost is generally based on the fair
value of the consideration given in exchange for goods and
services.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Basis of accounting (continued)
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of whether
that price is directly observable or estimated using another
valuation technique. More details on the fair value measurements of
financial instruments are given in Note 20.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries), made up to 31 March each year.
Consolidation of a subsidiary begins when the Company obtains
control over the subsidiary and ceases when the Company loses
control of the subsidiary. There have been no acquisitions or
disposals of subsidiaries in the current or prior year.
Accounting policies are consistent in all Group companies.
All intra-group assets and liabilities, equity, income, expenses
and cash flows relating to transactions between Group members are
eliminated on consolidation.
Business combinations and goodwill
Acquisitions of subsidiaries are accounted for using the
acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the
sum of the acquisition-date fair values of assets transferred by
the Group, liabilities incurred by the Group to the former owners
of the acquiree and the equity interest issued by the Group in
exchange for control of the acquiree. Acquisition related costs are
recognised in profit or loss as incurred.
Goodwill is measured as the excess of the consideration
transferred over the net of the acquisition-date amounts of the
identifiable assets acquired and liabilities assumed, and is
recognised as an asset. If, after reassessment, the net of the
acquisition-date amounts of the identifiable assets acquired and
liabilities assumed exceeds the consideration transferred, the
excess is recognised immediately in profit or loss.
Goodwill is allocated to cash-generating units and is not
amortised, but is reviewed for impairment annually, or more
frequently when there is an indication that it may be impaired.
Investments (Company only)
Investments in subsidiary undertakings are stated at cost less
any provisions for permanent diminution in value. Dividends
received and receivable are credited to the Company's income
statement to the extent that they represent a realised profit for
the Company.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable primarily for the distribution of
electricity in the normal course of business, net of VAT.
The recognition of revenue from the distribution of electricity
includes an assessment of the volume of unbilled energy distributed
as at the year end. Non-distribution sales relate to the invoice
value of other goods and services provided which also relate to the
electricity network.
Where turnover received or receivable in the year exceeds the
maximum amount permitted by regulatory agreement, adjustments will
be made to future prices to reflect this over-recovery; no
liability is recognised as such an adjustment to future prices
relates to the provision of future services. Similarly no asset is
recognised where a regulatory agreement permits adjustments to be
made to future prices in respect of an under-recovery.
Incentive income earned or adjustments for under or over spend
on totex, or over or under delivery of outputs, all in the
financial year are not adjusted as adjustments to revenues in the
period. These are adjusted through the regulatory mechanism in
revenues two years later. Similarly adjustments in respect of
comparable performance measures are reflected in the current year's
financial statements.
The Group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. Payments received in advance of revenue recognition are
recorded as deferred revenue. The treatment of revenue from
distribution of electricity remains the same under provisions of
IFRS 15 and is therefore not impacted by the transition to the new
standard.
Customer contributions
The current accounting treatment for customer contributions
towards distribution system assets is to defer revenue and release
over the life of the asset. The income is released to the statement
of profit or loss on a straight line basis, in line with the useful
economic life of the distribution system assets.
Customer contributions were previously accounted for under IFRIC
18. From 1 January 2018, IFRS 15 superseded IFRIC 18 and IAS 18.
Contributions from customers falls under the scope of the new
standard for the accounting year ended 31 March 2019.
Previously, the amortisation of contributions received pre 1
July 2009 was posted in operating costs and the amortisation of
contributions received post 1 July 2009 was posted in revenue (per
IFRIC 18). From the year ended 31 March 2019 onwards, all
amortisation will be recognised in revenue instead of being split
between revenue and operating costs. The accounts for the year
ended 31 March 2018 have not been restated for this under the
modified retrospective approach.
Under IFRS 15, revenue will be recognised as each performance
obligation within the contract is satisfied. If performance
obligations are not satisfied over time, revenue will not be
recognised over time.
Identification of contract with customer: The written quotation
provided by ENWL and accepted by the customer (the Agreement), has
commercial substance in that ENWL's future cash flows are expected
to change as a result and it is considered probable that ENWL will
collect the consideration to which it is entitled under the
Agreement in exchange for completion of the connection.
2. Significant accounting policies (continued)
Revenue recognition
Customer contributions (continued)
Identification of performance obligation: As the performance
obligation relating to the ongoing maintenance is not covered by
the Agreement, so in relation to the revenue arising from the
customer contribution, there is only one performance obligation.
This obligation is considered to be distinct because the following
criteria are met:
-- the customer can benefit from the good or service either on
its own or together with other resources that are readily available
to the customer; and readily available other resources being the
existing network
-- the entity's promise to transfer the good or service to the
customer is separately identifiable from other promises in the
contract. The connection is separately identifiable from
maintenance as maintenance is not covered by the Agreement.
The existing distribution network is considered to be a readily
available resource.
Determination of transaction price: All other factors being
equal and the completion of the job is on budget, the expected
transaction price will be that of the quoted price in the
Agreement. Generally the price is fixed by Ofgem regulations.
Variations may arise when the customer has certain specifications
and changes are reviewed on a contract by contract basis to
establish whether they should be treated as variable consideration.
Variable consideration is accounted for based on the best estimate
of the transaction price if it is highly probable that the revenue
will be received. Given the variations on contracts are relating to
a single performance obligation and do not constitute distinct
services, these should be accounted for as a continuation of the
original contract resulting in additional or reduced revenue.
Allocation of transaction price: For the Agreements being
considered there is only one performance obligation to allocate the
transaction price to. The transaction price is stated within the
Agreement.
Recognition of revenue when performance obligation is satisfied:
The performance obligation is regarded as satisfied over time as
ENWL creates a bespoke asset for which they have no alternative use
other than to provide electricity to the customer's premises. ENWL
has an enforceable right to payment for the performance completed
to date. Revenue is therefore recognised over the life of the
asset.
Refundable customer deposits
Refundable customer deposits received in respect of property,
plant and equipment are held as a liability until repayment
conditions come into effect and the amounts are repaid to the
customer or otherwise credited to customer contributions.
Dividend income
Dividend income is recognised when the Company's right to
receive payment is established.
Investment income
Interest income is recognised when it is probable that the
economic benefits will flow to the Group and the amount of the
revenue can be measured reliably. It is accrued on a time basis, by
reference to the principal outstanding and the effective interest
rate.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Leases
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
Operating lease rentals are charged to the Income Statement on a
straight-line basis over the period of the lease.
Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets
that necessarily take a substantial period of time to get ready for
their intended use or sale, are added to the cost of those assets,
until such time as the assets are substantially ready for their
intended use or sale.
All other borrowing costs are recognised in profit or loss in
the period in which they are incurred.
Retirement benefit costs
Payments to the defined contribution retirement benefit scheme
are recognised as an expense when employees have rendered service
entitling them to the contributions.
The defined benefit retirement benefit scheme is provided
through a division of the Electricity Supply Pension Scheme (ESPS).
The most recent actuarial valuation for the scheme for funding
purposes was carried out at 31 March 2016; agreed actuarial
valuations are carried out thereafter at intervals of not more than
three years.
Results are affected by the actuarial assumptions used, which
are disclosed in Note 21. Actual experience may differ from the
assumptions made, for example, due to changing market and economic
conditions and longer or shorter lives of participants.
Defined benefit costs are split into three categories:
-- current service cost, past service cost and gains and losses
on curtailments and settlements, recognised in employee costs (see
Note 6) in the Consolidated Income Statement;
-- net interest expense or income, recognised within finance
costs (see Note 9) in the Consolidated Income Statement; and
-- re-measurement comprising actuarial gains and losses and the
return on scheme assets (excluding interest) are recognised
immediately in the Statement of Financial Position with a charge or
credit to the Statement of Comprehensive Income in the period in
which they occur.
Defined benefit assets are measured at fair value while
liabilities are measured at present value. The difference between
the two amounts is recognised as a surplus or obligation in the
Statement of Financial Position.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Retirement benefit costs (continued)
IFRIC14: 'The limit on a defined benefit asset, minimum funding
requirements and their interaction' was published by the
interpretations committee of the International Accounting Standards
Board in July 2007 and was adopted during the year ended 31 March
2008. IFRIC14 provides guidance on the extent to which a pension
scheme surplus should be recognised as an asset and may also
require additional liabilities to be recognised where minimum
funding requirements exist. Legal opinion was obtained that a
pension surplus could be recovered on wind up of the scheme and
could, therefore, be recognised, along with associated
liabilities.
The Group has concluded that it can recognise the full amount of
this surplus on the grounds that it could gain sufficient economic
benefit from the refund of the surplus assets that would be
available to it following the final payment to the last beneficiary
of the Scheme.
Taxation
The tax expense represents the sum of current and deferred tax
charges for the financial year, adjusted for prior year items.
Current taxation
Current tax is based on taxable profit for the year and is
calculated using tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. Taxable profit
differs from the net profit as reported in the Income Statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible.
Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises
from the initial recognition of goodwill or from the initial
recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries, except where
the Group is able to control the reversal of the temporary
difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised based on tax rates and laws that have been enacted or
substantively enacted at the balance sheet date.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Deferred tax is charged
or credited in the Income Statement, except when it relates to
items charged or credited in other comprehensive income, in which
case the deferred tax is also dealt with in other comprehensive
income.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Intangible assets
Intangible assets with finite useful economic lives are measured
initially at cost and are amortised on a straight-line basis over
their estimated useful lives. The carrying amount is reduced by any
provision for impairment where necessary.
Amortisation periods for categories of intangible assets
are:
Computer software 1-12 years
Intangible assets under construction are not amortised.
Amortisation commences from the date the intangible asset is
available for use.
The Licence has an indefinite useful economic life and,
therefore, is tested annually for impairment.
Property, plant and equipment
Property, plant and equipment comprise operational structures,
non-operational land and buildings, fixtures and equipment,
vehicles and other assets.
Operational structures
Infrastructure assets are depreciated by writing off their
deemed cost, less the estimated residual value, evenly over their
useful lives, which range from 5 to 80 years. Employee costs
incurred in implementing the capital schemes of the Group are
capitalised within operational structure assets.
In 1997 the Company undertook a revaluation of certain assets
due to a business combination. This resulted in the creation of a
revaluation reserve of GBP234.9m. The additional depreciation, as
result of the revaluation, it is transferred from the revaluation
reserve to retained earnings on an annual basis.
Assets other than operational structures
All other property, plant and equipment is stated at historical
cost less accumulated depreciation.
Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Subsequent costs are
included in the asset's carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group
and the cost of the item can be measured reliably. All other
repairs and maintenance are charged to the Income Statement during
the financial year in which they are incurred.
Freehold land and assets in the course of construction are not
depreciated until the asset is available for use.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Assets other than operational structures (continued)
Other assets are depreciated by writing off their cost evenly
over their estimated useful lives, based on management's judgement
and experience, which are principally as follows:
Buildings 30-60 years
Fixtures and equipment, vehicles and other 2-40 years
Depreciation methods and useful lives are re-assessed annually
and, if necessary, changes are accounted for prospectively.
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sale proceeds and
the carrying amount of the asset and is recognised in the Income
Statement.
Impairment of tangible and intangible fixed assets
Tangible and intangible assets are reviewed for impairment at
each balance sheet date to determine whether there is any
indication that those assets have suffered an impairment loss. If
any such indication exists, the recoverable amount of the asset is
estimated to determine the extent of the impairment loss, if any.
Where the asset does not generate cash flows that are independent
from other assets, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
An intangible asset with an indefinite life is tested for
impairment at least annually and whenever there is an indication of
impairment.
The recoverable amount is the higher of fair value less costs of
disposal, and value in use. Value in use represents the net present
value of expected future cash flows, discounted on a pre-tax basis
using a rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit)
is estimated to be less than its carrying amount, the carrying
amount of the asset (or cash-generating unit) is reduced to its
recoverable amount. An impairment loss is recognised immediately in
profit or loss.
Where an impairment loss subsequently reverses, the reversal is
recognised immediately in profit or loss and the carrying amount of
the asset is increased to the revised estimate of its recoverable
amount, but not so as to exceed the carrying amount that would have
been determined had no impairment loss been recognised in prior
years.
Research and development
Research costs are recognised in the Income Statement as
incurred. Development expenditure on an individual project is
recognised as an intangible asset when the Group can demonstrate:
the technical feasibility of completing the intangible asset so
that it will be available for use, its intention to complete and
its ability to use the asset, how the asset will generate future
economic benefits, the availability of resources to complete the
asset and the ability to reliably measure the expenditure incurred
during development.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is based on weighted average cost and includes
expenditure incurred in acquiring the inventories, conversion costs
and other costs in bringing them to their present location and
condition. Net realisable value represents the estimated selling
price, net of estimated costs of selling.
Financial instruments
Financial assets and financial liabilities are recognised in the
Group's balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of financial assets and
financial liabilities (other than financial assets and financial
liabilities at fair value through profit or loss) are added or
deducted from the fair value of the financial assets or financial
liabilities, as appropriate, on initial recognition. Transaction
costs, directly attributable to the acquisition of financial assets
or financial liabilities at fair value through profit or loss, are
recognised immediately in profit or loss.
If the transaction price differs from fair value at initial
recognition, the Group will account for such difference as
follows:
-- if fair value is evidenced by a quoted price in an active
market for an identical asset or liability or based on a valuation
technique that uses only data from observable markets, then the
difference is recognised as a gain or loss on initial recognition
(i.e. day 1 profit or loss); and
-- in all other cases, the fair value will be adjusted to bring
it in line with the transaction price (i.e. day 1 profit or loss
will be deferred by including it in the initial carrying amount of
the asset or liability).
After initial recognition, the deferred gain or loss will be
released to profit or loss such that it reaches a value of zero at
the time when the contract can be valued using active market quotes
or verifiable objective market information. The Group policy for
the amortisation of day 1 gain or loss is to release it in a
reasonable fashion based on the facts and circumstances (e.g. using
a straight line amortisation).
Financial assets
All regular way purchases or sales of financial assets are
recognised and derecognised on a trade date basis. Regular way
purchases or sales are purchases or sales of financial assets that
require delivery of assets within the time frame established by
regulation or convention in the marketplace.
All recognised financial assets are measured subsequently in
their entirety at either amortised cost or fair value, depending on
the classification of the financial assets.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Classification of financial assets
Financial assets that meet the following conditions are measured
subsequently at amortised cost:
-- the financial asset is held within a business model whose
objective is to hold financial assets in order to collect
contractual cash flows; and
-- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
Financial assets that meet the following conditions are measured
subsequently at fair value through other comprehensive income
(FVTOCI):
-- the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and
selling the financial assets; and
-- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
By default, all other financial assets are measured subsequently
at fair value through profit or loss (FVTPL).
Amortised cost and effective interest method
The effective interest method is a method of calculating the
amortised cost of a debt instrument and of allocating interest
income over the relevant period.
The effective interest rate is the rate that exactly discounts
estimated future cash receipts (including all fees and points paid
or received that form an integral part of the effective interest
rate, transaction costs and other premiums or discounts) excluding
expected credit losses, through the expected life of the debt
instrument, or, where appropriate, a shorter period, to the gross
carrying amount of the debt instrument on initial recognition.
The amortised cost of a financial asset is the amount at which
the financial asset is measured at initial recognition minus the
principal repayments, plus the cumulative amortisation using the
effective interest method of any difference between that initial
amount and the maturity amount, adjusted for any loss allowance.
The gross carrying amount of a financial asset is the amortised
cost of a financial asset before adjusting for any loss
allowance.
Income is recognised using the effective interest method for
debt instruments measured subsequently at amortised cost and at
FVTOCI. For financial assets other than purchased or originated
credit-impaired financial assets, interest income is calculated by
applying the effective interest rate to the gross carrying amount
of a financial asset, except for financial assets that have
subsequently become credit-impaired. The Group has no financial
assets purchased or originated credit-impaired, or that have
subsequently become credit-impaired.
Interest income is recognised in profit or loss and is included
in the 'Investment income' line item.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Financial assets at FVTPL
Financial assets that do not meet the criteria for being
measured at amortised cost of FVTOCI are measured at FVTPL.
Specifically, the financial assets held by the Group classified as
at FVTPL are derivatives and are stated at fair value, with any
fair value gains or losses recognised in profit or loss to the
extent they are not part of a designated hedging relationship. Fair
value is determined in the manner described in Note 20.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses
on investments in debt instruments that are measured at amortised
cost or at FVTOCI, trade receivables and contract assets; the Group
holds no lease receivables or financial guarantee contracts. The
amount of expected credit losses is updated at each reporting date
to reflect changes in credit risk since initial recognition of the
respective financial instrument.
The Group always recognises lifetime ECL for trade receivables
and contract assets. The expected credit losses on these financial
assets are estimated using a provision matrix based on the Group's
historical credit loss experience, adjusted for factors that are
specific to the debtors, general economic conditions and an
assessment of both the current as well as the forecast direction of
conditions at the reporting date, including time value of money
where appropriate.
For all other financial instruments, the Group recognises
lifetime ECL when there has been a significant increase in credit
risk since initial recognition. However, if the credit risk on the
financial instrument has not increased significantly since initial
recognition, the Group measures the loss allowance for that
financial instrument at an amount equal to 12-month ECL.
Lifetime ECL represents the expected credit losses that will
result from all possible default events over the life of a
financial instrument. In contrast, 12-month ECL represents the
portion of lifetime ECL that is expected to result from default
events on a financial instrument that are possible within 12 months
after the reporting date.
a) Significant increase in credit risk
In assessing whether the credit risk on a financial instrument
has increased significantly since initial recognition, the Group
compares the risk of a default occurring on the financial
instrument at the reporting date with the risk of a default
occurring on the financial instrument at the date of initial
recognition. In making this assessment, the Group considers both
quantitative and qualitative information that is reasonable and
supportable, including historical experience and forward-looking
information that is available without undue cost or effort.
Irrespective of the outcome of the above assessment, the Group
presumes that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments
are more than 30 days past due, unless the Group has reasonable and
supportable information that demonstrates otherwise.
Despite the foregoing, the Group assumes that the credit risk on
a financial instrument has not increased significantly since
initial recognition if the financial instrument is determined to
have low credit risk at the reporting date. A financial instrument
is determined to have low credit risk if the financial instrument
has a low risk of default and the debtor has a strong capacity to
meet its contractual cash flow obligations in the near term.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
The Group regularly monitors the effectiveness of the criteria
used to identify whether there has been a significant increase in
credit risk and revises them as appropriate to ensure that the
criteria are capable of identifying a significant increase in
credit risk before the amount becomes past due.
b) Definition of default
The Group considers that default has occurred when a financial
asset is more than 90 days past due, unless the Group has
reasonable and supportable information to demonstrate that a more
lagging default criterion is more appropriate.
c) Credit-impaired financial assets
A financial asset is credit-impaired when one or more events
that have a detrimental impact on the estimated future cash flows
of that financial asset have occurred.
d) Measurement and recognition of expected credit losses
The measurement of expected credit losses is a function of the
probability of default, loss given default and the exposure at
default. The assessment of the probability of default and loss
given default is based on historical data adjusted by
forward-looking information. The exposure at default is represented
by the assets' gross carrying amount at the reporting date.
For financial assets, the expected credit loss is estimated as
the difference between all contractual cash flows that are due to
the Group in accordance with the contract and all the cash flows
that the Group expects to receive, discounted at the original
effective interest rate.
If the Group has measured the loss allowance for a financial
instrument at an amount equal to lifetime ECL in the previous
reporting period, but determines at the current reporting date that
the conditions for lifetime ECL are no longer met, the Group
measures the loss allowance at an amount equal to 12-month ECL at
the current reporting date, except for assets for which the
simplified approach was used.
The Group recognises an impairment gain or loss in profit or
loss for all financial instruments with a corresponding adjustment
to their carrying amount through a loss allowance account.
Derecognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire, or when
it transfers the financial asset and substantially all the risks
and rewards of ownership of the asset to another entity.
On derecognition of a financial asset measured at amortised
cost, the difference between the asset's carrying amount and the
sum of the consideration received and receivable is recognised in
profit or loss.
Cash and cash equivalents
In the consolidated cash flow statement and related notes, cash
and cash equivalents includes cash at bank and in hand, deposits,
other short-term highly liquid investments which are readily
convertible into known amounts of cash and have a maturity of three
months or less and which are subject to an insignificant risk of
change in value.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Money market deposits
Money market deposits with terms to maturity in excess of three
months are not included as cash or cash equivalents and are
separately disclosed on the face of the Statement of Financial
Position.
Financial liabilities and equity
Debt and equity instruments are classified as either financial
liabilities or as equity in accordance with the substance of the
contractual arrangements and the definitions of a financial
liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by the Group are recognised
at the proceeds received, net of direct issue costs.
Financial liabilities
All financial liabilities are measured subsequently at amortised
cost using the effective interest method or at FVTPL.
Financial liabilities at FVTPL
Financial liabilities at FVTPL are measured at fair value, with
any gains or losses arising on changes in fair value recognised in
profit or loss to the extent that they are not part of a designated
hedging relationship. The Group has no financial liabilities
designated at FVTPL. Fair value is determined in the manner
described in Note 20.
Financial liabilities measured subsequently at amortised
cost
Financial liabilities that are not at FVTPL are measured
subsequently at amortised cost using the effective interest
method.
The effective interest method is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is
the rate that exactly discounts estimated future cash payments
(including all fees and points paid or received that form an
integral part of the effective interest rate, transaction costs and
other premiums and discounts) through the expected life of the
financial liability, or (where appropriate) a shorter period, to
the amortised cost of a financial liability.
Trade payables
Trade payables are stated at their nominal value.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or have
expired. The difference between the carrying amount of the
financial liability derecognised and the consideration paid and
payable is recognised in profit or loss.
When the Group exchanges with the existing lender one debt
instrument into another one with the substantially different terms,
such exchange is accounted for as an extinguishment of the original
financial liability and the recognition of a new financial
liability. Similarly, the Group accounts for substantial
modification of terms of an existing liability, or part of it, as
an extinguishment of the original financial liability and the
recognition of a new liability. It is assumed that the terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective rate is at
least 10% different from the discounted present value of the
remaining cash flows of the original financial liability.
Derivative financial instruments
The Group enters into a variety of derivative financial
instruments to manage its exposure to interest rate and inflation
risk. Further details of derivative financial instruments are
disclosed in Note 20.
Derivatives are recognised initially at fair value at the date a
derivative contract is entered into and are subsequently
re-measured to their fair value at each reporting date. The
resulting gain or loss is recognised in profit or loss immediately
unless the derivative is designated in a hedging relationship.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is
recognised as a financial liability. A derivative is presented as a
non-current asset or a non-current liability if the remaining
maturity of the instrument is more than 12 months and it is not
expected to be realised or settled within 12 months. Other
derivatives are presented as current assets or current
liabilities.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that
also includes a non-derivative host, with the effect that some of
the cash flows of the combined instrument vary in a way similar to
a stand-alone derivative.
Derivatives embedded in hybrid contracts with a financial asset
host within the scope of IFRS 9 are not separated. The entire
hybrid contract is classified and subsequently measured as either
amortised cost or fair value as appropriate.
Derivatives embedded in hybrid contracts with hosts that are not
financial assets within the scope of IFRS 9 are treated as separate
derivatives when they meet the definition of a derivative, their
risks and characteristics are not closely related to those of the
host contracts and the host contracts are not measured at
FVTPL.
An embedded derivative is presented as a non-current asset or
non-current liability if the remaining maturity of the hybrid
instrument to which the embedded derivative relates is more than 12
months and is not expected to be realised or settled within 12
months.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Hedge accounting
The Group considers hedge accounting when entering any new
derivative, however, there are currently no formal hedging
relationships in the Group.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the
reporting date, taking into account the risks and uncertainties
surrounding the obligation. Where a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows (when the effect of
the time value of money is material).
3. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are
described in Note 2, the directors are required to make judgements
(other than those involving estimations) that have a significant
impact on the amounts recognised and to make estimates and
assumptions about the carrying amounts of assets and liabilities
that are not readily apparent from other sources. The estimates and
associated assumptions are based on historical experience and other
factors that are considered to be relevant. Actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period; or in the period of the revision and future
periods if the revision affects both current and future
periods.
Critical judgements in applying the group's accounting
policies
The following are the critical judgements, apart from those
involving estimations (which are presented separately below), that
the directors have made in applying the Group's accounting policies
and that have the most significant effect on the amounts recognised
in the financial statements.
Notes to the Financial Statements (continued)
3. Critical accounting judgements and key sources of estimation uncertainty (continued)
Revenue recognition
The principal direct customers of the business are the
electricity supply companies that utilise the Group's distribution
network to distribute electricity from generators to the end
consumer. Revenue from such activity is known as 'use of system'.
The amount billed reflects the volume of electricity distributed,
including estimates of the units distributed to customers. Revenue
is gradually adjusted to reflect actual usage in the period over
which the meters are read. In addition, the revenue includes
estimates made for the number of units distributed over the period
for which industry data is not yet available, which on average is
between one and two months prior to the reporting date. The
estimated units are based on historical consumption data
profiles.
Property Plant and Equipment
The Group recognises infrastructure assets where the
expenditures incurred enhance or increase the capacity of the
network, whereas any expenditure classed as maintenance is expensed
in the period it is incurred. Capital projects often contain a
combination of enhancement and maintenance activity which are not
distinct and therefore the allocation of costs between capital and
operating expenditure is inherently judgemental. The costs
capitalised include an allocation of overhead costs, relating to
the proportion of time spent by support function staff, which is
also inherently judgemental.
Taxation
Assessing the outcome of uncertain tax positions such as the tax
treatment of provisions requires judgements to be made regarding
the application of tax law and the results of negotiations with,
and enquiries from, tax authorities.
Accounting for provisions and contingencies
The Group is subject to a number of claims, incidental to the
normal conduct of its business, relating to and including
commercial, contractual and employment matters, which are handled
and defended in the ordinary course of business.
The Group routinely assesses the likelihood of any adverse
judgements or outcomes to these matters as well as ranges of
probable and reasonably estimated losses. Reasonable judgements are
made by management after considering available information
including notifications, settlements, estimates performed by
independent parties and legal counsel, available facts,
identification of other potentially responsible parties and their
ability to contribute, and prior experience.
A provision is recognised when it is probable that an obligation
exists for which a reliable estimate can be made of the obligation
after careful analysis of the individual matter. Matters that
either are possible obligations or do not meet the recognition
criteria for a provision are disclosed, unless the possibility of
transferring economic benefits is remote.
Notes to the Financial Statements (continued)
3. Critical accounting judgements and key sources of estimation uncertainty (continued)
Impairment of tangible and intangible assets (including
goodwill)
Management assesses the recoverability of tangible and
intangible assets on an annual basis. Determining whether any of
those assets are impaired requires an estimation of the value in
use of the asset to the Group. This value in use calculation
requires the Group to estimate the future cash flows expected to
arise from the asset and a suitable discount rate in order to
calculate present value for the asset and compare that to its
carrying value. This concluded that no impairment loss is required
against those assets. Details of the impairment loss calculation
are set out in Note 13.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources
of estimation uncertainty that may have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are outlined below.
Fair values of derivative financial instruments
In estimating the fair value of derivative financial
instruments, the Group uses market-observable data to the extent it
is available. Where such data is not available, certain estimates
regarding inputs to the valuation are required to be made.
Information about the valuation techniques and inputs used are
disclosed in Note 20.
Retirement benefit schemes
The Group's defined benefit obligation is derived using various
assumptions, as disclosed in Note 21. Results can be affected
significantly by the assumptions used, which management decide
based on advice by a firm of actuaries.
4. Revenue
2019 2018
Group GBPm GBPm
-------- ----- -----
Revenue 458.3 430.2
-------- ----- -----
Predominantly all Group revenues arise from electricity
distribution in the North West of England and associated
activities. Only one operating segment is therefore regularly
reviewed by the Chief Executive Officer and Executive Leadership
Team. Included within the above are revenues from three customers
(2018: three), each of which represented more than 10% of the total
revenue. Revenue from these customers totalled GBP174.3m (2018:
GBP189.5m). No other customer represented more than 10% of revenues
either this year or in the prior year.
In the current year GBP17.3m (2018: GBP6.4m) of customer
contributions amortisation has been amortised through revenue in
line with IFRS 15.
Notes to the Financial Statements (continued)
5. Operating profit
The following items have been included in arriving at the
Group's operating profit:
2019 2018
Group GBPm GBPm
--------------------------------------------------------------- ----- ------
Employee costs (Note 6) 58.1 51.5
--------------------------------------------------------------- ----- ------
Depreciation and amortisation expense
Depreciation of property, plant and equipment
Owned assets (Note 13) 110.7 108.3
Amortisation of intangible assets
Software (see Note 12) 6.2 5.5
Customer contributions1 (see Note 24) - (10.5)
Depreciation and amortisation expense (net) 116.9 103.3
--------------------------------------------------------------- ----- ------
Other income
Profit on disposal of property, plant and equipment (0.4) (0.2)
--------------------------------------------------------------- ----- ------
Provision charge/(credit) (Note 22) 0.7 (0.2)
--------------------------------------------------------------- ----- ------
Other operating costs include:
Research and development 2.9 3.4
Write down of inventories to net realisable value - 0.1
Operating leases:
vehicles 1.1 1.1
land and buildings 0.6 0.5
hire of plant and machinery 0.1 1.7
--------------------------------------------------------------- ----- ------
1 In 2019, all customer contributions (GBP17.3m) were amortised
through revenue in line with IFRS 15 (see Note 4 for details). In
2018, GBP6.4m of customer contributions were amortised through
revenue in line with IFRIC 18.
Analysis of the auditor's remuneration is as follows:
2019 2018
Group GBPm GBPm
-------------------------------------------------------------- ----- -----
Audit of the Company's annual financial statements 0.1 0.1
Total audit fees 0.1 0.1
-------------------------------------------------------------- ----- -----
Audit-related assurance services 0.1 0.1
Taxation advisory services - -
-------------------------------------------------------------- ----- -----
Total fees 0.2 0.2
-------------------------------------------------------------- ----- -----
Fees payable to Deloitte LLP and their associates for non-audit
services to the Company are not required to be disclosed because
the consolidated financial statements of the Parent are required to
disclose such fees on a consolidated basis.
Notes to the Financial Statements (continued)
6. Employee costs
2019 2018
Group GBPm GBPm
-------------------------------------------------------------- ------ ------
Wages and salaries 94.8 86.4
Social security costs 10.3 9.5
Pension costs (see Note 21) 21.2 19.7
-------------------------------------------------------------- ------ ------
Employee costs (including Directors' remuneration) 126.3 115.6
Costs transferred directly to fixed assets (68.2) (64.1)
-------------------------------------------------------------- ------ ------
Charged to operating expenses 58.1 51.5
-------------------------------------------------------------- ------ ------
The average monthly number of employees during the year
(including Executive Directors):
2019 2018
Group Number Number
------------------------------------ ------- -------
Electricity distribution 1,880 1,795
------------------------------------ ------- -------
7. Directors' remuneration
2019 2018
Group GBPm GBPm
---------------------------------------------------------------- ----- -----
Salaries and other short-term employee benefits 1.2 1.1
Accrued bonus 0.4 0.4
Amounts receivable under long-term incentive schemes 0.4 0.4
---------------------------------------------------------------- ----- -----
Total fees 2.0 1.9
---------------------------------------------------------------- ----- -----
The aggregate emoluments of the Directors in 2019 amounted to
GBP2,043,000 (2018: GBP1,934,000). Emoluments comprise salaries,
fees, taxable benefits, compensation for loss of office and the
value of short-term and long-term incentive awards. The aggregated
emoluments of the highest paid Director in 2019 in respect of
services to the Group amounted to GBP955,000 (2018: GBP894,000).
Under the Executive Incentive Plan bonuses are awarded and either
paid in the following financial year (accrued bonus) or paid in
subsequent years (amounts receivable under long-term incentive
schemes). There were no amounts payable for compensation for loss
of office in the year (2018: GBPnil). Not included in the amounts
shown above are further payments made in respect of Directors'
services, as detailed in Note 30.
The pension contributions for the highest paid Director for 31
March 2019 were GBPnil (2018: GBPnil). The accrued pension at 31
March 2019 for the highest paid Director was GBPnil (2018:
GBPnil).
As at 31 March 2019 the Directors have no interests in the
ordinary shares of the Company (2018: same).
Notes to the Financial Statements (continued)
8. Investment income
2019 2018
Group GBPm GBPm
----------------------------------------------------------------------- ----- -----
Interest receivable on short-term bank deposits held at amortised cost 0.4 1.0
----------------------------------------------------------------------- ----- -----
Total investment income 0.4 1.0
----------------------------------------------------------------------- ----- -----
9. Finance expense (net)
2019 2018
Group GBPm GBPm
------------------------------------------------------------- ----- ------
Interest payable:
Interest payable on Group borrowings (Note 30) 14.7 14.7
Interest payable on borrowings held at amortised cost 41.2 23.0
Interest payable on borrowings designated at FVTPL - 22.2
Net receipts on derivatives held for trading (9.9) (11.0)
Other finance charges related to index-linked debt (Note 19) 11.4 15.3
Accretion on index-linked swaps - 8.8
Interest cost on pension plan obligations (Note 21) 0.3 1.1
Capitalisation of borrowing costs under IAS 23 (1.1) (1.0)
============================================================= ===== ======
Total interest expense 56.6 73.1
Fair value movements on financial instruments:
Fair value movement on borrowings designated at FVTPL - (23.8)
Fair value movement on derivatives held for trading 47.3 (6.3)
============================================================= ===== ======
Total fair value movements 47.3 (30.1)
Total finance expense (net) 103.9 43.0
------------------------------------------------------------- ----- ------
Borrowing costs capitalised in the year under IAS 23 were
GBP1.1m (2018: GBP1.0m), using an average annual capitalisation
rate of 4.1% (2018: 4.8%), derived from the total general borrowing
costs for the year divided by the average total general borrowings
outstanding for the year.
The designation to measure the GBP250m 8.875% 2026 bond was at
fair value revoked at the start of the year on the adoption of IFRS
9 (see Note 1 for more details); in the current year, this bond is
measured at amortised cost.
The fair value movements on the derivatives are derived using a
discounted cash flow technique using both market expectations of
future interest rates and future inflation levels, obtained from
Bloomberg, and calibrations to observable market transactions
evidencing fair value; these are Level 2 inputs and Level 3 inputs
under IFRS 13. Note 20 provides more detail on this.
There has been GBPnil (2018: GBP8.8m) accretion payments on the
index-linked swaps in the year; these are scheduled five-yearly,
seven-yearly and ten-yearly with the next payment due in July 2022.
No swaps have been entered or closed out in the year (2018:
same).
Notes to the Financial Statements (continued)
10. Taxation
2019 2018
Group GBPm GBPm
------------------------------------- ----- -----
Current tax
Current year 21.9 21.1
Prior year (1.6) (0.8)
===================================== ===== =====
20.3 20.3
===================================== ===== =====
Deferred tax
Current year (5.4) 5.6
Prior year 0.3 (0.9)
Impact of change in future tax rates - -
===================================== ===== =====
(5.1) 4.7
===================================== ===== =====
Tax charge for the year 15.2 25.0
------------------------------------- ----- -----
Corporation tax is calculated at 19% (2018: 19%) of the
estimated assessable profit for the year. The Government announced
that it intends to reduce the rate of corporation tax to 17% with
effect from 1 April 2020. The legislation has been given effect by
the Finance Act 2019 which was substantively enacted on 12 February
2019. Deferred tax is calculated using the rate at which it is
expected to reverse. Accordingly, the deferred tax has been
calculated on the basis that it will reverse in future at the 17%
rate.
The table below reconciles the notional tax charge at the UK
corporation tax rate to the effective tax rate for the year:
2019 2018
Group GBPm GBPm
---------------------------------------------------------- ----- -----
Profit before tax 87.0 141.3
========================================================== ===== =====
Tax at the UK corporation tax rate of 19% (2018: 19%) 16.5 26.9
Prior year tax adjustments (1.3) (1.7)
Reduction in current year deferred tax due to rate change 0.6 (0.7)
Non-taxable expense (0.6) 0.5
Tax charge for the year 15.2 25.0
---------------------------------------------------------- ----- -----
Notes to the Financial Statements (continued)
11. Dividends
Amounts recognised as distributions to equity holders in the
year comprise:
2019 2018
Group and Company GBPm GBPm
------------------------------------------------------------------------------------------- ----- -----
Final dividends for the year ended 31 March 2018 of 3.36 pence per share (31 March 2017 of
2.52 pence per share) 16.0 12.0
Interim dividends for the year ended 31 March 2019 of 6.35 pence per share (31 March 2018:
13.34 pence) 30.3 63.6
------------------------------------------------------------------------------------------- ----- -----
46.3 75.6
------------------------------------------------------------------------------------------- ----- -----
In the year ended 31 March 2019, the Company declared interim
dividends of GBP30.3m, which were paid in December 2018 (31 March
2018: GBP63.6m). The final dividend for the year ended 31 March
2018 of GBP16.0m was paid in June 2019; the final dividend for the
year ended 31 March 2017 of GBP12.0m was paid in June 2018.
At the Board meeting in May 2019 the Directors proposed a final
dividend of GBP16.9m for the year ended 31 March 2019, subject to
approval by equity holders of the Company; that is not a liability
in the financial statements at 31 March 2019.
Notes to the Financial Statements (continued)
12. Intangible assets and goodwill
Goodwill Software Assets under the course of construction Total
Group and Company GBPm GBPm GBPm GBPm
-------------------- -------- -------- --------------------------------------- -----
Cost
At 1 April 2017 10.1 74.7 17.2 102.0
Additions - 1.9 7.7 9.6
Transfers - 1.4 (1.4) -
At 31 March 2018 10.1 78.0 23.5 111.6
Additions - 1.6 7.3 8.9
Transfers - 2.7 (2.7) -
-------------------- -------- -------- --------------------------------------- -----
At 31 March 2019 10.1 82.3 28.1 120.5
-------------------- -------- -------- --------------------------------------- -----
Amortisation
At 1 April 2017 - 56.5 - 56.5
Charge for the year - 5.5 - 5.5
At 31 March 2018 - 62.0 - 62.0
Charge for the year - 6.2 - 6.2
At 31 March 2019 - 68.2 - 68.2
-------------------- -------- -------- --------------------------------------- -----
Net book value
At 31 March 2019 10.1 14.1 28.1 52.3
-------------------- -------- -------- --------------------------------------- -----
At 31 March 2018 10.1 16.0 23.5 49.6
-------------------- -------- -------- --------------------------------------- -----
In the Company, goodwill arose on the acquisition of assets and
liabilities of Electricity North West Number 1 Company Ltd in the
year ended 31 March 2011. This value reflects the excess of the
investment over the book value of the trade and assets at the date
of acquisition.
At 31 March 2019, the Group and Company had entered into
contractual commitments for the acquisition of software amounting
to GBP9.5m (2018: GBP5.6m).
At each balance sheet date the Group reviews the carrying
amounts of its goodwill and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss (see Note 13).
Notes to the Financial Statements (continued)
13. Property, plant and equipment
Fixtures and Assets under the
Operational Non- operational equipment, vehicles course of
Structures land and buildings and other construction Total
Group and Company GBPm GBPm GBPm GBPm GBPm
--------------------- -------------------- -------------------- -------------------- -------------------- -------
Cost or valuation
At 1 April 2017 4,330.8 32.1 103.4 119.3 4,585.6
Additions 146.2 0.9 12.5 49.3 208.9
Transfers 35.2 0.5 1.5 (37.2) -
Disposals (5.4) - (0.9) - (6.3)
At 31 March 2018 4,506.8 33.5 116.5 131.4 4,788.2
Additions 176.5 0.2 9.5 46.3 232.5
Transfers 26.8 - 3.3 (30.1) -
Disposals (5.7) - (1.3) - (7.0)
--------------------- -------------------- -------------------- -------------------- -------------------- -------
At 31 March 2019 4,704.4 33.7 128.0 147.6 5,013.7
--------------------- -------------------- -------------------- -------------------- -------------------- -------
Accumulated
depreciation and
impairment
At 1 April 2017 1,469.1 8.2 71.0 - 1,548.3
Charge for the year 95.0 1.1 12.2 - 108.3
Disposals (5.4) - (0.9) - (6.3)
At 31 March 2018 1,558.7 9.3 82.3 - 1,650.3
Charge for the year 97.4 1.1 12.2 - 110.7
Disposals (5.7) - (1.3) - (7.0)
At 31 March 2019 1,650.4 10.4 93.2 - 1,754.0
--------------------- -------------------- -------------------- -------------------- -------------------- -------
Net book value
At 31 March 2019 3,054.0 23.3 34.8 147.6 3,259.7
--------------------- -------------------- -------------------- -------------------- -------------------- -------
At 31 March 2018 2,948.1 24.2 34.2 131.4 3,137.9
--------------------- -------------------- -------------------- -------------------- -------------------- -------
At 31 March 2019, the Group and Company had entered into
contractual commitments for the acquisition of property, plant and
equipment amounting to GBP86.6m (2018: GBP87.8m).
At 31 March 2019, had the property, plant and equipment of the
Group been carried at historical cost less accumulated depreciation
and accumulated impairment losses, the carrying amount would have
been GBP3,153.3m (2018: GBP3,028.9m). The revaluation reserve is
disclosed in Note 27, net of deferred tax. The revaluation reserve
arose following North West Water's acquisition of Norweb, in
1997.
Notes to the Financial Statements (continued)
13. Property, plant and equipment (continued)
Impairment testing of intangible assets and property plant and
equipment
At each balance sheet date, the Group reviews the carrying
amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss. An intangible asset with an indefinite useful life
is tested for impairment at least annually and whenever there is an
indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing the value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been
adjusted.
For the purposes of impairment testing the Group have determined
that there is only one cash generating unit (CGU). The key
assumptions for the value in use calculations are those regarding
discount rates and the outcomes of future Ofgem price control
settlements.
The Group has prepared cash flow forecasts for a 28 year period,
including a terminal value, which represents the planning horizon
used for management purposes being aligned to the end of an eight
year RIIO regulatory period. The rate used to discount cash flows
was 6.20% (2018: 6.37%) reflecting an assumed level of risk
associated with the cash flows generated from the licence. Cash
flow projections for the five year period to 2023 are based on the
Ofgem final determination and the Company's latest approved
business plan (2018: same) and reflect recent RPI forecasts.
Forecasts beyond this point are projected forward based on expected
levels of expenditure to maintain the health of the network and
long-term inflation assumptions. The forecasts have been sensitised
to a change in the discount rate of 1% either way and that analysis
indicates that there is sufficient headroom and that no impairment
would be required.
Based on the impairment testing performed, management believe
that sufficient headroom exists between the value in use and the
carrying value of the assets such that no impairment loss is
required to be booked.
Notes to the Financial Statements (continued)
14. Investments
Group Company
GBPm GBPm
----------------------------------- ----- -------
At 31 March 2018 and 31 March 2019 - 15.4
----------------------------------- ----- -------
Details of the investments as at 31 March 2019, all of which
were incorporated in the UK, and the principal place of business of
each is in the UK, are as follows.
Proportion Nature of business
Company Description of holding held
-------------------------------------------- ----------------------------- ----------- -------------------
Subsidiary undertakings
Electricity North West Number 1 Company Ltd Ordinary shares of GBP1 each 100% Dormant
ENW (ESPS) Pensions Trustees Limited Ordinary shares of GBP1 each 100% Dormant
Joint venture
Nor.Web DPL Limited Ordinary shares of GBP1 each 50% Dormant
-------------------------------------------- ----------------------------- ----------- -------------------
There have been no changes to these shareholdings during the
year and the address of the registered office for all of the
investments noted above is: 304 Bridgewater Place, Birchwood Park,
Warrington, WA3 6XG.
15. Inventories
2019 2018
Group and Company GBPm GBPm
----------------------------- ----- -----
Raw material and consumables 12.2 10.5
----------------------------- ----- -----
Notes to the Financial Statements (continued)
16. Trade and other receivables
Group and Company 2019 2018
GBPm GBPm
Trade receivables 5.3 10.6
Amounts owed by affiliated undertakings (Note 30) 4.5 5.3
Prepayments and accrued income 47.9 47.5
================================================== ===== =====
Balance at 31 March 57.7 63.4
================================================== ===== =====
The average credit period taken on sales is 14 days (2018: 14
days). Trade receivables do not carry interest and are stated net
of allowances for doubtful receivables of GBP1.3m (2018: GBP0.9m)
estimated by management based on known specific circumstances, past
default experience and their assessment of the current economic
environment.
Of the Group trade receivables, 69% (2018: 31%) are past due but
not impaired. A balance of GBP1.7m (2018: GBP2.8m) is less than 30
days past due; a balance of GBP3.1m is greater than 30 days past
due at 31 March 2019 (2018: GBP1.5m), against which an allowance
for doubtful debt of GBP1.3m (2018: GBP0.9m) has been made.
The movement on the provision for impairment of trade
receivables is as follows:
2019 2018
Group and Company GBPm GBPm
================================ ==== =====
Balance at 1 April 0.9 0.8
Charged to the Income Statement 0.4 0.1
================================ ==== =====
Balance at 31 March 1.3 0.9
================================ ==== =====
The Group is required by Ofgem to accept any company as a
counterparty that has obtained a trading licence regardless of
their credit status. To mitigate the risk posed by this, all
transactions with customers are governed by a contract which all
customers are required by Ofgem to sign and adhere to the
terms.
Under the terms of the contract, the maximum unsecured credit
that the Group may be required to give is 2% of the Regulatory
Asset Value ('RAV') of the Company. In addition the contract makes
provisions for the credit quality of customers and adjusts the
credit value available to them based on credit ratings and payment
history. Where a customer exceeds their agreed credit level, under
the contract, the customer must provide collateral to mitigate the
increased risk posed. As at 31 March 2019 GBP2.2m (2018: GBP1.7m)
of cash had been received as security.
The RAV is calculated using the methodology set by Ofgem for
each year of RIIO-ED1 (1 April 2016 to 31 March 2023) and is
GBP1,820m (2018: GBP1,758m) for the year ended 31 March 2019 based
on the actual retail price index (RPI) for March .
Notes to the Financial Statements (continued)
16. Trade and other receivables (continued)
At 31 March 2019 GBP133.8m (2018: GBP138.6m) of unsecured credit
limits had been granted to customers and the highest unsecured
credit limit given to any single customer was GBP6.9m (2018:
GBP13.9m). All of the customers granted credit of this level must
have a credit rating of at least A- from Standard and Poor's and A3
from Moody's Investor Services or a guarantee from a parent company
of an equivalent rating. Alternatively, the customer must be able
to prove their creditworthiness on an ongoing basis.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
17. Cash and cash equivalents and money market deposits
2019 2018
Group and Company GBPm GBPm
========================== ==== =====
Cash and cash equivalents 22.7 87.0
Balance at 31 March 22.7 87.0
========================== ==== =====
Cash and cash equivalents comprise cash at bank and in hand,
deposits and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity
of three months or less, net of any bank overdrafts which are
payable on demand. Money market deposits with terms to maturity in
excess of three months are not included as cash or cash equivalents
and are separately disclosed on the face of the Statement of
Financial Position.
The cash and cash equivalents amount is disclosed gross of any
collateral held on derivatives. At 31 March 2019, the group held
GBPnil (2018: GBP10.6m) as collateral in relation to derivative
financial instruments (see Notes 18 & 20).
The effective interest rate on all short-term deposits was a
weighted average of 0.79% (2018: 0.65%) and these deposits had an
average maturity of 1 day (2018: 1 day).
Notes to the Financial Statements (continued)
18. Trade and other payables
Group Company Group Company
2019 2019 2018 2018
GBPm GBPm GBPm GBPm
-------------------------------------------------- ----- ------- ----- --------
Trade payables 13.9 13.9 10.9 10.9
Refundable customer deposits (Note 25) 2.2 2.2 1.7 1.7
Other taxation and social security 8.5 8.5 10.5 10.5
Amounts owed to affiliated undertakings (Note 30) 3.8 3.8 3.4 3.4
Amounts owed to subsidiary undertakings (Note 30) - 15.4 - 15.4
Customer contributions (Note 24) 24.6 24.6 28.7 28.7
Obligation to return cash collateral (Note 20) - - 10.6 10.6
Accruals and deferred income 67.6 67.9 76.8 77.1
================================================== ===== ======= ===== ========
Balance at 31 March 120.6 136.3 142.6 158.3
-------------------------------------------------- ----- ------- ----- --------
Trade payables and accruals principally comprise amounts
outstanding for capital purchases and ongoing costs. The average
credit period in the year was 19 days from receipt of invoice
(2018: 15 days).
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
19. Borrowings
This note provides information about the contractual terms of
the Group's loans and borrowings. For more information about the
Group's exposure to credit risk, liquidity risk and market risk see
Note 20.
2019 2018
Group and Company GBPm GBPm
------------------------------------------------- ------- -------
Current liabilities
Bank and other term borrowings 6.8 6.6
------------------------------------------------- ------- -------
Non-current liabilities
Bonds 634.8 705.6
Bank and other term borrowings 253.0 253.2
Amounts owed to parent undertaking (Note 30) 75.3 73.7
Amounts owed to affiliated undertaking (Note 30) 198.7 198.2
------------------------------------------------- ------- -------
1,161.8 1,230.7
Total borrowings 1,168.6 1,237.3
------------------------------------------------- ------- -------
Notes to the Financial Statements (continued)
19. Borrowings (continued)
Carrying value by category
The carrying values by category of financial instruments were as
follows:
2019 2018
Nominal value Interest rate Maturity Carrying Carrying
value value
Group and Company GBPm % year GBPm GBPm
---------------------------------------- ------------- ------------- -------- -------- --------
Borrowings designated at FVTPL:
Bond 250.0 8.875% 2026 - 367.2
---------------------------------------- ------------- ------------- -------- -------- --------
Borrowings measured at amortised cost:
Bond 200.0 8.875% 2026 197.1 196.8
Bond 250.0 8.875% 2026 291.5 -
Index-linked bond 100.0 1.4746%+RPI 2046 146.3 141.6
Index-linked loan 135.0 1.5911%+RPI 2024 168.8 164.4
Index-linked loan 50.0 0.38% +RPI 2032 44.1 46.3
Index-linked loan 50.0 0%+RPI 2033 46.9 49.1
Amortising costs re: long-term loan Libor+0.35% 2022 (0.1) -
Amounts owed to parent undertaking 2.70% 2023 75.3 73.7
Amounts owed to affiliated* undertaking 200.0 6.125% 2021 198.7 198.2
---------------------------------------- ------------- ------------- -------- -------- --------
1,168.6 870.1
======================================== ============= ============= ======== ======== ========
Total borrowings 1,168.6 1,237.3
---------------------------------------- ------------- ------------- -------- -------- --------
*Affiliated companies are those owned by Companies under common
ownership with Electricity North West Limited in the North West
Electricity Networks (Jersey) Limited consolidation group.
The designation to measure the GBP250m 8.875% 2026 bond was
revoked at the start of the year, on adoption of IFRS 9 (see Note 1
for more details); in the current year, this bond is measured at
amortised cost.
The following table provides a reconciliation of the opening and
closing debt amounts.
Group and Company 2019 2018
GBPm GBPm
---------------------------------------------------------------- -------- --------
At 1 April 1,237.3 1,249.1
Remeasurement on transition to IFRS 9 (see Note 1) (71.0) -
Fair value movement on borrowings designated at FVTPL - (23.8)
Repayments (6.7) (6.5)
Increased inter-company borrowings 1.6 2.5
Indexation (Note 9) 11.4 15.3
Amortisation of transaction costs, bond discounts and premiums (4.0) 0.7
---------------------------------------------------------------- -------- --------
At 31 March 1,168.6 1,237.3
---------------------------------------------------------------- -------- --------
Notes to the Financial Statements (continued)
19. Borrowings (continued)
As at 31 March 2019 all loans and borrowings are unsecured and
are in sterling. There were no formal bank overdraft facilities in
place (2018: same). The fair values of the Group's financial
instruments are shown in Note 20.
Borrowing facilities
The Group and Company had GBP50m (2018: GBP25m) in unutilised
committed bank facilities at 31 March 2019; GBPnil (2018: GBPnil)
expires within one year, GBPnil (2018: GBPnil) expires after one
year but less than two years and GBP50m (2018: GBP25m) expires in
more than two years.
20. Financial instruments
The Group uses financial instruments to invest liquid asset
balances, raise funding and manage the risks arising from its
operations.
The principal risks to which the Group is exposed and which
arise in the normal course of business include credit risk,
liquidity risk and market risk, in particular interest rate risk
and inflation risk. Derivative financial instruments are used to
change the basis of interest cash flows from fixed to either
inflation-linked or an alternative fixed profile to more accurately
match the revenue profile.
The Board has authorised the use of derivatives by the Group to
reduce the risk of loss arising from changes in market risks, and
for economic hedging reasons.
The accounting policy for derivatives is provided in Note 2.
Control over financial instruments
The Group has a formal risk management structure, which includes
the use of risk limits, reporting and monitoring requirements,
mandates, and other control procedures. It is currently the
responsibility of the Board to set and approve the risk management
procedures and controls.
Risk management
All of the Group's activities involve analysis, acceptance and
management of some degree of risk or combination of risks. The most
important types of financial risk are credit risk, liquidity risk
and market risk. Market risk includes foreign exchange, interest
rate, inflation and equity price risks.
The only material exposure the Group has to foreign exchange
risk or equity price risk relates to the assets of the defined
benefit pension scheme, that are managed by the pension scheme
investment managers.
The Group's risk management policies are designed to identify
and analyse these risks, to set appropriate risk limits and
controls and to monitor the risks and limits continually by means
of reliable and up to date systems. The Group modifies and enhances
its risk management policies and systems to reflect changes in
markets and products. The Audit Committee is responsible for
independently overseeing the activities in relation to Group risk
management. The Group's treasury function, which is authorised to
conduct the day-to-day treasury activities of the Group, reports on
a regular basis to the Committee.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
The Group's processes for managing risk and the methods used to
measure risk have not changed since the prior year. In the year,
the Group's policies in relation to the management of credit risk,
risk limits and minimum credit ratings of counterparties have been
reviewed and updated as appropriate to reflect changes to market
conditions and the associated level of perceived risks.
Credit risk
The Group takes on exposure to credit risk, which is the risk
that financial loss arises from the failure of a customer or
counterparty to meet its obligations under a contract as they fall
due. Credit risk arises principally from trade finance and treasury
activities. The Group has dedicated standards, policies and
procedures to control and monitor credit risk.
Treasury activities
The counterparties under treasury activities consist of
financial institutions. In accordance with IFRS, the Directors have
considered and quantified the exposure of the Group to counterparty
credit risk and a credit risk adjustment is made where required
(see the section on Fair Values below). The exposure to
counterparty credit risk is updated at each reporting date.
Although the Group is potentially exposed to credit loss in the
event of non-performance by counterparties, such credit risk is
controlled through regular credit rating reviews of the
counterparties and by limiting the total amount of exposure to any
one party. Management does not anticipate any counterparty will
fail to meet its obligations.
The Directors do not believe that the Group is exposed to any
material concentrations of credit risk in relation to treasury
investments, including amounts on deposit with counterparties. As
at 31 March 2019, none (2018: none) of the Group's treasury
portfolio exposure was either past due or impaired, and no terms
had been re-negotiated with any counterparty. The Group has limits
in place to ensure counterparties have a certain minimum credit
rating, and individual exposure limits to ensure there is no
concentration of credit risk.
The table below provides details of the ratings of the Group's
treasury portfolio, including cash and cash equivalents, money
market deposits and derivative asset positions (prior to IFRS 13
credit risk adjustment):
2019 2019 2018 2018
Group and Company GBPm % GBPm%
================== ==== ===== ===== ====
AAA 13.3 25.7 32.7 26.4
AA - - --
AA- 3.7 7.2 5.9 4.8
A+ 10.0 19.3 26.4 21.2
A 24.7 47.8 59.0 47.6
================== ==== ===== ===== =====
51.7 100.0 124.0 100.0
================== ==== ===== ===== =====
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Trade receivables
Significant changes in the economy or in the utilities sector
could result in losses not necessarily provided for at the
Statement of Financial Position date. Credit risk in relation to
trade receivables is considered to be relatively low, due to the
small number of principal customers; there are only three (2018:
three) principal customers, see Note 4. Each of these customers has
a contract in place with the Group, and is required to provide
collateral in the form of a cash deposit subject to the amounts due
and their credit rating. Whilst the loss of one of the principal
customers could have a significant impact on the Group, due to the
small number of these, the exposure to such credit losses would be
mitigated in most cases by the protection the regulator provides to
cover such losses. Nonetheless, the credit management process must
be closely adhered to, to avoid such circumstances, and the Group's
management therefore closely monitor adherence to this process,
including closely monitoring the credit worthiness of each of these
customers.
At 31 March 2019 there was GBP4.8m receivables past due (2018:
GBP4.3m) against which an allowance for doubtful debts of GBP1.3m
has been made (2018: GBP0.9m).
Exposure to credit risk
The table below shows the maximum exposure to credit risk,
represented by the carrying value of each financial asset in the
Statement of Financial Position. For trade receivables, the value
is net of any collateral held in cash deposits (see Note 16 for
further details).
2019 2018
Group and Company GBPm GBPm
============================================= ==== ======
Trade receivables (Note 16) 5.3 10.7
Amounts owed by Group undertakings (Note 16) 4.5 5.2
Cash and cash equivalents (Note 17) 22.7 87.0
============================================= ==== ======
Balance at 31 March 32.5 102.9
============================================= ==== ======
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient funds to meet the obligations or commitments resulting
from its business operations or associated with its financial
instruments, as they fall due. The Group manages the liquidity
profile of its assets, liabilities and commitments so that cash
flows are appropriately balanced and all funding obligations are
met when due. This is achieved through maintaining a prudent level
of liquid assets, and arranging funding facilities.
The Board is responsible for monitoring the maturity of
liquidity and deposit funding balances and taking any action as
appropriate. A long-term view of liquidity is provided by Group
financial models which currently project cash flows out 28 years
ahead, to the end of the Regulatory Period ending 31 March 2047. A
medium-term view is provided by the Group business plan covering
the remainder of the current Regulatory Period ending 31 March
2023, which is updated and approved annually by the Board. The
Board has approved a liquidity framework within which the business
operates, including the maintenance of a minimum of 18 months
liquidity.
Available liquidity at 31 March was as follows:
2019 2018
Group and Company GBPm GBPm
================================== ==== =====
Cash and cash equivalents 22.7 87.0
Committed undrawn bank facilities 50.0 25.0
================================== ==== =====
Balance at 31 March 72.7 112.0
================================== ==== =====
Cash and cash equivalents comprise cash at bank and in hand,
deposits and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity
of less than three months, net of any unpresented cheques. There
was no formal bank overdraft facility in place during the year
(2018: none).
At 31 March 2019, the Group and Company had committed undrawn
bank facilities of GBP50.0m (2018: GBP25.0m), including GBPnil
(2018: GBPnil) expiring within one year, GBPnil (2018: GBP25.0m)
expiring after one year but less than two years and GBP50.0m (2018:
GBPnil) expiring in more than two years.
The Group gives consideration to the timing of scheduled
payments to avoid the risks associated with the concentration of
large cash flows within particular time periods. The Group uses
economic hedges to ensure that certain cash flows can be
matched.
The following is an analysis of the maturity profile of
contractual cash flows of financial liabilities, including
principal and interest payable under financial liabilities and
derivative financial instruments on an undiscounted basis.
Derivative cash flows have been shown net; all other cash flows are
shown gross.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
<1 year 1 - 2 years 2 - 3 years 3 - 4 years >4 years Total
Group and Company GBPm GBPm GBPm GBPm GBPm GBPm
====================================== ======== ============ ============ ============ ========== ==========
At 31 March 2019:
Trade payables (13.9) - - - - (13.9)
Refundable customer deposits (2.2) - - - - (2.2)
Amounts owed to parent undertaking (2.0) (2.0) (2.0) (77.9) - (83.9)
Amounts owed to affiliated companies (12.3) (12.3) (206.1) - - (230.7)
Bonds (42.1) (42.1) (42.1) (42.1) (769.1) (937.5)
Borrowings and overdrafts (9.6) (9.6) (9.6) (9.6) (236.3) (274.7)
Derivative financial instruments 9.8 9.8 4.7 (8.0) (266.2) (249.9)
Cash collateral - - - - - -
====================================== ======== ============ ============ ============ ========== ==========
(72.3) (56.2) (255.1) (137.6) (1,271.6) (1,792.8)
====================================== ======== ============ ============ ============ ========== ==========
At 31 March 2018:
Trade payables (10.9) - - - - (10.9)
Refundable customer deposits (1.7) - - - - (1.7)
Amounts owed to parent undertaking (2.0) (2.0) (2.0) (2.0) (76.3) (84.3)
Amounts owed to affiliated companies (12.3) (12.3) (12.3) (206.1) - (243.0)
Bonds (42.1) (42.1) (42.1) (42.1) (806.3) (974.7)
Borrowings and overdrafts (9.4) (9.4) (9.4) (9.4) (239.9) (277.5)
Derivative financial instruments 10.1 10.1 10.1 4.8 (134.6) (99.5)
Cash collateral (10.6) - - - - (10.6)
====================================== ======== ============ ============ ============ ========== ==========
(78.9) (55.7) (55.7) (254.8) (1,257.1) (1,702.2)
====================================== ======== ============ ============ ============ ========== ==========
Market risk
Market risk is the risk that future cash flows of a financial
instrument, or the fair value of a financial instrument, will
fluctuate because of changes in market prices. Market prices
include foreign exchange rates, interest rates, inflation, equity
and commodity prices. The main types of market risk to which the
Group is exposed are interest rate risk and inflation risk, and
these are explained below.
The Board is required to review and approve policies for
managing these risks on an annual basis. The Board approves all new
interest rate swaps and index-linked swaps entered into. The
management of market risk is undertaken by reference to risk
limits, approved by the Chief Financial Officer or Treasurer under
delegated authority from the Board.
The Group has no significant foreign exchange, equity or
commodity exposure.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
The Group borrows in the major global debt markets at fixed,
index-linked and floating rates of interest, using derivatives,
where appropriate, to generate the desired effective interest
basis.
Interest rate risk
Interest rate risk is the risk that either future cash flows of
a financial instrument, or the fair value of a financial
instrument, will fluctuate because of changes in market interest
rates. The Group's floating rate borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
interest rates. The Group's fixed rate borrowings and derivatives
are exposed to a risk of change in their fair value due to changes
in interest rates. Investments in short-term receivables and
payables are not exposed to interest rate risk due to their
short-term nature.
The Group uses derivative financial instruments to change the
basis of interest cash flows from fixed to either inflation-linked
or an alternative fixed profile to more accurately match the
revenue profile. The cash flows exchanged under the derivatives are
calculated by reference to a notional principal amount. The
notional principal reflects the extent of the Group's involvement
in the instruments, but does not represent its exposure to credit
risk, which is assessed by reference to the fair value.
Sensitivity analysis on interest
The following sensitivity analysis is used by Group management
to monitor interest rate risk and shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given interest rate movement.
As fair value movements are taken to the Income Statement, there
would be a corresponding adjustment to profit in these scenarios
(figures in brackets represent a reduction to profit). However,
there would be no direct cash flow impact arising from these
adjustments.
The sensitivity figures are calculated based on a downward
parallel shift of 0.5% and upward parallel shifts of 0.5% and 1% in
the yield curve.
Group and Company 2019 2018
+1% +1%
GBPm GBPm
====== ======
Change in interest rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
------------------------------ ======= ====== ====== ======= ====== ======
Debt held at fair value - - - (11.9) 11.4 22.4
Inflation-linked swaps (66.7) 46.3 94.5 (58.1) 51.9 98.6
============================== ======= ====== ====== ======= ====== ======
Total finance expense impact (66.7) 46.3 94.5 (70.0) 63.3 121.0
------------------------------ ------- ------ ------ ------- ------ ------
The debt held at FVTPL in the prior year has been reclassified
as at amortised cost upon transition to IFRS 9 (see Note 1 for more
details).
The Group's floating rate borrowings and derivatives are exposed
to a risk of change in cash flows due to changes in interest rates.
At 31 March 2019, the Group had no floating rate borrowings (2018:
same).
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Although the above measures provide an indication of the Group's
exposure to market risk, such measures are limited due to the
long-term nature of many of the financial instruments and the
uncertainty over future market rates.
Index-linked debt is carried at amortised cost and as such the
Statement of Financial Position in relation to this debt is not
exposed to movements in interest rates.
Inflation risk
The Group's revenues are linked to movements in inflation, as
measured by the Retail Prices Index (RPI). To economically hedge
exposure to RPI, the Company links a portion of its funding costs
to RPI by either issuing RPI linked bonds or by using derivative
financial instruments. The Group's index-linked swaps are exposed
to a risk of change in their fair value and future cash flows due
to changes in inflation rates. The Group's revenues are linked to
RPI via returns on the Regulated Asset Value (RAV) and an increase
in RPI would increase revenues, mitigating any increase in finance
expense.
Sensitivity analysis on inflation
The Group's inflation-linked derivatives are exposed to a risk
of change in their fair value due to changes in inflation rates.
The following sensitivity analysis is used by Group management to
monitor inflation rate risk. The analysis below shows
forward-looking projections of market risk assuming certain market
conditions occur. The sensitivity figures are calculated based on a
downward parallel shift of 0.5% and upward parallel shifts of 0.5%
and 1% in the yield curve.
Group and Company 2019 2018
+1% +1%
GBPm GBPm
======== ========
Change in inflation rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
------------------------------ ====== ======= ======== ====== ======= ========
Inflation-linked swaps 42.8 (45.3) (100.6) 70.5 (77.7) (163.6)
------------------------------ ------ ------- -------- ------ ------- --------
Total finance expense impact 42.8 (45.3) (100.6) 70.5 (77.7) (163.6)
------------------------------ ------ ------- -------- ------ ------- --------
The sensitivity analysis above shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given inflation rate
movement. As fair value movements are taken to the Income
Statement, there would be a corresponding adjustment to profit in
these scenarios (figures in brackets represent a reduction to
profit). However, there would be no direct cash flow impact arising
from these adjustments.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Sensitivity analysis on inflation (continued)
The Group's inflation-linked borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
inflation rates. The analysis below shows the impact on profit for
the year if inflation rates over the course of the year had been
different from the actual rates.
Group and Company 2019 2018
+1% +1%
GBPm GBPm
====== ======
Change in inflation rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
--------------------------------------------------------------- ====== ====== ====== ====== ====== ======
Debt held at amortised cost - inflation-linked interest basis 2.1 (2.1) (4.1) 2.0 (2.0) (4.1)
Inflation-linked swaps 0.1 (0.1) (0.1) 0.1 (0.1) (0.1)
--------------------------------------------------------------- ------ ------ ------ ------ ------ ------
Total finance expense impact 2.2 (2.2) (4.2) 2.1 (2.1) (4.2)
--------------------------------------------------------------- ------ ------ ------ ------ ------ ------
Hedging
The Group does not use derivative financial instruments for
speculative purposes, and has not pledged collateral in relation to
any of its derivative instruments. At 31 March 2019, the Group's
derivatives are not designated in formal hedging relationships
(2018: none), and instead are measured at fair value through the
Income Statement.
Fair values
The tables below provide a comparison of the book values and
fair values of the Group's financial instruments by category as at
the Statement of Financial Position date. Cash and cash
equivalents, trade and other receivables and trade and other
payables are excluded as the book values approximate to the fair
values because of their short-term nature.
2019 2019 2018 2018
Carrying value Fair Carrying value Fair
GBPm value GBPm value
GBPm GBPm
================ ========== ================ ==========
Group and Company
================================================= ================ ========== ================ ==========
Non-current liabilities:
Borrowings designated at FVTPL (Note 19) - - (367.2) (367.2)
Borrowings measured at amortised cost (Note 19) (887.8) (1,127.5) (591.6) (766.0)
Amounts due to parent undertaking (Note 19) (75.3) (75.3) (73.7) (73.7)
Amounts due to affiliated companies (Note 19) (198.7) (221.2) (198.2) (229.2)
Derivative financial instruments (Note 19) (404.6) (404.6) (357.3) (357.3)
================================================= ================ ========== ================ ==========
(1,566.4) (1,828.6) (1,588.0) (1,793.4)
Current liabilities:
Borrowings measured at amortised cost (Note 19) (6.8) (6.8) (6.6) (6.6)
================================================= ================ ========== ================ ==========
(1,573.2) (1,835.4) (1,594.6) (1,800.0)
------------------------------------------------- ---------------- ---------- ---------------- ----------
--
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
The value of derivatives is disclosed gross of any collateral
held. At 31 March 2019, the group held GBPnil (2018: GBP10.6m) as
collateral in relation to derivative financial instruments,
included within current liabilities (see Note 18). The cash
collateral does not meet the offsetting criteria in IAS 32:42, but
it can be set off against the net amount of the derivatives in the
case of default and insolvency or bankruptcy, in accordance with
associated collateral arrangements.
Fair value measurements recognised in the Statement of Financial
Position
Financial instruments that are measured subsequent to initial
recognition at fair value are grouped into Levels 1 to 3 based on
the degree to which the fair value is observable:
-- Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
-- Level 2 fair value measurements are those derived from inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
-- Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable
inputs).
Where available, market values have been used to determine fair
values (see Level 1 in the fair value hierarchy above).
Where market values are not available, fair values have been
calculated by discounting future cash flows at prevailing interest
and RPI rates sourced from market data (see Level 2 in the fair
value hierarchy above) in accordance with IFRS 13, an adjustment
for non-performance risk has then been made to give the fair
value.
The non-performance risk has been quantified by calculating
either a credit valuation adjustment (CVA) based on the credit risk
profile of the counterparty, or a debit valuation adjustment (DVA)
based on the credit risk profile of the relevant group entity,
using market-available data.
Whilst the majority of the inputs to the CVA and DVA
calculations meet the criteria for Level 2 inputs, certain inputs
regarding the Group's credit risk are deemed to be Level 3 inputs,
due to the lack of market-available data. The credit risk profile
of the Group has been built using the few market-available data
points, e.g. credit spreads on the listed bonds, and then
extrapolated over the term of the derivatives. It is this
extrapolation that is deemed to be Level 3. All other inputs to
both the underlying valuation and the CVA and DVA calculations are
Level 2 inputs.
For certain derivatives, the Level 3 inputs form an
insignificant part of the fair value and, as such, these
derivatives are disclosed as Level 2. Otherwise, the derivatives
are disclosed as Level 3.
The adjustment for non-performance risk, as at 31 March 2019, is
GBP100.5m (2018: GBP93.1m), of which GBP100.3m (2018: GBP91.6m) is
classed as Level 3.
On entering certain derivatives, the valuation technique used
resulted in a fair value loss. As this, however, was neither
evidenced by a quoted price nor based on a valuation technique
using only data from observable markets, this loss on initial
recognition was not recognised. This was supported by the
transaction price of nil. This difference is being recognised in
profit or loss on a straight-line basis over the life of the
derivatives. The aggregate difference yet to be recognised in
profit or loss is GBP60.7m (2018: GBP64.8m). The movement in the
period all relates to the straight-line release to profit or
loss.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Group 2019 2018
GBPm GBPm
------------------------------------------ ======== ========
FV of derivatives pre IFRS 13 adjustment (565.8) (515.2)
CVA/DVA 100.5 93.1
Day 1 60.7 64.8
IFRS 13 FV of derivatives (404.6) (357.3)
------------------------------------------ -------- --------
The following table provides an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which
the fair value is observable:
Group and Company Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
------------------------------------------- ======== ======== ======== ========
At 31 March 2019:
Derivative financial liabilities:
-GBP300m notional inflation-linked swaps - (9.2) (395.4) (404.6)
Financial liabilities designated at FVTPL - - - -
=========================================== ======== ======== ======== ========
- (9.2) (395.4) (404.6)
------------------------------------------- -------- -------- -------- --------
At 31 March 2018:
Derivative financial liabilities:
-GBP300m notional inflation-linked swaps - (34.6) (322.7) (357.3)
Financial liabilities designated at FVTPL (367.2) - - (367.2)
------------------------------------------- -------- -------- -------- --------
(367.2) (34.6) (322.7) (724.5)
------------------------------------------- -------- -------- -------- --------
The following table provides a reconciliation of the fair value
amounts disclosed as Level 3.
Group and Company 2019 2018
GBPm GBPm
---------------------------------------------- ======== ========
At 1 April (322.7) (244.3)
Transfers into Level 3 from Level 2 (30.0) (95.5)
Transfers from Level 3 into Level 2 2.3
Total gains or losses in profit or loss;
- On transfers into Level 3 from Level 2 (8.2) 1.5
- On instruments carried forward in Level 3 (36.8) 15.6
============================================== ======== ========
At 31 March (395.4) (322.7)
============================================== ======== ========
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
In the prior year, inflation-linked swaps with fair values of
GBP105.7m were restructured. Prior to restructure, all GBP105.7m
was classified as Level 2; upon restructure GBP95.5m was
transferred from Level 2 to Level 3, principally due to a change in
the significance of the unobservable inputs used to derive
Electricity North West's credit curve for the DVA, as described in
this section above. On restructure, there was no change in the fair
values of the swaps, as evidenced by GBPnil cash exchange.
The movement in the fair values of the derivative portfolio was
solely due to fair value movements; there were no additional swaps
entered, nor any swaps closed out, during the year.
The following table shows the sensitivity of the fair values of
derivatives disclosed as Level 3 to the Level 3 inputs, determined
by applying a 10bps shift to the credit curve used to calculate the
DVA.
2019 2019 2018 2018
-10bps +10bps -10bps -10bps
GBPm GBPm GBPm GBPm
======== ======== ======== ========
Group and Company
------------------------ ======== ======== ======== ========
Inflation-linked swaps (2.2) 2.1 (2.0) 1.9
======================== ======== ======== ======== ========
Fair value measurements disclosed but not recognised in the
Statement of Financial Position
Group and Company Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
--------------------------------------- ========== ======== ======== ==========
At 31 March 2019:
Borrowings measured at amortised cost (1,127.5) - - (1,127.5)
Amounts due to affiliated companies (221.2) - - (221.2)
======================================= ========== ======== ======== ==========
(1,348.7) - - (1,348.7)
At 31 March 2018:
Borrowings measured at amortised cost (766.0) - - (766.0)
Amounts due to affiliated companies (229.2) - - (229.2)
======================================= ========== ======== ======== ==========
(995.2) (995.2)
--------------------------------------- ---------- -------- -------- ----------
Notes to the Financial Statements (continued)
21. Retirement benefit schemes
Group and Company
Nature of Scheme
The Group's defined benefit arrangement is the Electricity North
West Group of the ESPS ("the Scheme") and forms part of the
Electricity Supply Pension Scheme (ESPS). Up to 31 March 2011 the
Scheme was split into two sections. However, following the
'hive-up' of the assets and liabilities of Electricity North West
Number 1 Company Ltd to the Company and the termination of the
Asset Services Agreement between the two companies on 31 March
2011, the two sections were merged as at that date.
The Scheme contains both a defined benefit section and a defined
contribution section. The defined benefit section of the Scheme
closed to new entrants on 1 September 2006, with new employees of
the Group subsequently provided with access to the defined
contribution section.
The defined benefit section is a UK funded final salary
arrangement providing pensions and lump sums to members and
dependants. The defined benefit section is a separate fund that is
legally separated from the entity. The Trustee board of the Scheme
is composed of representatives from both the employer and members
of the Scheme. Under the Pensions Act 2004 at least one third of
the Trustee Board must be member nominated and the Trustee Board
has made the necessary arrangements to fulfil this obligation. The
Trustee Board of the Scheme is required by law to act in the
interest of the Scheme and all relevant stakeholders of the Scheme,
i.e. active employees, retirees and employers. The Trustee Board is
responsible for the operation, funding and investment strategy of
the Scheme.
During the year the Group made contributions of GBP30.8m (2018:
GBP30.3m) to the defined benefit section of the Scheme. This
includes GBP17.8m of deficit contributions. The Group estimates
that contributions for the year ending 31 March 2020 will amount to
around GBP31.7m which includes GBP18.3m of expected deficit
contribution payments. The total defined benefit pension expense
for the year was GBP21.2m (2018: GBP17.6m). No Executive Directors
were part of the defined benefit scheme.
As at 31 March 2019 contributions of GBP2.5m (2018: GBP2.7m)
relating to the current reporting period had not been paid over to
the defined benefit Scheme.
Defined benefit assets are measured at fair value while
liabilities are measured at present value. The difference between
the two amounts is recognised as a surplus or obligation in the
Statement of Financial Position.
IFRIC14: 'The limit on a defined benefit asset, minimum funding
requirements and their interaction' was published by the
interpretations committee of the International Accounting Standards
Board in July 2007 and was adopted during the year ended 31 March
2008. IFRIC14 provides guidance on the extent to which a pension
scheme surplus should be recognised as an asset and may also
require additional liabilities to be recognised where minimum
funding requirements exist. Legal opinion was obtained that a
pension surplus could be recovered on wind up of the scheme and
could, therefore, be recognised, along with associated
liabilities.
The Group has concluded that it can recognise the full amount of
this surplus on the grounds that it could gain sufficient economic
benefit from the refund of the surplus assets that would be
available to it following the final payment to the last beneficiary
of the Section.
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
Funding the liabilities
UK legislation requires the Trustee Board to carry out
valuations at least every three years and to target full funding
against a basis that prudently reflects the Scheme's risk exposure.
The most recent valuation was carried out as at 31 March 2016 and
identified a shortfall of GBP142.6m against the Trustee Board's
statutory funding objective. In the event of underfunding the Group
must agree a deficit recovery plan with the Trustee Board within
statutory deadlines. As part of the 2016 Actuarial valuation the
Group agreed to remove the shortfall by paying annual contributions
to 2023.
The results of the 2016 funding valuation have been projected
forward by an independent actuary to take account of the
requirements of revised IAS 19 'Employee Benefits' in order to
assess the position as at 31 March 2019 for the purpose of these
financial statements. The present value of the defined benefit
obligation, the related current service cost and the past service
cost were measured using the projected unit credit method. A
pension surplus under IAS 19 (revised 2011) of GBP32.8m is included
in the Statement of Financial Position at 31 March 2019 (2018:
deficit of GBP18.2m).
The weighted average duration of the defined benefit obligation
is approximately 19 years (2018: 18 years).
Investment strategy
The Scheme has an investment strategy to aim to match pensioner
and other liabilities with lower risk cash flow investments and to
invest liabilities in respect of active members into return seeking
assets. As active members retire, then a switch of investments
would be carried out.
The Company recognises that the interests of customers, who
ultimately fund pension costs, should be given full recognition in
determining the investment strategy. The Company works in
collaboration with the Independent Scheme Trustee to ensure these
interests are considered alongside those of the members of the
pension scheme.
Other risks
The Scheme exposes the Group to risks, such as longevity risk,
inflation risk, interest rate risk and investment risk. As the
Scheme's obligation is to provide lifetime pension benefits to
members upon retirement, increases in life expectancy will result
in an increase in the Scheme's liabilities. Other assumptions used
to value the defined benefit obligation are also uncertain.
These risks are managed through de-risking and hedging
strategies and are measured and reported at Board level.
Winding up
Although currently there are no plans to do so, the Scheme could
be wound up in which case the benefits would have to be bought out
with an insurance company. The cost of buying-out benefits would be
significantly more than the defined benefit surplus calculated in
accordance with IAS 19 (revised 2011).
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
Defined Contribution arrangements
All assets within the defined contribution section of the Scheme
are held independently from the Group.
The total cost charged to the Income Statement in relation to
the defined contribution section for the year ended 31 March 2019
was GBP4.9m (2018: GBP4.0m) and represents contributions payable to
the Scheme at rates specified in the rules of the Scheme. As at 31
March 2019 contributions of GBPnil (2018: GBPnil) due in respect of
the current reporting period had not been paid over to the defined
contribution Scheme.
Defined Benefits employee benefits
The reconciliation of the opening and closing Statement of
Financial Position is as follows:
Group and Company 2019 2018
GBPm GBPm
------------------------------------------------------------- ======= =======
At 1 April (18.2) (58.0)
Expense recognised in the Income Statement (21.2) (17.6)
Contributions paid 30.8 30.3
Total re-measurement included in Other Comprehensive Income 41.4 27.1
============================================================= ======= =======
At 31 March 32.8 (18.2)
------------------------------------------------------------- ------- -------
Movements in the fair value of the Group defined benefit
obligations are as follows:
Group and Company 2019 2018
GBPm GBPm
----------------------------------------------- ======== ========
At 1 April 1,388.2 1,430.4
Current service cost 15.5 15.3
Interest expense 35.4 34.9
Member contributions 1.7 1.7
Past service costs:
Augmentation 0.6 0.4
GMP equalisation 4.1 -
Re-measurement:
Effect of changes in demographic assumptions (68.2) -
Effect of changes in financial assumptions 71.3 (25.0)
Effect of experience adjustments - -
Benefits paid (76.5) (69.5)
=============================================== ======== ========
At 31 March 1,372.1 1,388.2
----------------------------------------------- -------- --------
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
The liability value as at 31 March is made up of the following
approximate splits:
Group and Company 2019 2018
GBPm GBPm
---------------------------------------- ======== ========
Liabilities owing to active members 473.6 453.8
Liabilities owing to deferred members 70.5 70.5
Liabilities owing to pensioner members 828.0 863.9
Total liability at 31 March 1,372.1 1,388.2
---------------------------------------- -------- --------
Movements in the fair value of the Group Pension Scheme assets
were as follows:
Group and Company 2019 2018
GBPm GBPm
------------------------------------------------ ======== ========
At 1 April 1,370.0 1,372.4
Interest income 35.1 33.8
Return on plan assets (net of interest income) 44.5 2.0
Company contributions 30.8 30.3
Member contributions 1.7 1.7
Benefits paid (76.5) (69.5)
Scheme administration expenses (0.7) (0.7)
At 31 March 1,404.9 1,370.0
------------------------------------------------ -------- --------
The net pension expense before taxation recognised in the Income
Statement, before capitalisation, in respect of the Scheme is
summarised as follows:
Group and Company 2019 2018
GBPm GBPm
------------------------------------------ ======= =======
Current service cost (15.5) (15.3)
Past service cost:
Augmentation (0.6) (0.4)
GMP equalisation (4.1) -
Interest income on plan assets 35.1 33.8
Interest (expense) on Scheme obligations (35.4) (34.9)
Administration expenses (0.7) (0.8)
Net pension expense before taxation (21.2) (17.6)
------------------------------------------ ------- -------
The above amounts are recognised in arriving at operating profit
except for the interest on Scheme assets and interest on Scheme
obligations which have been recognised within net finance expense
(Note 9).
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
Past-service costs of GBP4.1m have been recognised relating to
the estimated cost of equalising Guaranteed Minimum Pensions (GMPs)
earned after 17 May 1990 between men and women. The Scheme has to
provide GMPs which, as a result of statutory rules, have been
calculated differently for men and women. Although equal treatment
in pension provision for males and females has been required since
1990, there has been uncertainty on whether, and how, pension
schemes are required to equalise GMPs. A High Court judgement on
the Lloyds Banking Group hearing was published on 26 October 2018.
The judgement confirmed that GMPs earned from 1990 must be
equalised and highlighted an acceptable range of methods. The
estimated cost of this equalisation is GBP4.1m. This represents the
Directors' best estimate of the cost, based on actuarial advice.
However, the final cost will differ from this amount when the
actual method of equalisation is agreed with the Trustee and
subsequently implemented.
The main financial assumptions used by the actuary (in
determining the deficit) were as follows:
Group and Company 2019 2018
% %
------------------------------ ===== =====
Discount rate 2.40 2.60
Pensionable salary increases 3.25 3.10
Pension increases 3.10 3.05
Price inflation (RPI) 3.25 3.10
============================== ===== =====
The mortality rates utilised in the valuation are based on the
standard actuarial tables SAPS S2PXA (birth year) tables with a
loading of 95% for male pensioners, 90% for female pensioners, 105%
for male non-pensioners and 100% for female non-pensioners. These
loading factors allow for differences in expected mortality between
the Scheme population and the population used in the standard
tables. A long-term improvement rate of 1.5% p.a. is assumed within
the underlying CMI 2018 model (2018: CMI 2015 model).
The current life expectancies underlying the value of the
accrued liabilities for the Scheme are:
Group and Company 2019 2018
Male life expectancy at age 60 Years Years
===================================== ======= =======
Retired member 26.8 28.0
Non-retired member (current age 45) 27.3 28.8
===================================== ======= =======
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
The following table presents a sensitivity analysis for each
significant actuarial assumption showing how the defined benefit
obligation would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at the Statement
of Financial Position date. This sensitivity analysis applies to
the defined benefit obligation only and not to the net defined
benefit pension liability, the measurement of which depends on a
number of factors including the fair value of Scheme assets. The
calculations alter the relevant assumption by the amount specified,
whilst assuming that all other variables remained the same. This
approach is not necessarily realistic, since some assumptions are
related: for example, if the scenario is to show the effect if
inflation is higher than expected, it might be reasonable to expect
that nominal yields on corporate bonds will also increase.
Group and Company 2019 2018
Increase in Defined Benefit Obligation GBPm GBPm
=============================================== ====== ======
Discount rate: decrease by 25 basis points 65.0 65.5
Price inflation: increase by 25 basis points 60.6 61.4
Life expectancy: increase longevity by 1 year 52.5 45.5
=============================================== ====== ======
As at 31 March 2019, the fair value of the Scheme's assets and
liabilities recognised in the Statement of Financial Position were
as follows:
Scheme assets Scheme assets
Value Value
Group and Company 2019 2019 2018 2018
At 31 March % GBPm % GBPm
----------------------------------- -------------- ---------- -------------- ----------
Cash and Cash equivalents 1.0 13.6 3.7 51.3
Equity instruments 2.7 38.3 10.0 137.0
Debt instruments 84.5 1,187.1 74.0 1,013.2
Real estate 10.0 140.6 10.6 145.0
Distressed debt 1.7 23.5 1.6 21.9
Hedge funds 0.1 1.8 0.1 1.6
=================================== ============== ========== ============== ==========
Total fair value of assets 100.0 1,404.9 100.0 1,370.0
Present value of liabilities (1,372.1) (1,388.2)
Net retirement benefit obligation 32.8 (18.2)
----------------------------------- -------------- ---------- -------------- ----------
The fair values of the assets set out above are as per the
quoted market prices in active markets.
Notes to the Financial Statements (continued)
22. Provisions
Group and Company 2019 2018
GBPm GBPm
------------------------------------------------------ ====== ======
At 1 April 3.1 4.0
Charged /(credited) to the income statement (Note 5) 0.7 (0.2)
Utilisation of provision (0.8) (0.7)
At 31 March 3.0 3.1
------------------------------------------------------ ------ ------
Group and Company 2019 2018
GBPm GBPm
------------------- ====== ======
Current 0.8 0.8
Non-current 2.2 2.3
At 31 March 3.0 3.1
------------------- ------ ------
During the year ended 31 March 2013 a provision was created in
connection with a portfolio of retail properties for which the
Company was liable under privity of contract. The combined closing
provision of GBP1.1m at 31 March 2019 (2018: GBP1.5m) which now
relates to one High Street retail property and two out of town
retail properties has been evaluated by management, is supported by
relevant external property specialists, and reflects the Company's
best estimate as at the Statement of Financial Position date of the
amounts that could become payable by the Company, on a discounted
basis. The estimate is a result of a detailed risk assessment
process, which considers a number of variables including the
location and size of the stores, expectations regarding the ability
of the Company to both defend its position and also to re-let the
properties, conditions in the local property markets, demand for
retail warehousing, likely periods of vacant possession and the
results of negotiations with individual landlords, letting agents
and tenants, and is hence inherently judgemental.
The Company is part of a Covenanter Group (CG) which is party to
a Deed of Covenant under which certain guarantees over the benefits
of members of the EATL Group of the Electricity Supply Pension
Scheme have been given. The closing provision at 31 March 2019 of
GBP1.9m (2018: GBP1.6m) on a discounted basis relates to the
Company's 6.7% share of the liabilities.
Notes to the Financial Statements (continued)
23. Deferred tax
The following are the major deferred tax liabilities and assets
recognised by the Group and Company, and the movements thereon,
during the current and prior years.
Other Total
Accelerated tax depreciation Retirement benefit obligations
Group and Company GBPm GBPm GBPm GBPm
--------------------------------- ================================= =============================== ======= ======
At 1 April 2017 193.9 (10.0) (57.2) 126.7
Charged/(credited) to the Income
Statement 0.4 2.2 2.1 4.7
Deferred tax on re-measurement
of defined benefit pension
schemes - 4.6 - 4.6
At 1 April 2018 194.3 (3.2) (55.1) 136.0
Opening reserve adjustment on
transition to IFRS 9 12.2 12.2
Charged/(credited) to the Income
Statement 0.8 1.6 (7.5) (5.1)
Deferred tax on re-measurement
of defined benefit pension
schemes - 7.0 - 7.0
At 31 March 2019 195.1 5.4 (50.5) 150.1
--------------------------------- --------------------------------- ------------------------------- ------- ------
There are no significant unrecognised deferred tax assets or
liabilities for either the Group or Company in either the current
or prior year. Other deferred tax relates primarily to derivative
financial instruments.
Notes to the Financial Statements (continued)
24. Customer Contributions
Customer contributions are amounts received from a customer in
respect of the provision of a new connection to the network.
Customer contributions are amortised through the Income Statement
over the expected lifetime of the relevant asset.
Group and Company 2019 2018
GBPm GBPm
================================================= ======= =======
At 1 April 641.3 614.2
Additions during the year 37.8 44.0
Amortisation - (10.5)
Amortised through revenue(1) (17.3) (6.4)
At 31 March 661.8 641.3
================================================= ======= =======
Split:
Amounts due in less than one year (see Note 18) 24.6 28.7
Amounts due after more than one year 637.2 612.6
================================================= ======= =======
At 31 March 661.8 641.3
================================================= ======= =======
(1) In the year 2019, GBPnil (2018: GBP6.4m) of customer
contributions amortisation was amortised through revenue in line
with IFRIC 18. In 2019, all customer contributions amortisation has
been posted through revenue in line with IFRS 15 (see Note 4 for
details).
25. Refundable customer deposits
Refundable customer deposits are those customer contributions
which may be partly refundable, dependent on contractual
obligations.
Group and Company 2019 2018
GBPm GBPm
================================================= ====== ======
Amounts due in less than one year (see Note 18) 2.2 1.7
Amounts due after more than one year - -
At 31 March 2.2 1.7
------------------------------------------------- ------ ------
Notes to the Financial Statements (continued)
26. Called up share capital
Company 2019 2018
GBP GBP
----------------------------------------------------------- ------------ ------------
Authorised:
569,999,996 (2017: same) ordinary shares of 50 pence each 284,999,998 284,999,998
4 'A' ordinary shares of 50 pence each 2 2
Special rights redeemable preference share of GBP1 1 1
At 31 March 285,000,001 285,000,001
----------------------------------------------------------- ------------ ------------
Company 2019 2018
GBP GBP
----------------------------------------------------------- ------------ ------------
Allotted, called up and fully paid:
476,821,341 (2017: same) ordinary shares of 50 pence each 238,410,671 238,410,671
4 'A' ordinary shares of 50 pence each 2 2
At 31 March 238,410,673 238,410,673
----------------------------------------------------------- ------------ ------------
The 'A' ordinary shares and the ordinary shares rank pari passu
in all respects, save that dividends may be declared on one class
of shares without being declared on the other.
Notes to the Financial Statements (continued)
27. Shareholders' Equity
Called up Share premium Revaluation Capital Retained Total Equity
share capital account reserve redemption earnings
GBPm GBPm reserve GBPm
GBPm GBPm GBPm
---------------- --------------- --------------- ---------------- --------------- ---------------- -------------
Group:
At 1 April 2018 238.4 4.4 90.3 8.6 486.1 827.8
Opening
adjustment on
transition to
IFRS 9 - - - - 71.0 71.0
Tax impact on
opening reserve
adjustment on
transition to
IFRS 9 - - - - (12.0) (12.0)
59.0 59.0
Profit for the
year - - - - 71.8 71.8
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
Other
comprehensive
income for the
year - - - - 41.4 41.4
Tax on
components of
comprehensive
income - - - - (7.0) (7.0)
Total
comprehensive
income for the
year - - (2.1) - 108.3 106.2
Transactions
with owners
recorded
directly in
equity
Equity dividends - - - - (46.3) (46.3)
At 31 March 2019 238.4 4.4 88.2 8.6 607.1 946.7
Company:
At 1 April 2018 238.4 4.4 90.3 8.6 485.8 827.5
Opening
adjustment on
transition to
IFRS 9 - - - - 71.0 71.0
Tax impact on
opening reserve
adjustment on
transition to
IFRS 9 - - - - (12.0) (12.0)
59.0 59.0
Profit for the
year - - - - 71.8 71.8
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
Other
comprehensive
income for the
year - - - - 41.4 41.4
Tax on
components of
comprehensive
income - - - - (7.0) (7.0)
Total
comprehensive
income for the
year - - (2.1) - 108.3 106.2
Transactions
with owners
recorded
directly in
equity
Equity dividends - - - - (46.3) (46.3)
At 31 March 2019 238.4 4.4 88.2 8.6 606.8 946.4
Notes to the Financial Statements (continued)
27. Shareholders' Equity (continued)
In 1997 the Company undertook a revaluation of certain assets,
following North West Water's acquisition of Norweb. This resulted
in the creation of a revaluation reserve of GBP234.9m. The
additional depreciation created as a result of the revaluation is
transferred from the revaluation reserve to retained earnings on an
annual basis.
Capital redemption reserve, is a non-distributable reserve
specifically for the purchase of own shares.
28. Capital structure
Details of the authorised and allotted share capital, together
with details of the movements in the Company's issued share capital
during the year are shown in Note 26. The Company has Ordinary
shares, which carry no right to fixed income. Each share carries
the right to one vote at general meetings of the Company. The
Company also has 'A' ordinary shares which rank pari passu in all
respects, save that dividends may be declared on one class of
shares without being declared on the other.
There exists an unissued special rights redeemable preference
share which does not carry any voting rights and can only be held
by one of Her Majesty's Secretaries of State, another Minister of
the Crown, the Solicitor for the affairs of her Majesty's Treasury
or any other person acting on behalf of the Crown. This share is a
legacy from the privatisation of the Company and was issued on 19
November 1990 and redeemed on 31 March 1995.
There are no specific restrictions on the size of a holding or
on the transfer of shares which are both governed by the general
provisions of the Articles of Association and prevailing
legislation. The Directors are not aware of any agreements between
holders of the Company's shares that may result in restrictions in
the transfer of securities or on voting rights.
No person has any special rights of control over the Company's
share capital and all issued shares are fully paid up. With regard
to the appointment and replacement of Directors, the Company is
governed by its Articles of Association, the Companies Act and
related legislation. The Articles themselves may be amended by
special resolution of the shareholders. The powers of Directors are
described in the Articles of Association, copies of which are
available on request; and in the Corporate Governance Report on
pages 32 to 45.
29. Ultimate parent undertaking and controlling party
The immediate parent undertaking is North West Electricity
Networks plc, a company incorporated and registered in the United
Kingdom. The address of the immediate parent undertaking is 304
Bridgewater Place, Birchwood Park, Warrington, England WA3 6XG. The
ultimate parent undertaking is NWEN (Jersey), a company
incorporated and registered in Jersey. The address of the ultimate
parent company is: 44 Esplanade, St Helier, Jersey, Channel
Islands, JE4 9WG.
This Group is the smallest group in which the results of the
Company are consolidated. The largest group in which the results of
the Company are consolidated is that headed by NWEN (Jersey).
First State Investments Fund Management S.à.r.l. on behalf of
First State European Diversified Infrastructure Fund FCP-SIF
('EDIF') and IIF Int'l Holding GP Ltd ('IIF') have been identified
as ultimate controlling parties. They are advised by Colonial First
State Global Asset Management (a member of the Commonwealth Bank of
Australia Group) and JP Morgan Investment Management Inc
respectively.
Notes to the Financial Statements (continued)
30. Related party transactions
During the year the following transactions with related parties
were entered into:
Group Company Group Company
2019 2019 2018 2018
GBPm GBPm GBPm GBPm
Recharges to:
Electricity North West (Construction and Maintenance) Ltd 1.6 1.6 0.6 0.6
Electricity North West Services Ltd 1.8 1.8 1.6 1.6
Recharges from:
Electricity North West (Construction and Maintenance) Ltd (0.1) (0.1) (0.1) (0.1)
Electricity North West Services Ltd (7.6) (7.6) (4.8) (4.8)
Interest payable to:
North West Electricity Networks plc (2.0) (2.0) (2.0) (2.0)
ENW Finance plc (12.3) (12.3) (12.4) (12.4)
Dividends paid to North West Electricity Networks plc (46.3) (46.3) (75.6) (75.6)
Directors' remuneration (Note 7) (2.1) (2.1) (1.9) (1.9)
Directors' services (0.2) (0.2) (0.2) (0.2)
For disclosure relating to executive directors remuneration see
Note 7. The Company's key management personnel comprise solely of
its directors.
Notes to the Financial Statements (continued)
30. Related party transactions (continued)
Amounts outstanding with related parties are as follows:
Group Company Group Company
2019 2019 2018 2018
GBPm GBPm GBPm GBPm
======== ========
Amounts owed by:
North West Electricity Networks plc 3.5 3.5 3.3 3.3
Electricity North West (Construction and Maintenance) Ltd 0.4 0.4 0.2 0.2
Electricity North West Services Ltd 0.3 0.3 1.3 1.3
Electricity North West Property Ltd - - 0.1 0.1
North West Electricity Networks (Jersey) Ltd 0.1 0.1 0.1 0.1
North West Electricity Networks (Holdings) Ltd 0.2 0.2 0.2 0.2
Total (Note 16) 4.5 4.5 5.2 5.2
Amounts owed to:
Electricity North West Number 1 Company Ltd (Note 18) - (15.4) - (15.4)
Electricity North West Services Ltd (0.7) (0.7) (0.3) (0.3)
Interest payable to:
North West Electricity Networks plc (0.6) (0.5) (0.5) (0.5)
ENW Finance plc (2.5) (2.5) (2.5) (2.5)
Total (Note 18) (3.8) (3.8) (3.3) (3.3)
Borrowings payable to:
North West Electricity Networks plc (Note 19) (75.3) (75.3) (73.7) (73.7)
ENW Finance plc (Note 19) (198.7) (198.7) (198.2) (198.2)
Group tax relief to:
North West Electricity Networks plc (5.0) (5.0) (5.6) (5.6)
Electricity North West Services Ltd - - (0.1) (0.1)
The loan from North West Electricity Networks plc accrues
weighted average interest at 2.70% (2018: 2.70%) and is repayable
in March 2023. The loan from ENW Finance plc accrues interest at
6.125% (2018: 6.125%) and is repayable in July 2021.
Fees of GBP0.1m (2018: GBP0.1m) were payable to Colonial First
State in respect of the provision of Directors' services. Colonial
First State is part of the Commonwealth Bank of Australia which is
identified as a related party as per Note 29.
Fees of GBP0.1m (2018: GBP0.1m) were payable to IIF Int'l
Holding GP Ltd ('IIF') in respect of the provision of Directors'
services which is identified as a related party as per Note 29.
Notes to the Financial Statements (continued)
31. Cash generated from operations
Group and Company 2019 2018
GBPm GBPm
======= =======
Operating profit 190.5 183.3
Adjustments for:
Depreciation of property, plant and equipment 110.7 108.3
Amortisation of intangible assets 6.2 5.5
Amortisation of customer contributions (17.6) (16.9)
Profit on disposal of property, plant and equipment (0.4) (0.2)
Cash contributions in excess of pension charge to operating profit (18.0) (22.4)
======= =======
Operating cash flows before movements in working capital 271.4 257.6
Changes in working capital
(Increase)/decrease in inventories (1.8) (0.9)
Increase in trade and other receivables 5.0 (2.9)
(Decrease)/increase in payables and provisions (7.0) (14.8)
======= =======
Cash generated from operations 267.6 239.0
32. Operating leases
Future minimum rental payments under non-cancellable operating
leases are as follows:
Land and Plant and Vehicles Land and Plant and Vehicles
buildings machinery buildings machinery
2019 2019 2019 GBPm 2018 2018 2018 GBPm
GBPm GBPm GBPm GBPm
================= ================= =================
Not later than one
year 0.7 0.1 1.1 0.7 0.1 1.1
Later than one
year and not
later than five
years 2.3 0.3 3.2 1.2 0.3 3.3
Later than five
years 1.8 2.4 - 1.9 2.5 -
=================
4.8 2.8 4.3 3.8 2.9 4.4
----------------- -----------------
Glossary
BEIS Department for Business, Energy and Industrial Strategy
BITC Business in the Community
CEG Customer Engagement Group
CI Customer Interruptions
CLASS Customer Load Active System Services
CML Customer Minutes Lost
CSAT Customer Satisfaction
CVA/DVA Credit/Debit Valuation Adjustment
DNO Distribution Network Operator
DSO Distribution System Operator
DUoS Distribution Use Of System
ECL Expected Credit Losses
ENWL Electricity North West Limited
ESPS Electricity Supply Pension Scheme
FVTPL Fair Value Through Profit or Loss
GDPR General Data Protection Regulation
GEMA Gas and Electricity Markets Authority
GMP Guaranteed Minimum Pensions
GRESB Global Real Estate Sustainability Benchmark
IFRS International Financial Reporting Standard
KPI Key Performance Indicators
Ofgem Office of Gas and Electricity Markets
PBTFV Profit before tax and fair value movements
PPE Property, Plant and Equipment
PSR Priority Services Register
RAV Regulatory Asset Value
RIIO Revenue using Incentives to deliver Innovation and
Outputs
RIIO - ED1 Revenue using Incentives to deliver Innovation and
Outputs - Electricity Distribution 1
RIIO - ED2 Revenue using Incentives to deliver Innovation and
Outputs - Electricity Distribution 2
RoRE Return on Regulated Equity
RPI Retail Prices Index - a UK general index of retail
prices (for all items) as published by the Office
for National Statistics (January 1987 = 100).
tco(2) e Tonnes of Carbon Dioxide Equivalent
Totex Total expenditure
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR CKDDKQBKDDPN
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May 31, 2019 10:10 ET (14:10 GMT)
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