Interim Results
Northumbrian Water Group PLC
19 November 2003
19 November 2003
INTERIM RESULTS FOR THE PERIOD ENDED 30 SEPTEMBER 2003
FIRST FINANCIAL RESULTS FOR NORTHUMBRIAN WATER GROUP PLC
Northumbrian Water Group plc is pleased to announce its first interim results
since its debut on AIM on 23 May 2003 and its admission to the Official List of
the London Stock Exchange on 23 September 2003.
HIGHLIGHTS
• Turnover of £182.7 million for the four months trading ended 30 September 2003
(2002: £172.7 million).
• Pro forma turnover of £261.4 million for the six month period to 30 September
2003 (2002: £249.8 million).
• Profit before tax of £15.5 million (2002: £34.8 million) reflecting the
increased interest charges principally due to the acquisition.
• Pro forma profit before tax of £24.1 million for the six month period
to 30 September 2003 (2002: £40.8 million).
• Interim dividend of 2.32 pence per share for the four month trading
period, consistent with expectations at the time of AIM listing.
• Kielder refinancing close to completion.
• Highest quality drinking water in the UK and continuing high levels of
customer service and environmental protection.
• Ofwat draft interim determination of K of 9.6% to be applied in 2004/05.
John Cuthbert, Managing Director, said today: "2003 has been a year of great
significance for Northumbrian Water Group. We listed on AIM in May, submitted
our draft business plan to Ofwat for the next regulatory period in August and
moved to the Official List in September. In response to our application for an
interim determination of our price limits, Ofwat has recently proposed that the
company raise its charges by 9.6% for the 2004/05 year.
"The business continues to perform well and our drinking water quality, levels
of customer service and environmental protection are amongst the highest in the
country. We continue to focus on our core business with an emphasis on
performance management across the Group."
For further information contact:
Northumbrian Water 0191 301 6419
John Cuthbert, Managing Director
Chris Green, Finance Director
Andrew Panting, Communications Manager
Finsbury 020 7251 3801
Rollo Head
Mark Harris
Anthony Silverman
Notes to Editors
Northumbrian Water Group plc ("the Group" or "NWG") was admitted to the Official
List of the London Stock Exchange on 23 September 2003, following four months on
AIM. The Group listed on AIM on 23 May 2003, the day that it purchased Atlantic
Water Limited ("AWL") for a consideration of £1,010 million (excluding
acquisition costs). AWL includes Northumbrian Services Limited ("NSL"), formerly
Ondeo Services UK plc, and its subsidiary companies. The acquisition was
financed by cash of £880 million, comprising £344 million (net of expenses)
raised from a group of institutional investors and a short term loan of £536
million from Deutsche Bank. The balance of the consideration was satisfied by
the issue of shares to Suez, the previous ultimate parent company of AWL, valued
at £130 million.
NSL comprises a number of companies, of which the largest are Northumbrian Water
Limited ("NWL"), Entec UK Limited, Analytical and Environmental Services Limited
and Fastflow Pipeline Services Limited. Northumbrian Water International, a
division of NSL, manages waste water treatment plants in Scotland and water
operations in Gibraltar.
NWL is a regulated water and sewerage company operating in the north east and
south east of England (trading as Northumbrian Water and Essex & Suffolk Water
respectively), and is committed to maintaining its leading position in the UK
water industry for customer service and environmental protection. NWL currently
provides water and sewerage services to 2.6 million people, and water services
to 1.7 million people, in the north east and south east of England respectively.
REPORTING PERIOD
These interim results cover the period from 12 May 2003, the date of
incorporation of Northumbrian Water Group plc ("the Group" or "NWG"), to 30
September 2003. There was no trading activity between the dates of 12 and 23 May
2003. The statement consolidates the trading results of Northumbrian Services
Limited ("NSL") and its subsidiaries for the four months from the date of the
acquisition (23 May 2003) of Atlantic Water Limited ("AWL"), its immediate
parent company. NSL's trading results for the equivalent period to 30 September
2002 have been provided for comparative purposes.
In addition, pro forma results for NSL for the six month period to 30 September
2003 have been presented which also include the actual trading performance of
NSL from 1 April to 22 May. The comparative results for NSL for the six month
period to 30 September 2002 are also presented.
GROUP FINANCIAL PERFORMANCE
The Group's turnover was £182.7 million for the trading period from 23 May to 30
September 2003 (2002: £172.7 million). The higher turnover in the current period
reflects a £6.5 million increase in income at Northumbrian Water Limited
("NWL"), mainly due to the inflation increase in charges in April 2003. It also
reflects £3.3 million of new income following the start of operations at
Caledonian Environmental Services ("CES") in late 2002. The pro forma turnover
for the six month period to 30 September 2003 was £261.4 million, representing a
4.6% increase on the six month period to 30 September 2002 (2002: £249.8
million).
Operating profit was £57.7 million for the trading period from 23 May to 30
September 2003 (2002: £59.9 million). Exceptional costs of £2.2 million have
been recognised in the current period relating to the listing process and costs
resulting from the change in relationship with the former parent company, Suez.
Operating costs have increased by £5.9 million at NWL and these are explained in
further detail below in the section on water. Operating costs at CES have
increased by £2.5 million, in line with the increase in turnover. The pro forma
operating profit for the six month period to 30 September 2003 was £78.6 million
(2002: £77.4 million).
The interest charge was £44 million for the trading period from 23 May to 30
September 2003 (2002: £25.5 million). Of this increase, £6 million (of which
£5.2 million is classed as exceptional) relates to the amortisation of debt
arrangement costs required to secure the additional debt finance which was
necessary for NWG to purchase AWL. Following the transaction, the increased
level of debt at NWG has resulted in an additional £7.1 million of interest
charges. A further £0.9 million of the increase reflects NWG's equity share of
the interest paid by the Ayrshire project company which commenced operation in
late 2002. The remaining increase in the interest charge reflects the underlying
increase in net debt at NWL and the cost of the short term facilities required
as a result of the new Group finance structure.
Profit on ordinary activities before tax was £15.5 million (2002: £34.8 million)
for the trading period from 23 May to 30 September 2003, reflecting the
acquisition of AWL, while profit on ordinary activities after tax for the same
period was £20.1 million (2002: £25.7 million).
CAPITAL STRUCTURE
On 10 September 2003, NWL applied to the Office of Water Services ("Ofwat") for
an interim determination of K ("IDoK"). On 5 November 2003, the Director General
for Water Services announced his draft interim determination. In this
announcement, Ofwat proposed to allow the company to raise its charges by 9.6%
in real terms in 2004/05. The Director General's final decision will be
announced by 11 December 2003 after a period of consultation. The application to
increase prices in real terms in 2004/05 was made because NWL faces
unanticipated additional costs caused by increased customer bad debt, water
quality monitoring, new obligations requiring capital expenditure and lower than
forecast demand for water.
NWL is close to raising additional finance with a long term maturity date by
securitising the income stream relating to its contract with the Environment
Agency ("EA") to operate the Kielder Water transfer scheme. Deutsche Bank has
been mandated to manage the transaction. The exact proceeds have not yet been
finalised but are likely to be in excess of £200 million. The proceeds will be
used to repay existing debt incurred on the acquisition of AWL.
Prior to flotation on AIM on 23 May 2003, the credit ratings for NSL and NWL
were reassessed by Standard & Poor's ("S&P's") and Fitch Ratings. S&P's lowered
its ratings on NSL and NWL to BB+ and BBB respectively, whereas Fitch Ratings
placed the existing ratings for the two companies on Ratings Watch with a
negative outlook. The ratings agencies' actions were largely due to the increase
in the net debt of NWG and the amounts falling due within five years. Both the
IDoK and the Kielder refinancing should strengthen the credit quality of NSL and
NWL.
NWG's net debt (prior to adjusting for fair value) increased to £1,730.9 million
at 30 September 2003 (2002: £1,092.0 million), mainly due to the increase in
borrowings which was required to finance the purchase of AWL. The remaining
increase reflects the underlying increase in net debt at NWL due to the ongoing
investment programme. The Group's gearing, based on its net debt (before fair
value) divided by an estimated Regulatory Asset Value of £2,242m at 30
September, is 77%. Cash and EBIT interest cover for the Group are 2.02 and 1.31
respectively.
WATER
Turnover was £166.4 million for the trading period from 23 May to 30 September
2003 (2002: £156.2 million). The increased turnover in the current period is
mainly due to RPI increases at NWL (£4.0 million) and the commencement of
operations at CES (£3.3 million). The pro forma turnover for the six month
period to 30 September 2003 was £237.9 million, representing a 5.3% increase on
the six month period to 30 September 2002 (2002: £226.0 million).
Operating profit was £60.5 million for the trading period from 23 May to 30
September 2003 (2002: £59.1 million), which reflects an increase in operating
costs of £8.8 million. The pro forma operating profit for the six month period
to 30 September 2003 was £79.9 million (2002: £77.5 million). The new operations
at CES account for £2.5 million of the increase in operating costs.
NWL accounts for the remainder of the cost increase, and this is largely due to
a higher charge for leakage management, increased sludge treatment and disposal
costs, and new operating costs relating to higher standards of sewage treatment.
Insurance costs have also increased reflecting higher premiums, more claims and
a more prudent provisioning policy. Manpower costs have increased following the
annual pay award and increases in national insurance, and abstraction charges
have increased following price increases above RPI in April 2003. Depreciation
has also increased by £1.1 million, reflecting the commissioning of further
investment.
Direct operating costs at NWL for the last regulatory year ended 31 March 2003
were £200.9 million, which compares favourably with £208.4 million which was
forecast for the same period by Ofwat in the 1999 Final Determination. This
efficiency has been achieved after absorbing various additional unanticipated
costs not allowed for by Ofwat. Capital expenditure at NWL for the three years
to 31 March 2003 was £615.5 million, £45.6 million lower than the amount
forecast by Ofwat for the same period. The lower capital expenditure reflects a
mixture of capital efficiencies on investment required to meet quality
objectives, lower expenditure relating to the supply demand balance and some
phasing differences. However, expenditure on capital maintenance is in line with
the Ofwat forecast.
During the period, NWL continued to provide its customers with high levels of
service. However, the exceptional floods experienced in its northern area during
August 2002 meant that NWL was unable to achieve the highest levels of service
in Ofwat's sewer flooding categories. The drinking water supplied in the
company's northern and southern areas continued to be of the highest quality in
the country.
Despite one of the driest summers on record, NWL was able to meet its customers'
water requirements without the need for restrictions, a clear demonstration of
the benefits of the company's investment in water resources and leakage
detection in recent years. One such investment, the Langford Recycling Plant,
has increased the available water in Essex by almost 10%, by returning water to
the river and reservoir network that used to be lost to sea. A new water
treatment works being constructed at Wearhead in County Durham to safeguard the
quality of water supplied to the Wear Valley and Sunderland areas is close to
completion. It has been carefully designed and constructed considering
environmental and social issues and to enable it to blend in to its
surroundings, which are designated as an Area of Outstanding Natural Beauty.
NWL's sewage treatment works continued to deliver high levels of performance.
The company's care for the environment was reflected in it being the only
company unplaced in the EA's pollution prosecution league for water and sewerage
companies. The coast of the north east of England continued to enjoy the high
levels of sea water quality that came with the commissioning of the company's
new state of the art coastal sewage treatment works two years ago. The results
of the EA's bathing water tests for the summer of 2003 confirmed that 100% of
the region's bathing waters achieved the required mandatory EU standard and 70%
met the much stricter guideline standard.
NWL submitted its draft business plan for the years 2005-2010 to Ofwat in August
2003. The company proposed to raise prices in real terms by 37% over the five
year period, taking average household water and sewerage bills in the north from
£206 in 2003 to £286 plus inflation in 2010. In the south, average household
water bills would increase from £113 in 2003 to £153 plus inflation in 2010.
These proposed increases will be modified in the light of the final outcome of
the IDoK application.
Northumbrian Water International (formerly known as Northumbrian Lyonnaise
International), a trading division of NSL, is now operating the waste water
treatment plants at Levenmouth (CES) and Ayrshire for Scottish Water. NWG has a
50% interest in the Ayrshire project company, and therefore accounts for the
results of this company on an equity basis. NWG's share of the operating profits
of Ayrshire in the current period was £1.2 million (2002: £nil).
Operations at a new treatment plant built for Cork City Council in the Republic
of Ireland will commence early in 2004. Lyonnaise des Eaux (Gibraltar) Limited,
soon to be renamed AquaGib Limited, has achieved certification to the new ISO
9001:2000 standard for its water supply, sewage pumping and billing activities -
a standard also achieved by NWL. Certification was achieved six months ahead of
schedule.
RELATED SERVICES
The Group's non-water companies' turnover was £27.7 million for the trading
period from 23 May to 30 September 2003 (2002: £28.4 million). The pro forma
turnover for the six month period to 30 September 2003 was £39.6 million,
representing a 2.9% decrease on the six month period to 30 September 2002 (2002:
£40.8 million). Operating profit was £1.3 million for the trading period from 23
May to 30 September 2003 (2002: £1.7 million). The pro forma operating profit
for the six month period to 30 September 2003 was £1.5 million (2002: £1.4
million).
The sale of Imass Limited, a subsidiary of NSL until December 2002, reduced
turnover in the trading period to 30 September 2003 by £2 million, though this
has been largely offset by a net increase in turnover from the other Group
companies.
The Group's environmental and engineering consultancy, Entec UK Limited,
successfully continues to build its third party activity with an excellent
client base and high levels of repeat business, resulting in increased turnover
of £2 million in the current period.
Fastflow Pipeline Services Limited, the Group's specialist underground asset
management company, has continued to make steady progress. It has developed its
range of services as well as increasing its customer base to include other water
companies and industrial clients.
Analytical and Environmental Services Limited continues to grow its external
client base and, as part of a consortium, it recently won a contract with the
Irish Department of Environment to audit drinking water laboratories throughout
the Republic of Ireland.
Northumbrian Water Technical Centre Limited (NWTC) carries out research and
development in water and sewerage networks management and operation. It has
recently provided assistance to companies in Hungary, Indonesia and Chile and
has supported NWL on a range of water and waste water projects. NWTC is also
strengthening its relationship with universities and industrial partners to
develop research programmes covering the challenges facing the water industry in
the future.
DIVIDEND
The Board has declared an interim dividend in respect of the four month trading
period ended 30 September 2003 of 2.32p per share. This dividend will be paid on
7 January 2004 to shareholders on the register at the close of business on 12
December 2003.
BOARD APPOINTMENT
Derek Wanless will be appointed as a Non-executive Director of the Group with
effect from 1 December 2003. Newcastle-born Mr Wanless is a Non-executive
Director of Northern Rock plc and of Business in the Community and was formerly
Group Chief Executive of National Westminster Bank plc.
OUTLOOK
The outlook for the business remains positive. The draft IDoK from Ofwat will be
finalised by 11 December 2003 and should improve the revenue and profitability
of the business. In addition, the proceeds from the Kielder refinancing will
replace the remaining short term debt arising from the purchase of AWL with a
long term facility secured on the Kielder operating contract. Both the IDoK and
the refinancing should strengthen the credit quality of NWG, NSL and NWL.
Whilst the outcome of the Periodic Review of prices cannot be predicted, the
IDoK does remove some of the uncertainty around the review. NWL believes its
draft business plan submission reflects a well balanced proposal and remains
confident that the Ofwat approach to the review will result in an acceptable
outcome.
The Group will continue to focus on its core competencies, improving efficiency
levels, driving down operating costs, maintaining high standards of customer
service, developing the skills and effectiveness of its employees and
integrating environmental management into its decision-making processes.
John Cuthbert
Managing Director
CONSOLIDATED PROFIT AND LOSS ACCOUNT
NWG NSL NSL NSL
12.5.03 to 23.5.02 to 1.4.03 to 1.4.02 to
30.9.03 30.9.02 30.9.03 30.9.02
£m £m £m £m
Pro forma
(unaudited) (unaudited) (unaudited) (unaudited)
Turnover: group and
share of joint
ventures 184.7 174.6 264.4 252.7
Less share of joint
ventures' turnover (2.0) (1.9) (3.0) (2.9)
Group turnover 182.7 172.7 261.4 249.8
Operating costs
- operating costs
before exceptional
costs (122.8) (112.8) (180.6) (172.4)
- exceptional costs
(see note 4) (2.2) - (2.2) -
Operating profit 57.7 59.9 78.6 77.4
Share of associated
undertakings'
operating profit 1.3 0.1 1.7 0.1
Share of joint
ventures' operating
profit 0.3 0.3 0.5 0.6
Investment income 0.2 - 0.2 -
Interest and similar
charges
- exceptional
amortisation of
financing costs
(see note 4) (5.2) - (5.2)
- net interest
payable and similar
charges (38.8) (25.5) (51.7) (37.3)
Profit on ordinary
activities 15.5 34.8 24.1 40.8
Before taxation
Taxation on profit on
ordinary activities
- current taxation 2.1 (2.6) 2.2 (2.6)
- deferred taxation 2.5 (6.5) 2.1 (6.2)
Profit on ordinary
activities after
taxation 20.1 25.7 28.4 32.0
Minority interests (0.2) (0.7) (0.7) (0.4)
Profit attributable
to shareholders 19.9 25.0 27.7 31.6
Dividends paid and
proposed (12.0) (31.1) (12.0) (31.1)
Retained
profit/(loss) for
the period 7.9 (6.1) 15.7 0.5
Basic earnings per
share 3.8p 5.4p 5.3p 6.8p
Adjusted earnings
per share
(excluding deferred tax,
goodwill and
exceptionals) 5.0p 6.8p 6.6p 8.1p
Diluted earnings
per share 3.8p 5.4p 5.3p 6.8p
Dividends per share 2.32p 6.68p 2.32p 6.68p
All results are attributable to continuing operations arising from acquisitions.
CONSOLIDATED BALANCE SHEET
NWG NSL
30.9.03 30.9.02
£m £m
(unaudited) (unaudited)
Fixed assets
Intangible assets - goodwill 55.9 -
Tangible fixed assets 2,642.3 2,528.6
Investments 6.0 4.8
2,704.2 2,533.4
Current assets
Stocks 6.5 6.5
Debtors: amounts receivable within one year 112.6 294.1
Debtors: amounts receivable after more than one
year 29.1 18.5
Investments 0.1 0.1
Cash at bank and in hand 90.1 48.8
238.4 368.0
Creditors: amounts falling due within one year (251.7) (270.7)
Net current (liabilities)/assets (13.3) 97.3
Total assets less current liabilities 2,690.9 2,630.7
Creditors: amounts falling due after more than
one year (1,877.9) (1,285.3)
Accruals and deferred income (131.2) (124.4)
Provisions for liabilities and charges (173.3) (178.4)
Net assets 508.5 1,042.6
Capital and reserves
Called up share capital 51.9 466.2
Share premium account 446.3 217.9
Group reconstruction relief reserve - 107.6
Profit and loss account 7.9 247.6
Shareholders' funds: equity interests 506.1 1,039.3
Minority equity interests 2.4 3.3
508.5 1,042.6
Net debt (including provisional fair value
adjustment) 1,835.2 1,092.0
Provisional fair value adjustment less (104.3) -
amortisation
Net debt (excluding provisional fair value
adjustment) 1,730.9 1,092.0
CONSOLIDATED CASH FLOW STATEMENT
NWG NSL
12.5.03 to 23.5.02 to
30.9.03 30.9.02
£m £m
(unaudited) (unaudited)
Reconciliation of total operating profit
to net cash inflow from operating activities
Total operating profit 57.7 59.9
Depreciation 31.0 30.1
Profit on disposal of tangible fixed assets (0.4) (0.4)
Other non-cash movements 0.2 (0.1)
Movement in provisions (0.5) 6.4
Amortisation of capital grants (0.8) (0.7)
Amortisation of fair value adjustment to debt (2.1) -
Amortisation of goodwill 1.0 -
Increase in stocks (0.5) (0.8)
Decrease in debtors 12.9 19.9
Decrease in creditors (9.3) (24.9)
Net cash inflow from operating activities 89.2 89.4
Cash flow statement
Net cash inflow from operating activities 89.2 89.4
Net cash outflow from returns on investments
and servicing of finance (38.2) (26.0)
Tax paid - (1.6)
Net cash outflow on capital expenditure (59.3) (69.3)
Acquisition of business expenses)(see note 7b) (889.8) -
Net cash outflow before use of liquid
resources and financing (898.1) (7.5)
Management of liquid resources 364.1 (5.5)
Issue of new shares 368.5 -
Other financing net cash inflow 194.7 8.8
Net cash inflow from financing 563.2 8.8
Increase/(decrease) in cash in the period 29.2 (4.2)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the period 29.2 (4.2)
Cash inflow from increase in net borrowings (194.7) (8.8)
Less unamortised financing costs 2.7 -
Cash (inflow)/outflow from management
of liquid resources (364.1) 5.5
Loans and finance leases acquired with
subsidiaries net of short term deposits (1,304.2) -
Inception of new finance leases (4.1) (2.2)
Movement in net debt in the period (1,835.2) (9.7)
Opening net debt - (1,082.3)
Closing net debt (1,835.2) (1,092.0)
Notes to the accounts
1 Basis of preparation
(a) The interim period covers the period from incorporation of NWG (12 May 2003)
to 30 September 2003, and includes the trading results of NSL for the four
month period from the date of the acquisition by NWG (23 May 2003) to
30 September 2003. NWG did not trade in the period from 12 May to 23 May 2003.
(b) In order to show consistent comparative figures, the results of NSL for
the four month period from 23 May to 30 September 2002 have also been included
as NWG did not exist at this time.
(c) The pro forma figures for the six months ended 30 September 2003 include
the six months trading results of NSL to 30 September 2003 with the addition of
the NWG acquisition accounting from 23 May 2003. These pro forma results are
presented to provide a comparative for the equivalent period next year. The pro
forma figures include 8 weeks of pre acquisition profits.
(d) The results of NSL for the six months ended 30 September 2002 are
presented to provide a trading comparison for the prior period, but do not
include any adjustment for the NWG acquisition on a pro forma basis. The
comparative figures provided in the consolidated balance sheet and cash flow
statement are in respect of NSL, prior to its acquisition by NWG.
The figures for the above periods are unaudited and do not constitute statutory
accounts. However, the auditors have carried out a review of the figures to 30
September 2003 and their report is set out in the independent review report.
The interim statement was approved by the Board of Directors on 18 November 2003.
2 Accounting policies
The Group has adopted the accounting policies set out in the 2002 statutory
accounts of NSL, with the exception of the accounting for court costs and
solicitors fees which, in accordance with the Group accounting policy, are
written off. The impact of this change on the consolidated profit after tax of
NSL for the four months to 30 September 2002 and the six months to 30 September
2002 was a net reduction of £0.1 million and £nil respectively and the impact on
the consolidated shareholders' funds of NSL, as at 30 September 2002, was a
reduction of £4.3 million.
The interim financial information has been prepared on the basis of these
accounting policies.
3 Segmental analysis of turnover and operating profit
NWG NSL NSL NSL
12.5.03 to 23.5.02 to 1.4.03 to 1.4.02 to
30.9.03 30.9.02 30.9.03 30.9.02
£m £m £m £m
Pro forma
(unaudited) (unaudited) (unaudited) (unaudited)
Turnover
UK water 158.0 151.5 226.4 218.5
International water 8.4 4.7 11.5 7.5
166.4 156.2 237.9 226.0
Related services 27.7 28.4 39.6 40.8
Joint ventures 2.0 1.9 3.0 2.9
Total turnover 196.1 186.5 280.5 269.7
Less: inter segment (11.4) (11.9) (16.1) (17.0)
External turnover 184.7 174.6 264.4 252.7
Group 182.7 172.7 261.4 249.8
Joint ventures 2.0 1.9 3.0 2.9
184.7 174.6 264.4 252.7
Operating profit
UK water 59.0 58.3 78.3 78.0
International water 1.5 0.8 1.6 (0.5)
60.5 59.1 79.9 77.5
Related services 1.3 1.7 1.5 1.4
61.8 60.8 81.4 78.9
Central unallocated costs
and provisions (4.1) (0.9) (2.8) (1.5)
Group operating profit 57.7 59.9 78.6 77.4
Share of associated
undertakings' profit 1.3 0.1 1.7 0.1
Share of joint ventures' 0.3 0.3 0.5 0.6
profit 0.3 0.3 0.5 0.6
Net interest payable and
investment income (43.8) (25.5) (56.7) (37.3)
Profit on ordinary
activities before taxation 15.5 34.8 24.1 40.8
4 Exceptional costs
The exceptional operating costs comprise additional severance costs of £1.1
million and the costs associated with the uplift to the main market. Financing
costs arising on the debt required for the acquisition have been apportioned
between debt that has been repaid and debt that is still outstanding. Finance
costs relating to the debt that has been repaid have been written off. Due to
the magnitude of these costs they have been disclosed as exceptional.
5 Earnings per share
Basic and diluted earnings per share are calculated using a weighted average
number of shares of 518.6 million for the periods 12 May to 30 September 2003
and 1 April to 30 September 2003. The weighted average number of shares for the
periods 23 May to 30 September 2002 and 1 April to 30 September 2002 was 466.2
million.
Adjusted EPS is considered by the directors to give a better indication of the
Group's underlying performance. Adjusted earnings per share is based on earnings
of £25.8 million, being the earnings for the period 12 May to 30 September 2003
excluding deferred tax, goodwill and exceptional charges. The impact of these
adjustments on the basic earnings per share is a 0.5p decrease, a 0.2p increase
and a 1.5p increase respectively.
6 Dividends
An interim dividend of 2.32p per share has been declared and will be paid on 7
January 2004 to shareholders on the register on 12 December 2003.
7 Acquisition of subsidiaries
On 23 May 2003 the Group purchased the whole of the issued share capital of AWL
which at that time held 100% of NSL. The consideration was satisfied by the
payment of £880m in cash and the allotment of 129,655,961 fully paid ordinary
shares representing 25% of the enlarged share capital of NWG.
(a) AWL has been accounted for under the acquisition method of accounting. The
assets and liabilities of NSL which were acquired are set out below:
Reconciliation of Book value Provisional Accounting Total
book value to provisional fair value policy provisional
fair value at 23 May 2003 adjustment alignment fair value
23.5.03
£m £m £m £m
Fixed assets 2,612.3 - - 2,612.3
Stocks 6.0 - - 6.0
Cash at bank and in hand 431.6 - - 431.6
Debtors: receivable
within one year (see note (i)) 139.9 (3.2) (6.0) 130.7
Debtors: receivable after
more than one year (see
note (ii)) 17.4 12.7 - 30.1
Creditors: amounts
falling due within one year
(see note (iii)) (228.7) (4.3) - (233.0)
Creditors: amounts
falling due after more than one
year (see note (iii)) (1,602.1) (102.1) - (1,704.2)
Provisions for liabilities and
charges (see note (iv)) (171.6) (5.1) - (176.7)
Accruals and deferred
income (128.0) - - (128.0)
Less minority interests (2.9) - - (2.9)
Net assets 1,073.9 (102.0) (6.0) 965.9
Goodwill 56.9
Consideration (including
acquisition costs) 1,022.8
Satisfied by:
129,655,961 shares 129.7
Cash to ordinary
shareholders 880.0
Costs of acquisition 13.1
1,022.8
(b) Net cash outflows in respect of the acquisition comprised:
NWG
12.5.03
to
30.9.03
£m
Cash consideration 880.0
Cash at bank and in hand acquired (25.3)
Bank overdrafts acquired 22.0
Expenses paid in connection with acquisition 13.1
Net cash outflow in respect of acquisition 889.8
Explanatory notes to the provisional fair value adjustments table:
(i) Debtors: receivable within one year
Fair value adjustment to restate balances at their estimated recoverable value.
Accounting policy alignment to write off debt recovery costs as incurred.
(ii) Debtors: receivable after more than one year
In accordance with FRS 7, a surplus in the defined benefit pension scheme has
been recognised as an asset.
(iii) Creditors: amounts falling due within one year and creditors: amounts
falling due after more than one year
The carrying values of fixed rate debt have been adjusted to reflect the market
rate of interest on the date of acquisition.
(iv) Provision for liabilities and charges
Deferred tax has been adjusted to reflect the discount rates effective at date
of acquisition. A further adjustment has been made to reflect the deferred tax
on the fair value adjustments.
8 Taxation
There is no current tax charge in the period to 30 September 2003 due to the
existence of tax losses in the parent company. The current tax credit of £2.1
million arises principally from the reversal of tax provided in the
pre-acquisition period from 1 January to 23 May 2003.
The deferred tax credit in the period to 30 September 2003 of £2.5 million
arises principally due to a credit of £8.1 million relating to discount
resulting from increases in government gilt interest rates since 23 May 2003.
Tax on exceptional operating and financing costs is £0.3 million deferred and
£1.9 million current tax respectively.
INDEPENDENT REVIEW REPORT TO NORTHUMBRIAN WATER GROUP PLC
Introduction
We have been instructed by the company to review the financial information for
the period from incorporation on 12 May 2003 to 30 September 2003 which
comprises the Consolidated Profit and Loss Account, Consolidated Balance Sheet,
Consolidated Cash Flow Statement, and the related notes 1 to 8. Further details
of the financial information provided are given in note 1. We have read the
other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the
financial information.
This report is made solely to the company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' issued by the
Auditing Practices Board. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the company, for our work,
for this report, or for the conclusions we have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
'Review of interim financial information' issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making enquiries
of group management and applying analytical procedures to the financial
information and underlying financial data, and based thereon, assessing whether
the accounting policies and presentation have been consistently applied, unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with United
Kingdom Auditing Standards and therefore provides a lower level of assurance
than an audit. Accordingly we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the period from 12
May to 30 September 2003.
Ernst & Young LLP
Newcastle upon Tyne
19 November 2003
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