2012 Annual Report

1

Contents2 Executive Summary4 Operational Review24 Financial Review28 Corporate Social Responsibility 32 The Executive Team33 Directors & Advisors 34 Directors’ Report 36 Corporate Governance 41 Directors’ Responsibilities Statement 42 Independent Auditor’s Report 44 Consolidated Profit & Loss Account 45 Consolidated Balance Sheet 46 Company Balance Sheet47 Consolidated Statement of Total Recognised Gains & Losses 47 Reconciliation of Movements in Consolidated Shareholders’ Funds48 Consolidated Cash Flow Statement 49 Notes to the Consolidated Cash Flow Statement51 Notes to the Accounts80 Group Five Year Summary 81 Contact Details

2

Executive SummaryThe board remains confident that our businesses are well positioned to deliver another year of growth for the Group. South Staffordshire Plc is an integrated services group that operates two regulated UK water supply companies and provides a range of specialist services, predominantly in the UK water sector but also increasingly to other infrastructure owners.

The Group has experienced another positive year with successful operational delivery in the regulated water supply businesses of South Staffs Water and Cambridge Water (which was acquired in October 2011). In addition, the year has also seen the continuing successful development of opportunities arising in our non-regulated service divisions, SSI Services and Echo, which have experienced sales and profit growth despite the continuing difficulties in the UK economy.

South Staffs WaterDomestic water charges remain 25% below the industry average with the business continuing to offer high levels of service to its customers.

Despite the very dry weather conditions experienced during the year, which resulted in a drought in much of the country including the Midlands, the business’s water resource position remained healthy with no water use restrictions being imposed. A relatively wet spring and start to the 2012 summer have also increased resources further. However, continual close management of the resource position remains a priority for the business.

South Staffs Water has successfully delivered capital investment (net of contributions) of £26.3m in the year including the replacement of 63km of mains that are susceptible to bursts and leaks.

Cambridge WaterIn October 2011 the Group acquired Cambridge Water, a water only company supplying approximately 310,000 people in the city of Cambridge and the surrounding area. The business has many similarities with South Staffs Water in that both businesses have low charges to customers, supply high quality drinking water and offer excellent service, whilst having an efficient operation.

As the Group already owned one water company there was an automatic referral of the acquisition to the Competition Commission which, on 31 May 2012, cleared the acquisition without the need for remedies. The Competition Commission recognised the potential for positive benefits from the sharing of best practice and increased resilience to improve further the performance of both businesses.

3

SSI ServicesSSI Services, the Group’s specialist infrastructure contracting division, provides a broad range of specialist added value services working in regulated environments serving the public and private sectors, including water utilities, government agencies, as well as major contractors and facility management companies serving these sectors.

The division has operated in a challenging environment, with a reduction in public sector budgets impacting demand for our specialist services. However, despite these challenges, the division has continued to grow and improve the levels of operational efficiency. A number of businesses have performed very well, with the water industry entering the second year of AMP5 and demand in this sector increasing with further growth expected in the current year.

EchoEcho is a leading provider of customer process management services focusing on regulated markets. The business remains committed to developments that continue to support its clients with the major challenges they face including, in the UK water sector, their focus on further improving their levels of customer satisfaction. This support has included further development of Echo’s RapidXtra system, resulting in innovations in business process management, meter data management and web self-service.

The business remains committed to building on its position in Northern Ireland where it is already established as one of the leading public sector service providers. Inter-Credit, Echo’s debt collection business, has performed well during the year securing new clients in the water industry.

Management and EmployeesThe success of the Group could not be achieved without the hard work, dedication and innovation of our main asset, our management and employees. The Group continues to encourage our people to develop their skills and knowledge to the benefit of both themselves and our businesses.

OutlookDespite continuing uncertainty over the prospects for growth in the UK economy and the challenges this uncertainty brings, the Board remains confident that our businesses are efficient and are well positioned to deliver another successful year of growth for the Group.

4

Despite being one of the smaller companies in the UK water sector, South Staffs Water is recognised as being a leading company. Drivers for the water industry are demands for a constant supply of safe and clean water, excellent value and high customer service and the business has a proven track record of meeting these demands.

The Long Term Strategic Direction Statement, which guides company policy and decision making, continues to be based upon:

• Providing excellent service to customers;

• Maximising business efficiency through controlling costs; and

• Reducing the carbon footprint by further enhancing energy efficiency.

The challenge to square these key drivers is increasingly being put to the test, especially as the carbon agenda continues to increase in significance. Nevertheless, South Staffs Water’s household customers continue to pay the third lowest water bills in England and Wales, with the average figure of £130 being 25% lower than the industry average.

The business is also recognised for being one of the most efficient in the sector and is ranked in the highest band for efficiency by Ofwat. For operating costs, South Staffs Water attained upper Band A efficiency status in the last Periodic Review

(2009) and the business is committed to maintaining this position going forward. While costs continue to be very carefully controlled and further savings achieved, the cost base is continually being influenced by factors outside of the business’s control, such as power and fuel costs, new and increased government charges, bad debts, a volatile inflation rate and unpredictable weather conditions.

Historically water companies’ service performance has been assessed using the Overall Performance Assessment (OPA) and, for more than ten consecutive years, South Staffs Water has been represented in the top five in the industry, an achievement of which the business is incredibly proud. In the spirit of

Operational Review:South Staffs WaterSouth Staffs Water is recognised for being one of the most efficient companies in the sector by Ofwat.

5

Our average household customer bill is 25% below the

industry average

6

continually incentivising performance of companies, Ofwat has introduced the Service Incentive Mechanism (SIM), essentially to replace the OPA.

The SIM measure is dominated by assessing levels of customer satisfaction and has a very different emphasis to the OPA. It became fully effective in 2011/12 and there has been much work done by the business during the year to review and improve processes and systems in order to enhance the experience and satisfaction of customers when they have contact with the business on billing or operational matters. Over the year the establishment of the Customer Voice team has been

pivotal to these improvements and ensuring that all employees understand the vital role they play in delivering good customer service. South Staffs Water has significantly improved performance in the year and comparison to the rest of the industry will be available in mid 2012.

In recent years severe winter weather saw significant peaks in burst main and leakage levels. This past winter has been exceptionally mild but extreme variability in weather conditions makes it even more important to plan effectively and have flexibility in managing resources. Despite the business entering the spring of 2011 in a

healthy water resource position, the lack of rainfall over the last summer, autumn and winter has highlighted the vulnerability of water resources to unusual weather patterns.

Following two very dry winters, areas of the country, including the Midlands, were officially declared in drought by the Environment Agency. As a consequence a number of water companies imposed water use restrictions on their customers, although the situation has been helped by an unusually wet spring and start to the summer. As a result of moving significant volumes of water around its supply area to meet customer needs and to protect reservoir levels, South Staffs Water’s resource position remains healthy and there are no water use restrictions foreseen. However, to ensure this position is maintained, there will be continual close management of resources.

The management of resources is also impacted upon by leakage levels, and the mild winter and

(left) Much work has been done to enhance customer satisfaction.

7

continued investment has helped in achieving the leakage target for the year coupled with a low number of prolonged supply interruptions.

During the period, the business complied with 99.97% of all tests carried out on drinking water supplies. The result continues the trend of high compliance rates achieved over a number of years.

With increasing energy prices, the drive to improve efficiency in the production of water and electricity procurement continues to be important. A full review of production costs has been undertaken to ensure the efficient use of energy continues and is further enhanced. Such activities are becoming increasingly important as 2012/13 sees the introduction of the Carbon Reduction Commitment. South Staffs Water will continue to work very hard to maintain its recognised position as one of the most energy efficient companies in the sector.

Much work has been undertaken on further improvements to procurement, contracting and AMP5 capital investment delivery strategies. By using these strategies, the business has made good progress in delivering its capital programme to ensure its assets remain in good condition, maintain stable asset serviceability and ensure good quality, reliable water supplies to customers. Capital expenditure net of

contributions for the year of £26.3m is in line with the 2009 Ofwat Final Determination before accounting for a change in the COPI index reported during the year.

Good progress has been made in replacing mains that are susceptible to bursts and leakage with the renewal of 63km of mains and associated services in the year. With an enhanced programme of meter

The business has significantly improved

its SIM performance in the year

8

Whilst the third year of the current AMP5 period has just started, preparations are already in progress for the 2014 Periodic Review. This will require even greater customer support for the Business Plan and South Staffs Water is in the process of implementing an enhanced Customer Engagement strategy to ensure key stakeholder endorsement of our future plans.

With the publication of the Water White Paper and Ofwat’s Future Price Limits consultation, there is a drive to promote competition, significantly enhance customer engagement and reduce the industry’s impact on the environment. These key documents will have a significant impact on the industry and its regulatory environment. Currently, the plans are at an early stage and work will progress over the coming months to understand the practicalities of the proposed regime. The sentiments of the high level principles are already being factored into the business’s operational activities and future plans.

• Improve the business’s capabilities to schedule jobs for customers directly;

• Improve response times to operational activities; and

• Sustain high operational efficiency.

The first phase of the improvements, being the replacement of systems used in the area of water production and the introduction of devices for staff out in the field to communicate more effectively with Head Office and customers, is well established. The implementation is now being undertaken in the areas of customer operations and network management activities and will continue over the current year.

installations approved as part of the 2009 Periodic Review, good progress is being made which will continue to increase the business’s level of meter penetration.

A comprehensive review of current and future IT capabilities was undertaken in recent years to ensure the business can continue to be efficient in its operations and meet customers’ rising service expectations now and into the future. This review determined a need for significant further investment in systems and IT over a number of years to:

• Allow customers to have improved response times after contacting us;

• Gain better information for customers regarding operational job activities;

South Staffs Water has a culture of

strong employee engagement

9

South Staffs Water has a culture of strong employee engagement, astute financial awareness and planning and a desire to work hard to provide an excellent service to all customers. Over the year a programme has been undertaken to improve the staff appraisal framework with a system which utilises Key Performance Indicators to evaluate staff and management performance.

South Staffs Water is proud of its achievements and is determined to remain one of the best performing companies in the industry, which will only be possible through the continued hard work and support of its employees, suppliers and contractors.

Blithfield Reservoir – the resource position remains

healthy and will continue to be managed closely.

10

Cambridge Water provides drinking water and associated customer services to around 130,000 households and businesses in and around Cambridge, of whom nearly 70% have meters installed. Its area of supply is located in the driest part of the country with average annual rainfall of less than 600mm. It has an excellent record for service and quality while customers’ bills are the second lowest of all water suppliers.

Cambridge Water measures its success against three separate, but mutually supportive, objectives:

• To achieve high levels of performance;

• To comply with its legal and regulatory obligations; and

• To maximise the returns from its regulated assets.

The results of the second year of the current AMP5 regulatory period demonstrate significant success in achieving the business’s objectives. The business outperformed the operating cost targets set for this regulatory period while service performance improved in a number of areas.

The challenge of a second very dry winter in such a water stressed area was met by increased leakage detection and repair, demonstrating to customers and regulators alike a commitment to water efficiency and the environment. Leakage levels per customer and kilometre of the network are now at an

all time low and amongst the lowest in the industry. Control of leakage, combined with high meter penetration and investment in resources following the 1991/93 drought, has resulted in a significant balance of supply over demand. As a consequence Cambridge Water was one of only three suppliers in the East of England able to avoid announcing water use restrictions at the end of the financial year in the face of an unprecedented lack of rain. The unusually wet spring and start to the summer has also helped to mitigate the previously dry conditions.

Water quality remains the business’s highest priority and, while fortunate in drawing all its supplies from chalk aquifers, only six samples out of around 25,000 failed to meet the

Operational Review:Cambridge WaterCambridge Water is respected locally and nationally for its customer service, low prices and innovative approach.

11

Water quality remains the business’s

highest priority

12

prescribed level. This has resulted in a Mean Zonal Compliance of 99.93% for the financial year.

Ofwat’s indicator of customer service is the Service Incentive Mechanism (SIM). The indicator measures both quantitative (by numbers of unwanted calls and complaints) and qualitative (by independent customer survey) service performance. In 2011/12 Cambridge Water improved its score by five percentage points and one of the challenges for 2012/13 is to review our systems and processes to make further advances.

The business has always taken great pride in its approach to finding innovative solutions to its challenges. One such challenge was to reduce the costs of its network repair and maintenance activities. Having identified that difficulties in providing information to repair teams was reducing their efficiency, a pilot project to provide information for repair works on handheld mobile devices was launched. This has proved a success, reducing not only standing and travelling time, but also paper usage as all documents are visible on screen. This system will now be rolled out to all teams.

Major projects progressed well and the business met all of its obligations under its undertaking to deal with rising nitrate levels in its raw water. Although water from the chalk aquifer is generally of very high quality, the rural nature of the catchments and agricultural practice has resulted in rising nitrate levels.

Our first nitrate treatment plant was commissioned at Babraham, East of Cambridge, and the second at Eustom is anticipated to be completed in the current year to continue the business’s record of compliance.

Also completed in the year was the scheme to safeguard supplies to the west and north of Cambridge at peak demands. The Grantchester Road boosters were installed to budget and the planned programme.

The challenge for the coming year may be in the form of a third dry winter and the business is already planning for that possibility.

Cambridge Water has always taken great pride in its approach to finding

innovative solutions to its challenges

13

Cambridge Water is rightly respected locally and nationally for its customer service, low prices and innovative approach. This is made possible by our employees, partners and suppliers, all of whom adopt the following values of the business:

• A personal approach – to customers and employees;

• A local service provided by local people to local people;

• Employees empowered to help; and• One team dedicated to delivering for both shareholders

and customers.

Installation of control building at the Grantchester Road boosters.

14

restriction on public spending being undertaken by Government departments, local authorities and other related bodies, all of whom have been a core source of business for the division.

Despite this, the division performed broadly in line with expectations, whilst ensuring the division further enhances its operating efficiency and remained aligned to its markets and customers. This positive performance is a testament to the strength in depth of the management team and its ability to generate success in a competitive and challenging environment.

During the year, the division acquired Data Contracts, which is a specialist in maintaining and refurbishing

SSI Services is made up of four business streams:

• Clean Water, comprising Hydrosave and Integrated Water Services (IWS);

• Water Hygiene, where IWS also operates;

• Wastewater made up of OnSite Utility Services and Pipe Lining; and

• Industrial Services, including Data Contracts and Perco.

2011/12 was a challenging year for the division due in large part to factors outside of its control. These included the impact on the market caused by the generally weak economic climate which saw the majority of construction markets remaining quiet and the continued

SSI Services, the Group’s specialist infrastructure contracting division, provides a range of added value services from design to installation, and from testing and repair to long-term maintenance capabilities. The division’s businesses work in regulated environments, managing client risk and serving both public and private sectors. Clients range from water utilities to the Environment Agency, major contractors and facilities management companies in the water, wastewater, water hygiene, rail, power generation, construction markets and the public sector. Building and maintaining long-term relationships with clients remains a key focus for the division as does the provision of a quality based service.

Operational Review:SSI ServicesSSI Services is the Group’s specialist infrastructure contracting division, providing a range of added value services.

15

Building and maintaining long-term relationships

with clients is a key focus for the division

16

without sacrificing the quality of service, through effective recruitment and extensive multi-skilling training programmes.

The business has continued to build its presence across the water utility sector including adding South West Water to its water utility framework contracts. Its range of specialist technology based services has been further developed during the year, including the ability to offer customers a valve maintenance service, further advances in undertaking pipe condition assessment works using the likes of “smart ball” technology and advanced camera techniques as well as the provision of “floran” water treatment plant filter cleaning capabilities.

In Scotland, our activities have been consolidated giving clients a complete service offering.

Going forward, Hydrosave is focused on its two core capabilities with the creation of a dedicated leakage framework business unit targeting

operate remotely and often in challenging environments. In 2011/12 a number of gold and silver RoSPA awards were achieved across the division and ISO9001 and 14001 accreditations were maintained.

Clean Water ServicesHydrosave, which specialises in providing leak detection and water conservation services, saw demand from all of its core customers solid but, due to the very mild winter, the normal level of winter activity did not take place. The management team has done well in managing this variable demand on resources

essential infrastructure, focused on providing high quality solutions for regulatory critical services. The business specialises in concrete repair, structural waterproofing and manhole refurbishment.

Data Contracts, alongside the no-dig technology business, Perco, is creating the backbone of an industrial services capability, providing services across the infrastructure and construction markets.

Health and Safety remains a priority for the division with some 1,200 employees, the majority of whom

Health and Safety remains a priority for the division with some 1,200 employees, the majority of whom operate remotely and often in challenging environments.

17

also had a successful year and has recently undertaken a project laying pipes to a major new water bottling plant in the Midlands. The business has continued to develop strong working relationships with key clients, becoming a valued partner in managing their networks.

scope outside of its traditional Midlands base. The Coal Authority remains an important client for the business which demonstrates the breadth and depth of capabilities and services available in managing and maintaining critical infrastructure.

The Pipeline Services business, which was integrated with IWS at the beginning of 2011/12, has

water utilities as well as a technical services unit which is working closely with water utilities and a wider range of commercial and industrial clients, promoting the use of technology in maintaining clean water networks.

IWS offers Mechanical and Electrical (M&E) services to the clean water market. The business also offers pipeline services, including new lay, repairs, maintenance and replacement of clean water pipes including those provided to South Staffs Water under their AMP5 framework contract. IWS had another excellent year with all parts of the business expanding their areas of operation, geographic scope and customer base.

The M&E business has undertaken further significant projects over the year, including working on a number of projects for South Staffs Water. The division was successful in winning a multi-year contract with Northumbrian Water as well as a new contract with Anglian Water, thereby extending its geographic

The division continues to build its presence across

the water utility and other infrastructure and

regulated sectors

18

a second tier contractor, as well as direct for its traditional water utility customer base.

The management team has continued to invest in business development and resource flexibility to enable it to satisfy its expanding client base. This has included increased amounts of work for the Environment Agency, British Waterways, Local Authorities and the Highways Agency.

Our Swindon office has provided a regional capability to support this wider client base.

The OS8000 Flow Monitoring system has become a recognised market leader in the UK due to its capability to not just record data reliably but also through the development of related software to interpret the information in support of clients’ needs to understand their network capabilities and performance. The system is now being increasingly used for long-term monitoring of key elements of wastewater networks.

local authorities, housing associations and other Government bodies.

Wastewater ServicesOnSite, which offers specialist wastewater services including flow monitoring, sewer rehabilitation, CCTV surveys and a 24/7 reactive sewer maintenance capability, mobilised a number of new contracts including those for Severn Trent Water and Yorkshire Water. The business went through a restructuring process during the year as it re-aligned itself to a new, broader customer base and has looked to enhance its capabilities to work as

Water HygieneIWS has continued to grow its capabilities and geographic presence in the water hygiene market. The business is now working nationally including the facility in Crayford, East London, opened at the beginning of 2011, thereby enabling IWS to better serve the London and south-east markets.

The business is now a market leading provider of legionella control services, water hygiene risk assessment, maintenance and remedial works to a wide range of clients from major facilities management companies to

Looking ahead, the division has the ability to offer its clients more

integrated specialist solutions

19

As a result, growth is anticipated to continue through improved operating efficiencies and new technology which leaves the division well placed to deliver its strategic objectives for 2012/13.

integrated approach to providing specialist infrastructure solutions. 2012/13 should see an increase in AMP5 workloads and, despite the general construction market remaining weak, some growth is anticipated in specialist markets.

In addition, OnSite’s pipe lining business, which provides leading edge sewer lining services, had an excellent year with strong demand in the market and the addition of UV lining to its portfolio (transferred from Perco) has enabled an enhanced product offering for its client base.

Industrial ServicesPerco, the no-dig technology specialist, is recognised as a market leader in undertaking specialist projects where augerboring, directional drilling, pipe-bursting and micro tunnelling is required. Perco is able to serve a broad range of clients from major contractors through to house builders and developers. Together with Data Contracts, which has had a very strong first year in the division, under a single management team, SSI Services has taken the first step in creating an industrial services business unit.

OutlookLooking ahead, the division has the ability to offer its clients, across a broader range of sectors, a more

The division’s businesses work in both the public and private sectors for a

range of infrastructure owners.

20

more accountable by requiring them to focus on meeting their customers’ expectations. As a wide variety of water company activities and service performance issues are captured through the principal forms of customer/company interaction covered by SIM, it provides an effective barometer of a company’s performance as rated by their customers. SIM has brought about a much greater focus on resolving calls on the first contact and managing the customer’s contact as a “case”, which can help to reduce repeat contacts. Echo’s UK water clients are looking to invest in services and tools that support this approach.

As part of its objective to develop and invest in its products, Echo has invested in further research

The water industry is facing a key period of change, with subjects such as the SIM measure, increasing customer debt and the possibility of expanded competition on the agenda. The publication of the Water White Paper has provided the water industry with more guidance on the likely direction the industry will take in the coming years. In this environment, Echo is dedicated to ensuring all of its UK water clients are able to drive change rather than be driven by it.

During 2011/12, Echo has supported its UK water clients as they strive to further improve their levels of customer satisfaction following the introduction of SIM, Ofwat’s customer satisfaction measurement. SIM aims to make water companies

Echo is a leading provider of customer process management services focused on regulated markets. Its services include customer contact management, resolving customer queries and issues, as well as a billing and revenue management service, including its proprietary RapidXtra billing and customer care software.

A fundamentally strong, stable and focused business strategy has enabled Echo to achieve continued growth, despite persistent challenging economic conditions. At the heart of Echo’s strategy is the ability to understand thoroughly the challenges faced by its clients and a commitment to working in partnership to develop solutions to address them.

Operational Review:EchoEcho is a leading provider of customer process management services focused on regulated markets.

21

Echo remains focused on further business growth

though new opportunities

22

In line with the objective to grow the business, Echo secured a further extension to the NI Direct contract and has continued to work closely with the client as they shape the future of the service. A highlight of the year was achieving the recommendation for continued certification of the Customer Contact Association Standard. This is the fourth consecutive year this recommendation has been made. It is expected that the award of the longer term strategic partnership procurement project will be made during 2012.

During the year a Director of Business and Product Development was appointed. This is an important executive appointment which reflects Echo’s continued commitment to growing the business and continuing to win new clients.

In line with the business’s objective to develop and invest in its people, Echo was successfully reassessed for the Investors in People accreditation. The

of businesses able to switch their water supplier from 2,200 to 26,000. This change could potentially impact the billing and customer service functions of UK water companies and Echo is currently working with its clients to help meet their individual requirements.

Echo’s London based debt collection agency, Inter-Credit International, has performed and grown as planned, despite challenging economic conditions. Inter-Credit has maintained its relationships with its public sector clients and has increased its penetration into the UK water industry by securing two new clients.

and development for RapidXtra, which has resulted in innovations in the areas of business process management, meter data management and web self-service. The business is focused on ensuring that its roadmap of future developments continues to support the key challenges facing its water industry clients. For example, in 2011 the Water White Paper outlined the potential for increased competition for commercial customers. Ofwat subsequently lowered the threshold for large water users in England from 50 megalitres to five megalitres per annum. This increases the number

Echo Northern Ireland was highly commended in the ‘Right Place to Work’ category of Northern Ireland’s most prestigious business awards.

23

public sector service providers. Echo will also continue to support its clients through the implications of SIM and the impact of the Water White Paper.

for Echo with a number of potential growth opportunities already identified. We expect the outcome of these to be realised in the course of the year. Echo remains fully committed to building on its position in Northern Ireland, where it is already established as one of the leading

assessment, which measures how the performance of an organisation is improved through the management and development of its people, included Echo India (where IT development activities take place) for the first time. A further highlight for the year was Echo Northern Ireland being highly commended by the Irish News at their annual Workplace and Employment Awards in the Right Place to Work category. The awards, the most prestigious business awards in Northern Ireland, recognise excellence in the workplace, with the Right Place to Work award honouring socially responsible organisations that can demonstrate close links to community or charitable initiatives and which have a genuine commitment to environmental issues.

Looking to the future, Echo remains focused on further business growth through new opportunities currently being worked on, including existing client relationships. The 2012/13 financial year will be a pivotal year

Echo is supporting its UK water clients as

they strive to further improve their levels of customer satisfaction

24

Financial ReviewThe Group has once again exceeded its financial targets for the year.Despite the continuing lack of growth in the UK economy and the challenging commercial environment, the Group has once again exceeded its financial targets for the year to 31 March 2012, through a combination of making the most of its opportunities and by continuing with tight cost and cash flow control. The Board is confident that the Group remains well positioned for further growth in 2012/13.

Turnover and ProfitGroup turnover increased by £29.3m (18.4%) to £188.8m (2011: £159.5m). After adjusting for the acquisitions made in the year and the full year effect of acquisitions made in the previous year this represents like-for-like growth of £7.6m (4.6%), representing an encouraging performance in a difficult economic environment.

Total turnover from regulated companies amounted to £102.1m (2011: £87.8m). South Staffs Water’s turnover increased from £87.8m to £91.1m, primarily due to the inflationary price increase allowed by Ofwat of 4.7%. The turnover of Cambridge Water, since its acquisition by the Group in October 2011, amounted to £11.0m.

Turnover from the Group’s non-regulated service companies increased by £15.1m to £86.7m (2011: £71.6m), with the increase being partly the result of acquisitions made during the year (£4.3m), the full year effect of those made last year (£6.4m) and further organic growth (£4.4m) in the majority of businesses as demand from our main customer base increased. This was due partly to 2011/12 being the second year of the AMP5 capital investment period in the water sector but also due to

a number of new contracts being awarded and further growth from our existing client base.

The Group’s operating profit (before goodwill amortisation) of £38.3m was ahead of our expectations and £8.7m ahead of last year with increased profits arising from the acquisitions made in the year (£5.5m), the full year effect of those made last year (£1.1m) and encouraging organic growth (£2.1m). High levels of inflation experienced throughout most of the year have put pressure on our cost base and profit margins, although tight control of costs where possible have mitigated the impact.

Operating profit in respect of our regulated companies increased by £4.0m to £25.6m. After adjusting for the impact of the acquisition of Cambridge Water, this represents like-for-like growth of £2.3m in respect

25

of South Staffs Water on last year with higher water charges of 4.7%, as allowed by Ofwat, partly offset by higher costs representing the effect of the expected inflationary pressures, additional power costs required to respond to the very dry weather conditions in the year, additional resources to ensure challenging service targets are achieved net of further operational efficiencies that have been generated. The operating profit of Cambridge Water, since its acquisition, amounted to £3.7m, being ahead of expectations set at acquisition, due principally to lower than expected operating costs.

Operating profit from our non-regulated service companies increased by £3.3m to £9.7m reflecting increased trading activity in the majority of the businesses, profits arising from acquisitions made in the year and the full year effect of acquisitions made last year. Total Group operating profit (after goodwill amortisation) was £35.3m (2011: £28.1m).

Finance charges (net of interest receivable) increased to £12.2m (2011: £8.7m) in the year principally due to the interest payable on increased borrowings (see below - including the borrowings of Cambridge Water which was acquired in October 2011). Overall, profit before tax increased from £20.8m to £23.1m.

TaxThe Group’s tax charge increased to £0.9m (2011: £0.3m) mainly representing the increase in Group profits as explained above.

DividendsTotal dividends paid and proposed in the year were £21.4m (2011: £28.8m). This includes £5.9m in respect of 2010/11 which was paid and proposed in the year but reflected

Tight cost control has helped to

mitigate the impact of high inflation

26

Staffs Water’s total expenditure (net of contributions) for the first two years of the AMP5 investment period of £54.3m is marginally behind Ofwat’s Final Determination after adjusting for an unexpected adjustment to the COPI index used to inflate the Determination. It is expected that the total shortfall to date of £3.3m will be recovered in 2012/13.

Tax payments amounted to £2.7m, an increase of £2.8m on last year, mainly representing the increased profits as detailed above.

Overall, free cash flow reduced to £18.0m from £24.3m with the reduction of £6.3m being better than expected and representing the Group’s continuing commitment to achieving strong cash flow performance.

Group net book debt at 31 March 2012 amounted to £338.9m (2011: £281.7m). This differs from the value used for covenant reporting purposes of £325.8m (2011: £266.5m) which excludes unamortised

environment and reflects the Group’s ongoing commitment to keep working capital at efficient levels.

The Group’s net cash interest payments increased by £4.2m to £7.7m (2011: £3.5m) mainly due to higher interest paid on increased levels of borrowings, although the amounts paid were lower than expected due in part to strong cash flow performance and partly due to lower than expected interest rates.

Capital expenditure (net of capital contributions) increased to £34.5m compared to £29.9m last year, mainly reflecting the half year impact of Cambridge Water which was acquired in October 2011. South

better than expected cash flows and levels of debt achieved in 2010/11. Dividends of £15.5m were paid or proposed in respect of 2011/12, including a final dividend of £0.6m paid in April 2012. Dividends paid in cash in the year amounted to £23.3m (2011: £27.4m).

Cash Flow & DebtCash flow from operating activities was better than expected at the start of the year and increased to £61.0m from £56.4m mainly as a result of higher operating profits, as explained above, partly offset by lower working capital reductions than last year due to growth in trading activities, although this was better than expected in a very challenging

During the year, the Group invested £34.5m in capital

assets

27

Water, Cambridge Water and the Group has maintained significant headroom in respect of all borrowing covenants.

Standard and Poors continues to rate South Staffs Water as BBB+, well within investment grade, and South Staffordshire Plc as BBB-.

PensionsAs at 31 March 2012 the actuarial valuation of the Group’s existing final salary pension scheme (prepared in accordance with FRS 17) showed a post tax surplus of £9.2m (2011: £11.8m), with the year-on-year movement principally reflecting an increase in the value of the scheme assets with improvements in world-wide equity values offset by an increase in the present value of scheme liabilities due mainly to lower discount rates.

premium and issue costs and uses actual inflation at the relevant dates as opposed to the long-term inflation assumption used in the book value of index-linked debt. The increase in the covenant value from March 2011 of £59.3m mainly reflects the impact of acquisitions made during the year and higher values for index-linked debt of £7.9m, due to high levels of inflation experienced during the year.

South Staffs Water’s net debt for covenant reporting purposes was £182.8m (2011: £174.6m) being 72.4% (2011: 73.2%) of its Regulated Asset Value (RAV) of £252.5m (2011: £238.5m) being the Final Determination RAV uplifted for inflation. This ratio reflects inflation (RPI) at March 2012 of 3.6%, which is used to inflate RAV, whereas the majority of index-linked debt was inflated using inflation at July 2011 of 5.0%. South Staffs Water’s dividend policy is to pay dividends up to 77% of net debt/RAV although over the AMP5 period this ratio is expected to be at or below 77%. South Staffs

28

Corporate Social ResponsibilityCorporate Social Responsibility remained a focus during the year.

Corporate Social Responsibility (CSR) remained a focus for many activities during 2011/12. The environment and community in particular have benefited from a considered approach with various projects related to Sites of Special Scientific Interest, water efficiency and support for local and national charities.

During the year, Echo Northern Ireland was highly commended in the Irish News Workplace and Employment Awards in the ‘Right Place to Work’ category. The most prestigious business awards in Northern Ireland recognise excellence in the workplace, honouring social responsibility.

Health & SafetyThe Group recognises its employees’ contribution to the continued success of its businesses and is committed to safeguarding their occupational health, safety and welfare by providing, as far as

reasonably practical, a safe and healthy environment in which to work.

The Group believes that health and safety management should remain firmly at a local level within each business, ensuring individual Boards of Directors accept responsibility to protect the health and safety of their staff. To monitor this, and ensure consistent standards and governance, a Group Health and Safety Strategy Forum exists, led by the Group Finance Director which includes the Managing Directors of all the Group divisions.

All businesses operate under a comprehensive occupational health and safety management system, the majority of which have gained or retained certification to the internationally recognised OHSAS 18001:2007 standard. Systems continue to be reviewed to ensure they remain suitable and effective

and are aligned with the evolving needs of each business and external accreditation requirements. In addition, individual businesses continue to be externally recognised for excellence in safety performance, gaining awards from RoSPA and the British Safety Council.

During 2011/12 most businesses have been subjected to an external health and safety audit undertaken by RoSPA. The audit scores confirmed that, as a minimum, good levels of health and safety practice are being achieved, with the majority of businesses demonstrating high performance. The remaining businesses will be audited in 2012/13.

Although employee numbers across the Group continue to rise, the focus remains on targetting an incident and injury free environment for all. As such, monthly reporting to the Board now includes all accident frequency rates (accidents per

29

for renewable energy schemes according to current subsidy regimes.

At Blithfield, surveys have been carried out to explore the possibilities of creating a sustainable woodland management plan and the clearance of intrusive rhododendrons in order to revitalise approximately 38 hectares of dense woodland. Land drainage channels have been dredged to assist tenant farmers in reducing the extent of waterlogged areas of arable land with the added benefits of releasing more ground water run-off into the reservoir and creating new wildlife habitat.

to 1.2 million customers per annum. 96% of the electricity supplied now comes from good quality combined heat and power sources so has a lower carbon footprint than power from most other sources.

South Staffs Water’s strategy is to reduce carbon emissions in three main areas: firstly, continuing with a successful energy management programme and maintaining pumps to the highest efficiency levels in the water industry; secondly, reducing the volumes of water treated and pumped on a daily basis by further managing leakage and encouraging water efficiency; and thirdly, continuing to assess opportunities

100,000 hours worked) and severity rates (days absent per 100,000 hours worked) rather than simply capturing reportable accident totals. For the most part, businesses are making good progress; however, the number of reportable accidents, taking into account new business acquisitions, has increased from 22 incidents last year to 25. All accidents continue to be investigated appropriately in order to learn any lessons that can be implemented to improve health and safety standards.

EnvironmentClimate change is recognised as the greatest environmental challenge facing the world today. South Staffordshire Plc recognises the commitment of the UK government to tackle climate change and reduce carbon emissions by 34% from 1990 levels by the year 2020 and 80% by 2050.

At present, the vast majority of the electricity supplied to South Staffs Water is used to treat and pump over 124 million tonnes of drinking water

At Blithfield, land drainage channels have been dredged to help tenant

farmers reduce the extent of water-logged arable land.

30

Stakeholders- EmployeesThe Group, which strives to maintain its position as a highly regarded employer, has approximately 2,200 employees who all contribute to its success.

The Group runs many campaigns promoting personal health and well-being as well as screening programmes and full Occupational Health support. Much importance is placed on promoting personal health, a healthy workplace and working environment.

The Group’s commitment to development and training continues, resulting in a strengthening of the training team, helping drive excellence in Customer Service. Furthermore, at South Staffs Water, an implementation project was launched with the aim of introducing employee KPIs for all roles in April 2012. Based on a phased approach, role profiles and KPIs have been developed and agreed for more than 150 roles, including the Executive Team. Work is continuing on a scoring mechanism to be introduced at half year appraisals, following trials of internally developed options earlier in the year.

Employees are offered membership of a Group pension scheme, most employees have access to discounted private medical insurance schemes and an Employee Assistance Programme. Employees have access to an on-site nursery at Head Office, run by Busy Bees, which was rated as Good by Ofsted at its last inspection and takes part in a wide variety of activities.

The Group ensures that its equal opportunities policies are effectively operated, making every reasonable effort to ensure that all people have equal opportunities for employment, training and promotion, and strives for continued employment under normal terms and conditions where possible if an employee becomes disabled.

- CustomersRelationships with customers form a key element of the Group’s continued success and stability. The Group continues to strive for customer satisfaction in all areas, from domestic, public and commercial customers, through continued

Echo’s Community Scheme saw employees from the Midlands team extend their support to West Midlands based Acorn Children’s Hospice.

31

provision of high quality customer service, innovation and delivery of excellent service.

- CommunityEducation-based initiatives continued to benefit both the community and the Group alike. Emphasis was placed on partnerships with local schools to deliver water efficiency assemblies, outreach key stage 2 and 3 learning programmes and support for engineering road shows organised by Enterprise Business Partnerships.

The Group contributed £128,000 in the year to charities and sponsorship of youth teams and organisations linked to employees.

In addition, events ranging from a Gala Dinner, running half marathons, climbing mountains and sponsored bike rides raised in excess of £20,000 for WaterAid during the year. Echo employees raised over £5,000 for causes including Macmillan, Simon Community, Comic Relief, Make a Wish Foundation, PIPS and Mencap.

Echo’s Community Scheme, which allows employees to carry out charitable work in their local communities, saw employees support Habitat for Humanity and participate in Business in the Community events in Northern Ireland. In addition, the Midlands team extended their support to West Midlands based Acorns Children’s Hospice.

South Staffs Water’s Employee Volunteer Scheme continued to attract support for a wide range of community and environmentally based activities. Employees were involved in local projects including reading for the blind, habitat conservation, building restoration projects and fund raising events for charities.

Education-based initiatives continued to benefit both the Community and the

Group alike

32

and has previously been the Midlands area President of the Institute of Water Officers.

3. Stephen Kay, BSc (Eng), CdipAF, MICE, MCIWEMAppointed as Managing Director of Cambridge Water in April 2000, after a long career in the water industry – firstly in South Africa and Mauritius before commencing 36 years in the English water industry with Lee Valley Water, Thames Water and Cambridge Water. Stephen is Chairman of both the Water UK Standards Board and The Water Regulations Advisory Scheme Ltd. Stephen is a Board member for the Water Companies Pension Scheme trustee company.

4. Andrew Garcia, MBA, BA (Hons)Appointed as Managing Director of SSI Services in September 2010.

1. Adrian Page, BSc (Hons) ACAExecutive Director of South Staffordshire Plc. Appointed as Group Finance Director in April 2004. Previously Group Finance Director of South Staffordshire Group Plc from 1998 to 2002. Prior to this appointment Adrian worked for ACT Group Plc and KPMG. Adrian is a Board member for the Water Companies Pension Scheme trustee company.

2. Liz Swarbrick, PhD, BScAppointed as Managing Director of South Staffs Water in February 2011, having previously worked with the business as Quality and Planning Director and Regulation and Asset Management Director. A chemist by profession, she has over 20 years’ experience in the water industry. Liz has represented South Staffs Water in a number of strategic Water UK groups

The Executive Team

Prior to his appointment, Andrew spent 28 years in industry in the UK and in Europe having worked with Veolia ES, SIG Plc and Pilkington Glass in a variety of operational and commercial senior management roles. Andrew also led an Energy and Environment team as part of a major US consultancy specialising in public sector procurement, including working as Commercial Director for the Welsh Assembly Government’s Environment Department.

5. Phillip Newland, BA (Hons)Appointed Managing Director of Echo in April 2006, having previously worked with the business as Project Director and as Business Development Director. Prior to joining Echo, Phil was a Management Consultant with Automatic Data Processing (ADP) and Terence Chapman Associates.

1. 2. 3. 4. 5.

33

Directors Adrian Page

Simon Riggall

Alex Black

Secretary Jason Goodwin

Registered Office Green Lane, Walsall, West Midlands, WS2 7PD

Telephone: 01922 638282 Registered in England, Number 4295398

Auditor Deloitte LLP

Four Brindleyplace, Birmingham, B1 2HZ

Directors & Advisors

34

The Directors have pleasure in presenting their Annual Report for the year ended 31 March 2012.

Principal Activities and Review of BusinessThe Group is engaged in regulated water supply to domestic, industrial and commercial customers and non-regulated services in the water and wider infrastructure sectors. A detailed review of the Group’s businesses and the future development of the Group is presented in the Executive Summary, the Operational Review and the Financial Review on pages 2 to 27.

Major Corporate TransactionsThe Group has made two acquisitions during the financial year to 31 March 2012, as follows:• Cambridge Water PLC – a

regulated supplier of clean water in Cambridge and the surrounding area; and

• Data Contracts Specialist Maintenance Limited – a specialist infrastructure maintenance business, based in Nottingham.

As the Group owns two regulated water supply companies, the acquisition of Cambridge Water was referred to the Competition Commission for its review. On 31 May 2012, the Competition Commission cleared the acquisition without the need for remedies.

Except for any matters referred to elsewhere in this Annual Report, there have been no other significant events affecting the Company or any of its subsidiary undertakings since the end of the financial year.

Financial ResultsThe Group’s turnover increased to £188.8m (2011: £159.5m) with total operating profit of £35.3m (2011: £28.1m) and profit before tax of £23.1m (2011: £20.8m). The Group’s results are explained in more detail in the Financial Review on pages 24 to 27 and shown in the consolidated profit and loss account and the consolidated cash flow statement on pages 44 and 48.

Financial And Treasury RiskDetails of the Group’s policy in respect of financial and treasury risk are provided in note 28 to the accounts.

Fixed AssetsCapital expenditure before contributions towards tangible fixed assets, including infrastructure renewals, amounted to £40.7m (2011: £34.9m) during the year.

DirectorsNo Director had any material interest in any contract of significance with the Company or the Group during the year under review.

Indemnities have been given to all of the Directors to the extent permitted by the Companies Act 2006. Directors’ and Officers’ insurance has been established for all Directors and senior management to provide cover against any actions brought against them as Officers of the South Staffordshire Plc group of companies.

Directors’ Report

35

Details of the Directors who held office at the date of this report are as detailed in the table below.

Retirement & Re-Election Of DirectorsIn accordance with the Companies Act 2006 and the Articles of Association, Mr Black will retire by rotation and being eligible will offer himself for re-election.

Corporate Social ResponsibilitySouth Staffordshire Plc regards compliance with relevant environmental laws, the adoption of responsible social and ethical standards and the well-being and development of its employees, including disabled persons, as integral to its businesses. A summary of the Group’s practices is provided on pages 28 to 31.

Corporate Governance & RiskA report on corporate governance including the Group’s approach to risk management and the Directors’ assumptions in respect of preparing the accounts on a going concern basis is set out on pages 36 to 40.

DonationsCharitable donations and sponsorship of £128,000 were made during the year (2011: £117,000). There were no political contributions in the year (2011: nil).

Payment of CreditorsThe Group’s policy is to pay suppliers in line with the terms of payment agreed with each of them when contracting for their products or services. Group trade creditors at 31 March 2012 represent 57 days of purchases during the year (2011: 59 days).

AuditorIn Accordance with the Companies Act 2006, the Directors confirm that as far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and that the Board has taken all reasonable steps to make itself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

A resolution proposing the reappointment of Deloitte LLP as auditor will be put to the Annual General Meeting.

By Order of the Board

J GoodwinCompany Secretary29 June 2012Directors who held office during the year

First Appointed

Mr A Page 4 December 2003

Mr S Riggall* 14 November 2007

Mr A Black* 26 March 2010* Denotes a Non-Executive Director

36

South Staffordshire Plc and its subsidiary undertakings (the “Group”) continues to apply the spirit of the Combined Code where considered applicable to the Group.

The Board of DirectorsThe Group Board comprises of one Executive Director and two Non-Executive Directors.

Directors may be appointed by the Company by Ordinary Resolution or by the Board. As set out in the Company’s Articles of Association, a Director appointed by the Board will hold office until the next Annual General Meeting (AGM). At each AGM one third of the Directors will retire by rotation and will submit themselves for re-election at least once every three years.

All Directors and senior management are covered by Directors’ & Officers’ insurance against any actions taken against them as Officers of the Group.

Functions of the BoardCompany Law requires that a company has an effective Board, with duties aligned to the success and interests of the Company, setting strategic goals and ensuring that Company strategy is fulfilled.

The Board sets standards of conduct to promote the success of the Company, provides leadership, reviews the Group’s internal controls, risk management policies and governance structure. It approves major financial and investment decisions over senior management thresholds and evaluates the performance of the individual businesses and the Group as a whole by monitoring reports received directly from the subsidiary businesses and those prepared at a Group level. The Non–Executive Directors have a duty to oversee this work, and to scrutinise management performance.

In addition to the Audit Committee and guidance from the Turnbull recommendations, the Board is also

responsible for the Group’s systems of internal control, evaluating and managing significant risks to the Company and the Group.

In compliance with the Combined Code, all Board members are provided with sufficient information prior to any Board meeting to allow preparation time to ensure that they can properly discharge their duties. The Board undertakes site visits to maintain familiarity with the Group’s operations.

The Board also keeps up to date with legal and regulatory changes by receiving written briefings where appropriate from both internal and external advisors.

A schedule of matters specifically reserved for the Board’s decision has been adopted. The terms include, but are not limited to:

• Approval of capital and operating budgets;

• Reviewing and approving the Group’s strategy;

Corporate Governance

37

management, including the Executive Team. Non-Executive Directors do not receive any remuneration or fee.

The total remuneration package of the Executive Director and senior management includes basic salary, benefits, an annual bonus and a long-term incentive bonus that is linked to individual business targets and performance related incentives. Performance related incentives are designed to encourage and reward continuing improvement in the Group’s performance over the longer term.

Board Committees– Remuneration CommitteeThe Remuneration Committee is responsible for the remuneration policy of the Board and senior management, including the Executive Team, and meets at least once a year. No Director is involved in determining his own remuneration.

policies and procedures and other matters that are not reserved for the Board. There are written procedures containing a regime of authorisation levels for key decision-making.

The Board undertakes an informal evaluation of its performance, the performance of the individual Directors and various Committees. These appraisals do not take a written form as it is felt that more formal procedures would not add to the effectiveness of the Board.

All Directors are aware of the procedure for those wishing to seek independent legal and other professional advice. The Board also has access to the advice and services of the Company Secretary.

RemunerationThe remuneration packages are designed to attract, retain and motivate high-calibre Directors. The Remuneration Committee has overall responsibility for determining the Executive Director’s remuneration package and level and those of senior

• Reviewing and approving any changes to the Group’s capital structure;

• Review and approval of financial reports;

• Review and approval of major contracts; and

• Powers to delegate authority.

The Board maintains a flexible approach to Board matters with the delegation of power to a Committee, with precise terms of reference, being used for specific routine purposes. Both the terms of reference and composition of the Committees are regularly reviewed to ensure their ongoing effectiveness.

The Directors are supported by a team of senior managers, including the Executive Team, who have responsibility for assisting them in the development and achievement of the Group’s strategy and reviewing the financial and operational performance of the Group and its individual businesses. This team of senior managers is responsible, along with the Board, for monitoring

38

The key terms of reference for the Committee in this respect are to:

• Review and appraise the work of the external auditor;

• Monitor, review and challenge when necessary the integrity of the financial statements of the Company and other Group companies, including its Annual Report and any other formal announcement relating to its financial performance, and reviewing significant financial reporting issues and judgements which they contain; and

• Keep under review the effectiveness of the Company’s and the Group’s internal controls and risk management practices and policies.

There are also separate independent Audit Committees for both of the regulated companies in the Group, South Staffordshire Water PLC and Cambridge Water PLC.

– Audit CommitteeThe Audit Committee meets twice each financial year. Deloitte LLP, the Group’s external auditor, the Company Secretary and the Group Internal Audit Manager are also invited to the meetings.

The Committee is responsible for reviewing and monitoring the Group’s internal controls and systems for mitigating the risk of financial and non-financial loss. This includes assessing the integrity of financial statements, including changes to accounting policies, reviewing financial reporting procedures and risk management systems.

The Committee is responsible for recommending to the Board the appointment of the external auditor and monitoring the auditor’s independence, performance and effectiveness and approving the nature and scope of external audits and approving the auditor’s remuneration.

The key terms of reference for the Committee are to:

• Agree remuneration that will ensure that the Executive Director and senior management are provided with appropriate incentives to achieve high standards of performance and reward them for their individual contributions to the success of the Group;

• Determine such packages and arrangements with regard to any relevant legal requirements and associated guidance and to obtain reliable, up-to-date information about remuneration in other companies;

• Approve the design of, and determine targets for, any performance related pay schemes operated within the Group;

• Ensure that contractual terms on termination are fair and that failure is not rewarded; and

• Oversee any major changes in employee benefits structures throughout the Group.

39

into account the nature of the Group’s operations and risks. This process includes the identification, evaluation and management of the significant risks faced by the Group. The Board considers the internal audit arrangements in operation are appropriate to the size and complexity of the business but will continue to review these arrangements on a regular basis.

The Audit Committee will normally meet to review the annual accounts, to monitor the adequacy and effectiveness of internal controls and to review external and internal audit activity and strategy.

– Organisational StructureA defined organisational structure for the Group exists with clear lines of accountability and appropriate division of duties.

The Board sets overall policy and strategy and has delegated the necessary authority to departments in order to fulfil these. This is communicated to employees by way

prepared on a regular basis, as is the Group’s level of borrowing facilities, their maturity dates and liquidity.

The responsibilities of the external auditor in the area of financial reporting are set in their report in each year’s Annual Report.

– Internal ControlThe Board attaches considerable importance to its system of internal control and for reviewing its effectiveness, including its responsibility for taking reasonable steps for the safeguarding of the assets of the Company and the Group and for preventing and detecting fraud and other irregularities. Such a system is designed to manage rather than eliminate the risk and can nonetheless provide only reasonable, and not absolute assurance, against misstatement or loss. The Board has delegated some responsibility for such reviews to the Audit Committee.

There is an established internal control framework that is continually reviewed and updated taking

Accountability and Audit– Financial Reporting and

SystemsThe Board of Directors recognises the need to present a balanced and clearly defined assessment of the Group’s operational and financial performance and position including its future prospects. This is provided by a review of the Group’s performance as set out in the Executive Summary, Operational Review and Financial Review of each year’s Annual Report.

Three-year business plans, annual budgets and investment proposals for each business and for the Group have been formally prepared, reviewed and approved by the Board. These include three-year profit and loss and cash flow forecasts. Financial results and cash flows, including a comparison with budgets and forecasts, are reported to the Board monthly with variances being identified and used to initiate any action deemed appropriate. Forecasts of the Group’s compliance with its borrowing covenants are also

40

– External AuditorThe Board, assisted by the Audit Committee, reviews each year the external auditor’s performance, effectiveness and fees including the level of non-audit services and fees.

– Going ConcernThe Directors consider each year the appropriateness of the assumption of preparing the accounts on a going concern basis. This is based upon a review of the Company’s and the Group’s budget, the three-year operating plan, financial forecasts, the investment programme, and forecast compliance with borrowing covenants and with the committed borrowing facilities available to the Group.

of published policies and procedures and regular management briefings. The Group’s extensive financial regulations specify authorisation limits for individual managers, with all material transactions being approved by a member of the Board. In addition, formal treasury policies are in place. Where appropriate, commercial and financial responsibility is clearly delegated to local business units and supported by the Board.

– Risk ManagementRisk management is discussed at Board level both in terms of the Group and its businesses on a regular basis. The Group’s individual businesses are required to monitor risk and its management with any significant changes in business risk and any subsequent actions or controls to mitigate the risk being reported to the Board and the Audit Committee.

41

The following statement, which should be read in conjunction with the auditor’s statement of its responsibilities set out on the following pages, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the auditor in relation to the accounts.

Company Law requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year. Under that law the Directors have elected to prepare the accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).

In preparing these accounts, the Directors are required to:

• Select suitable accounting policies and then apply them consistently;

• Make judgments and accounting estimates that are reasonable and prudent;

• State whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the accounts; and

• Prepare the accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The Directors confirm that they have complied with the above requirements in preparing the accounts.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracyat any time the financial position of the Company and the Group and

enable them to ensure that the accounts comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors, having prepared the accounts, are required to provide the auditor with such information and explanation as the auditor thinks necessary for the performance of its duty.

The Directors have responsibility for the maintenance and integrity of the Company’s website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

Directors’ Responsibilities Statement

42

We have audited the financial statements of South Staffordshire Plc for the year ended 31 March 2012 which comprise the consolidated profit and loss account, the consolidated and individual Company balance sheets, the consolidated statement of total recognised gains and losses, the reconciliation of movements in consolidated shareholders’ funds, the consolidated cash flow statement, notes to the consolidated cash flow statement, and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

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.

Respective responsibilities of Directors and auditorAs 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. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Independent Auditor’s Report

43

report to you if, in our opinion:• 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 statements are not in agreement with the accounting records and returns; or

• certain disclosures of Directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

David Hall FCA(Senior Statutory Auditor)for and on behalf of Deloitte LLPChartered Accountants and Statutory AuditorBirmingham, UK29 June 2012

Opinion on financial statementsIn our opinion the financial statements:• give a true and fair view of the

state of the Group’s and of the parent Company’s affairs as at 31 March 2012 and of the Group’s profit for the year then ended;

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to

Independent Auditor’s Report

44

Consolidated Profit & Loss AccountFor the year ended 31 March 2012

2012 2011 Note £’000 £’000

Turnover 2 188,796 159,452Less share of joint ventures’ turnover (245) (815)

Group turnover 188,551 158,637

Operating costs before goodwill amortisation (net) 3 (150,200) (128,892)

Group operating profit before goodwill amortisation 38,351 29,745

Share of joint ventures’ operating loss (64) (96)

Total operating profit before goodwill amortisation 38,287 29,649

Goodwill amortisation 11 (2,982) (1,567)

Total operating profit after goodwill amortisation 2 35,305 28,082

Exceptional profit on sale of tangible fixed assets — 1,465

Profit on ordinary activities before finance charges (net) 35,305 29,547

Finance charges (net) 7 (12,209) (8,744)

Profit on ordinary activities before taxation 23,096 20,803

Taxation on profit on ordinary activities 8 (875) (296)

Profit on ordinary activities after taxation 22,221 20,507

Less profit after tax of minority interests 26 (5) (1)

Profit for the financial year 22,216 20,506

Earnings per share Basic and diluted 10 173.3p 160.0p

A statement of movements in reserves is given in note 24 to the accounts.

The results above are all derived from continuing operations. The results of the businesses acquired during the year are disclosed seperately in note 2 to the accounts.

The accompanying notes are an integral part of these accounts.

4545

Consolidated Balance SheetAs at 31 March 2012

2012 2011 Note £’000 £’000

Fixed assets Intangible assets - goodwill 11 28,636 17,117 Tangible assets 12 288,149 202,252 Investments - share of joint ventures’ net assets 15 13 72

316,798 219,441Current assets Stocks 16 2,769 2,527 Debtors - amounts recoverable within one year 17 45,074 35,885 Debtors - amounts recoverable in more than one year 17 104,067 138,383 Cash at bank and in hand 11,309 5,722

163,219 182,517Creditors – amounts falling due within one year Borrowings 18 (87,920) (11,776) Other creditors 19 (66,382) (57,144)

(154,302) (68,920)

Net current assets 8,917 113,597

Total assets less current liabilities 325,715 333,038

Creditors – amounts falling due in more than one year Borrowings 18 (262,303) (275,679) Other creditors 19 (21,270) (21,261) Accruals and deferred income 14 (7,914) (6,799) Provisions for liabilities - deferred tax 20 (14,977) (8,625)

(306,464) (312,364)

Retirement benefit surplus 21 9,237 11,755

Net assets 28,488 32,429

Capital and reserves Share capital 23 5,449 5,449 Share premium account 24 10,882 10,882

Merger reserve 24 (253) (253)Hedging reserve 24 (9,702) (10,354)Currency translation reserve 24 1 15Capital redemption reserve 24 1 1Profit and loss account 24 22,097 26,681

Shareholders’ funds 28,475 32,421Minority interests 26 13 8

Total capital employed 28,488 32,429

The accompanying notes are an integral part of these accounts.The accounts of South Staffordshire Plc, registered number 4295398, were approved by the Board of Directors and authorised for issue on 29 June 2012.A P Page

46

2012 2011 Note £’000 £’000

Fixed assets Investments 15 100,756 45,802 Tangible assets 12 218 138

100,974 45,940

Current assets Debtors - amounts recoverable within one year 17 8,874 6,944 Debtors - amounts recoverable in more than one year 17 62,454 96,650 Cash at bank and in hand 6,301 1,702

77,629 105,296Creditors – amounts falling due within one year Borrowings 18 (95,181) (21,971) Other creditors 19 (15,429) (9,454)

(110,610) (31,425)

Net current (liabilities)/assets (32,981) 73,871

Total assets less current liabilities 67,993 119,811

Creditors – amounts falling due in more than one year Borrowings 18 (45,000) (89,180) Other creditors 19 (5,443) (7,396)

Net assets 17,550 23,235

Capital and reserves Share capital 23 5,449 5,449 Share premium account 24 10,882 10,882 Hedging reserve 24 (4,441) (5,278)

Capital redemption reserve 24 1 1 Profit and loss account 24 5,659 12,181

Shareholders’ funds 17,550 23,235

The accompanying notes are an integral part of these accounts.

The accounts of South Staffordshire Plc, registered number 4295398, were approved by the Board of Directors and authorised for issue on 29 June 2012.

A P Page

Company Balance SheetAs at 31 March 2012

4747

2012 2011 £’000 £’000 Profit on ordinary activities after taxation 22,221 20,507Actuarial (loss)/gain relating to retirement benefit surplus Actual return less expected return on schemes’ assets 4,002 3,071 Experience (loss)/gain arising on schemes’ liabilities (467) 2,078 (Loss)/gain due to changes in assumptions underlying schemes’ liabilities (13,755) 17,098Gain/(loss) due to movement in the pension asset limit 2,752 (2,741)Deferred tax on actuarial loss/(gain) and movement on the pension asset limit 2,110 (5,183)Movement on hedging reserve (net of deferred tax) 652 1,872Exchange movement on translation of overseas operations (14) (2)

Total recognised gains and losses relating to the year 17,501 36,700

2012 2011 £’000 £’000

Profit for the financial year 22,216 20,506Actuarial (loss)/gain and movement on asset limit relating to retirement benefit surplus (net of deferred tax) (5,358) 14,323Movement on hedging reserve (net of deferred tax) 652 1,872Exchange movement on translation of overseas operations (14) (2)Dividends paid or proposed (note 9) (21,442) (28,787)

Net (reduction)/addition to shareholders’ funds (3,946) 7,912

Opening shareholders' funds 32,421 24,509

Closing shareholders’ funds 28,475 32,421

The accompanying notes are an integral part of these accounts.

Consolidated Statement of Total Recognised Gains & LossesFor the year ended 31 March 2012

Reconciliation of Movements in Consolidated Shareholders’ FundsFor the year ended 31 March 2012

48

2012 2011 Note £’000 £’000 £’000 £’000

Net cash inflow from operating activities (a) 61,023 56,424

Returns on investments and servicing of finance: Interest paid (net of interest received) (7,462) (3,277) Interest element of finance lease and hire-purchase rental payments (193) (178)

Net cash outflow from returns on investments and servicing of finance (7,655) (3,455)

Taxation: Corporation tax (paid)/refunded (2,746) 45

Capital expenditure and financial investment: Purchase of tangible fixed assets (40,470) (33,907) Proceeds from sale of tangible fixed assets 1,849 1,194 Capital contributions received 6,014 3,989

Net cash outflow from capital expenditure and financial investment (32,607) (28,724)

Free cash flow 18,015 24,290

Acquisitions: Cash consideration for businesses acquired (including costs) (61,574) (8,670) Cash balances acquired (net) 7,254 1,730

Net cash outflow from acquisitions (54,320) (6,940)

Equity dividends paid (23,324) (27,351)

Financing: Additions to bank loans payable 15,000 — Reduction to loans receivable 34,197 — Capital element of finance lease and hire-purchase rental payments (553) (456)

Net cash inflow/(outflow) from financing 48,644 (456)

Decrease in cash (net of overdrafts) (10,985) (10,457)

The accompanying notes are an integral part of these accounts.

Consolidated Cash Flow StatementFor the year ended 31 March 2012

4949

(a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities 2012 2011 £’000 £’000 £’000 £’000

Total operating profit: Group and share of joint ventures’ 35,305 28,082Depreciation (non-infrastructure assets) 15,205 13,349 Depreciation (infrastructure assets) 10,306 9,555Amortisation of goodwill 2,982 1,567Amortisation of capital contributions (575) (567) Defined benefit pension scheme current service cost (employer) 1,537 1,858 Defined benefit pension scheme contributions (employer) (3,791) (3,425)Profit on disposal of tangible fixed assets (210) (375)

25,454 21,962

Share of operating loss in joint ventures 64 96Increase in stocks (103) (640)Increase in debtors (339) (2,400)Increase in creditors 642 9,324

200 6,284

Net cash inflow from operating activities 61,023 56,424

(b) Reconciliation of Movement in Net Debt 2012 2011 £’000 £’000

Increase/(decrease) in cash 5,587 (1,475)Increase in bank overdrafts (16,572) (8,982)

(10,985) (10,457)Finance lease repayments (cash) 553 456Assets purchased under finance leases (net of disposals, non-cash) (555) (893)Finance lease obligations acquired from acquisitions in the year (non-cash) (240) (455)Irredemable debenture stock acquired from acquisitions in the year (non-cash) (192) —Bank loans acquired from acquisitions in the year (non-cash) (25,000) —Issue of bank loans (cash) (15,000) —Bank loan issue costs amortisation (non-cash) (425) (410)Movement on index-linked debt (non-cash) (5,337) (5,172)

Increase in net debt in the year (57,181) (16,931)Net debt brought forward (281,733) (264,802)

Net debt carried forward (338,914) (281,733)

Notes to the Consolidated Cash Flow StatementFor the year ended 31 March 2012

50

(c) Analysis of Net Debt Balance at Balance at 1 April Non-Cash 31 March 2011 Acquisitions Cash Flow Movements 2012 £’000 £’000 £'000 £'000 £’000

Cash at bank and in hand 5,722 7,254 (1,667) — 11,309Bank overdrafts (11,007) — (16,572) — (27,579)

(5,285) 7,254 (18,239) — (16,270)Irredeemable debenture stock (1,633) (192) — — (1,825)Index-linked debt (net of issue costs) (183,563) — — (5,337) (188,900)Bank loans payable (net of issue costs) (89,180) (25,000) (15,000) (425) (129,605)Obligations under finance leases and hire-purchase contracts (2,072) (240) 553 (555) (2,314)

Net debt (281,733) (18,178) (32,686) (6,317) (338,914)

Non-cash movements represent indexation, amortisation of issue costs, the discount/premium on index-linked debt and the inception of new finance leases net of disposals. The book value of net debt differs from the value used for covenant reporting purposes. Index-linked debt used for covenant reporting is the indexed principal whereas in accordance with applicable accounting standards the book value represents amortised cost. Also, bank loans for covenant purposes are reported at principal value before costs whereas the book value above includes un-amortised costs.

Notes to the Consolidated Cash Flow Statement

5151

Notes to the Accounts1 Statement of Accounting Policies

The principal accounting policies are summarised below, which have all been applied consistently throughout the year and the preceding year.

(a) Basis of AccountingThe accounts have been prepared under the historical cost convention and in accordance with applicable United Kingdom accounting standards. In order to show a true and fair view, the Company has departed from the requirements of the Companies Act 2006 in respect of merger accounting for group reconstructions and in respect of accounting for capital contributions. Further details are provided in (b) and (g) below respectively.

The Directors have considered the assumptions for preparing the accounts on a going concern basis. These are set out on page 40.

(b) Basis of ConsolidationThe Group accounts consolidate the accounts of the Company and its subsidiary undertakings made up to 31 March each year.

In accordance with Financial Reporting Standard Number 6, certain group reorganisations which took place in previous years have been accounted for using merger accounting principles, in order to meet the overriding requirement under section 393 of the Companies Act 2006 for financial statements to present a true and fair view. The transactions accounted for using these principles did not meet all of the conditions for merger accounting under Companies Act 2006, namely that the fair value of any non-equity consideration must not exceed 10 per cent of the nominal value of equity shares issued as consideration. However, the Directors consider that in substance the consideration for these transactions

comprised equity share capital with no net cash impact and that the alternative approach of acquisition accounting, with the restatement of separable assets and liabilities to fair values, the creation of goodwill, and the inclusion of post reorganisation results only would not give a true and fair view of the Group's results and financial position. The substance of the transactions was not the acquisition of businesses but rather a group reconstruction under which the ultimate shareholders of the businesses transferred, and their rights relative to the others, remained unchanged. The Directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 2006 requirements.

Other business combinations have been accounted for under the acquisition method.

(c) Joint VenturesThe Group’s share of turnover and profit or loss of its joint ventures is included in the consolidated profit and loss account. The Group’s share of their net assets or liabilities is included in the consolidated balance sheet within fixed asset investments or provisions for liabilities and charges respectively.

(d) TurnoverRegulated water company turnover includes amounts billed together with an estimation of amounts for water supply services provided but remaining unbilled at the year-end.

Software licence income is recognised within turnover once software implementation and customer acceptance are complete. Income from separate software maintenance contracts is recognised evenly over the contract period to which it relates. Income generated through the performance of software development and consultancy services is included within turnover on the basis that turnover is matched with the delivery of the service.

Contract accounting is applied to certain contracts the Group is a party to. Where the outcome of the contract can be assessed with reasonable certainty, attributable turnover and profit are calculated on an appropriate and prudent basis and included in the accounts for the period under review. Where a contract loss is anticipated, the entire anticipated loss is recognised immediately.

Turnover of other non-regulated activities represents amounts receivable excluding VAT, from the sale of goods and services.

(e) GoodwillGoodwill arising on acquisitions represents the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired. Goodwill is amortised over its estimated useful life of 10 to 20 years.

(f ) Tangible Fixed Assets and DepreciationTangible fixed assets comprise infrastructure assets (including water mains, impounding and pumped raw water storage reservoirs and dams), operational structures (including pumping stations, treatment stations, boreholes and service reservoirs), land and buildings and other assets including plant.

Infrastructure AssetsInfrastructure assets comprise networks of systems that, as a whole, are intended to be maintained in perpetuity at a specified level of service by the continuing replacement and refurbishment of their components. Expenditure on infrastructure assets relating to increases in capacity or enhancements of the networks and on maintaining the operating capability of the networks in accordance with defined standards of service are treated as additions which are included at cost.

The depreciation charge for infrastructure assets is the level of annual expenditure

52

required to maintain the operating capability of the network which is based on the relevant company’s independently certified asset management plan.

Other AssetsOther assets are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on a straight line basis to write off the cost less estimated residual value over the estimated useful lives of the assets, with the exception of land which is not depreciated. The estimated useful lives of assets are as follows:

Boreholes 100 yearsBuildings and Service Reservoirs Up to 80 yearsFixed Plant 20–30 years Water Meters Up to 20 yearsOffice Equipment Up to 20 yearsMobile Plant Up to 20 yearsMotor Vehicles 3–7 years

(g) Capital ContributionsCapital contributions are treated as deferred income and amortised over the estimated useful lives of the assets concerned, except in the case of contributions towards the cost of infrastructure assets, which are not amortised. This departure from the requirements of the Companies Act 2006 is, in the opinion of the Directors is consistent with industry accounting practice and is necessary for the financial statements to show a true and fair view as it is not possible to amortise contributions to the profit and loss account over the lives of the fixed assets concerned, as infrastructure assets do not have determinable finite lives as they are maintained in perpetuity.

(h) Leased AssetsAssets financed by leasing and hire-purchase arrangements which transfer substantially all the risks and rewards of ownership to the Group are included in tangible fixed assets,

and the net obligation to pay future rentals is included as borrowings within creditors. Rentals are apportioned between finance charges and a reduction of the outstanding liability for future rentals so as to produce a constant charge to the profit and loss account based upon the capital outstanding. Operating lease rentals are charged to the profit and loss account on a straight line basis.

(i) InvestmentsInvestments held as fixed assets are stated at cost less amounts written off and any provision for impairment. In accordance with Section 611 of the Companies Act 2006, the cost of shares acquired from a fellow group undertaking by way of a share for share exchange are recorded at the higher of the nominal value of the shares issued as consideration and the carrying value of the investment in the transferring company.

(j) StocksStocks are valued at the lower of cost and net realisable value. Cost includes an appropriate element of overheads. Provision is made for obsolete, slow moving or defective items where appropriate.

(k) Foreign CurrencyTransactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date.

The results of overseas operations are translated at the average rates of exchange during the year and their balance sheets at the rates prevailing at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas operations and on foreign currency borrowings, to the extent that they hedge the Group’s investment in such operations, are reported in the consolidated statement

of total recognised gains and losses. All other exchange differences are included in the profit and loss account.

(l) PensionsThe profit and loss charge in respect of defined benefit pension schemes represents:

- the increase in the present value of scheme liabilities expected to arise from employee service in the year. This is charged against operating profit.

- the difference between the unwinding of the discount on scheme liabilities and the expected return on scheme assets. This is charged or credited within finance charges (net).

Actuarial gains and losses are charged or credited directly to the consolidated statement of total recognised gains and losses net of deferred tax. The defined benefit schemes’ liabilities, valued using the projected unit method and the fair value of schemes’ assets, are recognised in the consolidated balance sheet (net of deferred tax) as a net retirement benefit obligation or surplus. In the case of a surplus, this is recognised in the consolidated balance sheet to the extent that the Group is legally entitled to recover the surplus in the future either through reduced contributions to schemes, or refunds from schemes.

In respect of the Group defined contribution schemes the amounts charged to the profit and loss account are the contributions payable in the year.

(m) Research and DevelopmentResearch and development expenditure is charged to the profit and loss account in the year in which it is incurred.

Notes to the Accounts

5353

(n) TaxationCorporation tax payable is provided on taxable profits at the current rate. Deferred tax is provided in respect of capital allowances in excess of depreciation and all other timing differences that have originated but not reversed at the balance sheet date using future tax rates that have been enacted at the balance sheet date. The balance is discounted, using the yield to maturity on government gilts, to reflect the time value of money over the period between the balance sheet date and the date on which the timing differences are expected to reverse. A deferred tax asset is recognised only when, on the basis of all available evidence, it is regarded as more likely than not that there will be suitable taxable profits from which the reversal in the future can be deducted.

(o) Financial Instruments Financial Assets All financial assets, being cash and cash

equivalents, debtors and loans receivable, are categorised as “loans and receivables” which are measured at amortised cost. Cash and cash equivalents comprise cash at bank and in hand and short-term deposits.

Financial LiabilitiesFinancial liabilities other than derivative financial liabilities (see Hedge Accounting below) are initially measured at fair value and subsequently measured at amortised cost. The premium/discount and costs of issue are amortised over the life of the instrument, with the amortisation being included in the effective interest rate of the instrument which is included in finance charges (net) in the profit and loss account.

(p) Hedge AccountingThe Group designates certain hedging instruments, including derivatives, as cash flow hedges. At inception of the hedge relationships, the Group documents the relationships between the hedging instruments and the hedged items along with the Group’s risk management strategy and objectives in relation to each hedge. At the inception of the hedges, and on an ongoing basis, the Group documents whether the hedging instruments are highly effective in offsetting changes in cash flows of hedged items.

The effective proportion of changes in fair value of hedging instruments that are designated and qualify as cash flow hedges are deferred in equity (net of tax) in a hedging reserve. The gain or loss relating to the ineffective proportion is recognised immediately in the profit and loss account. The amounts deferred in the hedging reserve are recycled to the profit and loss account in the periods when the hedged items are recognised in the profit and loss account.

Hedge accounting is discontinued when the Group de-designates the hedging relationships, the hedging instruments expire, are terminated or are sold or they no longer qualify for hedge accounting. Any cumulative gain or loss that remains in the hedging reserve at that time is recognised when hedged forecast transactions are ultimately recognised in the profit and loss account. When forecast transactions are no longer expected to occur, the cumulative gains or losses are recognised immediately in the profit and loss account.

(q) Related Party TransactionsAs at 31 March 2012, the Company was an indirectly wholly owned subsidiary undertaking of Hydriades IV Limited, the ultimate parent company in the United Kingdom. As such, the Company has taken

advantage of the exemption in FRS 8 “Related Party Disclosures” from disclosing transactions with other members of the group headed by Hydriades IV Limited, as consolidated financial statements for this company in which the accounts of the Company and its subsidiaries are included, are publicly available. The Group has no other related party transactions requiring disclosure other than those disclosed in note 30.

(r) DividendsDividends are accrued if they have been paid or if they have been approved by shareholders before the year end.

54

2 Segmental Information

Turnover 2012 2011 £’000 £’000

Regulated companies: Existing operations 91,060 87,843 Acquisitions 11,040 —

Total regulated companies 102,100 87,843

Non-regulated service companies: Existing operations 107,966 92,740 Acquisitions 4,311 —

Total non-regulated service companies 112,277 92,740

Inter-divisional (25,581) (21,131)

Non-regulated service companies (external) 86,696 71,609

188,796 159,452

Inter-divisional turnover relates principally to services charged to regulated companies by non-regulated service companies.

Operating Profit 2012 2011 £’000 £’000

Regulated companies: Existing operations 23,911 21,658 Acquisitions 1,712 —

Total regulated companies 25,623 21,658

Non-regulated service companies: Existing operations 8,440 6,424 Acquisitions 1,242 —

Total non-regulated service companies 9,682 6,424

35,305 28,082

Notes to the Accounts

5555

Net Operating Assets 2012 2011 £’000 £’000

Regulated companies 258,061 177,141Non-regulated service companies 13,147 10,223

Net operating assets 271,208 187,364

Net debt (338,914) (281,733)Goodwill 28,636 17,117Loans receivable in more than one year 99,804 134,000Other non-operating net liabilities (20,897) (20,011)Corporation tax (4,978) (4,925)Retirement benefit surplus 9,237 11,755Proposed dividends (631) (2,513)Provisions for liabilities - deferred tax (14,977) (8,625)

Net assets 28,488 32,429

All turnover, operating profit and net operating assets arise in the United Kingdom and India. The Directors do not consider the turnover, operating profit and net operating assets arising in India to be material to the Group and as such these have not been separately disclosed.

56

3 Operating Costs Before Goodwill Amortisation (net) 2012 2011 £’000 £’000

Other operating income (note 6) (1,064) (1,148)Raw materials and consumables 23,014 16,726Staff costs (note 4) 64,951 56,539Depreciation (non-infrastructure assets) 15,205 13,349Depreciation (infrastructure assets) 10,306 9,555Amortisation of capital contributions (575) (567)Operating lease rentals: plant and machinery 47 302 other 2,998 2,276Other operating costs 35,318 31,860

150,200 128,892

Auditors' remuneration is analysed as follows: 2012 2011 £'000 £'000

Fees payable to the Company's auditors for the audit of the Company's annual accounts 21 15

The audit of other Group undertakings pursuant to legislation 161 107

Total audit fees 182 122

Other services pursuant to legislation 5 18 Tax services 95 32

Total non-audit fees 100 50

Notes to the Accounts

5757

4 Staff Costs Group

2012 2011 £’000 £’000

Wages, salaries and bonuses 57,306 49,662Social security costs 5,163 4,207Pension costs 2,482 2,670

64,951 56,539

Group 2012 2011 Number Number

Average number of employees Regulated companies 459 399 Non-regulated companies 1,624 1,458

2,083 1,857

5 Directors’ Remuneration

The remuneration of the Directors of the Company, for the year ended 31 March 2012 is set out below.

2012 2011 £’000 £’000

Emoluments 377 407

There was 1 Director holding office at 31 March 2012 accruing benefits under a defined benefit pension scheme (2011: 1 Director) and no Directors were accruing benefits under a money purchase pension scheme (2011: 0 Directors). There were no contributions paid by the Group to money purchase pension schemes in respect of Directors during the year (2011: £Nil). No Directors received or exercised share options or had share interests under a share-related long-term incentive plan that vested during either year.

The highest paid Director received emoluments of £377,000 (2011: £407,000) during the year. He is a member of a defined benefit pension scheme which provided for an accrued pension of £47,000 (2011: £41,000) and an accrued lump sum of £140,000 at 31 March 2012 (2011: £124,000). There were no Group contributions to a money purchase pension scheme in respect of the highest paid Director (2011: £Nil).

None of the Directors had a material interest in any contract to which the Group was party during the year or the preceding year.

58

6 Other Operating Income

2012 2011 £'000 £’000

Profit on disposal of tangible fixed assets (non-exceptional) 210 375Rental income 854 773

1,064 1,148

During the year ended 31 March 2011, South Staffs Water disposed of land generating a profit of £1,465,000. Due to the high value and exceptional nature of this profit it has been reported as an exceptional item after Group operating profit for that year. The profit did not impact the tax charge of the Group for that year.

7 Finance Charges (net)

2012 2011 £’000 £’000

Interest payable and similar charges Index-linked debt (cash) 6,316 6,002 Index-linked debt (non-cash) 5,337 5,172 Bank loan and other interest payable 8,868 6,305 Finance leases and hire-purchase contracts 193 178 Irredeemable debenture stock 73 67 Share of joint ventures’ interest payable — 15

20,787 17,739

Interest receivable Bank interest receivable (7) (33) Share of interest receivable in joint ventures (9) — Interest on loans to parent undertakings (7,277) (8,792)

13,494 8,914

Other finance (income)/charges (net) Defined benefit pension scheme interest cost 8,719 8,726 Expected return on defined benefit pension scheme assets (restricted) (10,202) (9,098) Amounts recycled from hedging reserve 198 202

12,209 8,744

Notes to the Accounts

5959

8 Taxation on Profit on Ordinary Activities

The tax charge for the year comprises: 2012 2011 £’000 £’000

Current tax Current year 3,313 943 Adjustment in respect of prior years (3,516) 346 Share of joint ventures - adjustment in respect of prior years 20 —

Total current tax charge (183) 1,289

Deferred tax Pension cost timing differences 897 504 Origination and reversal of other timing differences (1,362) (431) Impact of changes in future tax rates (before discount) (1,609) (1,264) Decrease in discount 2,872 565 Adjustment in respect of prior years 260 (367)

Total deferred tax charge/(credit) 1,058 (993)

Total tax charge 875 296

The overall rate of tax for the Group, including deferred tax, based on the profit before tax was 3.8% (2011: 1.4%). The principal differences between the current corporation tax rate for the Group of -0.8% (2011: 6.2%), based on profit before tax and the standard rate of corporation tax of 26.0% (2011: 28.0%) are as follows:

2012 2011 % %

Standard rate of corporation tax 26.0 28.0Expenses not deductible for tax purposes (net) 4.2 0.3Pension cost timing differences (4.0) (2.6)Losses carried forward - timing (0.1) —Losses carried forward - permanent 0.2 (0.1)Capital allowances in excess of depreciation (net) (2.9) (3.9)Group relief received and not paid for (13.1) (21.0)Adjustments in respect of prior years including joint ventures (15.1) 1.7Other timing differences 4.0 3.8

Current corporation tax rate for the year (0.8) 6.2

60

9 Dividends Paid or Proposed 2012 2011 £’000 £’000

Equity interests Ordinary dividend paid of 162.3p (2011: 204.9p) per share 20,811 26,274 Proposed dividend of 4.9p (2011: 19.6p) per share 631 2,513

21,442 28,787

10 Earnings per Share

The calculation of earnings per share is based on profit for the financial year divided by the weighted average number of shares in issue during the year. The calculations of earnings per share are based on the following profits and number of shares:

2012 2011 £’000 £'000

Profit for the financial year and profit for earnings per share 22,216 20,506

2012 2011 Number of Number of Shares Shares

Weighted average number of sharesfor basic and diluted earnings per share 12,819,856 12,819,856

11 Goodwill

Group £’000

Cost At 1 April 2011 22,211 Aquisitions in the year 14,722 Adjustments in respect of prior year acquisitions (221)

At 31 March 2012 36,712

Amortisation At 1 April 2011 5,094 Charge for the year 2,982

At 31 March 2012 8,076

Net Book ValueAt 31 March 2012 28,636

At 31 March 2011 17,117

Details of acquisitions made during the year and the resulting goodwill acquired are provided in note 27.

Notes to the Accounts

6161

12 Tangible Fixed Assets Group Infra- Specialised Land and structure Fixed Plant & Operational Buildings Assets Equipment Assets Total £’000 £’000 £’000 £’000 £’000

Cost At 1 April 2011 21,302 170,753 131,865 114,822 438,742 Additions 119 16,663 15,960 7,988 40,730 Capital contributions received — (4,239) — — (4,239) Disposals (231) (1,174) (7,020) (61) (8,486) Acquisitions 4,758 60,283 23,620 27,536 116,197

At 31 March 2012 25,948 242,286 164,425 150,285 582,944

Depreciation At 1 April 2011 5,028 116,085 68,960 46,417 236,490 Charge for the year 416 10,306 10,139 4,650 25,511 Disposals (230) (1,174) (5,441) (52) (6,897) Acquisitions 541 14,943 10,319 13,888 39,691

At 31 March 2012 5,755 140,160 83,977 64,903 294,795

Net Book ValueAt 31 March 2012 Owned 20,193 97,898 78,010 83,003 279,104 Leased — 4,227 2,439 2,379 9,045

20,193 102,125 80,449 85,382 288,149

At 31 March 2011 Owned 16,274 50,441 60,865 66,653 194,233 Leased — 4,227 2,040 1,752 8,019

16,274 54,668 62,905 68,405 202,252

Infrastructure renewals expenditure and the charge to the profit and loss account have been included within infrastructure assets cost and accumulated

depreciation respectively. The net book value of infrastructure assets is stated net of capital contributions. The balance of capital contributions at 31 March 2012 and movements in the year are set out in note 14.

Freehold land of £2,464,000 (2011: £2,220,000) included above is not subject to depreciation.

62

Company Land & Plant & Total Buildings Equipment £’000 £’000 £'000Cost At 1 April 2011 80 71 151 Additions — 108 108

At 31 March 2012 80 179 259

Depreciation At 1 April 2011 — 13 13 Charge for the year — 28 28

At 31 March 2012 — 41 41

Net Book Value

At 31 March 2012 80 138 218

Net Book Value

At 31 March 2011 80 58 138

Freehold land of £80,000 (2011: £80,000) held at 31 March 2012 was not subject to depreciation.

None of the tangible fixed assets of the Company were financed by finance leases or hire purchase agreements.

13 Capital Commitments

Group capital commitments outstanding at 31 March 2012 were £3,189,000 (2011: £454,000). The Company had no capital commitments at either year-end.

Notes to the Accounts

6363

14 Capital Contributions Group Infrastructure Other

Assets Assets £’000 £’000

Balance at 1 April 2011 85,232 6,799Acquisitions 39,267 611Capital contributions received 4,239 1,079Disposals (582) —Amortised in the year — (575)

Balance at 31 March 2012 128,156 7,914

Capital contributions in respect of other assets are included in the consolidated balance sheet in accruals and deferred income. The Company had no capital contributions at either year-end. Capital contributions in respect of infrastructure assets are netted against tangible fixed assets in the consolidated balance sheet (note 12).

15 Fixed Asset Investments Group Company

Share of Shares in Joint Ventures’ Subsidiary Net Assets Undertakings £’000 £’000

At 1 April 2011 72 45,802Loss after tax for the year (75) -—Equity investment during the year — 54,954Other movements 16 —

At 31 March 2012 13 100,756

The Group’s share of gross assets and gross liabilities in its joint ventures were £1,277,000 (2011: £2,110,000) and £1,264,000 (2011: £2,038,000) respectively. Shares in subsidiary undertakings are stated at their cost which is equal to net book value.

64

As at 31 March 2012 the Company’s principal subsidiary undertakings, all of which are incorporated in the United Kingdom with the exception of Onsite India Private Limited, which is incorporated in India, and all of which have only ordinary shares in issue, were as follows:

Company Name Direct Indirect Nature of Principal Business

South Staffordshire Water PLC 100% Regulated water supply

Cambridge Water PLC 100% Regulated water supply

Aqua Direct Limited 100% Supply of spring and mineral water

Office Watercoolers Limited 90% Rental of water cooling units and sale of spring water

Echo Managed Services Limited 100% Customer management

Echo Northern Ireland Limited 100% Customer management

Inter-Credit International Limited 100% Customer credit management

SSI Services (UK) Limited 100% Holding company for those companies listed below

Onsite Central Limited 100% Sewer inspection, relining, drainage, surveying and flow monitoring

Perco Engineering Services Limited 100% Trenchless installation and refurbishment of pipeline networks

Onsite India Private Limited 1% 99% Sewer inspection, relining, drainage, surveying and flow monitoring

Data Contracts Specialist Maintenance Limited 100% Specialist infrastructure maintenance

Integrated Water Services Limited 100% Clean water asset installation, repair, maintenance and refurbishment services and water hygiene services

Hydrosave UK Limited 100% Water main leak detection services and clean water network management services

Hydrosave Pipeline Technologies Limited 100% Non-destructive testing of clean water pipelines

Notes to the Accounts

6565

16 Stocks

Group 2012 2011 £’000 £’000

Stores and raw materials 2,769 2,527

The Company had no stocks at either year-end.

17 Debtors Group Company

2012 2011 2012 2011 £’000 £’000 £’000 £’000

Amounts recoverable within one year Trade debtors 30,547 24,696 6 52 Other debtors 2,595 2,601 2,108 2,156 Amounts owed by Group undertakings — — 5,552 4,312 Amounts owed by parent undertakings 364 364 — — Prepayments and accrued income 11,568 8,224 1,208 424

45,074 35,885 8,874 6,944 Amounts recoverable in more than one year Loans receivable from parent undertakings 99,804 134,000 59,804 94,000 Amounts owed by Group undertakings — — 2,650 2,650 Other amounts owed by parent undertakings 4,263 4,383 — —

104,067 138,383 62,454 96,650

149,141 174,268 71,328 103,594

Other debtors in the Company include a deferred tax asset of £1,849,000 (2011: £2,156,000). The movement in the deferred tax asset is analysed below:

£’000

At 1 April 2011 2,156Credit to profit and loss account 408Charge to statement of total recognised gains and losses (715)

At 31 March 2012 1,849

Deferred tax assets for the Group as a whole are set-off against deferred tax liabilities (note 22).

66

18 Borrowings Group Company

2012 2011 2012 2011 £’000 £’000 £’000 £’000

Amounts falling due within one year Bank overdrafts 27,579 11,007 35,576 21,971 Short-term bank loans 59,605 — 59,605 — Obligations under finance leases and

hire purchase contracts 736 769 — —

87,920 11,776 95,181 21,971

Amounts falling due in more than one year Bank loans 70,000 89,180 45,000 89,180 Index-linked debt 188,900 183,563 — — Irredeemable debenture stock 1,825 1,633 — — Obligations under finance leases and hire-purchase contracts:

Payable between one and two years 946 695 — — Payable between two and five years 632 608 — —

262,303 275,679 45,000 89,180

Total borrowings 350,223 287,455 140,181 111,151

The book value of the index-linked debt of £188,900,000 (2011: £183,563,000) is stated at amortised cost. The indexed principal of £175,407,000 (2011: £167,473,000) is used for covenant purposes. Similarly, bank loans are stated net of unamortised costs whereas the principal value is used for covenant purposes.

Notes to the Accounts

6767

19 Other Creditors Group Company 2012 2011 2012 2011 £’000 £’000 £’000 £’000

Amounts falling due within one year Trade creditors 31,693 24,107 6,446 3,981 Payments received in advance 13,142 11,398 — — Other creditors 11,285 13,106 1,531 1,758 Proposed dividends 631 2,513 631 2,513 Corporation tax payable 4,978 4,925 3,351 1,091 Other taxation and social security 1,319 1,095 136 111 Amounts payable to parent undertaking 1,369 — 1,369 — Derivitive financial liabilities 1,965 — 1,965 —

66,382 57,144 15,429 9,454

Amounts falling due in more than one year Derivative financial liabilities 4,850 7,396 3,879 7,396 Other creditors 16,420 13,865 1,564 —

21,270 21,261 5,443 7,396

Derivative financial liabilities represent the market value of floating to fixed rate interest rate swaps designated as cash flow hedges.

20 Provisions for Liabilities

Group Deferred Tax

£’000

At 1 April 2011 8,625Profit and loss account charge 161Amounts acquired with subsidiary undertakings 5,170Credit to statement of recognised gains and losses 1,050Other adjustments (29)

At 31 March 2012 14,977

An analysis of deferred tax is set out in note 22. The Company had no provisions for liabilities at either year-end.

68

21 Retirement Benefit Surplus

Surplus of defined benefit pension schemes (net of deferred tax) £'000

Surplus at 1 April 2011 11,755 Surplus acquired with subsidiary undertaking — Current service cost (employer) (1,537) Current service cost (employee) (793) Contributions (employer) 3,791 Contributions (employee) 793 Finance income (restricted) 1,483 Actuarial loss (10,220) Gain due to movement on asset limit 2,752 Movement on deferred tax 1,213

Surplus at 31 March 2012 9,237

Further disclosures relating to the above surplus are provided in note 29.

22 Deferred Tax Group Company

2012 2011 2012 2011 £’000 £’000 £’000 £’000

Deferred tax liabilities/(assets) are provided as follows: Accelerated capital allowances 24,185 17,627 22 5 Timing differences in respect of finance charges 2,357 3,262 — — Timing differences in respect of hedging reserves (3,281) (4,097) (1,402) (1,923) Other timing differences (720) (110) (469) (238)

Undiscounted provision for deferred tax 22,541 16,682 (1,849) (2,156) Discount (7,564) (8,057) — —

Discounted provision for deferred tax 14,977 8,625 (1,849) (2,156)

Reductions to the future corporation tax rate of 24% were enacted during the year ended 31 March 2012 and as such deferred tax has been provided at this rate. The government has also indicated that it intends to enact further reductions in the corporation tax rate of 1% per annum, reducing the rate to 22% by 1 April 2014. These further reductions had not been substantially enacted at the balance sheet date and therefore have not been reflected in the financial statements.

The decrease in the discount of £493,000 represents the charge to profit and loss for the year less the discount at acquisition in relation to Cambridge Water PLC. It includes the impact of the change in future tax rates to 24% as explained above. There is an unprovided deferred tax liability of £3,810,000 (2011: £1,668,000) on capital gains rolled over into other assets of the Group. This will crystallise if the Group sells the assets into which the gain has been rolled into. Deferred tax relating to the retirement benefit surplus (2011: surplus) is excluded from the above and included in the surplus (2011: surplus) stated in the consolidated balance sheet.

The deferred tax asset of the Company at 31 March 2012 of £1,849,000 (2011: £2,156,000) is presented within other debtors (note 17).

Notes to the Accounts

6969

23 Share Capital

Group and Company 2012 2011 £’000 £’000

Authorised47,058,824 ordinary shares of 42.5p each 20,000 20,000

Issued and fully paid12,819,856 ordinary shares of 42.5p each 5,449 5,449

24 Reserves

Group Share Capital Currency Premium Redemption Merger Profit & Hedging Translation Account Reserve Reserve Loss Account Reserve Reserve £’000 £’000 £’000 £’000 £’000 £’000

At 1 April 2011 10,882 1 (253) 26,681 (10,354) 15Profit for the financial year — — — 22,216 — —Dividends paid or proposed (note 9) — — — (21,442) — —Other recognised losses (net of deferred tax) — — — (5,358) — —Exchange movements on translation of overseas operations — — — — — (14)Change in value of hedging instruments - cash flow hedges (net of deferred tax) — — — — 502 —Amounts recycled to profit and loss (net of deferred tax) — — — — 150 —

At 31 March 2012 10,882 1 (253) 22,097 (9,702) 1

Included within the profit and loss account balance is the surplus (net of deferred tax) of the defined benefit pension scheme of £9,237,000 (2011: £11,755,000 - net surplus).

Company Share Capital Premium Redemption Profit & Hedging Account Reserve Loss Account Reserve £’000 £’000 £’000 £’000

At 1 April 2011 10,882 1 12,181 (5,278)Profit for the financial year — — 14,920 —Dividends paid or proposed (note 9) — — (21,442) —Change in value of hedging instruments - cash flow hedges (net of deferred tax) — — — 837

At 31 March 2012 10,882 1 5,659 (4,441)

As provided by Section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. The Company’s profit after tax for the financial year was £14,920,000 (2011: £22,710,000).

70

25 Operating Lease Commitments

At 31 March 2012 the Group and the Company had the following annual commitments under non-cancellable operating leases:

Group 2012 2011 2012 2011 Buildings Buildings Other Other £’000 £’000 £’000 £’000Operating leases which expire: within one year 118 87 289 229 between two and five years 436 49 2,449 1,926 after five years - 279 - 15

554 415 2,738 2,170

Company 2012 2011 Motor Motor Vehicles Vehicles £’000 £’000Operating leases which expire: within one year 16 10 between two and five years 29 21

45 31

26 Minority Interests

£'000

At 1 April 2011 8Profit on ordinary activities after taxation 5

At 31 March 2012 13

27 Acquisitions

On 6 April 2011, Onsite Central Limited acquired the entire issued ordinary share capital of Data Contracts Specialist Maintenance Limited, a specialist infrastructure maintenance company based in Nottingham.

On 3 October 2011, South Staffordshire Plc acquired the entire issued ordinary share capital of Cambridge Water PLC a regulated water supply company based in Cambridge.

The acquisition method of accounting has been adopted in all cases.

A summary of the acquisitions including the consideration, the assets and liabilities acquired (based on the provisional fair values), the related goodwill and the impact of these transactions on group cash flow and net debt are set out below.

Notes to the Accounts

7171

Total £’000

Consideration: Cash consideration 58,298 Contingent consideration 2,363 Acquistion costs 327

61,618

Book value of net assets acquired: Tangible fixed assets 52,243 Stocks 139 Debtors 8,731 Cash at bank and in hand 7,254 Creditors and provisions for liabilities (including debt) (45,734)

Net assets (book value) 22,633

Provisional fair value adjustment to net assets acquired: Tangible fixed assets 24,263

Provisional fair value of net assets acquired 46,896

Goodwill on acquisitions 14,722

Cash consideration paid in the year (including acquisition costs) 59,255Cash balances acquired (7,254)

Net cash outflow 52,001

Acquired finance leases 240Acquired debentures 192Acquired bank debt 25,000

Increase in net debt 77,433

The cash consideration reported above differs to that reported in the Consolidated Cash Flow Statement due to additional cash payments made in the year to 31 March 2012 in respect of prior year acquisitions.

During the year to 31 March 2012 adjustments were made in respect of goodwill on prior year acquisitions of £221,000, reflecting adjustments made in the year to the provisional fair values of consideration and the acquired assets and liabilities as reported last year.

Goodwill is being amortised over an estimated useful economic life of 10 to 20 years.

72

28 Financial Assets and Liabilities

The Group’s financial assets and liabilities include cash, loans receivable, borrowings, derivative financial liabilities, trade creditors and trade debtors. Borrowings represent bank loans and overdrafts, finance lease obligations, index-linked debt and irredeemable debenture stock. The purpose of the Group's borrowings is to finance the Group’s operations. It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The Group’s policy in respect of cash, loans receivable and borrowings is to maintain flexibility with both fixed and floating rates and long and short-term debt while not exposing the Group to significant risk of market movements (see below). Derivative financial liabilities represent floating to fixed interest rate swaps used as cash flow hedges to reduce the Group’s risk to changes in LIBOR. The Group is not subject to any material foreign exchange risk.

Interest Rate Risk Profile

Borrowings 2012 2011 £’000 £’000

Retail Price Index-linked debt 188,900 183,563 Fixed rate financial liabilities 118,744 92,885 Floating rate financial liabilities 42,579 9,779

350,223 286,227

The floating rate borrowings principally comprise sterling denominated bank loans and overdrafts that bear interest at rates based on LIBOR or the Bank of England base rate. Fixed rate financial liabilities include floating rate bank loans of £114,605,000 (2011: £89,180,000) that are swapped to fixed rate by fully effective cash flow hedges using interest rate swaps. The Group’s cash balances earn interest at floating rates linked to LIBOR or the Bank of England base rate. The Group's trade debtors and trade creditors are not subject to interest unless considered to be overdue.

For all financial assets and liabilities, the book values and fair values are not materially different, except for the £111,400,000 (2011: £111,400,000) Retail Price Index-linked loan which had a book value at 31 March 2012 of £149,688,000 (2011: £145,619,000), and a fair value of £179,321,000 (2011: £170,497,000) and the £35,000,000 (2011: £35,000,000) Retail Price Index-linked bond which had a book value at 31 March 2012 of £39,212,000 (2011: £37,944,000) and a fair value of £36,120,000 (2011: £30,251,000).

Fixed Rate Borrowings Weighted Weighted average average period for which interest rate rate is fixed

% Years

2012 Sterling 4.7 1.7

2011Sterling 6.4 2.5

Notes to the Accounts

7373

Borrowing Facilities

The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31 March 2012 in respect of which all conditions precedent had been met at 31 March 2012 were as follows:

2012 2011 £’000 £’000

Expiring in one year or less 14,000 — Expiring in more than one year but not more than two years 9,700 15,000 Expiring in more than two years but not more than five years 5,000 5,000 Expiring in more than five years — —

28,700 20,000

Financial Risks

The Group’s activities result in it being subject to a limited number of financial risks, principally interest rate risk, as the Group has floating rate and retail price index-linked borrowings and credit risk as the Group has financial assets receivable from third parties. Management of financial risks focuses on reducing the likely impact of these risks to a level that is considered acceptable. The Group has formal principles for overall risk management as well as specific policies to manage individual risks.

1) Interest rate risk

Interest rate risk arises from borrowings issued at floating rates including those linked to LIBOR and the Retail Price Index (RPI) that expose the Group’s earnings and cash flows to changes in LIBOR and the long term forecast for RPI. Risks of increases in LIBOR are managed by limiting the value and proportion of Group borrowings that are linked to this variable rate and by entering into floating to fixed rate swap contracts. Risks associated with increases in RPI are effectively hedged against the revenues and the Regulatory Asset Value of the regulated water supply companies, both of which are also linked to RPI.

2) Credit risk

As is market practice, the Group grants certain customers credit on amounts due for the services it supplies, leading to limited risk over the recovery of amounts receivable from these customers. Full details of the way this risk is managed are provided below. Credit risk also includes the risk over recovery of loans receivable. This risk is managed by ensuring that loans are only made to entities with sufficient financial resources to both service and repay the loans. The total carrying value of financial assets subject to credit risk, net of provisions, at 31 March 2012 was £137,560,000 (2011: £166,044,000).

3) Liquidity risk

Liquidity risk represents the risk of the Group having insufficient liquid resources to meet its obligations as they fall due. The Group manages this risk by regularly monitoring the maturity of credit facilities, actual and forecast cash flows and ensuring that the payment of its obligations are matched with cash inflows and availability of adequate banking facilities. The table above details the undrawn committed borrowing facilities available to the Group to manage this risk.

74

Security Over Assets

Obligations under finance leases and hire purchase contracts are secured on the assets to which they relate. The Group’s index-linked debt is not secured on any assets. Bank loans are secured against the shares of the Company and its subsidiaries.

Sensitivity Analysis

The following analysis, required by Financial Reporting Standard 29, is intended to illustrate the sensitivity to reasonably possible movements during the year, in variables affecting financial liabilities, being LIBOR and the long-term forecast for the UK Retail Price Index (RPI) on the pre-tax profit and loss account of the Group for the year ended 31 March 2012. There is no impact on reserves other than the impact on the profit and loss account after tax.

2012 2011 £’000 £’000

RPI + 0.25% (435) (417)RPI - 0.25% 435 417LIBOR +1.00% (267) (6)LIBOR -1.00% 267 6

The impact on the pre-tax profit and loss account for 2012 detailed above has been calculated by assuming that the illustrated changes to the variables occurred on 1 April 2011 and remained different to the actual variables recorded by the stated amount during the year with all other variables remaining at the actual amounts. The comparative figures have been calculated using the same methodology assuming the change to the variables occurred on 1 April 2010.

Notes to the Accounts

7575

Maturity of Financial Assets and Liabilities

The maturity profile of the Group’s financial liabilities recorded at repayment value at 31 March 2012 was as follows:

2012 2011 £’000 £’000

BorrowingsIn one year or less, or on demand 87,920 11,776In more than one year, but not more than two 45,946 45,695In more than two years, but not more than five 25,632 45,608In more than five years, but not more than twenty — —In more than twenty years 177,232 169,106

336,730 272,185Other financial liabilitiesIn one year or less, or on demand 66,382 57,144In more than one year but not more than two 7,280 4,250In more than two years but not more than five 3,771 6,387In more than five years but not more than twenty 9,634 9,132In more than twenty years 585 1,492

Total 424,382 350,590

The table above excludes future interest payments and future indexation on financial liabilities. Index-linked borrowings of £175,407,000 (2011: £167,473,000) included in the table above are stated at the principal amount indexed by RPI to the balance sheet date. The estimated redemption value of index-linked borrowings at redemption in 2045 is £399,467,000 (2011: £399,467,000) and at redemption in 2051 is £139,996,000 (2011: £139,996,000).

Group debtors recoverable in more than one year of £104,067,000 (2011: £138,383,000) principally represent loans receivable from the Company's parent undertakings of £99,804,000 (2011: £134,000,000) with £Nil (2011: £Nil) due to be repaid within a year, £15,000,000 (2011: £15,000,000) due to be repaid between five and twenty years and £84,804,000 (2011: £119,000,000) having no fixed repayment date.

Trade Debtors

Before accepting orders from customers and offering credit terms, the Group undertakes appropriate credit assessments and uses this information to determine if the order is accepted and the credit terms that will be offered. Provision is made within the trade debtor values detailed below, based on judgement by senior management, for amounts considered to be unrecoverable due either to their nature or age. Due to the different nature of the Group’s operations there is no single method that is applied to all trade debtors. This would not be considered appropriate with the methods applied being considered appropriate to each business. The total amount charged to the profit and loss account in the year ended 31 March 2012 in respect of such provisions was £2,800,000 (2011: £3,053,000). Total Group trade debtors (net of provisions) as at 31 March 2012 were £30,547,000 (2011: £24,696,000). The total amount of the provision included in the above, as at 31 March 2012 was £17,860,000 (2011: £14,212,000). The Group does not hold collateral over its trade debtors.

76

The Directors consider that debtors that are neither past due nor impaired are of a high quality and were considered, at the balance sheet date, to be fully recoverable at their gross book value. The Directors consider that the concentration of credit risk across the Group is limited due to the Group’s customer base being significant. The largest balance outstanding from any single company at 31 March 2012 was £1,648,000 (2011: £1,243,000), representing 5% of the above Group total (2011: 5%). Individually significant debtors are principally due from customers with investment grade credit ratings including utilities, government agencies and local authorities.

An ageing analysis of trade debtors that are past due but not impaired is provided below:

Regulated companies <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total £’000 £’000 £’000 £’000 £’000 £’000 £’000

2012 5,728 1,863 1,277 658 91 32 9,6492011 4,629 1,506 1,007 339 41 — 7,522

Non-regulated service companies <1 month 1-2 months >2 months Total £’000 £’000 £’000 £’000

2012 4,119 1,211 3,374 8,7042011 3,324 992 1,509 5,825

Non-regulated service companies’ debtors that are considered to be impaired of £1,158,000 (2011: £1,097,000) were all more than 2 months past due. An ageing analysis of debtors of regulated companies that are considered to be impaired is provided below:

<1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total £’000 £’000 £’000 £’000 £’000 £’000 £’000

2012 2,691 2,914 2,482 2,317 2,108 4,190 16,702 2011 2,469 2,397 2,023 1,931 1,682 2,613 13,115

The Directors consider that the carrying value of trade and other debtors including loans receivable, net of provisions, detailed in note 17 approximates to their fair value.

29 Pension Retirement Benefits

The Group operates a number of funded pension schemes for the benefit of its employees. The Group participates in the Water Companies Pension Scheme, by way of two separate sub-funds, which provide benefits based on final pensionable pay. The Group also operates a defined contribution money purchase pension scheme. The assets of these schemes are held separately from those of the Group, being invested by discretionary fund managers.

The Group accounts for pension schemes in accordance with Financial Reporting Standard 17, "Retirement Benefits" (FRS 17). Further details are provided in note 1. In accordance with the recommendations of the actuary, the employers current service cost charged to the Group's profit and loss account for the defined benefit schemes in the year ended 31 March 2012 was £1,537,000 (2011: £1,858,000). For the defined benefit scheme fund which is not closed to future accrual, the employer’s contribution rate in the year ended 31 March 2012 was 23.0% (2011: 23.0%) plus a fixed contribution of £1,715,000 (2011: £1,640,000) with the employee contribution rates being 9.5% (2011: 9.5%). Contribution rates for the year ending 31 March 2013 remain at 9.5% for the employee with the employer rate increasing to 26.2% and a fixed contribution of £1,629,000. The amount charged to the profit and loss account for the defined contribution scheme in the year was £945,000 (2011: £812,000). There were no overdue contributions at either year-end.

Notes to the Accounts

7777

Financial Reporting Standard 17

Additional disclosures regarding the Group’s defined benefit pension schemes are required under the provisions of FRS 17. The FRS 17 valuations at 31 March 2012 have been undertaken by a qualified actuary using assumptions that are consistent with the requirements of FRS 17. The market value of investments has been calculated using the bid price. Figures provided at 31 March 2012 include those of the defined benefit pension fund of Cambridge Water PLC which was acquired by the Group on 3 October 2011. Figures for the year to 31 March 2012 include those of that scheme from 3 October 2011 to 31 March 2012.

The major assumptions used were as follows:

31 March 31 March 31 March 2012 2011 2010 % % %

Rate of increase in salaries 4.0 4.5 4.7 Rate of increase in pensions 2.5 2.8 3.7 Discount rate 4.7 5.5 5.5 Annual inflation RPI 3.5 3.5 3.7 Annual inflation CPI 2.5 2.8 —

31 March 31 March 31 March 2012 2011 2010 No. of Years No. of Years No. of Years

Life expectancy of male aged 60 at accounting date 26.9 26.5 26.4

The market value of the assets in the schemes, the present value of the liabilities in the schemes at the balance sheet date were:

Valuation 2012 2012 2011 2011 2010 2010 % £’000 % £’000 % £’000

Equities 38 81,439 48 79,005 55 84,407Bonds/gilts 52 109,794 42 68,917 45 70,430Diversified growth funds 10 20,656 10 16,895 — —Cash — 123 — 174 — 53

Market value of schemes’ assets 212,012 164,991 154,890Present value of schemes’ liabilities (195,201) (146,365) (160,450)

Surplus/(deficit) in the schemes 16,811 18,626 (5,560)Amount not recognised due to asset limit (4,657) (2,741) —

Surplus/(deficit) recognised in the consolidated balance sheet 12,154 15,885 (5,560)Related deferred tax (liability)/asset (2,917) (4,130) 1,557

Surplus/(deficit) after deferred tax 9,237 11,755 (4,003)

78

Changes in the present value of the schemes’ liabilities are as follows:

2012 2011 £’000 £’000

Opening present value of schemes’ liabilities 146,365 160,450Liabilities acquired with subsidiary undertakings 30,993 —Current service cost (employer) 1,537 1,858Current service cost (employee) 793 787Interest cost 8,719 8,726Actuarial loss/(gain) 14,222 (19,176)Benefits paid (7,428) (6,280)

Closing present value of schemes’ liabilities 195,201 146,365

Changes in the market value of the scheme’s assets are as follows:

2012 2011 £’000 £’000

Opening market value of schemes’ assets 164,991 154,890Assets acquired with subsidiary undertakings 35,555 —Expected return on schemes’ assets 10,308 9,098Actuarial gain 4,002 3,071Contributions (employer) 3,791 3,425Contributions (employee) 793 787Benefits paid (7,428) (6,280)

Closing market value of the schemes’ assets 212,012 164,991

The actual return on the schemes’ assets over the year to 31 March 2012 was a gain of £14,310,000 (2011: £12,169,000).

An analysis of the movement in the scheme surplus during the year ended 31 March 2012 is provided in note 21. The following disclosures represent the analysis of the scheme surplus/deficit and the amounts that have been charged in the consolidated statement of total recognised gains and losses over a five year history.

Notes to the Accounts

7979

2012 2011 2010 2009 2008 £’000 £’000 £’000 £’000 £’000

Market value of schemes’ assets 212,012 164,991 154,890 125,682 150,252Present value of schemes’ liabilities (195,201) (146,365) (160,450) (122,828) (140,256)

Surplus/(deficit) in the schemes 16,811 18,626 (5,560) 2,854 9,996

Experience adjustments on schemes’ liabilities - amount of (loss)/gain (467) 2,078 3,472 1,214 165% of scheme liabilities 0% 1% 2% 1% 0%Experience adjustments on schemes’ assets - amount of gain/(loss) 4,002 3,071 26,069 (30,953) (6,096)% of scheme assets 2% 2% 17% (25%) (4%)(Loss)/gain due to changes in assumptions underlying the (13,755) 17,098 (38,155) 22,108 8,293 present value of schemes’ liabilities% of scheme liabilities 7% 12% (24%) 18% 6%

Actuarial (loss)/gain (10,220) 22,247 (8,614) (7,631) 2,362% of schemes’ liabilities 5% 15% (5%) (6%) 2%

30 Related Party Transactions

During the year ended 31 March 2009, South Staffordshire Water PLC entered into a series of agreements with a parent undertaking, Hydriades I LP. The agreements were put in place to offset the impact on South Staffordshire Water PLC of certain hedging relationships entered into with a third party bank, on both cash flow and the profit and loss account. The balance due from Hydriades I LP in respect of these transactions at 31 March 2012 was £4,628,000 (2011: £4,746,000). This amount has been recognised within debtors in the Group Consolidated Balance Sheet. In accordance with applicable accounting standards, the impact of both arrangements on the profit and loss account of South Staffordshire Water PLC and the Group have been netted off with no overall impact.

31 Ultimate Controlling Party

The Company's immediate parent undertaking is Aquainvest Acquisitions Limited. The ultimate controlling party in the United Kingdom is Hydriades IV Limited. The results of the Company and the Group for the year ended 31 March 2012 are consolidated in the accounts of Hydriades IV Limited. The ultimate controlling party is Alinda Capital Partners LLC, a company registered in the United States of America.

80

Group Five Year Summary 2012 2011 2010 2009 2008 £’000 £’000 £’000 £’000 £’000

Turnover Regulated companies 102,100 87,843 86,088 82,986 81,243 Non-regulated service companies 112,277 92,740 72,405 80,342 74,027 Inter-divisional (25,581) (21,131) (16,012) (17,713) (16,925)

188,796 159,452 142,481 145,615 138,345

Operating profit Regulated companies 25,623 21,658 23,097 22,853 22,844 Non-regulated service companies 9,682 6,424 5,200 7,457 5,424

35,305 28,082 28,297 30,310 28,268 Exceptional profit on sale of tangible fixed assets — 1,465 — — —Finance charges (net) (12,209) (8,744) (9,692) (9,818) (5,461)

Profit before tax 23,096 20,803 18,605 20,492 22,807

EBITDA 63,223 51,986 50,484 51,152 47,390Profit for the financial year 22,216 20,506 18,581 19,635 19,282Net cash inflow from operating activities 61,023 56,424 44,152 49,995 45,680Average number of employees 2,083 1,857 1,673 1,611 1,416Capital investment (before contributions) 40,730 34,918 25,036 31,502 32,748Net assets 28,488 32,429 24,516 29,955 43,636Net debt 338,914 281,733 264,802 261,610 231,235

8181

Regulated Water Supply

South Staffordshire PlcExecutive Director & Group Finance Director: Adrian Page

Green Lane, Walsall, West Midlands, WS2 7PDTelephone: 01922 638282

www.south-staffordshire.com

South Staffordshire Water PLCManaging Director: Dr Liz Swarbrick

Green Lane, Walsall, West Midlands, WS2 7PDTelephone: 01922 638282

www.south-staffs-water.co.uk

Cambridge Water PLCManaging Director: Stephen Kay

90, Fulbourn Road, Cambridge, CB1 9JNTelephone: 01223 706050

www.cambridge-water.co.uk

Contact Details

82

SSI Services (UK) LtdManaging Director: Andrew Garcia

Green Lane, Walsall WS2 7PDTelephone: 01922 638282

www.ssi-services.co.uk

Integrated Water Services LtdManaging Director: Pete Aspley

Wood End Lane, Fradley, Lichfield, WS13 8NFTelephone: 01543 445700

www.integrated-water.co.uk

OnSite Central LtdManaging Director: Alan Plante

89 Blackpole West, Blackpole, Worcester, WR3 8TJTelephone: 01905 340054

Managing Director: Simon Baylis

Unit 14, W & G Estate, Farringdon Road, East Challow, Wantage, OX12 9TFTelephone: 01235 772882

www.onsite.co.uk

SSI Services

8383

W a t e r N e t w o r k E f f i c i e n c y

Hydrosave UK LtdManaging Director: Simon Dray

Swallow Court, Kettering Venture Park, Kettering, NN15 6XXTelephone: 01536 515110

www.hydrosave.co.uk

Perco Engineering Services LtdManaging Director: Dave Taylor

The Old Nurseries, Nottingham Road,Radcliffe-on-Trent, Nottingham, NG12 2DUTelephone: 0115 933 5010

www.perco.co.uk

Data Contracts Specialist Mainenance LtdManaging Director: Dave Taylor

The Old Nurseries, Nottingham Road,Radcliffe-on-Trent, Nottingham, NG12 2DUTelephone: 0115 933 5010

www.data-contracts.co.uk

84

Echo Managed Services LtdManaging Director: Phil Newland

Green Lane, Walsall, West Midlands, WS2 7PDTelephone: 0845 12 12 122

www.echomanagedservices.com

Inter-Credit International LtdManaging Directors: Brendan Glover & Simon Davison

4th Floor, South Point House, 321 Chase Road, Southgate, London N14 6JTTelephone: 0208 482 4444

www.intercred.com

Echo

South Staffordshire PlcGreen LaneWalsallWS2 7PD

Tel: +44 (0)1922 638282Fax: +44 (0)1922 723631

www.south-staffordshire.com