TIDMBD49
RNS Number : 7390G
Electricity North West Limited
31 May 2017
Electricity North West Limited (the "Company") is pleased to
announce its Annual Financial
Report for the year ended 31 March 2017.
The Annual Financial Report is available to view on the
Company's website:
www.enwl.co.uk.
In accordance with the requirements of Listing Rule 17.3.1, a
copy of the annual financial
report has been submitted to the National Storage Mechanism and
will shortly be available
for inspection at: http://www.hemscott.com/nsm.do.
In accordance with Disclosure and Transparency Rule 6.3.5 the
Annual Financial Report is
here reproduced in full unedited text (the Company has not taken
advantage of the
exemption afforded in 6.3.5 (2)).
For further information please contact Electricity North West's
press office on 0844 209 1957
or email pressoffice@enwl.co.uk
Electricity North West Limited
Annual Report and
Financial Statements
for the year ended 31 March 2017
Introduction
Electricity North West Limited ('Electricity North West' or 'the
Company') is the electricity distributor for the North West of
England. We own, invest in, operate and maintain the network of
poles, wires, transformers and cables which carry electricity from
the national grid to 2.4 million premises and five million
customers. Our job is to keep electricity flowing safely to our
customers' homes and businesses, keeping the lights on 24 hours a
day, seven days a week.
We are proud of who we are, the essential role we play for our
customers and the investment we make locally and nationally.
North West - We are champions of the North West and proud that
it is our network that connects communities and will support the
success of the Northern Powerhouse.
Service - We invest in our people and they are experts who
ensure we provide exceptional service.
Innovation - We believe in continuous improvement, leading in
energy innovation.
We are pleased to present the Annual Report and Consolidated
Financial Statements of the Company and its subsidiaries (together
referred to as 'the Group') to shareholders for the year ended 31
March 2017. Further information on our Company can also be found by
visiting our website: www.enwl.co.uk.
Notice regarding limitations on directors' liability under
English law
The information supplied in the Strategic Report and Directors'
Report has been drawn up and presented in accordance with English
company law. The liabilities of the Directors in connection with
that report shall be subject to the limitations and restrictions
provided by such law.
Strategic Report
In preparing the Strategic Report, the Directors have complied
with s414 of the Companies Act 2006. The Strategic Report has been
prepared for the Electricity North West Group as a whole comprising
Electricity North West Limited ('the Company') and its non-trading
subsidiaries ('the Group').
Cautionary statement regarding forward-looking statements
The Chairman's Statement, Chief Executive Officer's Statement
and Strategic Report section of the Annual Report and Consolidated
Financial Statements ('the annual report') have been prepared
solely to provide additional information to the shareholders to
assess the Group strategies and the potential for those to succeed.
These sections and other sections of the annual report contain
certain forward looking statements that are subject to factors
associated with, amongst other matters, the economic and business
circumstances occurring within the region and country in which the
Group operates. It is believed that the expectations reflected in
these statements are reasonable but they may be affected by a wide
range of variables which could cause actual results to differ
materially from those anticipated at the date of the annual report.
The Group does not undertake any obligation to update or revise
these forward-looking statements, except as may be required by law
or regulation.
Regulatory reporting and regulatory audits for the year ended 31
March 2017
Certain regulatory performance data contained in this annual
report remain subject to regulatory audit by the Office of Gas and
Electricity Markets ('Ofgem'). The final regulatory reporting pack
and regulatory financial statements for the year ended 31 March
2017 are not due for submission to Ofgem until July 2017, and will
be reviewed by Ofgem after their submission.
Website and investor relations
Electricity North West's website, www.enwl.co.uk, gives
additional information on the Company and Group. Notwithstanding
the references we make in this annual report to Electricity North
West's website, none of the information made available on the
website constitutes part of this annual report or shall be deemed
to be incorporated by reference herein. Interested institutional
debt investors can also gain access to additional financial
information by visiting our website
www.enwl.co.uk/about-us/investor-relations.
Contents Page
Chairman's Statement 1
Chief Executive Officer's Statement 2
Strategic Report 4
- Company Background 4
- Corporate Social Responsibility 9
- Key Performance Indicators 12
- Financial Performance 16
- Risk Management 20
Corporate Governance Report 25
- The Board 25
- Report of the Audit Committee 31
- Report of the Nominations Committee 34
- Report of the Remuneration Committee 34
- Report of the Health, Safety & Environment Committee
36
Directors' Report 37
Independent Auditor's Report to the Members of Electricity North West Limited 40
Financial Statements 48
- Consolidated Income Statement 48
- Consolidated and Company Statement of Comprehensive Income 49
- Consolidated and Company Statement of Financial Position
50
- Consolidated Statement of Changes in Equity 51
- Company Statement of Changes in Equity 52
- Consolidated and Company Statement of Cash Flows 53
Notes to the Financial Statements 54
Glossary 115
Chairman's Statement
I am pleased to present the Annual Report and Consolidated
Financial Statements of the Electricity North West Limited Group
for the year ended 31 March 2017, the second year of the current 8
year regulatory period.
There are many areas of the Company's performance in which we
can be justifiably proud. The Company's financial performance
remains strong and the Company continues to make efficiency savings
which are shared with customers. We continue to be leading in
innovation which was recognised by Ofgem in the discretionary award
of GBP1.7m made during the year. We have now started the commercial
implementation of CLASS, taking its innovative solution for
controlling network voltage into commercial use.
The reliability and resilience of the network continues to
improve with this year seeing the lowest ever level of
interruptions on the network. When we were hit by Storm Doris the
resilience of the network was such that it did not even rank as an
Ofgem Exceptional Event, in contrast to other operators, a
testament to our maintenance and tree cutting work.
Peter Emery took up his post as Chief Executive Officer in May
2016, and has focused in particular on the critical areas of safety
and customer satisfaction.
The first, and most important, challenge for the Company is in
the area of safety. We have a clear understanding of what is needed
to create a top performing safety culture and are making changes to
simplify safety rules to make them easier to implement.
The prosecution of the Company by the Health and Safety
Executive, as a result of the tragic death of an overhead linesman
in November 2013, has only served to reinforce the importance of
safety in a sector which, by the nature of the work that it has to
do and service that it provides, will always be hazardous.
The Company was found not guilty of two charges relating to a
failure to risk assess and a failure to ensure the safety of its
employees, but was found guilty of failing to manage working at
height, a finding which the Company is appealing. The Company was
fined GBP900k.
I am pleased to be able to report that customer performance has
improved this year compared to last but remains below both targeted
levels and below the performance of comparable companies. Analysis
of areas of poor performance and implementation of corrective
actions has led to an improving trend, with performance in the
final quarter being closer to targeted levels.
Board Changes
I would like to take this opportunity to thank Mark Walters, who
resigned from the Board on 31 January 2017 after 3 years' service.
John Lynch joined the Board on the same date and we very much look
forward to his contribution to the Board.
I would also like to thank my Board colleagues for their support
and contribution during the year and, finally, I would like to
extend the Board's thanks to all Electricity North West employees
and contractors for their continued commitment to keeping the
lights on for our customers.
Dr John Roberts CBE
Chairman
Chief Executive Officer's Statement
This is my first report as Chief Executive Officer of
Electricity North West Limited. When I joined in May 2016, I
undertook an assessment of the business. I concluded that there
were, as expected, both areas of strength and those in need of
improvement. I would highlight the commitment and the skills of the
employees in the business, the quality of the plant and equipment
along with the ability for technical and regulatory innovation, as
being some of the key positives of this review.
However, not unexpectedly, there were a number of areas where
improvements were necessary. In particular, I would note the need
to improve the safety culture of the business as well as the level
of performance in customer satisfaction, upon which the Chairman
has already commented. There are also opportunities to improve
cross functional team-working across the business. This will enable
the Company to improve the execution of its day to day activities
and speed up the pace of change.
An overview of performance in the year against our corporate
goals is contained within the Strategic Report.
Future Outlook
The electricity industry is going through many changes as we
move to a low carbon economy:
-- There are increasingly blurred boundaries between wholesale markets and networks;
-- The evolution of Distribution Network Operators (DNO) to
Distribution System Operators (DSO) as both the level of generation
connected to our network grows, and with increasing complexity of
connection and load constraints; and
-- In some cases customers are seeking more control and a more
holistic energy solution, rather than a simple grid connection,
which will allow them to operate 'off-grid'.
This brings many opportunities and challenges in helping to
shape the role the Company will play in the electricity industry of
the future.
A review of the Company's current position and external
environment has been used to create priorities to help guide the
Company as the industry moves forward. We have developed plans for
the short and longer term supported by a focus on the culture
required to achieve and sustain the Company's position as a high
performing organisation. These are summarised in three areas:
-- Strategic Direction - how the Company plans to align its
strengths to exploit opportunities and mitigate threats to develop
a long-term competitive advantage.
-- Tactical Plans - the Company's short-term plans to
continuously improve performance and deliver value for customers,
stakeholders and shareholders.
-- Corporate Culture - the behaviours required to sustain long-term high performance.
Strategic Direction
The strategic agenda is to build competitive advantage and
includes demonstrable actions to develop and prove capability. The
RIIO incentive mechanisms that Ofgem has put in place ensure
customers share the benefits of our success as these are
financially realised.
We have to recognise that our market, and the environment in
which we operate, is going to go through the biggest change since
the electrification of rural areas in the 1960s. The use of
innovative technology is becoming prevalent across the industry. We
see this today within our operations, for example using technology
better to identify the location of transient faults, reducing
customer interruptions and traffic disruptions, or automated
restoration systems to reconnect as many customers as possible in
the event of faults. Outside of our operations, the move to a low
carbon economy, electric vehicles in particular and the use of more
local generation involve a step change in the way we work.
Chief Executive Officer's Statement (continued)
Strategic Direction (continued)
This is already giving rise to opportunities for the business.
We are implementing our Customer Load Active System Services
(CLASS) project into some of our substations, a project which was
initiated as a funded Low Carbon Network Fund (LCNF) project. This
will enable us to offer National Grid market based frequency
balancing services and, if it succeeds, save over 20,000 tonnes CO2
equivalent from UK emissions annually as it displaces power station
energy consumption.
In this changing environment, we must operate differently.
Whether this is to review the range of services that we provide, or
the way we organise ourselves in a more competitive world, the
future will be both different and exciting.
Being at the forefront of this change, we are using our
experiences to influence the future shape of the Company's
services. This could be through leading discussions on how we, as
an industry, construct the electricity networks of the future to
ensure efficient delivery of the service that our customers need.
It could also be through supporting and managing larger local
developments, not least being the Moorside nuclear construction
project in Cumbria and the construction of Grid Transmission lines
to transfer the power to the National Grid from the new power
station.
Tactical Plans
The tactical agenda is about improving our day-to-day
operational performance. Actions plans are in place to improve
focus, simplify and carry out detailed stewardship.
Our safety management system is continually reviewed to ensure
risks associated with the Company's activities remain controlled.
Safety culture is at the heart of our plans and we have a series of
initiatives in progress which are aimed at positioning the Company
as a top-class safety operator.
Delivering excellent customer service underpins the credibility
of the Company and we have been disappointed that our performance
has not been as good as other DNOs in this area. We have a Customer
Satisfaction Roadmap in place and are starting to see an improved
performance from driving compliance against standardised operating
procedures. We are strengthening Governance to support delivery of
the required improvement.
Productivity improvements are essential in being able to deliver
savings for our customers and workforce flexibility is an important
part of this. We need to schedule the working day around the length
of time it takes to complete jobs. This will involve agreeing new
ways of organising our time and our work, and to develop new
approaches.
Corporate Culture
Ultimately operational performance is a function of culture. The
cultural characteristics that we believe will help ENWL become a
high performing organisation revolve around management philosophy,
leadership, policy and control, and securing our competitive
advantage. They have been established and communicated to leaders
across the organisation.
Defining and creating a high performance culture requires the
Company to utilise a range of different business resources and
skills including policy, process, training, role-modelling,
reporting, measurement and behaviours. Alongside this, our new
ethics policy has been introduced and communicated across the
business clearly setting out how we expect our colleagues and
contractors to operate.
I look forward to the challenges and opportunities that will
come with the move to a low carbon future. With the support of my
executive leadership team, our committed colleagues and
contractors, we are well placed to build on the successes to
date.
Peter Emery
Chief Executive Officer
Strategic Report
Company Background
Electricity North West Limited is the electricity distributor
for the North West of England. We are based here and we invest
here.
The Company serves approximately 5 million customers at 2.4
million domestic and industrial locations, has circa 1,700
employees and provides a safe and reliable electricity supply, 24
hours a day, seven days a week.
We own, invest in, operate and maintain the network of poles,
wires, transformers and cables which carry electricity from the
national grid to homes and business across the North West.
We charge our customers through their electricity suppliers in
the case of domestic and small customers, or directly for larger
customers.
The prices that we charge our customers for distributing
electricity are regulated by the Gas and Electricity Markets
Authority which operates through Ofgem, but ultimately it is our
customers that fund the business. Approximately 17p from every
pound of a standard domestic electricity bill comes to Electricity
North West to provide our services equivalent to GBP85 per home
last year.
From April 2015 charges have been regulated by Ofgem through the
RIIO model, which stands for Revenue = Incentives + Innovation +
Outputs. This model determines how much the Company is allowed to
charge its customers to fund network investment and operating costs
in the period from 2015 to 2023 and is designed to drive real
benefits for customers.
The RIIO price controls have been developed to ensure that the
revenues collected from customers are linked to company
performance. Income in each year is largely fixed but will increase
or decrease depending on performance against the outputs we deliver
through a number of incentive mechanisms.
These mechanisms aim to promote good customer service and to
minimise the number of interruptions that customers suffer and the
average length of those interruptions. Performance is assessed each
year and any positive or negative adjustments are fed annually into
a process which will modify revenues for subsequent years.
The RIIO price control model also incentivises cost reductions.
These are shared between customers and shareholders, again after an
annual review.
The Company also charges separately for new connections to, and
diversions of, the network. This activity is also closely regulated
by Ofgem.
The Company is committed to ensuring the sustainability of the
network for our customers now and in the future. We routinely
inspect the network and these inspections inform our maintenance
and asset replacement programmes taking electrical load and
customer numbers into account.
Investment and innovation continues to ensure the development
and availability of the appropriate technology to meet the changing
demands of electricity supply and meet the challenge of a low
carbon future, at a price our customers can afford to pay.
Strategic Report (continued)
Company Background (continued)
Company ownership
Electricity North West is a private limited company registered
in England and Wales, ultimately owned by two shareholders each
being long-term infrastructure funds as shown in note 29.
Corporate goals
The Company aims to provide customers with an excellent service
at a competitive price through a safe and reliable electricity
network.
To help achieve this objective the Company has the following
corporate goals:
-- Safety - safety has to be a key priority - every day.
-- Customer - to provide excellent customer service.
-- Affordability - to keep costs down for customers.
-- Reliability - to keep power flowing to customers, 24 hours a day, seven days a week.
-- Sustainability - to maintain the network now and for future generations.
-- People - to ensure the best working climate possible.
The safety of the Company's people, contractors and customers is
a fundamental cornerstone of the business. The Company ensures that
all of our people are well trained and able to operate safely,
backed by policy driven procedures and compliance assurance,
alongside a behavioural approach that seeks to ensure that all
staff and contractors approach any task with a strong behavioural
attitude to safety.
Electricity North West needs to deliver on its commitment to
customers. The Company has constantly to make decisions that
balance the conflicting priorities of maintaining a reliable
network in the near term, investing to ensure this is sustainable
in the long term, whilst keeping costs as low as reasonably
practicable to meet the affordability challenge for our
customers.
Safety and Environment
The Company has three broad safety obligations:
-- To ensure the safety of its employees and contractors
-- Ensure third parties are protected from the risks inherent in
the electrical assets it operates in the public environment
-- Targeted investment in outputs that deliver a positive environmental impact
Strategic Report (continued)
Company Background (continued)
Safety and Environment (continued)
This is an industry that operates with hazards, and therefore
the attention to safety needs to be top of the agenda. It is
evident that improvements have been made in this area in recent
years - near miss reports, a leading indicator of safety
performance - were 12,199 in the year, an increase from the 9,240
near miss reports recorded in the year to March 2016. Having raised
the attention on near miss reporting and resolution, and by
implication on to safety, we are aiming to improve the quality of
the reporting, focussing on behavioural challenge and those near
misses that could have resulted in extreme harm. We have commenced
a training programme designed to facilitate the ability of people
throughout the organisation to challenge poor or risky
behaviour.
We have also changed the messaging around safety in the
business, reducing the messaging to focus on a limited number of
clear "Golden Rules" which simplify the messaging and make
behaviours easier to enforce.
The prosecution of the Company by the Health and Safety
Executive, as a result of the tragic death of an overhead linesman
in November 2013, has only served to reinforce the importance of
safety in a sector which, by the nature of the work that it has to
do and service that it provides, will always be hazardous. Safety
is a continuous challenge for our business and our Board are fully
committed to maintaining the focus on developing the safety culture
in the Company.
The Company was found not guilty of charges relating to failure
to risk assess and failure to ensure the safety of its employees.
It was exonerated in respect of its underlying health and safety
management but was found guilty of failing to adequately manage
working at height. The Company has been fined GBP900k.
The Company has lodged an appeal against this guilty
verdict.
The total number of lost time incidents involving employees and
contractor employees for the year ended 31 March 2017 was seven
(2016: four). The corresponding lost time incident frequency rate
for the year ended 31 March 2017 was 0.10 (2016:0.06).
The safety of the public, customers and personnel from the
inherent risks of electrical assets is assured through the
Company's ongoing investment programme and the associated asset
risk management policies that define the programme scope.
The Company is dedicated to achieving the highest standards of
environmental performance, not only by minimising the risks created
by our activities, but also through targeted investment in outputs
that deliver a positive environmental impact. This includes:
-- Removal of oil filled cable - to address oil leakage from
fluid filled cables by replacing them with alternative modern oil
free cabling and to respond quickly to leaks on legacy
circuits.
-- Undergrounding of overhead lines - part of our Network Investment Programme.
In terms of our own direct impact on the environment our
principal performance indicator is the level of carbon dioxide
emissions equivalent. This measure covers the environmental impact
both from the use of fossil fuels in vehicles and generators and of
energy in buildings, as well as the impact of Sulphur Hexafluoride
(SF6), which is a strong greenhouse gas historically used as
insulation in electrical equipment. We have a target to reduce our
emissions, in tonnes of CO2 equivalent, by 10% from a 2014/15 base
by 2020. In the year ended 31 March 2017, we emitted 21,012 tCO2
equivalent, a 14.4% reduction from 2014/15.
Customer
The aim of Electricity North West is to put customers at the
heart of everything the Company does, constantly balancing the
conflicting priorities of maintaining a reliable network in the
near term, investing to
Strategic Report (continued)
Company Background (continued)
Customer (continued)
ensure this is sustainable in the long term, whilst keeping
costs as low as reasonably practicable, while providing excellent
customer service.
Reliability
Customers say that "keeping the lights on" is their top
priority. This is achieved by targeted investment in the network
both to limit the number of faults and also to limit the number of
customers affected by those faults that do occur.
Performance is tracked using a variety of metrics including:
delivery of the capital programme outputs, delivery against
guaranteed standards of performance and network reliability
measures including customer interruptions ('CIs') and customer
minutes lost ('CMLs').
The reliability of the network continues to improve though
proactive investment, the use of network automation and innovative
solutions and an ongoing focus on operational response when
incidents do occur. This year saw the lowest ever level of Customer
Interruptions on the network, an improvement of 14% on the prior
year, reflecting the investment in, and improved performance of,
network automation.
In the year ended 31 March 2017, the average number of
interruptions per 100 customers was 32.1, (2016: 37.2)
outperforming the target of 48.0 set by Ofgem.
The average number of minutes for which customers were without
supply during the year to 31 March 2017 was 33.1 (2016: 32.7),
which outperformed the target of 45.8 set by Ofgem. Most customers
enjoy excellent service from us but we recognise that there is
variability in the level of service experienced. A few customers
experience a level of service significantly worse than average,
usually by virtue of their location or due to localised network
issues. We continued to invest in the year in schemes to reduce the
numbers of worst served customers in line with our business plan
commitment to have no customers falling into this category by
2023.
Investment in an affordable and sustainable network
In the year ended 31 March 2017, a total network investment
programme of GBP89.7m was delivered (2016: GBP91.2m).
The current network has been installed over many decades and a
significant proportion of the programme relates to replacing
existing equipment at, or approaching, the end of its life with
modern equivalents. We continue to deliver this replacement
programme and to meet changing customer needs, using innovation to
also ensure the Affordability challenge is met.
Innovation is vital to the future success and sustainability of
the organisation. The Company is a leading network operator for
innovation with a well established track record that the Company
will continue to build on into the future.
The Company continues to be at the forefront of innovation. We
were awarded a discretionary award of GBP1.7m in the year by Ofgem,
reflecting the success of some of our past innovation projects, and
a testament to the ability of the Company to deliver these
projects.
Following the impact in our region of storms Desmond and Eva
last year the mitigation of the impact of flooding is an important
area of focus. The Company continues to invest in a significant
programme of flood mitigation works, which have included both
short-term measures and longer-term investment, such as raising the
height of Rochdale and Lancaster sub-stations, both of which are in
progress for completion in 2017.
Customer Service
Delivering excellent customer service is a priority for
Electricity North West. Historic performance levels in this area
have been below the acceptable level, with a relative ranking of
13(th) or 14(th) out the DNO group.
Strategic Report (continued)
Company Background (continued)
Customer (continued)
Whilst there has been some recent improvement in performance
levels, performance in this area needs to improve further. A
customer strategy and detailed roadmap is in place and closely
monitored by the executive leadership team.
The customer strategy is to provide to customers an easy to use
service through a choice of communication channels 24 hours a day,
365 days a year. The tailored options and higher expectations of
some customers require investment and development of current IT
systems that manage both the customer journey and associated
communication channels. The customer experience will be tailored
based on individual customer needs and situation (such as fault
type, resource availability). Every customer needs to feel that
they are important.
During the year ended 31 March 2017 an improvement was seen in
the customer satisfaction results measured through the Ofgem
survey. The Company's overall satisfaction rating was 83.2% (2016:
80%) although the ranking among the Distribution Network Operators
remained in 14(th) position. This is well below targeted levels and
a continued focus on compliance with the customer journey has,
however, seen performance in the last quarter improve to closer to
targeted levels.
Analysis of the underlying reasons for poor customer
satisfaction has resulted in targeted changes to operating
procedures. For example, improvement in the way that our people
communicate restoration times during faults, through the use of
mobile technology that enables the identification of good and bad
performance alike, has led to an improvement in the scores we
receive from this area.
We are continuing the development of an improved website to
improve the customer interaction that will continue into the year
to March 2018.
The overall complaints performance within the year continued to
outperform the Ofgem penalty incentive. Complaints performance has
achieved a 76.8% (2016 52%) 24 hour resolution with a complaint
metric of 3.76 (2016 7.65) forecasting us to 6(th) position within
the DNO league table. This is an improvement on the previous
year.
We have continued to focus on our Guaranteed Standards of
Performance for connections during the year. We were disappointed
in the high number of failures to meet the standards during last
year. Whilst we have reduced the numbers of failures this year we
are still not at the level of service that we want to give to our
customers and will be continuing to focus on making improvements
next year.
During 2016/17 we have introduced the welfare team to focus on
the service for Priority Service Registered customers; this has
provided the focus to contact over 77,000 customers from the
register to deliver against our RIIO commitment.
The national Single Emergency Number (SEN) was launched in
September 2016 with great success and call volumes are being
monitored monthly showing that in March over 36% of our "no supply
calls" came through this new channel.
People
The Company is a major employer in the North West of England and
employs circa 1,700 people in the region. The Company also works
with a carefully chosen contractor workforce providing even greater
levels of employment for the region. We are committed to providing
secure, long-term employment and career development opportunities
for employees. We look to balance the right skills and people
resources to support the business in the long term.
Ultimately operational performance is a function of
organisational culture. The overarching goal is to create a culture
that drives the behaviours required for sustained high performance.
Climate is the measure the Company uses to quantify how people feel
about working for the business and, in turn, makes the link between
this 'feeling' and how the Company performs.
Strategic Report (continued)
Company Background (continued)
People (continued)
Significant investment is made by the Company in developing our
managers into leaders who are able to demonstrate the Company's
culture. Half yearly surveys are undertaken to measure both
colleague engagement and levels of agreement with the Company's
identified climate priorities. Time is provided between each survey
to allow leadership teams to reflect on what they've learnt through
the survey and then act to address issues identified.
Levels of colleague engagement are high, with a survey
completion rate of almost 1,300 colleagues. The last survey in
January 2017 had an overall agreement rate of 72%, an increase of
two percentage points from the prior year. We have set a target of
75% employee agreement.
Electricity North West is committed to high ethical standards
and to conducting our business with honesty and integrity. The
Company expects all colleagues to act in the best interests of our
business at all times and to operate in a manner which enhances and
protects the Company's reputation.
During the year our ethics policy was approved by the Board and
launched into the business to support this expectation. The policy
provides a single statement which applies to everyone who works for
the business and to our contract partners. We provide a supportive
environment for colleagues to voice any concerns, with training and
refresher sessions launched to ensure our policies and ethical
standards are adhered to. We also provide a confidential
'Whistleblower' telephone number to encourage disclosure.
The Group sets policies and encourages a working culture that
recognises, respects, values and harnesses diversity for the
benefit of the Group and the individual, and we are committed to
integrating equality and diversity into all that the Group
does.
The Group is committed to fulfilling its obligations in
accordance with the Disability Discrimination Act 1995 and best
practice. As an equal opportunities employer, equal consideration
is given to applicants with disabilities in the Group's employment
criteria. The business will modify equipment and practices wherever
it is safe and practical to do so, both for new employees and for
those employees that become disabled during the course of their
employment.
Corporate Social Responsibility
Stakeholder engagement
Electricity North West is committed to ongoing stakeholder
engagement and recognises that such engagement enhances the
Company's ability to achieve its aims and objectives and to provide
the highest level of service at a price customers can afford.
A strategic approach to stakeholder engagement provides
structure to the activity undertaken by the business to support
work reported in the RIIO-ED1 Stakeholder Engagement and Customer
Vulnerability Incentive and the Connections Incentive as well as to
the dissemination and learning work undertaken to support Low
Carbon Network and Network Innovation Competition projects.
The Company has a number of Stakeholder Advisory Panels, each
aligning to the Company goals of affordability, reliability,
sustainability and customer service, together with an overarching
Strategic Stakeholder Advisory Panel. All work is overseen by an
Executive-level Internal Stakeholder Advisory Panel.
To support adherence to these initiatives, for the 6th year
running the Company has engaged auditors for a non-financial
assurance of its Stakeholder Engagement and Customer Vulnerability
Submission and its commitment to AA1000APS.
Strategic Report (continued)
Corporate Social Responsibility (continued)
Our Corporate Social Responsibility approach
On top of the engagement with its stakeholders the Company is
committed to being a responsible and sustainable business and has
set out Corporate Social Responsibility focus areas being;
community, workplace, marketplace and environment.
The Corporate Social Responsibility activity is informed and
shaped by the Business in the Community (BITC) Corporate
Responsibility Index. This is the fifth year that the Company has
participated in the Index and, in line with its plan, has
maintained performance at 79%. The aim is to achieve 90% by
September 2018.
Further information on these and other initiatives can be found
under the Sustainability section of the Company's website:
http://www.enwl.co.uk/sustainability
Human rights
The Company operates exclusively in the UK and, as such, is
subject to the European Convention on Human Rights and the UK Human
Rights Act 1998 and the Modern Slavery Act 2015.
The Company respects all human rights and regards those rights
relating to non-discrimination, fair treatment and respect for
privacy to be the most relevant and to have the greatest potential
impact on key stakeholder groups of customers, employees and
suppliers.
The Company seeks to anticipate, prevent and mitigate any
potential negative human rights impacts as well as enhance positive
impacts through policies and procedures and, in particular, through
policies regarding employment, equality and diversity, treating
customers fairly and information security.
The Company's Modern Slavery Act statement is available on its
website:
http://www.enwl.co.uk/about-us/modern-slavery-act-compliance-statement
Gender and diversity
Information on the composition of the workforce at the year end
is summarised below:
Turnover
2017 - 145 leavers (2016: 144 leavers)
Training courses delivered
2017 - 281* (2016: 177*)
Training course attendees
2017 - 6,482 (2016: 4,757)
*These figures include e-learning courses and operational and
non-operational training.
Workforce composition
Total employees 1,287 415 1,274 367
Senior managers 30 10 29 12
Executive leadership
team* 7 1 8 1
Directors 9 0 9 0
* The Executive leadership team figure includes the two
Executive Directors, who are also included in the Directors
figure.
2017 2016
tCO2e tCO2e
Scope 1
Operational
transport 7,151 7,419
Business transport
- road 1,231 1,192
Fugitive emissions 1,276 352
Fuel combustion 2,657 4,113
---------- ----------
12,315 13,076
---------- ----------
Scope 2
---------- ----------
Buildings energy
usage 8,595 9,840
---------- ----------
Scope 3
Business transport
- rail 19 29
Business transport
- air 83 188
---------- ----------
102 217
---------- ----------
Business Carbon
Footprint (excl.
losses) 21,012 23,133
---------- ----------
Electrical
Losses 580,352 668,012
Business Carbon
Footprint (incl.
losses) 601,364 691,145
-------------------- ---------- ----------
Strategic Report (continued)
Corporate Social Responsibility (continued)
Environment
The protection and enhancement of the natural environment
impacted by our activities is a core value of the Company. The
Company is dedicated to achieving the highest standards of
environmental performance. This is achieved by minimising the risk
of adverse impacts such as emissions, as well as investing in
outputs that enhance the environment such as the undergrounding of
overhead cables and supporting the UK in its move to a low carbon
economy.
The RIIO-ED1 business plan and the supporting health, safety and
environment strategy, set out the objectives and plans for
delivering exceptional performance in environmental management,
delivered though an environmental management system that is
certified to ISO 14001 standard.
The Company continued during the year to implement energy
efficiency measures through the refurbishment of its buildings and
the replacement of fleet vehicles and company cars with more
efficient vehicles. The Company also achieved certification of its
energy management system to the ISO 50001 Energy Management
Standard as well as retaining its ISO14001 certification.
Business Carbon footprint
The Company's business carbon footprint (excluding losses) for
the year was 21,012 tCO2e (tonnes of CO2 equivalent), a 9%
reduction on the year ended 31 March 2016 of 23,133 tCO2e.
The Company undergrounded and connected 11.2km of overhead lines
in the year through the completion of three schemes. It remains on
plan to complete the 80km planned in the RIIO-ED1 period.
A further 7.2km of oil filled cable was removed in the year and
our overall leakage of oil from underground cables was 21,096
litres which is below the target of 30,000 litres per year across
the RIIO-ED1 period, was in line with the forecast.
Electricity losses are measured as the difference between energy
entering the network (generation) and energy exiting the network
(demand). Whilst it is impossible to eliminate these losses, we do
take steps to minimise them. This is done through installing more
efficient assets in our network, particularly low loss transformers
and cables and through our revenue protection unit, addressing the
issue of theft.
Next year the Company will deliver more reductions in its carbon
footprint and focus on delivering planned asset related
environmental investment.
Strategic Report (continued)
Key Performance Indicators
KPI Definition and comment Performance
---------- --------------- ----------------------------------- ------------------
Definition: The total
number of reportable incidents
in the period divided
by the number of hours
worked in that period
by employees and contractors'
employees, multiplied
by 100,000 hours.
Performance: There were
seven lost time incidents
in the year, four involving
Company employees and
three involving contractors'
employees. Improving the
Lost time safety culture and reducing
incident the risk of harm to our
frequency employees and contractors
Safety rate remains our highest priority. 0.10
---------- --------------- ----------------------------------- ------------------
Near miss Definition: Near miss 12,199 near miss
reporting reports are collected reports
to provide valuable information
on hazards and behavioural
attitude. Near miss reporting
is actively encouraged
to promote a safety culture.
Performance: In the year
ended 31 March 2017 the
number of near misses
reported by Electricity
North West employees was
12,199 compared with 9,240
in the previous year and
also above the target
of 8,000. Having seen
an increase in the volume
of near misses over the
last two years, the intention
is now to focus on improving
the quality and level
of 'behavioural challenge'.
---------- --------------- ----------------------------------- ------------------
Definition: The overall
customer satisfaction
score is a composite score
from an Ofgem survey,
assessing levels of customer
satisfaction for connections
quotations and delivery,
interruptions and general
enquiries.
Performance: Performance
this year has improved
to 83.2%, from 80% in
the prior year and reflects
the ongoing focus on improvement
actions. Performance continues
Overall to be short of internal
customer targets and remains a
Customer satisfaction key focus area. 83.2%
---------- --------------- ----------------------------------- ------------------
People Employee Definition: Climate is 72% Climate score
engagement measured through a climate
survey which through a
series of questions provides
details of overall employee
engagement and how employees
feel about the 'working
climate'.
Performance: Overall employee
engagement increased to
72% in the year from 70%
in the prior year.
---------- --------------- ----------------------------------- ------------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
--------------- ----------------- ----------------------------------- --------------
Reliability Customer Definition: Customer interruptions 32.06 CIs
interruptions2 represents the number
of interruptions our customers
experience. It is calculated
by taking the total number
of customers affected
divided by the total number
of customers connected
to the networks, multiplied
by 100, adjusted for exceptional
events.
Performance: The result
of 32.06 for the year
outperforms the Ofgem
target of 48.03 and is
our best year ever. The
improved performance reflects
the ongoing investment
in network automation
and interconnection, to
secure supplies to our
customers.
--------------- ----------------- ----------------------------------- --------------
Customer Definition: Customer minutes 33.06 minutes
minutes lost represents the time
lost customers are without
power in the event of
an interruption. It is
calculated by taking the
sum of the customer minutes
lost for all restoration
stages for all incidents,
excluding exceptional
events, and dividing by
the number of connected
customers as at 30 September
each year.
Performance: The result
of 33.06 for the year
outperforms the Ofgem
target of 45.83 and is
our second best year ever,
marginally behind the
prior year.
--------------- ----------------- ----------------------------------- --------------
Sustainability Carbon footprint Definition: Carbon footprint 21,012 tCO2e
excluding measures the impact of
electrical our operations on the
losses environment and is calculated
in line with Ofgem guidance.
The calculation excludes
electrical losses arising
from the operation of
the network which cannot
be directly controlled
or accurately measured.
Performance: We are aware
of the environmental impacts
we can have and are committed
to manage the impact of
our operations. Our carbon
footprint has reduced
by 9% from the prior year
reflecting the ongoing
focus in energy usage.
There may be some year-on-year
volatility in emissions
dependant on levels of
generation deployed on
the network as a result
of interruptions or exceptional
events.
--------------- ----------------- ----------------------------------- --------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
-------------- ------------------ --------------------------------- ------------
Affordability Total Expenditure Definition: Totex is a GBP209.3m
key financial measure
for the business. It is
an abbreviation which
stands for total expenditure.
It includes the money
we spend on running our
business day-to-day, and
the amount we invest in
new assets through our
network investment programme.
We aim to deliver efficiencies
in totex which we share
with our customers and
that helps reduce customers'
bills.
Performance: Totex for
the year ending 31 March
2017 was GBP209.3m compared
to an Ofgem allowance
of GBP243.2m in outturn
prices. Efficiencies have
been delivered in the
network investment programme
and there was some delivery
slippage which will be
caught up in future years.
Performance in the year
benefited from a GBP7m
insurance payout in relation
to the December 2015 storms.
2015/16 costs included
significant expenditure
in relation to these storms.
-------------- ------------------ --------------------------------- ------------
Financial Revenue Definition: Revenue is GBP485.5m
KPIs largely fixed and is determined
by Ofgem to allow recovery
of efficient costs to
maintain the network,
This revenue is profiled
over the price review
period to 2023. Additional
revenue is generated through
charges for new connections
to the network, along
with an opportunity to
earn incentive revenue
for delivering improved
performance.
Performance: Revenues
have increased from the
prior year in line with
the average price increase.
The revenue over recovery
for the year was GBP3.7m
and it will be corrected
through adjustments in
pricing in two years'
time.
-------------- ------------------ --------------------------------- ------------
Profit before Definition: Profit before GBP187.2m
tax and tax and fair value is
fair value the operating profit after
movements interest charges.
Performance: Profit before
tax and fair value movements
has increased to GBP187m
(2016: GBP164m), mainly
as a result of the lower
operating costs.
-------------- ------------------ --------------------------------- ------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
----------- -------------- ----------------------------------- ------------
Financial Net debt Definition: Net debt includes GBP1,096.4m
KPIs the total borrowings,
current and non-current,
net of cash and cash equivalents
and money market deposits.
Performance: Net debt
has increased over the
year by GBP6m, the net
effect of GBP16m higher
debt and GBP10m higher
cash balances. The increase
in debt is due to the
increased fair value of
the GBP250m 8.875% 2026
bond at FVTPL and indexation
on the inflation-linked
debt. There were no new
borrowings in the year.
----------- -------------- ----------------------------------- ------------
Definition: Regulatory
Asset Value ('RAV') gearing
is measured as borrowings
at nominal value, plus
accretion where applicable,
net of cash and short-term
deposits divided by the
estimated RAV of GBP1,696m
as at March 2017 (2016:
GBP1,643m).
Performance: The RAV gearing
is within the required
maximum level of 65% and
ahead of the internal
RAV gearing target of 63%. 60%
-------------- ----------------------------------------------- ------------
Interest Definition: Interest cover 5.5 times
cover is the number of times
the net interest expense,
adjusted for indexation
and capitalisation of
borrowing costs, is covered
by operating profit from
continuing operations.
Performance: Interest
cover has increased due
to the GBP45m increase
in Operating Profit, with
the interest expense (excluding
inflation movements on
inflation-linked instruments
and FV movements) remaining
in line with the prior
year.
-------------- ----------------------------------------------- ------------
Capital Definition: This represents GBP210.5m
expenditure investment in the network
to maintain its reliability
and resilience for future
customers. Capital expenditure
represents the total additions
to property, plant and
equipment and software.
Expenditure is less than
the prior year reflecting
the investment programme
for RIIO ED1 and the impact
of the December 2016 storms
causing delays in delivery.
Performance: We continue
to invest to improve the
quality and reliability
of the network. During
the year we invested GBP210.5m;
this was lower than planned
investment levels due
to a combination of scope
efficiencies and some
delivery slippage, which
will be caught up in future
years.
-------------- ----------------------------------------------- ------------
Strategic Report (continued)
Financial Performance
Given the nature of the business, traditional revenue and
profitability measures are less meaningful than in other trading
organisations.
Revenue is largely fixed across a price review period. It is set
at a level that meets our efficient operating costs and expenses,
as well as funding efficient investment, interest on necessary loan
funding, taxes so it allows for a return to shareholders at a level
that regulates the return and encourages future investment.
Consequently the profit earned in any given period does not reflect
a return to shareholders. The measure that is most closely aligned
to this result is cash flow before financing activites (see page
17).
In any given year, an underspend against the allowed revenue can
either be the result of efficient delivery and/or under-delivery,
for example of investment expenditure. Where under-delivery has
taken place, although this is recorded in the Financial Statements
as an increased level of profitability in the year, as investment
commitments are still required to be met, this expenditure will
need to be undertaken in subsequent periods. Consequently
underspends result in an overstatement of true returns to
shareholders, with the converse true for overspends.
Revenue
Revenue has increased to GBP486m (2016: GBP451m) during the
year, in line with the allowed Distribution Use of System (DUoS)
revenue under the RIIO price control.
The allowed revenue is recovered against an estimated level of
electricity demand across the network. Given the difficulty of
predicting this demand each year we end up with either an over or
an under recovery against planned revenue. These over or under
recoveries are included in the profit and loss account for the
period and will be corrected in future periods through the Ofgem
price setting mechanism.
For the year 31 March 2017 there was an over recovery of DUoS
revenue of GBP3.7m against plan, before adjustment for RPI
indexation (2016: GBP10.4m over-recovery), reflecting variability
against forecast in consumption volumes year on year. This over
recovery will be corrected through adjustments in pricing in two
years' time, in accordance with Ofgem methodology.
Operating profit
Operating profit has increased to GBP260m (2016: GBP215m) as a
result of the increase in revenue detailed above and lower
operating costs.
Profit before tax and fair value movements
Profit before tax and fair value movements has increased to
GBP187m (2016: GBP164m), mainly as a result of the lower operating
costs.
Taxation
Corporation tax is calculated at 20% (2016: 20%) of the
estimated assessable profit for the period. The rate will be
reduced to 19% on 1 April 2017 and to 17% on 1 April 2020. The
deferred tax is calculated based on the expected future tax
rates.
The overall taxation for the year has increased from a charge of
GBP5m in 2016 to a charge of GBP10m in 2017 mainly as a result of
the lower impact of the changes in future tax rates on deferred
tax.
Strategic Report (continued)
Financial Performance (continued)
Dividends and dividend policy
The Group's dividend policy is to distribute the maximum amount
of available cash in each financial year at semi-annual intervals.
Distribution decisions take into account the forecast business
needs, the Group's treasury policy on liquidity, financing
restrictions, applicable law in any given financial year and are
subject to the Company's licence obligations.
In the year ended 31 March 2017 the Company declared a final
dividend for the year ended 31 March 2016 of GBP18m, paid in June
2016, and an interim dividend of GBP63m that was paid in December
2016. In the year ended 31 March 2016 the Company declared an
interim dividend of GBP30m that was paid in December 2015.
Property, plant and equipment and software
The Group's business is asset-intensive. The Group allocates
significant financial resources in the renewal of its network to
maintain services, improve reliability and customer service and to
invest to meet the changing demands of the UK energy sector.
The total original cost of the Group's property, plant and
equipment at 31 March 2017 was GBP4,586m (2016: GBP4,391m), with a
net book value of GBP3,037m (2016: GBP2,943m). In the year ended 31
March 2017, the Group invested GBP200m (2016: GBP206m) in property,
plant and equipment in a large number of projects to reinforce and
improve the network, and GBP10m (2016: GBP15m) on new computer
software platforms. New investment is financed through a
combination of operating cash flows and increased borrowing
capacity against the Regulatory Asset Value.
Pension obligations
The valuation of the Group's Pension Scheme under IAS 19 has
resulted in a net pension deficit at 31 March 2017 of GBP58m (2016:
GBP16m). The main reason for the increase in the deficit is due to
a significant decrease in the discount rate from 3.5% to 2.5% and a
small increase in market expectations for future inflation over the
period. This has been offset to some extent by the positive returns
on the pension assets over the year, the payment of deficit repair
contributions and the incorporation of experience gains from the
2016 actuarial valuation for funding purposes.
The most recent triennial valuation of the Group's Pension
Scheme was carried out as at 31 March 2016 and identified a
shortfall of GBP142.6m against the Trustee Board's statutory
funding objective. In the event of underfunding, the Group must
agree a deficit recovery plan with the Trustee Board within
statutory deadlines. As part of the 2016 Actuarial valuation, the
Group agreed to eliminate the shortfall by paying additional annual
contributions from April 2016 to December 2023.
Cash flow before financing activities
Cash generated before financing in the year was GBP112m (2016:
GBP32m), reflecting the increase in cash from operations and
reduced investment.
Net debt
Cash and deposits 153 143
Borrowings (1,249) (1,233)
Net debt (1,096) (1,090)
Included within the total borrowings figure are GBP71m of loans
from the parent company North West Electricity Networks plc, due to
mature in March 2023 (2016: GBP70.9m) and GBP198m loans from an
affiliated company ENW Finance plc, maturing in 2021 (2016:
GBP197m).
GBP6.4m (2016: GBP4.6m) of the borrowings are due to be repaid
within the next year, under the European Investment Bank (EIB)
loans that have an amortising repayment profile.
All other borrowings are repayable after more than one year and
include bonds with long-term maturities of GBP724m (2016: GBP711m)
and EIB loans of GBP249m (2016: GBP249m). Note 19 provides more
details on the borrowings.
Strategic Report (continued)
Financial Performance (continued)
Liquidity
The Group's primary source of liquidity is from Group operations
and from funding raised through external borrowings.
Short-term liquidity
Short-term liquidity requirements are met from the Group's
operating cash flows. Further liquidity is provided from short-term
deposit balances and unutilised committed borrowing facilities.
As at 31 March 2017, the unutilised committed facilities were
GBP25m (2016: GBP50m) and together with GBP153m (2016: GBP143m) of
cash and short-term deposits provide short-term liquidity for the
Group.
Utilisation of undrawn facilities remains subject to limits
based on gearing levels determined against the Regulatory Asset
Value.
Long-term liquidity
The Group's long-term debt is comprised of a combination of
fixed, floating and index-linked debt, with a range of maturities
and interest rates reflective of prevailing market rates at
issue.
The Group issues debt in the public bond markets and maintains
credit ratings with a number of leading credit rating agencies.
During the period, the Group's credit ratings have been formally
reviewed and affirmed on a stable outlook basis. Long-term debt
ratings have also remained stable. Currently the Group is rated
BBB+ with stable outlook by Standard and Poor's, Baa1 with stable
outlook by Moody's Investors Service and A- with stable outlook by
Fitch Ratings. Our short-term debt ratings are A-2 and F2 with
Standard and Poor's and Fitch Ratings respectively. Further details
are available to credit investors on the Companies' website
www.enwl.co.uk.
Treasury policy
The Group's treasury function operates with the delegated
authority of, and under policies approved by, the Board. The
treasury function does not undertake any speculative trading
activity and seeks to ensure that sufficient funding is available
in line with policy and to maintain the agreed targeted headroom on
key financial ratios. Long-term borrowings are mainly at fixed
rates to provide certainty or are indexed to inflation to match the
Group's inflation-linked ('RPI') cash flows.
The Group's use of derivative instruments relates directly to
underlying indebtedness. The proportion of borrowings at effective
fixed rates of interest for a period greater than one year is set
in conjunction with the level of floating rate borrowings and
projected regulatory revenues that are exposed to inflationary
adjustments (index-linked).
Going concern
When considering whether to continue to adopt the going concern
basis in preparing the Annual Report and Consolidated Financial
Statements, the Directors have taken into account a number of
factors, including the following:
-- The Company's electricity distribution licence includes the
obligation in standard licence condition 40 to maintain an
investment grade issuer credit rating.
-- Under section 3A of the Electricity Act 1989, the Gas and
Electricity Markets Authority has a duty, in carrying out its
functions, to have regard to the need to secure that licence
holders are able to finance their activities, which are the subject
of obligations imposed by or under Part 1 of the Electricity Act
1989 or the Utilities Act 2000.
-- Management has prepared, and the Directors have reviewed,
Group budgets for the year ending 31 March 2018 and forecasts
covering the period to the end of the current price review in 2023.
These forecasts include projections and cash flow forecasts,
including covenant compliance considerations. Inherent in
forecasting is an element of uncertainty and our forecasts have
been sensitised for possible changes in the key assumptions,
including RPI and under recoveries of allowed revenue. This
analysis demonstrates that there is sufficient headroom on key
covenants and that there are sufficient resources
Strategic Report (continued)
Financial Performance (continued)
Going concern (continued)
available to the Group within the forecast period.
-- Short-term liquidity requirements are forecast to be met from
the Group's normal operating cash and short-term deposit balances.
A further GBP25m of committed undrawn bank facilities are available
from lenders; these have a maturity of more than one year. Whilst
the utilisation of these facilities is subject to gearing covenant
restrictions, 12 month projections to 31 May 2018 indicate there is
significant headroom on these covenants.
Consequently, after making appropriate enquiries, the Directors
have a reasonable expectation that the Company and Group have
adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and Financial
Statements.
The going concern basis has been adopted by the Directors, with
consideration of the guidance given in 'Going Concern and Liquidity
Risk: Guidance for Directors of UK Companies 2009' published by the
Financial Reporting Council in October 2009.
Viability statement
In accordance with the provision of C.2.2 of the 2014 UK
Corporate Governance Code, the Directors have assessed viability
over a period longer than that required for going concern and have
chosen three years.
Whilst the Board has no reason to believe the Group will not be
viable over a longer period, the period over which the Board
considers it possible to form a reasonable expectation as to the
Group's longer-term viability, based on the risk and sensitivity
analysis undertaken, is the three-year period to 31 March 2020.
Whilst this period is shorter than the forecast period the Board
reviews, this three-year forecast period gives management and the
Board sufficient, realistic visibility of the future. The Board has
considered whether it is aware of any specific relevant factors
beyond the three-year horizon and confirmed that there are
none.
The Directors have conducted a robust assessment of the
principal risks facing the Company and believe that the Company is
in a position to manage these risks.
In arriving at their conclusion, the Directors have considered
the Company's forecast financial performance and cash flow over the
three year viability period. The forecast has been subject to
sensitivity analysis driven by the principal risks and the
potential impact has been considered by sensitising a number of key
assumptions, including Retail Price Index (RPI), interest rates and
incentive revenue performance. Each analysis considered the
Company's ability to meet its operational and financial obligations
throughout the period, including debt covenant compliance.
On the basis of this assessment, and assuming that the principal
risks are managed or mitigated as expected, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three
year period of their assessment.
Strategic Report (continued)
Financial Performance (continued)
Fair, balanced & understandable
The Directors have reviewed the thorough assurance process in
place within the Group with regards to the preparation,
verification and approval of financial reports. This process
includes:
-- Detailed review and appropriate challenge from key internal
Group functions, such as Group Risk, Control and Assurance;
-- Formal sign-offs from the business area senior managers, the
finance managers and Chief Financial Officer;
-- Group Audit Committee oversight, involving a review of key
financial reporting judgements, review and appropriate challenge on
matters such as any changes to significant accounting policies and
practices during the year, significant adjustments and the going
concern assumption;
-- The involvement of qualified, professional employees with an
appropriate level of expertise and experience throughout the
business; and
-- Engagement of a professional and experienced external
auditor, a framework for full transparent disclosure of information
during the audit process and post audit evaluation.
As a result of these processes together with the information and
assurance provided by the day to day internal control processes,
the information provided by the Executive Leadership Team and the
in-depth reporting required by Ofgem, both the Audit Committee and
the Board are satisfied that the Annual Report and Consolidated
Financial Statements taken as a whole, provide a fair, balanced and
understandable assessment of the Group's position at 31 March
2017.
Risk Management
The Board is responsible for the alignment of strategy and risk,
and for maintaining a sound system of risk management and internal
controls. Our processes and systems are always evolving with the
needs of our business and have been developed in accordance with
the Financial Reporting Council's (FRC's) Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting.
Our Corporate Risk Register currently details a wide range of
risks. These risks are considered in the context of the corporate
goals - Safety, Customer, Affordability, Reliability,
Sustainability and People and monitored by a business wide network
of Risk Co-ordinators.
The electricity industry is embarking on a journey of
unprecedented change. As with any business, the achievement of our
goals necessitates a certain level of risk being taken. The key is
ensuring that such a scale of change is managed with a good
understanding of the risks involved, in a manner consistent with
our strategy, and importantly making sure that these risks are
managed within our agreed risk appetite. Risks should only be
accepted where appropriate reward is achievable given the level of
resources employed to manage them.
Our appetite for risk is defined using a framework which is
reviewed annually by the Board. The framework enables our Board to
demonstrate its risk appetite for the overall strategic direction
of the business, and maps appetite for risk taking in the pursuit
of each of our company goals at a tactical and operational
level.
In line with the framework which provides descriptors on a scale
of 'averse' to 'bold', the Company generally operates within a
'cautious' risk range, given that the achievement of the stretching
business plan would not be possible without a level of measured
risk taking. The areas where a 'very cautious' risk appetite is
adopted relate
Strategic Report (continued)
Risk Management (continued)
to Sustainability, given our desire to ensure that the Company
maintains its reputation for compliance and an ethical way of doing
business, and most notably our Safety goal, on the basis that sound
working practices that protect our employees and the general public
are the number one priority for the business.
The key features of the risk management system include:
-- Clear risk management strategy approved by the Board.
-- Risk appetite framework, approved by the Board, in place that
forms a key driver of the strategic business plan.
-- Board oversight in identifying and understanding significant
risks (and opportunities) to the Group in achieving strategic
objectives.
-- Dedicated Board and Executive Committees to oversee the management of risks for the Group.
-- Appropriate operational and non-operational risks being
managed within a corporate risk system.
-- The underpinning of the corporate register by a number of
"local" risk registers across the business with a network of Risk
Co-ordinators which enhance the local monitoring process.
Strategic Report (continued)
Risk Management (continued)
Principal risks and uncertainties
The Group considers the following to be the principal risks that
it faces.
Risk Mitigations
--------- -------------------------- ------------------------------------------------------------------
Safety Health Safety
and the Environment: * Board Health, Safety and Environment Committee
Risk associated oversees this area.
with unsafe working
practices, man-made
or naturally occurring * Extensive policy and procedures to ensure a safe
hazards that could system of work
cause harm to
people or the
environment. * Behavioural safety training programme across all
areas of the organisation.
* Simple "Golden Rules" to ensure strong safety
approach throughout the Company's operations
* Robust lessons learned exercises conducted to
identify root causes when safety issues occur.
* Robust authorisation process to control who works on
the network and the activities that they can perform.
* Annual programme of audits and an inspection regime.
* Enhanced hazard and near miss reporting.
--------- -------------------------- ------------------------------------------------------------------
Customer Meeting our customers'
commitments: * A programme of improvement activities described in
Failure to meet more detail on pages 6 to 8 is being co-ordinated by
the required level the Executive Leadership Team to optimise Electricity
of customer satisfaction North West's position against all elements of the
performance and customer satisfaction measure.
to achieve costs
and efficiencies
against the commitments * Robust plans in place to achie
made to our customers
in the RIIO-ED1
period. * ve other commitment targets, or outperform where
possible.
* Controls in place regarding the ongoing reporting of
performance against targets.
--------- -------------------------- ------------------------------------------------------------------
People Developing our
people: * Succession plans are in place, that are subject to
Resource and succession periodic executive level review.
planning for the
business.
* Training delivered throughout the Company to ensure
employees are equipped to do their roles competently
and effectively.
--------- -------------------------- ------------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Principal risks and uncertainties (continued)
Risk Mitigations
--------------- --------------------------- ------------------------------------------------------------------
Reliability Cyber and physical
security threat: * Dedicated qualified personnel allocated to Cyber and
Breach of our IT security.
security regime
and access to
key network security * A training programme in place to inform all users of
systems by an the risks of e mail and social engineering attacks.
internal/external
party.
* A cyber risk assessment methodology implemented
within the Group.
* Pre-employment screening.
* A strong governance and inspection regime to protect
infrastructure assets and operational capacity.
* Physical and technological security measures.
* Key laptops are encrypted preventing the loss of
data.
* Data Centre infrastructure providing enhanced
security monitoring and management tools, 'next
generation' firewalls and network traffic analysis.
* Periodic internal and external security reviews.
* Key systems migration and testing.
Physical security measures
are in place to limit access
to sites.
--------------- --------------------------- ------------------------------------------------------------------
Sustainability Government and
regulator policy: * The Company has dedicated Regulation, Legal and
The Company is Compliance departments that provide advice and
subject to a high guidance regarding the interpretation of political,
degree of regulatory regulatory and legislative change.
and legislative
intervention.
The legal and * There is regular engagement with the Board on
compliance framework political and regulatory developments which may
can change leading impact the Company.
to additional
compliance obligations,
market conditions
and reporting
requirements that
can have a significant
effect on profitability.
--------------- --------------------------- ------------------------------------------------------------------
Business resilience:
Events outside * The Company has comprehensive contingency plans for
of our control, network emergencies, including key contract resources
for example environmental such as mobile generators and overhead line teams.
or medical emergencies,
affecting large
areas may negatively * Business continuity testing on a regular basis.
impact the business.
* Reciprocal arrangements with other network operators.
* Ongoing targets and monitoring of environmental
performance.
--------------- --------------------------- ------------------------------------------------------------------
Regulation and
Compliance risk: * Overall governance and control framework in place,
Compliance failure including established compliance routines and
leading to an accountabilities, owned by the Executive Leadership
adverse affect Team and ultimately the Board.
on the business.
* Specialist teams in place to ensure compliance and
assurance is carried out.
* An internal audit programme focussing on the Group's
key risk area, including fraud, regulatory compliance
and business processes.
* Established controls in place, including segregation
of duties and restricted access to systems.
--------------- --------------------------- ------------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Principal risks and uncertainties (continued)
Risk Mitigations
-------------- --------------------------- ------------------------------------------------------------------
Affordability Financial risks:
The business is * A formal treasury policy in place to manage exposure
unduly subject to counterparty, liquidity and market risk, overseen
to treasury, tax by the Audit Committee.
and liquidity
risk exposures
* A well established monthly banking covenant
Under performance monitoring process.
of the Pension
Scheme investments,
market impacts * Tax risk scoring.
and/ or an increase
in the scheme
liabilities giving
rise to higher * Active monitoring of the Scheme's investments carried
contributions. out on a quarterly basis.
* The Trustee engages professional legal, actuarial and
investment advice for all decisions taken and
regularly consults with the Company.
-------------- --------------------------- ------------------------------------------------------------------
Programme delivery
including change * Fault response times and team performance are closely
programmes: monitored.
Delays in the
investment programme
leading to an * Supply interruptions planned to minimise customer
adverse impact impact.
on customer interruptions
and customer minutes
lost performance. * Network automation to minimise the effect of faults.
* Significant expenditure on routine maintenance to
reduce the causes of network interruption.
* Initiatives to improve dispatch and mobilisation of
response teams.
-------------- --------------------------- ------------------------------------------------------------------
Macro economic
factors: Factors, * Monitoring the potential exposure to fluctuating
such as Retail factors through forecasts from a range of financial
Price Index (RPI), institutions.
may impact negatively
on the business.
* Inflation sensitivities reported quarterly through
the business valuation process.
* A significant proportion of our Group debt is
RPI-linked to provide an economic hedge between
allowed revenues and some of our financing costs.
-------------- --------------------------- ------------------------------------------------------------------
The Strategic Report, outlined on pages 4 to 24, has been
approved by the Board of Directors and signed on behalf of the
Board on 26 May 2017.
D Brocksom
Director
Corporate Governance Report
Introduction
As is required by the Company's Regulator, Ofgem, the Company
reports on how the principles and provisions of the UK Corporate
Governance Code (the Code) have been applied during the year. There
are some limited areas of non-compliance, all of which are
considered appropriate to the privately owned status of the Company
and are explained on pages 29 and 30.
The Board
Board Members at 31 March 2017
John Roberts
Independent Non-Executive Chairman
Appointed on 1 March 2014
John Roberts was Chief Executive of United Utilities plc from
1999 to 2006. He has a wealth of experience and knowledge,
particularly in the utilities sector, having also been Chief
Executive of Manweb in 1995. He has also sat on Ofgem's
Environmental Advisory Panel and has chaired the North West Energy
Council. He is currently a Chairman of the Halite Energy Group.
Chris Dowling
Independent Non-Executive Director
Appointed on 1 May 2014
Chris Dowling was, until December 2013, Chairman of Challenger -
Europe with particular responsibility for Challenger's European
Infrastructure investments. Prior to that, he was Managing Partner
of Rutland Partners LLP, the Private Equity fund, and a founding
director of Rutland Trust plc. He has a degree in Economics and
qualified as a Chartered Accountant with Deloitte Haskins &
Sells (now PricewaterhouseCoopers LLP 'PwC').
Rob Holden
Independent Non-Executive Director
Appointed on 1 January 2016
Rob Holden combines a portfolio of Non-Executive Directorships
with consultancy roles. He has board roles with HS1, the Submarine
Delivery Authority, EdF and the Nuclear Decommissioning Authority.
His advisory assignments in the UK include work with HS2, Thames
Tideway Tunnel, the Type 26 Frigate and the QE Carrier programmes.
Overseas he has worked in the USA and Singapore on High Speed Rail
projects and in Australia on a regional rail project.
Niall Mills
Non-Executive Director
Appointed on 12 June 2009
Niall Mills is employed by First State Investments Management
(UK) Limited where he is a Partner in the Direct Infrastructure
Investment business. He has extensive infrastructure experience
gained in senior industry roles across a variety of sectors,
including utility companies, rail and airports. He is also a
director of several other fund investments across Europe. He has
been a Non-Executive Director of Anglian Water Group plc since
September 2008. He is a Fellow of the Institution of Civil
Engineers and holds a Masters of Business Administration from the
London Business School and an Institute of Directors' Diploma in
Company Directorship.
Hamish Lea-Wilson
Non-Executive Director
Appointed on 23 November 2015
Hamish Lea-Wilson is employed by First State Investments
Management (UK) Limited where he is a Director in the Direct
Infrastructure Investment business. He is also a director of
several other fund investments across Europe including New Finerge
SA (Portuguese operator of wind farms with gross installed capacity
of 843MW) and HH Ferries AB (high frequency ferry route operator,
operating between Denmark and Sweden). He holds a B.Sc. (Hons)
Economics degree from Durham University.
Mike Nagle
Non-Executive Director
Appointed on 28 January 2011
Mike Nagle was the Group Company Secretary and Solicitor of
SEEBOARD plc and Senior Vice President, Legal Services at Metronet
Rail. Now retired as a solicitor, he remains involved in
consultancy work and is also a Non-Executive Director of the JP
Morgan Infrastructure Investments Fund
Corporate Governance Report (continued)
The Board (continued)
and of Greensands Holdings Limited (the parent company of
Southern Water).
John Lynch
Non-Executive Director
Appointed on 31 January 2017
John Lynch is an investment principal in the Infrastructure
Investments Fund of J.P. Morgan Asset Management, based in London.
Prior to joining the firm, he had a twenty year global career in
investment banking, including the role of head of EMEA Power at
Bank of America Merrill Lynch where he led the bank's advisory and
lending efforts in utilities, conventional power generation,
renewables and energy/utility related infrastructure. He is a dual
citizen of the United States and Ireland. He graduated from
Dartmouth College and holds an MBA from the University of Chicago
Booth School of Business.
Peter Emery
Chief Executive Officer
Appointed on 27 May 2016
Peter Emery has over thirty years experience in the Energy
Sector. He spent twenty years working for ExxonMobil in corporate
planning, distribution operations, refining and supply with
experience in Europe, North America and the Far East. His final
assignment was as Operations Manager for Fawley Refinery having
full operational responsibility for the UK's largest refinery. On
leaving ExxonMobil, he became the Executive Director of Production
at Drax Power Limited and was a member of the executive team which
completed the IPO of Drax Group plc in 2005, working with the Group
until 2016, in which year he joined the Company. He is also a
Non-Executive Director of N.G. Bailey Limited, having been
appointed in September 2012 and a Board member of the York, North
Yorkshire and East Riding Local Enterprise Partnership. He is a
fellow if the Institute of Materials Minerals and Mining.
David Brocksom
Chief Finance Officer
Appointed on 5 October 2015
David Brocksom joined the Company as interim Chief Financial
Officer in September 2013 and has, with a short break at the start
of 2015, been with the Company since then, becoming a Director in
October 2015. Previously he has held a number of CFO roles
including at UK Coal plc and Pace plc. He qualified as a chartered
accountant with Price Waterhouse (now PricewaterhouseCoopers LLP
'PWC') and is also a member of the Institute for Turnaround.
Mark Walters
Non-Executive Director
Appointed on 7 March 2014, resigned on 31 January 2017
Steve Johnson
Executive Director
Appointed on 8 September 2008, resigned on 27 May 2016
Niall Mills, Hamish Lea-Wilson, John Lynch and Mark Walters are
shareholders appointed directors and have appointed alternate
Directors during their time as Board members, Hamish and Niall's
alternate was Tomas Pedraza. Andrew Truscott was Mark's alternate
until Mark's resignation, when Andrew was appointed as John Lynch's
alternate.
Attendance at Board meetings
The Company Secretary attended all Board meetings during the
year. Karen O'Donnell resigned as Company Secretary on 17 March
2017. Richard Somerville was appointed on the same day.
Where a Director was unable to attend a Board meeting, their
views were canvassed by the Chairman prior to the meeting.
At the discretion of the Board, senior management were invited
to attend meetings when appropriate to specific items
subject to discussion.
Corporate Governance Report (continued)
The Board (continued)
The table below shows Board and Board Committee attendance
during the year, for committee members only. Informal meetings to
discuss board member replacements are not included nor are
attendances by Directors at committee meetings where they are not
formal members.
Attended / Scheduled
Board Member ENWL Audit Remuneration Nominations Health,
Board Committee Committee Committee Safety
& Environment
Committee
------------------- ------- ----------- ------------- ------------ ---------------
John Roberts 9/9 4/4 2/2 1/1 -
------------------- ------- ----------- ------------- ------------ ---------------
Chris Dowling 8/9 3/4 - 1/1 -
------------------- ------- ----------- ------------- ------------ ---------------
Rob Holden 9/9 - - 1/1 3/3
------------------- ------- ----------- ------------- ------------ ---------------
Niall Mills 8/9 3/3 2/2 1/1 3/3
------------------- ------- ----------- ------------- ------------ ---------------
Hamish Lea-Wilson 9/9 4/4 2/2 - -
------------------- ------- ----------- ------------- ------------ ---------------
Mark Walters 6/8 3/3 1/1 - -
------------------- ------- ----------- ------------- ------------ ---------------
Mike Nagle 9/9 4/4 2/2 - 3/3
------------------- ------- ----------- ------------- ------------ ---------------
John Lynch* 1/2 1/1 0/1 0/1 -
------------------- ------- ----------- ------------- ------------ ---------------
Peter Emery 7/8 - - - 1/2
------------------- ------- ----------- ------------- ------------ ---------------
David Brocksom 9/9 - - - -
------------------- ------- ----------- ------------- ------------ ---------------
Steve Johnson 1/1 - - - 1/1
------------------- ------- ----------- ------------- ------------ ---------------
*John Lynch attended four meetings as an observer prior to his
appointment to the Board on 31 January 2017. At the 31st March 2017
meeting Andrew Truscott attended as an alternate Director in place
of John Lynch.
The Remuneration Committee agreed some further business via
email during July 2016 without meeting formally.
Corporate Governance Report (continued)
Diversity
The Board supports diversity in its broadest sense and
accordingly aims to ensure that its number is made up of a diverse
range of experience and expertise appropriate to the industry in
which it operates, its operational business model and the extensive
financial, governance, risk management and legal expertise
required.
The Audit Committee last reviewed and updated the Board's
Diversity Statement in May 2015. Diversity of the Board continues
to be assessed on a case by case basis as vacancies arise. This is
principally a matter for the Nominations Committee.
Composition
The Board comprises three Non-Executive Directors considered
under the Code to be independent, one of whom is the Chairman, four
Non-Executive Directors representing the two shareholders and two
Executive Directors. The Directors' biographies are on pages
25-26.
Two of the Independent Non-Executive Directors, Chris Dowling
and John Roberts have been named to Ofgem as fulfilling the role of
Sufficiently Independent Directors as required by Ofgem. The role
of the Sufficiently Independent Director was introduced from 1
April 2014 as part of a range of enhancements made to the
ring-fence conditions in the Company's licence to protect
consumers, should a distribution operator experience financial
distress.
Leadership
The Board provides leadership of the Company, ensuring it
continues to balance the needs of stakeholders while delivering the
Company's strategy. Individually the Directors act in a way that
they consider will promote the long-term success of the
Company.
The role of the Chairman and the Chief Executive Officer is
separate, defined by clear role descriptions set out in writing and
agreed by the Board.
The Chairman is responsible for the leadership and governance of
the Board and the Chief Executive Officer for the operational
management of the Company and implementation of the strategy on the
Board's behalf. The Chief Executive Officer is assisted by the
Executive Leadership Team that comprises the operation unit
directors.
Advice
All Directors are able to consult with the Company Secretary and
the appointment and removal of the Company Secretary is a matter
reserved for the Board.
Any individual Director, or the Board as a whole, may take
independent professional advice relating to any aspect of their
duties at the Company's expense. This is clearly stated in the
Terms of Reference of the Board and of its Committees.
How the Board operates
The Board's role is to promote the long-term success of the
Company and provide leadership within a framework of effective
controls. The Board is responsible for approving the strategy and
for ensuring that there are suitable resources to achieve it. In
doing so, the Board takes into account all stakeholders, including
its shareholders, employees, suppliers and the communities in which
it operates.
The Board has Terms of Reference that detail matters
specifically reserved for its decision, including the approval of
budgets and financial results, assessment of new Board
appointments, dividend decisions, litigation which is material to
the Group and Directors' remuneration.
Evaluation
In December 2016, the Board undertook a questionnaire based
evaluation process to which there was a 100% response.
The evaluation focused on ensuring that the Board reporting is
succinct and focused and that the Board should continue to be
cognisant of the Board diversity.
An externally facilitated evaluation will be conducted in the
year ending March 2018.
Corporate Governance Report (continued)
How the Board operates (continued)
Training
The Chairman is responsible for ensuring that all Directors
update their skills, knowledge and familiarity of the Company.
Directors regularly receive reports facilitating greater
awareness and understanding of the Company, its regulatory
environment and the industry. The Board held one workshop and a
strategy meeting during the year aimed at developing a greater
understanding of the Company's operations and to explore strategic
matters in detail.
Committee members received detailed presentations at meetings
focussing on areas of relevance to the Committee and Board members
are invited to workshops with shareholder representatives which are
able to delve into areas of interest in greater detail.
The Chairman is also responsible for ensuring that all new
Directors receive a tailored induction programme that reflects
their experience and position as either an Executive or
Non-Executive Director. This involves meetings with the Board, the
Company Secretary, other members of the Executive and Senior
Leadership Teams and site visits. Additional documentation is
provided as appropriate.
Appointments
The three independent Non-Executive Directors (are provided with
a detailed letter of appointment) and are appointed for an initial
three-year term, to be reviewed every three years thereafter if
they are reappointed. On the 31 March 2017 John Roberts and Chris
Dowling were reappointed to the Board for 3 more years.
The four other Non-Executive Directors are appointed by the
Company's shareholders as their representatives. The minimum
expected time commitment required from Non-Executive Directors is
six to ten days per year and is detailed in their letter of
appointment.
On his appointment, Peter Emery was a Non-Executive Director of
N G Bailey, the Board agreed to his remaining a Non-Executive
Director with the proviso that when he is due for re-election, this
is again discussed with the Electricity North West Board.
Conflicts of interest
The Board has appropriate processes in place to assess and
manage any potential conflicts of interest. As part of these
procedures the Board:
-- Considers conflicts of interest as part of the agenda for all meetings.
-- Asks Directors annually if there are any changes to their
conflict of interest declarations, including appointments to the
Boards of other entities.
-- Keeps records and Board minutes regarding any decisions made.
-- Maintains a companywide conflicts of interest register.
Areas of non-compliance with the UK Corporate Governance
Code
There are some areas where the Company does not comply with the
UK Corporate Governance Code, all of which are due to its privately
owned status and are discussed below. The Company has endeavoured
to comply with the spirit of the Code in the areas where compliance
with the provision is either impractical or inappropriate.
Senior independent director
The Board has not appointed a Non-Executive Director as a Senior
Independent Director under the Code. The Board meets the objectives
behind this requirement through its shareholder representation on
the Board.
Details of remuneration to executive directors, released to
serve as non-executive directors
The Company does not disclose the remuneration to its Executive
Directors who are released to serve as non-executive directors
elsewhere. This information is made available to the shareholders
through their representation on the Board.
Corporate Governance Report (continued)
Constitution of the Board
The Code states that half the Board should be Independent
Non-Executive Directors. As the Company is privately owned and both
shareholders are represented on the Board, it is felt that the
needs of shareholders are met through their presence on the
Board.
In addition to the two Sufficiently Independent Directors
required by Ofgem, there is a further Independent Non-Executive
Director. The Board considers that the three Independent
Non-Executives offer an appropriate perspective, allowing for the
refreshment of its Committees while allowing meaningful individual
participation and effective collective decision making.
Annual election of Directors
The Board does not subject its Directors to annual elections as
the shareholder representation on the Board allows the opportunity
to challenge a Director's performance directly rather than an
Annual General Meeting.
Publication of the terms and conditions of Non-Executive
Directors
As a privately owned company Electricity North West is not
required to provide a remuneration report in line with the Large
and Medium Sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013.
The purpose of the remuneration report is to enable shareholders
to exercise judgement over directors' remuneration. With the
presence of shareholder representatives on the Remuneration
Committee, this purpose is directly met.
Engagement with stakeholders
As a privately owned company, Electricity North West does not
have a large or dispersed shareholder base with which to formally
communicate, nor are there any minority shareholders. Therefore
Annual General Meetings are not held.
Shareholders:
In addition to formal Board meetings and workshop sessions, the
meeting cycle includes quarterly valuation workshops to focus on
financial and treasury matters and detailed periodic workshops to
meet the requirements of strategic planning and more detailed
performance reviews. Board members are invited to attend these
meetings.
The Company works closely with its shareholders and both
shareholders endorse the UK Stewardship Code and see their
stewardship commitments as a key feature of their investment
philosophy. They are committed to maintaining the integrity and
quality of the markets in which they operate and allocate
investment capital to productive purposes, while protecting and
enhancing their clients' capital over the longer term.
Stakeholders:
The Company has strong and open relationships with stakeholders,
including Ofgem, local government, schools, emergency services, MPs
and central government. There are a number of key relationships and
a vast range of public sector stakeholders. The Company also
engages across the industry with electricity suppliers, employees,
contractors and other utilities.
Our stakeholder engagement strategy is outlined on page 9.
Board Committees
The Board has an extensive workload and therefore has delegated
the detailed oversight of certain items to six standing Committees
and two ad-hoc Committees:
Audit Committee
===============================
Remuneration Committee
===============================
Nominations Committee
===============================
Health, Safety and Environment
Committee
===============================
Use of Systems Pricing
Committee
===============================
Financing Committee
===============================
Corporate Governance Report (continued)
Board Committees (continued)
Banking Committee
==========================
Retail Property Committee
==========================
The minutes of each Committee are made available to the
Board.
Those Committees listed in green produced a report for the
year.
The Use of Systems Pricing Committee and the Financing Committee
meet as required to approve detail about system pricing contained
in Licence Condition 14 and financing transactions
respectively.
The Banking and Retail Property Committees meet on an ad hoc
basis to review bank mandates and the Company's residual retail
property portfolio as necessary.
Report of the Audit Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference which are reviewed by the Committee and
approved by the Board annually. The Terms of Reference are
available on the Electricity North West website.
Membership and meetings
The Committee members are all Non-Executive Directors. The Board
is satisfied that the committee chair, Chris Dowling, as a
Chartered Accountant, has relevant financial experience. Attendance
by individual members is detailed in the table on page 27.
There were a number of regular attendees by invitation at each
of the Committee's meetings including the Chief Executive Officer,
the Chief Financial Officer, the Head of Risk, Control and
Assurance and the external auditor.
Over the course of the year, the Committee Chairman held
separate meetings with both the lead external audit partner at
Deloitte LLP and with the Head of Risk, Control and Assurance.
The Committee also met as a whole with the external auditor
without management present.
The role of the Committee
The key responsibilities of the Audit Committee are to:
-- Monitor the integrity of the financial statements, including
its annual and half-yearly reports and to report the Board on
significant financial reporting issues and judgements which they
contain.
-- Monitor the independence, effectiveness and remuneration of the external auditor.
-- Review the adequacy and effectiveness of the Company's
internal financial controls and internal control and risk
management systems and compliance with the UK Corporate Governance
Code.
-- Monitor the effectiveness of the Company's internal audit function.
-- Ensure that the Group's treasury function is effective and
approve treasury transactions in line with banking activity.
The significant matters considered by the Committee during the
year included:
-- Review of the 31 March 2017 Annual Report and Consolidated
Financial Statements and the September 2016 half year-report.
-- Evaluation of the effectiveness and scope of the internal
audit plan including management response to audit reports.
-- Review of the scope and methodology of the audit work to be
undertaken by the external auditor, their terms of engagement and
fees.
Corporate Governance Report (continued)
The role of the Committee (continued)
In accordance with UK regulations, the Company's auditor adheres
to a rotation policy based on best practice and a new Group lead
engagement partner is appointed once their predecessors have
completed a term of five years. The current lead engagement partner
will complete her five year term at the end of the 2016/17 audit.
The Committee discussed the audit tender process at its November
2016 meeting and agreed that, given the business changes being
currently undertaken across the business, that it would advise the
Board to consider next tendering the audit in 2019 or 2020.
The significant issues considered by the Committee during the
approval of the 2016/17 financial statements were:
-- Capital and revenue allocations and ensuring the appropriate
treatment of fixed asset expenditure. Management's key controls and
a sample of projects were tested, as was capitalised interest cost
to ensure compliance with IAS23. No evidence of management bias was
identified and key assumptions were in line with external audit
expectation.
-- Accounting for the Electricity North West Group of the
Electricity Supply Pension Scheme. This is a complex area where
small changes in assumptions can have a significant effect on the
valuation of liabilities and therefore on the financial statements.
The Committee considered the evaluation by external actuaries,
benchmarking data and the disclosure requirement of IAS19. The
calculations and assumptions were considered appropriate.
-- Treasury accounting, particularly fair value calculations and
ensuring appropriate disclosures. There is a risk, due to the
complexity of the financial instruments, that they are incorrectly
valued, accounted for or disclosed, resulting in a material error
in the financial statements or a material disclosure deficiency.
The Committee noted the specialist advice received in the area and
compliance with appropriate accounting standards in valuation and
disclosure.
-- Compliance with the FRC guidance and licence condition with
regard to the going concern assessment. Consideration was given to
operational performance against budget, financing arrangements,
banking facility covenants and the application of appropriate
sensitivities and compliance with Licence Condition 30.
-- The risk of fraud in revenue recognition where considerations
included specific testing on unbilled income and analytical
review.
External audit
The external auditor is engaged to express an opinion on the
Company's and Group's financial statements. The audit includes the
review and testing of the data contained in the financial
statements to the extent necessary for expressing an audit opinion
on the truth and fairness of the financial statements. This year's
report is the fourteenth conducted by Deloitte LLP.
To assess the effectiveness of the previous year's external
audit the Committee reviewed the audit approach and strategy and
received a report of Deloitte LLP's performance from both members
of the Board and Executives. The performance evaluation was
conducted via a questionnaire circulated to the Committee, the
Chief Financial Officer, the Chief Executive Officer and the
Company's senior financial leadership for completion.
The result of this evaluation was that the audit was
appropriately scoped, was well planned and executed and provided
appropriate challenge across the Company.
Corporate Governance Report (continued)
Auditor independence and the provision of non-audit services
The Company has a formal policy on the use of the auditor for
non-audit work and the awarding of such work is managed in order to
ensure that the auditor is able to conduct an independent audit and
is perceived to be independent by our stakeholders.
The Committee will review its non-audit services policy in
2017/18 in light of the publication of the final draft of the FRC's
Ethical Standard 2016.
In keeping with professional ethical standards, Deloitte also
confirmed their independence to the Committee and set out the
supporting evidence in their report to the Committee prior to the
publication of the Annual Report and Financial Statements.
The non-audit services provided by Deloitte LLP during the year
were in connection to Ofgem regulatory requirements, the covenant
compliance agreed upon procedures and tax compliance and advisory
services. Deloitte LLP have informed us that from 1 April 2017 they
have resigned from providing tax compliance services and will not
be performing any further work in this area in line with EU PIE
rules.
Internal control framework
The Committee, on behalf of the Board, is responsible for
reviewing the Company's internal control framework. This review is
consistent with the Code and covers all material areas of the
Group, including risk management and compliance with controls.
Further details of risk management and internal controls are set
out on pages 20 to 24.
Whistleblowing arrangements
The Committee is responsible for reviewing the Company's
Disclosure (Whistleblowing) policy and any concerns raised through
these channels and management actions taken in response. A
confidential service is provided by an external company whereby
employees can raise concerns by e mail or telephone in confidence.
Any matters reported are investigated and escalated as
appropriate.
Committee effectiveness
The Committee formally reviewed its Terms of Reference and its
membership during the year to ensure both remain fit for purpose
and were considered effective by the Board.
Fair, balanced and understandable
The Audit Committee was requested to assist the Board in
confirming that the Annual Report is fair, balanced and
understandable. As part of its review, the Audit Committee took
into account the preparation process for the Annual Report and
Consolidated Financial Statements:
-- Different sections of the Annual Report are drafted by
appropriate senior management who have visibility of the Company's
performance in these areas.
-- Reviews of the drafts are carried out by the Executive
Directors and other members of the Executive Leadership Team.
Feedback is received from the external auditor on the content of
the Annual Report. A final draft is reviewed by the Audit Committee
before being recommended to the Board for approval.
The Directors' statement on a fair, balanced and understandable
Annual Report and Consolidated Financial Statements is set out on
page 39.
Corporate Governance Report (continued)
Report of the Nominations Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference and these are available on the Electricity
North West website. The Committee's responsibilities include
keeping under review the composition of the Board and senior
executive, identifying and nominating candidates for approval by
the Board to fill any vacancies and succession planning for
Directors and other senior executives.
Membership and meetings
Composition of the Committee and attendance by individual
members at meetings is detailed on page 27.
The Chief Executive Officer and the Customer and Corporate
Services Director attend meetings at the invitation of the Chairman
of the Committee.
Diversity
As described in the Corporate Governance report on page 28, the
Board is committed to diversity in its broadest sense and the
Nominations Committee ensures this remains central to recruitment
and succession planning.
Report of the Remuneration Committee
The Committee's role is to determine the remuneration structure
for the Executive Directors to ensure that it balances appropriate
reward with the creation of long-term value and sustainability of
the network. The Terms of Reference for the Committee are available
on the Electricity North West website.
It is also responsible for the review of the remuneration of
other members of the Executive Leadership Team to ensure the
structure and levels of remuneration appropriately incentivise
these individuals to achieve the Company's strategic
objectives.
The Committee has been joined by invitation during the year by
the Chief Executive Officer, Chief Financial Officer and the
Customer and Corporate Services Director.
Membership and meetings
Composition of the Committee and attendance by individual
members is detailed on page 27.
Role of the Committee
The Committee reviews and approves the overall remuneration
levels of employees below senior management level, but does not set
remuneration for these individuals. This oversight role allows the
Committee to take into account pay policies and employment
conditions across the Group.
A significant piece of work for the Committee during the year
was reviewing the Company's Executive Incentive Plan, the long-term
incentive scheme for senior individuals covering the eight-year
period beginning on 1 April 2015, aligned with the RIIO-ED1 price
control period.
The Committee reviewed and re-approved the Executive Incentive
Plan in May 2016. This scheme is for senior executives and covers
the eight-year period beginning on 1 April 2015, aligned with the
RIIO-ED1 price review period.
In compliance with the Code, this plan includes:
-- An allowance for a downward adjustment to amounts not yet paid to individuals (malus); and
-- An allowance for recovery of amounts already paid from the
Executive Incentive Plan (clawback).
The Committee is of the opinion that the remuneration structure,
designed for the RIIO period, reflects the strategic direction of
the business and the steps taken during the year ensures that
remuneration is designed to promote the long-term success of the
Company.
Share options are not offered as an incentive to either
Executive or Non-Executive Directors as the Company is privately
owned.
Corporate Governance Report (continued)
The table below set out the nature of the remuneration of the
Executive Directors:
Element Purpose and link to strategy Framework
Basic Salary Basic salary provides the core reward for External advice is taken on all
the role. Salaries are set at a remuneration to ensure that it remains
sufficient level effective and appropriate.
to attract and retain high calibre Levels of basic salary are benchmarked
individuals who can deliver the Group's but also reflect the Director's
strategic objectives. experience and time
at Director level.
Benefits Other benefits provided are designed, as In addition to basic salary, Directors
with basic salary, to provide a are provided with a car allowance and
competitive but not private medical
excessive reward package. insurance.
Executive Incentive Plan (EIP) Executive Directors are members of the The EIP works on a balanced scorecard
Executive Incentive Plan which was approach, containing short-term metrics
introduced in April to evaluate
2015 to reward both in-year performance in- year performance and longer-term
and incentivise strategic and innovative measures promoting a strategic focus and
behaviours sustainable
over the longer term, aligned to performance.
shareholder objectives. Partial payments are made each year
based on achievement against the
balanced scorecard, with
additional payments made in years 4 and
8 to ensure the balance of short and
long-term incentivisation
is retained.
Following Health & Safety best practice,
Safety is considered to be an essential
part of any
role and Directors therefore receive no
Health & Safety related incentives.
However a range
of safety performance measures act as a
gateway to earn bonus.
Pension Directors are offered the same level of No Director is a member of the defined
defined contribution benefits as all benefit scheme which is now closed to
other employees, new members.
or a taxable payment in lieu.
------------------------------- ------------------------------------------ -----------------------------------------
Corporate Governance Report (continued)
Report of the Health, Safety & Environment Committee
The Committee continues to develop the Company's health, safety
and environment strategies, agrees targets and monitors Company
performance in this area. It regularly challenges the executive and
the health, safety and environment team to look at new initiatives
and work with other organisations.
Membership and meetings
Composition of the Committee and attendance by individual
members is detailed on page 27.
Meetings are also attended by executives in charge of
operationally focussed directorates.
The role of the Committee
The Committee has designated authority from the Board set out in
its Terms of Reference which is published on the Electricity North
West website.
The primary purpose of the Committee is to:
-- Set the corporate health, safety and environment strategy,
objectives, targets and programmes.
-- Monitor performance in these areas with a view to:
- Minimising risk;
- Ensuring legal compliance;
- Responding to significant events; and
- Ensuring significant resources are allocated for the control
of health, safety and environmental risks.
-- Report to the Board developments, trends and / or forthcoming
legislation in relation to the health, safety and environmental
matters which may be relevant to the Company's operations, assets
or employees.
-- Review the Company's external reporting in this area and regulatory disclosures.
At every meeting the Committee receives and discusses in detail
a Health, Safety and Environment performance report for the
preceding period, prepared and presented by the Head of Health
Safety and Environment who attends every meeting.
Directors' Report
The Directors present their Annual Report and the audited
Consolidated Financial Statements of Electricity North West Limited
('the Company') and its subsidiaries (together referred to as the
'Group') for the year ended 31 March 2017.
Dividends
In the year ended 31 March 2017 the Company declared interim
dividends of GBP63m, which were paid in December 2016 (31 March
2016: GBP30m). The final dividend for the year ended 31 March 2016
of GBP18m was paid in June 2016. At the Board meeting in May 2017
the Directors proposed a final dividend of GBP12m for the year
ended 31 March 2017.
Directors
The Directors of the Company during the year ended 31 March 2017
are set out below. Directors served for the whole year except where
otherwise indicated.
Executive Directors
P Emery (appointed 27 May 2016)
S Johnson (resigned 27 May 2016)
D G Brocksom
Non-executive Directors
Dr J Roberts
N P Mills
M A Nagle
J E Lynch (appointed 31 January 2017)
M A Walters (resigned 31 January 2017)
C Dowling
H Lea-Wilson
R D Holden
Alternate Directors during the year were:
T Pedraza
A Truscott (resigned as M A Walters alternate 31 January 2017,
appointed as J E Lynch's alternate 31 January 2017)
At no time during the year did any Director have a material
interest in any contract or arrangement which was significant in
relation to the Group's business.
Directors' and Officers' insurance
The Group maintains an appropriate level of Directors' and
Officers' insurance whereby Directors are indemnified against
liabilities to third parties to the extent permitted by the
Companies Act.
People
The Group's policies on employee consultation, the treatment of
disabled employees and on equality and diversity across all areas
of the business are contained within the People section of the
Strategic Report.
Corporate Social Responsibility
Details of the Group's approach to Corporate Social
Responsibility can be found in the Strategic Report.
Research and development
The Group is committed to developing innovative and
cost-effective solutions for providing high quality services and
reliability to our customers, and for the benefit of the wider
community and the development of the network, as further detailed
in the Strategic Report. During the year ended 31 March 2017 the
Group incurred GBP3.9m of expenditure on research and developments
(2016: GBP6.7m).
Financial instruments
The risk management objectives and policies of the Group in
relation to the use of financial instruments can be found in the
Strategic Report and in note 20 to the financial statements.
Fixed assets
Further details on Property, Plant and Equipment are provided in
the Strategic Report and note 13 to the Financial Statements.
Capital structure
The Company's capital structure is set out in note 28 to the
Financial Statements.
Commitments
Details of commitments and contractual obligations are provided
in notes 12, 13, 20 and 32 of the Financial Statements.
Directors' Report (continued)
Information given to auditor
Each of the persons who are a Director at the date of approval
of this Annual Report confirms that:
(1) so far as the Director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
(2) each Director has taken all the steps that they ought to
have taken as a Director in order to make themselves aware of any
relevant audit information and to establish that the Company's
auditor is aware of that information.
This confirmation is given and should be interpreted within the
provisions of s418 of the Companies Act 2006.
Independent auditor
Deloitte LLP has expressed its willingness to continue in office
as auditor of the Group. In accordance with section 487 of the
Companies Act 2006, Deloitte LLP is deemed to be re-appointed as
auditor of the Company.
Registered address
Electricity North West Limited
304 Bridgewater Place
Birchwood Park
Warrington
WA3 6XG
Registered number: 02366949
Approved by the Board on 26 May 2017 and signed on its behalf
by:
D Brocksom
Director
Directors' Report (continued)
Directors' Responsibilities Statement
The Directors are responsible for preparing the annual report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law, the Directors
have elected to prepare the Group financial statements in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union (EU) and have also chosen to
prepare the parent Company financial statements under IFRS as
adopted by the EU. Under company law the Directors must not approve
the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and Company
and of the profit or loss of the Group and Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
-- Properly select and apply accounting policies;
-- Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- Provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- Make an assessment of the Group's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that the
financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom, governing the
preparation and dissemination of financial statements, may differ
from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance with IFRSs
as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a
whole;
-- The Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face; and
-- The Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's performance,
business model and strategy.
This responsibility statement was approved by the Board of
Directors on 26 May 2017 and is signed on its behalf by:
D Brocksom
Director
Independent Auditor's Report to the Members of Electricity North
West Limited
Opinion on financial statements of Electricity
North West Ltd
======================================================================
In our opinion:
* the financial statements give a true and fair view of
the state of the group's and of the parent company's
affairs as at 31 March 2017 and of the group's profit
for the year then ended;
* the group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the
European Union;
* the parent company financial statements have been
properly prepared in accordance with IFRSs as adopted
by the European Union and as applied in accordance
with the provisions of the Companies Act 2006; and
* the financial statements have been prepared in
accordance with the requirements of the Companies Act
2006.
The financial statements that we have audited
comprise:
* the consolidated income statement;
* the consolidated and company statements of
comprehensive income;
* the consolidated and company statements of financial
position;
* the consolidated and company statements of changes in
equity;
* the consolidated and company statements of cash
flows; and
* the related notes 1 to 32.
The financial reporting framework that has been
applied in their preparation is applicable law
and IFRSs as adopted by the European Union and,
as regards the parent company financial statements,
as applied in accordance with the provisions
of the Companies Act 2006.
Summary of our audit approach
=====================================================
The key risks that we identified in
the current year were:
* Treasury accounting
* Pensions - defined benefit scheme liability
assumptions
* Inappropriate capitalisation of costs
===================================================
The materiality that we used in the
current year was GBP4.3m which was
determined on the basis of revenue.
===================================================
All audit work for the group was performed
directly by the group audit engagement
team.
===================================================
Our approach is consistent with the
previous year.
===================================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Going concern and the directors' assessment
of the principal risks that would threaten the
solvency or liquidity of the group
We are required to state whether We confirm that
we have anything material to we have nothing
add or draw attention to in relation material to add
to: or draw attention
-- the disclosures on pages 22-24 to in respect
that describe the principal risks of these matters.
and explain how they are being We agreed with
managed or mitigated; the directors'
-- the directors' confirmation adoption of the
on page 19 that they have carried going concern
out a robust assessment of the basis of accounting
principal risks facing the group, and we did not
including those that would threaten identify any such
its business model, future performance, material uncertainties.
solvency or liquidity; However, because
-- the directors' statement in not all future
note 2 to the financial statements events or conditions
about whether they considered can be predicted,
it appropriate to adopt the going this statement
concern basis of accounting in is not a guarantee
preparing them and their identification as to the group's
of any material uncertainties ability to continue
to the group's ability to continue as a going concern.
to do so over a period of at
least twelve months from the
date of approval of the financial
statements; and
-- the directors' explanation
on pages 18-19 as to how they
have assessed the prospects of
the group, over what period they
have done so and why they consider
that period to be appropriate,
and their statement as to whether
they have a reasonable expectation
that the group will be able to
continue in operation and meet
its liabilities as they fall
due over the period of their
assessment, including any related
disclosures drawing attention
to any necessary qualifications
or assumptions.
Independence
===================================== =======================
We are required to comply with We confirm that
the Financial Reporting Council's we are independent
Ethical Standards for Auditors of the group and
and confirm that we are independent we have fulfilled
of the group and we have fulfilled our other ethical
our other ethical responsibilities responsibilities
in accordance with those standards. in accordance
with those standards.
We also confirm
we have not provided
any of the prohibited
non-audit services
referred to in
those standards.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Our assessment of risks of material misstatement
===================================================================
The assessed risks of material misstatement
described below are those that had the greatest
effect on our audit strategy, the allocation
of resources in the audit and directing the
efforts of the engagement team.
===================================================================
Risk description Treasury is a complex area and includes
the accounting for material financial
instruments including index-linked
swaps and bonds. Due to the complexity
of the accounting there is a risk that
these instruments are incorrectly valued,
accounted for or disclosed in the financial
statements which may result in a material
error.
As at 31 March 2017 ENWL had GBP724.4m
of bonds in issue (2016: GBP711.3m)
as disclosed in note 19 to the financial
statements, and held derivative financial
instruments, being a portfolio of index-linked
swaps, with a fair value of GBP363.5m
(2016: GBP267.7m) as disclosed in note
20. Total fair value movements in the
year were GBP106.2m (2016: GBP42.8m)
as per note 9 to the financial statements.
See also the Audit Committee's Report
on page 32 where treasury accounting
is discussed as a significant issue,
the accounting policy on financial
instruments in note 2 to the financial
statements and the associated critical
accounting judgement and key sources
of estimation uncertainty in note 3.
================= ================================================
How the Due to the complexity of the financial
scope of instruments held in the group our audit
our audit team includes financial instrument
responded specialists.
to the risk We tested a sample of valuations in
respect of the index-linked swaps held
by the group, including an assessment
of the application of credit risk under
IFRS 13. In addition we recalculated
the carrying value of the bonds held
at both amortised cost and at fair
value through profit and loss, along
with the associated amortisation and
interest charges as the bonds unwind
to maturity.
We have challenged management by reviewing
the inputs into the valuation model
and agree that certain derivatives
should be classified as Level 3. In
addition our review of the financial
statements assessed whether the disclosures
made in note 20 are consistent with
the requirements of IFRS 13 and IFRS
7.
================= ================================================
Key observations From the work performed we are satisfied
that the valuation of the Group's portfolio
of bonds and index-linked swaps is
materially correct. In addition we
note that the index-linked swaps are
appropriately disclosed as Level 3
in the financial statements.
================= ================================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Risk description The risk concerns the appropriateness
of the actuarial assumptions, for example
assumptions around the discount rate,
mortality and inflation, used in calculating
the Group's defined benefit liability
of GBP58.0m (2016: GBP16.2m) as shown
in note 21. The valuation of the Group's
IAS 19 liability involves significant
judgement, in particular in the choice
of discount rate used. This is because
a small movement in the discount rate
can have a large impact on the funded
status of the pension deficit.
See also the Audit Committee's Report
on page 32 where pension accounting
is discussed as a significant issue,
the accounting policy on retirement
benefit schemes in note 2 to the financial
statements and the associated critical
accounting judgement and key sources
of estimation uncertainty in note 3.
================= ==============================================
How the We have assessed the appropriateness
scope of of the assumptions underpinning the
our audit valuation of the schemes liabilities.
responded Specifically we challenged the discount
to the risk rate, and other key assumptions including
inflation and mortality, by using our
internal pension specialists to benchmark
the assumptions applied against comparable
third-party data and to assess the
appropriateness of the assumptions
in the context of the Group's own position.
================= ==============================================
Key observations From the work performed we are satisfied
that the assumptions applied in respect
of the valuation of the Group's IAS
19 liabilities are materially correct.
The assumptions, when taken together
as a whole, are in the middle of our
benchmarked range.
================= ==============================================
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Risk description We focus our key risk in relation to
inappropriate capitalisation of costs
to the judgemental percentage rates
applied to employee cost overhead absorption.
In particular we focus on those judgemental
areas, for example engineers and electricians
whose time is split between capital
projects and repair and maintenance
on the network. The effect of inappropriate
capitalisation of costs from a financial
statement perspective is that items
which are capital in nature are expensed,
whilst items which are expenditure
in nature are, conversely, capitalised.
Given the magnitude of overheads capitalised
in the business the impact could be
material. Total employee costs are
GBP105.0m in the year (2016: GBP102.3m),
of which GBP58.1m (2016: GBP55.1m)
has been capitalised directly to fixed
assets.
See also the Audit Committee's Report
on page 32 where overhead absorption
is discussed as a significant issue,
the accounting policy for tangible
fixed assets in note 2 to the financial
statements and the associated critical
accounting judgement and key sources
of estimation uncertainty in note 3.
================= ===============================================
How the We have reviewed the Company's assumptions,
scope of policies and procedures with regards
our audit to overhead absorption and compared
responded these to the balances capitalised.
to the risk In respect of overhead absorption we
have considered the relative percentage
capitalisation by function/operational
area in the business and challenged
the key assumptions made by management
including testing on a sample basis
to appropriate support.
As part of our audit of tangible fixed
assets we tested a sample of additions
to consider whether those items are
capital in nature. A sample of capital
projects were reviewed in detail, with
discussions and supporting documentation
obtained from project managers in order
to better understand those projects
and determine the specific nature of
the spend and method of overhead absorption.
================= ===============================================
Key observations From the work performed we are satisfied
that the assumptions made in respect
of the rates of overhead absorption
applied in the business are reasonable.
================= ===============================================
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Our application of materiality
=========================================================
We define materiality as the magnitude of misstatement
in the financial statements that makes it probable
that the economic decisions of a reasonably
knowledgeable person would be changed or influenced.
We use materiality both in planning the scope
of our audit work and in evaluating the results
of our work.
Based on our professional judgement, we determined
materiality for the financial statements as
a whole as follows:
GBP4.3m
=======================================================
We determined materiality for the
group to be GBP4.3 million (2016:
GBP4.1 million) using revenue as the
determining base. This materiality
is below 4.2% (2016: 3.4%) of pre-tax
profit and below 1% (2016: 1%) of
equity.
=======================================================
Revenue is determined to be the key
metric used by users of the financial
statements and we have been requested
by the Audit Committee to determine
our materiality on the basis of revenue.
=======================================================
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP82,000 (2016:
GBP79,000), as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we
identified when assessing the overall presentation of the financial
statements.
An overview of the scope of our audit
=============================================================
Given the nature of the group's corporate structure
where all evidence relating to each entity is
compiled at the group's head office and statutory
audits are required for each non-dormant entity
within the group, we performed an audit covering
100% of the group's companies and accordingly
our work was performed on each individual component's
total assets, revenue and profit.
We have also tested the consolidation process.
Opinions on other matters prescribed by the
Companies Act 2006
=============================================================
In our opinion, based on the work undertaken
in the course of the audit:
* the information given in the strategic report and the
directors' report for the financial year for which
the financial statements are prepared is consistent
with the financial statements; and
* the strategic report and the directors' report have
been prepared in accordance with applicable legal
requirements.
In the light of the knowledge and understanding
of the parent company and its environment obtained
in the course of the audit, we have not identified
any material misstatements in the strategic
report and the directors' report.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Matters on which we are required to report by
exception
Adequacy of explanations received We have nothing
and accounting records to report in respect
Under the Companies Act 2006 of these matters.
we are required to report to
you if, in our opinion:
* we have not received all the information and
explanations we require for our audit; or
* adequate accounting records have not been kept by the
parent company, or returns adequate for our audit
have not been received from branches not visited by
us; or
* the parent company financial statements are not in
agreement with the accounting records and returns.
Directors' remuneration We have nothing
Under the Companies Act 2006 to report arising
we are also required to report from these matters.
if in our opinion certain disclosures
of directors' remuneration have
not been made.
Our duty to read other information We confirm that
in the Annual Report we have not identified
Under International Standards any such inconsistencies
on Auditing (UK and Ireland), or misleading
we are required to report to statements.
you if, in our opinion, information
in the annual report is:
* materially inconsistent with the information in the
audited financial statements; or
* apparently materially incorrect based on, or
materially inconsistent with, our knowledge of the
group acquired in the course of performing our audit;
or
* otherwise misleading.
In particular, we are required
to consider whether we have identified
any inconsistencies between our
knowledge acquired during the
audit and the directors' statement
that they consider the annual
report is fair, balanced and
understandable and whether the
annual report appropriately discloses
those matters that we communicated
to the audit committee which
we consider should have been
disclosed.
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.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Respective responsibilities of directors and
auditor
===========================================================
As explained more fully in the directors' responsibilities
statement, the directors are responsible for
the preparation of the financial statements
and for being satisfied that they give a true
and fair view.
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). We also comply
with International Standard on Quality Control
1 (UK and Ireland). Our audit methodology and
tools aim to ensure that our quality control
procedures are effective, understood and applied.
Our quality controls and systems include our
dedicated professional standards review team
and independent partner reviews.
Scope of the audit of the financial statements
=======================================================
An 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 and to identify any information that
is apparently materially incorrect based on,
or materially inconsistent with, the knowledge
acquired by us in the course of performing the
audit. If we become aware of any apparent material
misstatements or inconsistencies we consider
the implications for our report.
Jane Boardman BSc FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Manchester, United Kingdom
26 May 2017
Financial Statements
Consolidated Income Statement
for the year ended 31 March 2017
Note Group Group
2017 2016
GBPm GBPm
Revenue 4 485.5 450.8
--------------------------------- ---- ------- -------
Employee costs 5,6 (46.9) (47.2)
Depreciation and amortisation
expense (net) 5 (99.3) (94.4)
Other operating costs (79.9) (94.6)
Total operating expenses (226.1) (236.2)
Operating profit 5 259.4 214.6
Investment income 8 0.7 0.9
Finance expense (net) 9 (179.1) (94.0)
Profit before taxation 81.0 121.5
Taxation 10 (10.0) (4.5)
Profit for the year attributable
to equity shareholders 27 71.0 117.0
The results shown in the Consolidated Income Statement for the
current and preceding year are derived from continuing
operations.
Consolidated and Company Statement of Comprehensive Income
for the year ended 31 March 2017
Group and Group and
Company Company
2017 2016
Note GBPm GBPm
Profit for the year 71.0 117.0
------------------------------- ---- --------- ---------
Items that will not be
reclassified subsequently
to profit or loss:
Re-measurement of defined
benefit pension schemes 21 (52.1) 9.1
Deferred tax on re-measurement
of defined benefit pension
schemes taken directly
to equity 23 8.9 (1.6)
Adjustment due to change
in future tax rates of
brought forward deferred
tax taken directly to
equity 23 (1.0) (2.2)
=============================== ==== ========= =========
Other comprehensive income
for the year (44.2) 5.3
=============================== ==== ========= =========
Total comprehensive income
for the year attributable
to equity holders 26.8 122.3
------------------------------- ---- --------- ---------
Consolidated and Company Statement of Financial Position
as at 31 March 2017
Group Company Group Company
Note 2017 2017 2016 2016
ASSETS GBPm GBPm GBPm GBPm
Non-current assets
Intangible assets
and goodwill 12 45.5 45.5 39.5 39.5
Property, plant and
equipment 13 3,037.3 3,037.3 2,942.7 2,942.7
Investments 14 - 15.4 - 15.4
---------------------------- ----- --------- --------- --------- ----------
3,082.8 3,098.2 2,982.2 2,997.6
---------------------------- ----- --------- --------- --------- ----------
Current assets
Inventories 15 9.6 9.6 8.5 8.5
Trade and other receivables 16 60.5 60.5 67.9 67.9
Money market deposits 17,20 10.0 10.0 23.5 23.5
Cash and cash equivalents 17,20 142.7 142.7 119.3 119.3
222.8 222.8 219.2 219.2
---------------------------- ----- --------- --------- --------- ----------
Total assets 3,305.6 3,321.0 3,201.4 3,216.8
---------------------------- ----- --------- --------- --------- ----------
LIABILITIES
Current liabilities
Trade and other payables 18 (142.7) (158.4) (137.1) (152.8)
Current income tax
liabilities (8.2) (8.2) (7.1) (7.1)
Borrowings 19 (6.4) (6.4) (4.6) (4.6)
Provisions 22 (1.1) (1.1) (0.6) (0.6)
(158.4) (174.1) (149.4) (165.1)
---------------------------- ----- --------- --------- --------- ----------
Net current assets 64.4 48.7 69.8 54.1
---------------------------- ----- --------- --------- --------- ----------
Non-current liabilities
Borrowings 19 (1,242.7) (1,242.7) (1,228.4) (1,228.4)
Derivative financial
instruments 20 (363.5) (363.5) (267.7) (267.7)
Provisions 22 (2.9) (2.9) (1.9) (1.9)
Retirement benefit
obligations 21 (58.0) (58.0) (16.2) (16.2)
Deferred tax 23 (126.7) (126.7) (158.0) (158.0)
Customer contributions 24 (588.8) (588.8) (561.0) (561.0)
(2,382.6) (2,382.6) (2,233.2) (2,233.2)
---------------------------- ----- --------- --------- --------- ----------
Total liabilities (2,541.0) (2,556.7) (2,382.6) (2, 398.3)
---------------------------- ----- --------- --------- --------- ----------
Total net assets 764.6 764.3 818.8 818.5
---------------------------- ----- --------- --------- --------- ----------
EQUITY
Called up share capital 26 238.4 238.4 238.4 238.4
Share premium account 27 4.4 4.4 4.4 4.4
Revaluation reserve 27 92.5 92.5 93.5 93.5
Capital redemption
reserve 27 8.6 8.6 8.6 8.6
Retained earnings 27 420.7 420.4 473.9 473.6
---------------------------- ----- --------- --------- --------- ----------
Total equity 764.6 764.3 818.8 818.5
---------------------------- ----- --------- --------- --------- ----------
The financial statements of Electricity North West Limited
(registered number 2366949) were authorised for issue and approved
by the Board of Directors on 26 May 2017 and signed on its behalf
by:
D Brocksom
Director
Consolidated Statement of Changes in Equity
for the year ended 31 March 2017
Group
Called Share Capital
up share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2015 238.4 4.4 99.2 8.6 375.9 726.5
Profit for the
year - - - - 117.0 117.0
Transfer from
revaluation
reserve - - (5.7) - 5.7 -
Other comprehensive
income for the
year - - - - 5.3 5.3
Total comprehensive
(expense)/income
for the year - - (5.7) - 128.0 122.3
Transactions
with owners
recorded directly
in equity
Equity dividends
(note 11,27) - - - - (30.0) (30.0)
--------------------- ---------- --------- ------------ ------------ ---------- --------
At 31 March
2016 238.4 4.4 93.5 8.6 473.9 818.8
Profit for the
year - - - - 71.0 71.0
Transfer from
revaluation
reserve - - (1.0) - 1.0 -
Other comprehensive
expense for
the year - - - - (44.2) (44.2)
Total comprehensive
(expense)/income
for the year - - (1.0) - 27.8 26.8
--------------------- ---------- --------- ------------ ------------ ---------- --------
Transactions
with owners
recorded directly
in equity
Equity dividends
(note 11,27) - - - - (81.0) (81.0)
--------------------- ---------- --------- ------------ ------------ ---------- --------
At 31 March
2017 238.4 4.4 92.5 8.6 420.7 764.6
--------------------- ---------- --------- ------------ ------------ ---------- --------
Company Statement of Changes in Equity
for the year ended 31 March 2017
Company
Called Share Capital
up share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2015 238.4 4.4 99.2 8.6 375.6 726.2
Profit for the
year - - - - 117.0 117.0
Transfer from
revaluation
reserve - - (5.7) - 5.7 -
Other comprehensive
income for the
year - - - - 5.3 5.3
Total comprehensive
(expense)/income
for the year - - (5.7) - 128.0 122.3
Transactions
with owners
recorded directly
in equity
Equity dividends
(note 11,27) - - - - (30.0) (30.0)
--------------------- ---------- --------- ------------ ------------ ---------- --------
At 31 March
2016 238.4 4.4 93.5 8.6 473.6 818.5
Profit for the
year - - - - 71.0 71.0
Transfer from
revaluation
reserve - - (1.0) - 1.0 -
Other comprehensive
expense for
the year - - - - (44.2) (44.2)
Total comprehensive
(expense)/income
for the year - - (1.0) - 27.8 26.8
--------------------- ---------- --------- ------------ ------------ ---------- --------
Transactions
with owners
recorded directly
in equity
Equity dividends
(note 11,27) - - - - (81.0) (81.0)
--------------------- ---------- --------- ------------ ------------ ---------- --------
At 31 March
2017 238.4 4.4 92.5 8.6 420.4 764.3
--------------------- ---------- --------- ------------ ------------ ---------- --------
Consolidated and Company Statement of Cash Flows
for the year ended 31 March 2017
Group Company Group Company
Note 2017 2017 2016 2016
GBPm GBPm GBPm GBPm
Operating activities
Cash generated from
operations 31 348.1 348.1 270.8 270.8
Interest paid (46.3) (46.3) (46.8) (46.8)
Tax paid (32.3) (32.3) (22.8) (22.8)
------------------------------ ---- ------- --------- ------- ---------
Net cash generated
from operating activities 269.5 269.5 201.2 201.2
------------------------------ ---- ------- --------- ------- ---------
Investing activities
Interest received and
similar income 0.8 0.8 0.9 0.9
Purchase of property,
plant and equipment (194.3) (194.3) (199.5) (199.5)
Purchase of intangible
assets (10.1) (10.1) (14.9) (14.9)
Customer contributions
received 45.5 45.5 44.3 44.3
Proceeds from sale
of
property, plant and
equipment 0.1 0.1 0.2 0.2
------------------------------ ---- ------- --------- ------- ---------
Net cash used in investing
activities (158.0) (158.0) (169.0) (169.0)
Net cash flow before
financing activities 111.5 111.5 32.2 32.2
Financing activities
Proceeds from borrowings 0.4 0.4 1.8 1.8
Repayment of borrowings (4.8) (4.8) (22.2) (22.2)
Accretion on index
linked swaps (16.2) (16.2)
Transfer from money
market deposits 13.5 13.5 1.5 1.5
Dividends paid to equity
shareholders of the
Company (81.0) (81.0) (30.0) (30.0)
------------------------------ ---- ------- --------- ------- ---------
Net cash used in financing
activities (88.1) (88.1) (48.9) (48.9)
------------------------------ ---- ------- --------- ------- ---------
Net increase/(decrease)
in cash and cash equivalents 23.4 23.4 (16.7) (16.7)
------------------------------ ---- ------- --------- ------- ---------
Cash and cash equivalents
at the beginning of
the year 17 119.3 119.3 136.0 136.0
------------------------------ ---- ------- --------- ------- ---------
Cash and cash equivalents
at the
end of the year 17 142.7 142.7 119.3 119.3
------------------------------ ---- ------- --------- ------- ---------
Notes to the Financial Statements
Electricity North West Limited is a company incorporated in the
United Kingdom under the Companies Act 2006.
1. Adoption of new and revised Standards
Amendments to IFRSs that are mandatorily effective for the
current year
Certain new and amended standards have taken effect during the
year, as outlined below. The Directors have determined that these
have not had any material impact on the amounts or disclosures
reported in these Financial Statements:
-- Amendments to IFRS 10, IFRS 12 and IAS 28 - Investment
Entities: Applying the Consolidation Exception. The Group and
Company do not meet the definition of an investment entity,
therefore the amendments have no impact.
-- Amendments to IFRS 11 - Accounting for Acquisitions of
Interests in Joint Operations. The Group and Company have not
acquired a joint operation in the year, therefore the amendments
have no impact.
-- Amendments to IAS 1 - Disclosure Initiative. The amendments
clarify that an entity need not provide a specific disclosure
required by an IFRS if the information resulting from that
disclosure is not material, whilst reiterating that additional
disclosures should be considered when compliance with the specific
requirements in IFRS is insufficient for the understanding of users
of the financial statements. The structure of the financial
statements is also addressed, in terms of systematic ordering and
grouping of notes. The amendments have no material impact. In
addition, the amendments clarify the treatment of other
comprehensive income from associates and joint ventures accounted
for using the equity method. The Group and Company have no such
arrangements, therefore this amendment has no impact.
-- Amendments to IAS 16 and IAS 38 - Clarification of Acceptable
Methods of Depreciation and Amortisation. The amendments to IAS 16
prohibit the use of a revenue-based depreciation method for items
of property, plant and equipment. The amendments to IAS 38
introduce a rebuttable presumption that revenue is not an
appropriate basis for amortisation of an intangible asset. The
Group and Company uses the straight-line method for depreciation
and amortisation; therefore the amendments have no impact.
-- Amendments to IAS 16 and IAS 41 - Agriculture: Bearer Plants.
As the Group and Company are not engaged in agricultural activities
these amendments have no impact.
-- Amendments to IAS 27 - Equity Method in Separate Financial
Statements. The amendments allow the use of the equity method in
separate financial statements and also clarify when a parent ceases
to be, or becomes, an investment entity the change should be
accounted for from the date of the change. The Company accounts for
investments in subsidiaries at cost and is not an investment
entity; therefore the amendments have no impact.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
The Group has adopted the amendments to IFRSs included in the
Annual Improvements to IFRSs 2012-2014 Cycle for the first time in
the current year. The adoption of these amendments has had no
effect on the Group's consolidated financial statements.
-- IFRS 5 - the amendments introduce specific guidance for when
an entity reclassifies an asset (or disposal group) from
held-for-sale to held-for-distribution to owners (or vice versa).
Such a change should be considered as a continuation of the
original plan of disposal and hence requirements set out in IFRS 5
regarding the change of sale plan do not apply. The guidance for
when held-for-distribution accounting is discontinued is also
clarified.
-- IFRS 7 - the amendments provide additional guidance to
clarify whether a servicing contract is continuing involvement in a
transferred asset for the purpose of the disclosures required in
relation to transferred assets.
-- IAS 19 - the amendments clarify that the rate used to
discount post-employment benefit obligations should be determined
by reference to market yields at the end of the reporting period on
high quality corporate bonds. The assessment of the depth of a
market for high quality corporate bonds should be at the currency
level (i.e. the same currency as the benefits are to be paid). For
currencies for which there is no deep market in such high quality
corporate bonds, the market yields at the end of the reporting
period on government bonds denominated in that currency should be
used instead.
New and revised IFRSs in issue but not yet effective
At the date of authorisation of these financial statements, the
following Standards and Interpretations which have not been applied
in these financial statements were in issue but not yet effective
(and, in some cases, had not yet been adopted by the EU):
IFRS 9: Financial Instruments
IFRS 15: Revenue from Contracts with Customers
IFRS 16: Leases
IFRS 2 (amendments): Classification and Measurement of
Share-based Payment Transactions
IAS 7 (amendments): Disclosure Initiative
IAS 12 (amendments): Recognition of Deferred Tax Assets for
Unrealised Losses
IFRS 10 and IAS 28 (amendments): Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
The Group intends to adopt these standards, as applicable, when
they become effective. It is not expected that they will have a
material impact on the financial statements of the Group, except as
noted below:
-- IFRS 9 will impact the measurement and disclosures of financial instruments; and
-- IFRS 15 may have an impact on revenue recognition and related disclosures.
The Group is assessing the impact of both these IFRSs.
Beyond the information above, it is not practicable to provide a
reasonable estimate of the effect of these standards until a
detailed review has been completed.
Notes to the Financial Statements (continued)
2. Significant accounting policies
The principal accounting policies adopted in the preparation of
these financial statements are set out below. These policies have
been applied consistently in the current year and the prior
year.
Basis of accounting
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRS') adopted by the
European Union ('EU') and Article 4 of the IAS Regulation and have
chosen to prepare the financial statements of the Company under
IFRS as adopted by the EU.
The financial statements have been prepared on the historical
cost basis, except for financial instruments that are measured at
fair value, and certain property, plant and equipment that were
revalued in 1997. Historical cost is generally based on the fair
value of the consideration given in exchange for goods and
services. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, regardless of
whether that price is directly observable or estimated using
another valuation technique. More details on the fair value
measurements of financial instruments are given in note 20.
The financial statements are presented in sterling, which is the
functional currency of the Company and Group. All values are
rounded to the nearest million pounds (GBPm) unless otherwise
indicated.
Basis of consolidation
The Group financial statements consolidate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries), made up to 31 March each year.
The results of subsidiaries acquired or disposed of during the
year are included in the Consolidated Income Statement from the
date the Company gains control until the date the Company ceases to
control the subsidiary. There have been no such acquisitions or
disposals in the current or prior year.
Accounting policies are consistent in all Group companies.
All intragroup assets and liabilities, equity, income, expenses
and cash flows relating to transactions between Group members are
eliminated on consolidation.
Going concern
The Directors have, at the time of approving the financial
statements, a reasonable expectation that the Company and Group
have adequate resources to continue in operational existence for
the foreseeable future. Accordingly, they continue to adopt the
going concern basis in preparing the Annual Report and Consolidated
Financial Statements. Further detail is contained in the Strategic
Report.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Business combinations and goodwill
Acquisitions of subsidiaries are accounted for using the
acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the
sum of the acquisition-date fair values of assets transferred by
the Group, liabilities incurred by the Group to the former owners
of the acquiree and the equity interest issued by the Group in
exchange for control of the acquiree. Acquisition related costs are
recognised in profit or loss as incurred.
Goodwill is measured as the excess of the consideration
transferred over the net of the acquisition-date amounts of the
identifiable assets acquired and liabilities assumed, and is
recognised as an asset. If, after reassessment, the net of the
acquisition-date amounts of the identifiable assets acquired and
liabilities assumed exceeds the consideration transferred, the
excess is recognised immediately in profit or loss.
Goodwill is allocated to cash-generating units and is not
amortised but reviewed for impairment annually, or more frequently
when there is an indication that it may be impaired.
Investments (Company only)
Investments in subsidiary undertakings are stated at cost less
any provisions for permanent diminution in value. Dividends
received and receivable are credited to the Company's income
statement to the extent that they represent a realised profit for
the Company.
Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable primarily for the distribution of
electricity in the normal course of business, net of VAT.
The recognition of revenue from the distribution of electricity
includes an assessment of the volume of unbilled energy distributed
as at the year end. Non-distribution sales relate to the invoice
value of other goods and services provided which also relate to the
electricity network.
Where turnover received or receivable in the year exceeds the
maximum amount permitted by regulatory agreement, adjustments will
be made to future prices to reflect this over-recovery; no
liability is recognised as such an adjustment to future prices
relates to the provision of future services. Similarly no asset is
recognised where a regulatory agreement permits adjustments to be
made to future prices in respect of an under-recovery.
The Group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. Payments received in advance of revenue recognition are
recorded as deferred revenue.
Customer contributions
Customer contributions received in respect of expenditure on
property, plant and equipment are treated as deferred income, which
is credited to the Income Statement over the estimated economic
lives of the related assets. Amortisation of contributions received
post 1 July 2009 is shown as revenue, rather than within operating
costs, following the adoption of IFRIC 18.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Refundable customer deposits
Refundable customer deposits received in respect of property,
plant and equipment are held as a liability until repayment
conditions come into effect and the amounts are repaid to the
customer or otherwise credited to customer contributions.
Dividend income
Dividend income is recognised when the Company's right to
receive payment is established.
Investment income
Interest income is recognised when it is probable that the
economic benefits will flow to the Group and the amount of the
revenue can be measured reliably. It is accrued on a time basis, by
reference to the principal outstanding and the effective interest
rate.
Leases
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
Operating lease rentals are charged to the Income Statement on a
straight-line basis over the period of the lease.
Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets are added to the
cost of those assets. A qualifying asset is any major project with
a projected timescale of greater than 12 months. Capitalisation
commences when activities are undertaken to prepare the asset for
use, and expenditure and borrowing costs are being incurred.
Capitalisation ceases when substantially all of the activities
necessary to prepare the intended asset for its intended use or
sale, are complete.
All other borrowing costs are recognised in profit or loss in
the period in which they are incurred.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Operating profit
Operating profit is stated after charging operating expenses but
before investment income, net finance expense and other gains and
losses.
Retirement benefit costs
Payments to the defined contribution retirement benefit scheme
are recognised as an expense when employees have rendered service
entitling them to the contributions.
The defined benefit retirement benefit scheme is provided
through a division of the Electricity Supply Pension Scheme
('ESPS'). The most recent actuarial valuation for the scheme for
funding purposes was carried out at 31 March 2016; agreed Actuarial
valuations are carried out thereafter at intervals of not more than
three years.
Results are affected by the actuarial assumptions used, which
are disclosed in note 21. Actual experience may differ from the
assumptions made, for example, due to changing market and economic
conditions and longer or shorter lives of participants.
Defined benefit costs are split into three categories:
-- current service cost, past service cost and gains and losses
on curtailments and settlements, recognised in employee costs (see
note 6) in the Consolidated Income Statement;
-- net interest expense or income, recognised within finance costs (see note 9); and
-- re-measurement comprising actuarial gains and losses and the
return on scheme assets (excluding interest) are recognised
immediately in the balance sheet with a charge or credit to the
statement of comprehensive income in the period in which they
occur.
Defined benefit assets are measured at fair value while
liabilities are measured at present value. The difference between
the two amounts is recognised as a surplus or obligation in the
Statement of Financial Position.
IFRIC14: 'The limit on a defined benefit asset, minimum funding
requirements and their interaction' was published by the
interpretations committee of the International Accounting Standards
Board in July 2007 and was adopted during the year ended 31 March
2008. IFRIC14 provides guidance on the extent to which a pension
scheme surplus should be recognised as an asset and may also
require additional liabilities to be recognised where minimum
funding requirements exist. Legal opinion was obtained that a
pension surplus could be recovered on wind up of the scheme and
could therefore be recognised, along with associated liabilities.
At the current time, this interpretation does not affect the
Group.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Taxation
The tax expense represents the sum of current and deferred tax
charges for the financial year, adjusted for prior year items.
Current taxation
Current tax is based on taxable profit for the year and is
calculated using tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. Taxable profit
differs from the net profit as reported in the Income Statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible.
Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises
from the initial recognition of goodwill or from the initial
recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries, except where
the Group is able to control the reversal of the temporary
difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised based on tax rates and laws that have been enacted or
substantively enacted at the balance sheet date.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Deferred tax is charged
or credited in the Income Statement, except when it relates to
items charged or credited in other comprehensive income, in which
case the deferred tax is also dealt with in other comprehensive
income.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Intangible assets
Intangible assets with finite useful economic lives are measured
initially at cost and are amortised on a straight-line basis over
their estimated useful lives. The carrying amount is reduced by any
provision for impairment where necessary.
Amortisation periods for categories of intangible assets
are:
Computer software 3-10 years
Intangible assets under construction are not amortised.
Amortisation commences from the date the intangible asset is
available for use.
The Licence has an indefinite useful economic life and,
therefore, is tested annually for impairment.
Property, plant and equipment
Property, plant and equipment comprise operational structures,
non-operational land and buildings, fixtures and equipment,
vehicles and other assets.
Operational structures
Infrastructure assets are depreciated by writing off their
deemed cost, less the estimated residual value, evenly over their
useful lives, which range from 5 to 80 years. Employee costs
incurred in implementing the capital schemes of the Group are
capitalised within operational structure assets.
In 1997 the Company undertook a revaluation of certain assets
due to a business combination. This resulted in the creation of a
revaluation reserve of GBP234.9m. The additional depreciation as
result of the revaluation is transferred from the revaluation
reserve to retained earnings on an annual basis.
Assets other than operational structures
All other property, plant and equipment is stated at historical
cost less accumulated depreciation.
Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Subsequent costs are
included in the asset's carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group
and the cost of the item can be measured reliably. All other
repairs and maintenance are charged to the Income Statement during
the financial year in which they are incurred.
Freehold land and assets in the course of construction are not
depreciated until the asset is available for use.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Property, plant and equipment (continued)
Assets other than operational structures (continued)
Other assets are depreciated by writing off their cost evenly
over their estimated useful lives, based on management's judgement
and experience, which are principally as follows:
Buildings 30-60 years
Fixtures and equipment, vehicles and other 3-40 years
Depreciation methods and useful lives are re-assessed annually
and, if necessary, changes are accounted for prospectively.
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sale proceeds and
the carrying amount of the asset and is recognised in the Income
Statement.
Impairment of tangible and intangible fixed assets
Tangible and intangible assets are reviewed for impairment at
each balance sheet date to determine whether there is any
indication that those assets have suffered an impairment loss. If
any such indication exists, the recoverable amount of the asset is
estimated to determine the extent of the impairment loss, if any.
Where the asset does not generate cash flows that are independent
from other assets, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
An intangible asset with an indefinite life is tested for
impairment at least annually and whenever there is an indication of
impairment.
The recoverable amount is the higher of fair value less costs of
disposal, and value in use. Value in use represents the net present
value of expected future cash flows discounted on a pre-tax basis
using a rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit)
is estimated to be less than its carrying amount, the carrying
amount of the asset (or cash-generating unit) is reduced to its
recoverable amount. An impairment loss is recognised immediately in
profit or loss.
Where an impairment loss subsequently reverses, the reversal is
recognised immediately in profit or loss and the carrying amount of
the asset is increased to the revised estimate of its recoverable
amount, but not so as to exceed the carrying amount that would have
been determined had no impairment loss been recognised in prior
years.
Research and development
Research costs are recognised in the Income Statement as
incurred. Development expenditure on an individual project is
recognised as an intangible asset when the Group can demonstrate:
the technical feasibility of completing the intangible asset so
that it will be available for use, its intention to complete and
its ability to use the asset, how the asset will generate future
economic benefits, the availability of resources to complete the
asset and the ability to reliably measure the expenditure incurred
during development.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is based on weighted average cost and includes
expenditure incurred in acquiring the inventories, conversion costs
and other costs in bringing them to their present location and
condition. Net realisable value represents the estimated selling
price, net of estimated costs of selling.
Financial instruments
Financial assets and financial liabilities are recognised in the
Group's balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of financial assets and
financial liabilities (other than financial assets and financial
liabilities at fair value through profit or loss) are added or
deducted from the fair value of the financial assets or financial
liabilities, as appropriate, on initial recognition. Transaction
costs, directly attributable to the acquisition of financial assets
or financial liabilities at fair value through profit or loss, are
recognised immediately in profit or loss.
If the transaction price differs from fair value at initial
recognition, the Group will account for such difference as
follows:
-- if fair value is evidenced by a quoted price in an active
market for an identical asset or liability or based on a valuation
technique that uses only data from observable markets, then the
difference is recognised as a gain or loss on initial recognition
(i.e. day 1 profit or loss);
-- in all other cases, the fair value will be adjusted to bring
it in line with the transaction price (i.e. day 1 profit or loss
will be deferred by including it in the initial carrying amount of
the asset or liability).
After initial recognition, the deferred gain or loss will be
released to profit or loss such that it reaches a value of zero at
the time when the contract can be valued using active market quotes
or verifiable objective market information. The Group policy for
the amortisation of day 1 gain or loss is to release it in a
reasonable fashion based on the facts and circumstances (e.g. using
a straight line amortisation).
Financial assets
All financial assets are recognised and derecognised on a trade
date basis where the purchase or sale of a financial asset is under
a contract whose terms require delivery of the financial asset
within the timeframe established by the market concerned, and are
initially measured at fair value, plus transaction costs, except
for those financial assets classified as at fair value through
profit or loss when the transactions costs are recognised
immediately in profit or loss.
Financial assets are classified into the relevant categories, as
specified in IAS 39. The classification depends on the nature and
purpose of the financial assets and is determined at the time of
initial recognition. The financial assets held by the Group are
either financial assets 'at fair value through profit or loss'
(FVTPL) or 'loans and receivables'.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Financial assets (continued)
Financial assets at FVTPL
The financial assets held by the Group classified as at FVTPL
are derivatives and are stated at fair value, with any gains or
losses arising on re-measurement recognised in profit or loss. Fair
value is determined in the manner described in note 20.
Loans and receivables
Trade receivables, loans and other receivables that have fixed
or determinable payments that are not quoted in an active market
are classified as 'loans and receivables' and are measured at
amortised cost using the effective interest method, less any
impairment. Interest income is recognised by applying the effective
interest rate.
Trade receivables
Trade receivables are stated at nominal value with any
allowances made for any estimated irrecoverable amounts.
Cash and cash equivalents
In the consolidated cash flow statement and related notes, cash
and cash equivalents includes cash at bank and in hand, deposits,
other short-term highly liquid investments which are readily
convertible into known amounts of cash and have a maturity of three
months or less and which are subject to an insignificant risk of
change in value.
Money market deposits
Money market deposits with terms to maturity in excess of three
months are not included as cash or cash equivalents and are
separately disclosed on the face of the Statement of Financial
Position.
Effective interest method
The effective interest method is a method of calculating the
amortised cost of a debt instrument and of allocating interest
income over the relevant period. The effective interest rate is the
rate that exactly discounts estimated future cash receipts
(including all fees and points paid or received that form an
integral part of the effective interest rate, transaction costs and
other premiums or discounts) through the expected life of the debt
instrument, or, where appropriate, a shorter period, to the net
carrying amount on initial recognition.
Income is recognised on an effective interest basis for debt
instruments other than those financial assets classified as at
FVTPL.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for
indicators of impairment at each balance sheet date. Financial
assets are impaired where there is objective evidence that, as a
result of one or more events that occurred after the initial
recognition of the financial asset, the estimated future cash flows
of the investment have been affected.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Financial assets (continued)
Impairment of financial assets (continued)
The carrying amount of the financial asset is reduced by the
impairment loss directly for all financial assets with the
exception of trade receivables, where the carrying amount is
reduced through the use of an allowance account. When a trade
receivable is considered uncollectible, it is written off against
the allowance account. Subsequent recoveries of amounts previously
written off are credited against the allowance account. Changes in
the carrying amount of the allowance account are recognised in
profit or loss.
Derecognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire, or when
it transfers the financial asset and substantially all the risks
and rewards of ownership of the asset to another entity.
On derecognition of a financial asset, the difference between
the asset's carrying amount and the sum of the consideration
received and receivable is recognised in profit or loss.
Financial liabilities and equity
Debt and equity instruments are classified as either financial
liabilities or as equity in accordance with the substance of the
contractual arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by the Group are recognised
at the proceeds received, net of direct issue costs.
Financial liabilities
Financial liabilities are classified as either financial
liabilities 'at FVTPL' or 'other financial liabilities'.
Financial liabilities at FVTPL
The financial liabilities held by the Group classified as at
FVTPL are either derivatives or those designated as at FVTPL and
are stated at fair value, with any gains or losses arising on
re-measurement recognised in profit or loss. Fair value is
determined in the manner described in note 20.
The Group elects to designate a financial liability at inception
as at FVTPL on the basis that it meets the conditions specified in
IAS 39 'Financial Instruments: Recognition and Measurement'. The
GBP250m 8.875% 2026 bond was designated as at FVTPL upon initial
recognition as the complexity of the associated swaps at that time
meant that the criteria to allow hedge accounting was not met.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Financial liabilities and equity (continued)
Other financial liabilities
Other financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs and are
subsequently measured at amortised cost using the effective
interest method, with interest expense recognised on an effective
yield basis.
The effective interest method is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is
the rate that exactly discounts estimated future cash payments
through the expected life of the financial liability, or, where
appropriate, a shorter period, to the net carrying amount on
initial recognition.
Trade payables
Trade payables are stated at their nominal value.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or have
expired. The difference between the carrying amount of the
financial liability derecognised and the consideration paid and
payable is recognised in profit or loss.
When the Group exchanges with the existing lender one debt
instrument into another one with the substantially different terms,
such exchange is accounted for as an extinguishment of the original
financial liability and the recognition of a new financial
liability. Similarly, the Group accounts for substantial
modification of terms of an existing liability, or part of it, as
an extinguishment of the original financial liability and the
recognition of a new liability. It is assumed that the terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective rate is at
least 10 per cent different from the discounted present value of
the remaining cash flows of the original financial liability.
Derivative financial instruments
The Group enters into a variety of derivative financial
instruments to manage its exposure to interest rate and inflation
risk. Further details of derivative financial instruments are
disclosed in note 20.
Derivatives are initially recognised at fair value at the date a
derivative contract is entered into and are subsequently
re-measured to their fair value at each balance sheet date. The
resulting gain or loss is recognised in profit or loss immediately;
the Group does not currently designate derivatives into hedging
relationships and apply hedge accounting.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is
recognised as a financial liability. A derivative is presented as a
non-current asset or a non-current liability if the remaining
maturity of the instrument is more than 12 months and it is not
expected to be realised or settled within 12 months. Other
derivatives are presented as current assets or current
liabilities.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Embedded derivatives
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their risks
and characteristics are not closely related to those of the host
contracts and the host contracts are not measured at FVTPL.
An embedded derivative is presented as a non-current asset or
non-current liability if the remaining maturity of the hybrid
instrument to which the embedded derivative relates is more than 12
months and is not expected to be realised or settled within 12
months. Other derivatives are presented as current assets or
current liabilities.
Hedge accounting
The Group considers hedge accounting when entering any new
derivative, however, there are currently no formal hedging
relationships in the Group.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation. The amount recognised as a provision is the best
estimate of the consideration required to settle the present
obligation at the balance sheet date, taking into account the risks
and uncertainties surrounding the obligation. Where a provision is
measured using the cash flows estimated to settle the present
obligation, its carrying amount is the present value of those cash
flows (when the effect of the time value of money is material).
3. Critical accounting judgements and key sources of estimation
uncertainty
In the application of the Group's accounting policies, which are
described in note 2, the directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period; or in the period of the revision and future
periods if the revision affects both current and future
periods.
Critical judgements in applying the group's accounting
policies
The following are the critical judgements, apart from those
involving estimations (which are dealt with separately below), that
the directors have made in applying the Group's accounting policies
and that have the most significant effect on the amounts recognised
in the financial statements.
Notes to the Financial Statements (continued)
3. Critical accounting judgements and key sources of estimation
uncertainty (continued)
Critical judgements in applying the group's accounting policies
(continued)
Revenue recognition
Under IFRS, the Group recognises revenue generally at the time
of delivery and when collection of the resulting receivable is
reasonably assured. Should management consider that the criteria
for revenue recognition are not met for a transaction, revenue
recognition would be delayed until such time as the transaction
becomes fully earned. Payments received in advance of revenue
recognition are recorded as deferred revenue. The Group recognises
revenue in accordance with its entitlement to receive revenue as
established by the periodic regulatory price review process. The
principal direct customers of the business are the electricity
supply companies that utilise the Group's distribution network to
distribute electricity from generators to the end consumer. Revenue
from such activity is known as 'use of system'. The amount billed
reflects the volume of electricity distributed, including estimates
of the units distributed to customers. Revenue is gradually
adjusted to reflect actual usage in the period over which the
meters are read.
Property Plant and Equipment
The Group recognises infrastructure assets where the
expenditures incurred enhance or increase the capacity of the
network, whereas any expenditure classed as maintenance is expensed
in the period it is incurred. Capital projects often contain a
combination of enhancement and maintenance activity which are not
distinct and therefore the allocation of costs between capital and
operating expenditure is inherently judgemental. The costs
capitalised include an allocation of overhead costs, relating to
the proportion of time spent by support function staff, which is
also inherently judgemental.
Taxation
Assessing the outcome of uncertain tax positions such as the tax
treatment of provisions requires judgements to be made regarding
the application of tax law and the results of negotiations with,
and enquiries from, tax authorities.
Accounting for provisions and contingencies
The Group is subject to a number of claims, incidental to the
normal conduct of its business, relating to and including
commercial, contractual and employment matters, which are handled
and defended in the ordinary course of business. The Group
routinely assesses the likelihood of any adverse judgements or
outcomes to these matters as well as ranges of probable and
reasonably estimated losses. Reasonable judgements are made by
management after considering available information including
notifications, settlements, estimates performed by independent
parties and legal counsel, available facts, identification of other
potentially responsible parties and their ability to contribute,
and prior experience.
A provision is recognised when it is probable that an obligation
exists for which a reliable estimate can be made of the obligation
after careful analysis of the individual matter. Matters that
either are possible obligations or do not meet the recognition
criteria for a provision are disclosed, unless the possibility of
transferring economic benefits is remote.
Notes to the Financial Statements (continued)
3. Critical accounting judgements and key sources of estimation
uncertainty (continued)
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources
of estimation uncertainty that may have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are outlined below.
Impairment of tangible and intangible assets (including
goodwill)
Management assesses the recoverability of tangible and
intangible assets on an annual basis. Determining whether any of
those assets are impaired requires an estimation of the value in
use of the asset to the Group. This value in use calculation
requires the Group to estimate the future cash flows expected to
arise from the asset and a suitable discount rate in order to
calculate present value for the asset and compare that to its
carrying value. This concluded that no impairment loss is required
against those assets. Details of the impairment loss calculation
are set out in note 13.
Fair values of derivative financial instruments
In estimating the fair value of derivative financial
instruments, the Group uses market-observable data to the extent it
is available. Where such data is not available, certain estimates
regarding inputs to the valuation are required to be made.
Information about the valuation techniques and inputs used are
disclosed in note 20.
Retirement benefit schemes
The Group's defined benefit obligation is derived using various
assumptions, as disclosed in note 21. Results can be affected
significantly by the assumptions used, which management decide
based on advice by a firm of actuaries.
Notes to the Financial Statements (continued)
4. Revenue
2017 2016
Group GBPm GBPm
-------- ----- -----
Revenue 485.5 450.8
-------- ----- -----
Predominantly all Group revenues arise from electricity
distribution in the North West of England and associated
activities. Only one operating segment is therefore regularly
reviewed by the Chief Executive Officer and Executive Leadership
Team. Included within the above are revenues from two customers
(2016: three), each of which represented more than 10 per cent of
the total revenue. Revenue from these customers totalled GBP162.8m
(2016: GBP234.4m). No other customer represented more than 10 per
cent of revenues either this year or in the prior year.
5. Operating profit
The following items have been included in arriving at the
Group's operating profit:
2017 2016
Group GBPm GBPm
-------------------------------------- ------ ------
Employee costs (see note 6) 46.9 47.2
Depreciation and amortisation expense
(net)
Depreciation of property, plant
and equipment
Owned assets (see note 13) 105.8 100.3
Amortisation of intangible assets
and customer contributions
Software (see note 12) 4.1 4.8
Customer contributions1 (see note
24) (10.6) (10.7)
Depreciation and amortisation expense
(net) 99.3 94.4
-------------------------------------- ------ ------
Other income
Profit on disposal of property,
plant and equipment (0.1) (0.2)
-------------------------------------- ------ ------
Provision charge/ (credit) (see
note 22) 1.9 (1.0)
-------------------------------------- ------ ------
Other operating costs include:
Research and development 3.9 6.7
Write down of inventories to net
realisable value 0.3 0.2
Operating leases:
- land and buildings 0.7 0.7
- hire of plant and machinery 1.9 2.7
-------------------------------------- ------ ------
1 In the current year GBP5.5m (2016: GBP4.6m) of customer
contributions amortisation has been amortised through revenue in
line with IFRIC 18.
Notes to the Financial Statements (continued)
5. Operating profit (continued)
Analysis of the auditor's remuneration is as follows:
2017 2016
Group GBPm GBPm
---------------------------------- ----- -----
Fees payable to the Company's
auditor and their associates
for the audit of the Company's
annual financial statements 0.1 0.1
Total audit fees 0.1 0.1
---------------------------------- ----- -----
Audit-related assurance services 0.1 0.1
Taxation advisory services 0.1 -
Total non-audit fees 0.2 0.1
---------------------------------- ----- -----
Total fees 0.3 0.2
Fees payable to Deloitte LLP and their associates for non-audit
services to the Company are not required to be disclosed because
the consolidated financial statements of the Parent are required to
disclose such fees on a consolidated basis.
6. Employee costs
2017 2016
Group GBPm GBPm
------------------------------- ------ ------
Wages and salaries 80.6 77.3
Social security costs 8.8 7.6
Pension costs (see note 21) 15.6 17.4
------------------------------- ------ ------
Employee costs (including
Directors' remuneration) 105.0 102.3
Costs transferred directly
to fixed assets (58.1) (55.1)
------------------------------- ------ ------
Charged to operating expenses 46.9 47.2
The average monthly number of employees during the year
(including Executive Directors):
2017 2016
Group Number Number
-------------------------- ------- -------
Electricity distribution 1,666 1,604
Notes to the Financial Statements (continued)
7. Directors' remuneration
2017 2016
Group GBPm GBPm
------------------------------------ ----- -----
Salaries and other short-term
employee benefits 1.0 0.9
Accrued bonus 0.5 0.1
Amounts receivable under long-term
incentive schemes 0.5 0.3
2.0 1.3
The aggregate emoluments of the Directors in 2017 amounted to
GBP1,979,000 (2016: GBP1,295,865). Emoluments comprise salaries,
fees, taxable benefits, compensation for loss of office and the
value of short-term and long-term incentive awards. The aggregated
emoluments of the highest paid Director in 2017 in respect of
services to the Group amounted to GBP865,000 (2016: GBP682,000).
Under the Executive Incentive Plan bonuses are awarded and either
paid in the following financial year (accrued bonus) or paid in
subsequent years (amounts receivable under long-term incentive
schemes). There were no amounts payable for compensation for loss
of office in the year (2016: GBP35,000). Not included in the
amounts shown above are further payments made in respect of
Directors' services, as detailed in note 30.
As at 31 March 2017 the Directors have no interests in the
ordinary shares of the Company (2016: same).
8. Investment income
2017 2016
Group GBPm GBPm
----------------------------------- ----- -----
Interest receivable on short-term
bank deposits held at amortised
cost 0.7 0.9
Total investment income 0.7 0.9
Notes to the Financial Statements (continued)
9. Finance expense (net)
2017 2016
Group GBPm GBPm
-------------------------------------- ------ ------
Interest payable
Interest payable on Group borrowings 14.7 15.0
Interest payable on borrowings
held at amortised cost 23.0 23.3
Interest payable on borrowings
designated at fair value through
profit or loss 22.2 22.2
Net receipts on derivatives held
for trading (12.0) (12.9)
Other finance charges related
to index-linked debt 9.5 3.9
Accretion on index-linked swaps 16.2 -
Interest cost on pension plan
obligations (see note 21) 0.1 0.7
Capitalisation of borrowing costs
under IAS 23 (0.8) (1.0)
====================================== ====== ======
Total interest expense 72.9 51.2
Movements on financial instruments
Fair value movement on borrowings
designated at fair value through
profit or loss 10.3 (12.7)
Fair value movement on derivatives
held for trading 95.9 55.5
Total fair value movements 106.2 42.8
Total finance expense (net) 179.1 94.0
Borrowing costs capitalised in the year under IAS 23 were
GBP0.8m (2016: GBP1.0m), using an average annual capitalisation
rate of 4.9% (2016: 4.9%).
The fair value movement of the borrowings designated at fair
value through profit or loss is derived from movements in the
market ask price of the bond; this is a Level 1 input under IFRS
13. The fair value movements on the derivatives are derived using a
discounted cash flow technique using both market expectations of
future interest rates and future inflation levels, obtained from
Bloomberg, and calibrations to observable market transactions
evidencing fair value; these are Level 2 inputs and Level 3 inputs
under IFRS 13. Note 20 provides more detail on this.
There have been GBP16.2m (2016: GBPnil) in accretion payments on
the index-linked swaps in the year; these are scheduled
five-yearly, seven-yearly and ten-yearly with the next payment due
in July 2017. No swaps have been closed out in the year (2016:
same).
Notes to the Financial Statements (continued)
10. Taxation
2017 2016
Group GBPm GBPm
-------------------------------- ------ ------
Current tax
Current year 34.4 31.9
Prior year (1.1) 1.6
Deferred tax
Current year (14.7) (6.6)
Prior year 1.2 (1.9)
Impact of change in future tax
rates (9.8) (20.5)
================================ ====== ======
Tax charge for the year 10.0 4.5
Corporation tax is calculated at 20% (2016: 20%) of the
estimated assessable profit for the period. The rate reduces to 19%
on 1 April 2017 and 17% on 1 April 2020.
Deferred tax is calculated using the rate at which it is
expected to reverse.
The table below reconciles the notional tax charge at the UK
corporation tax rate to the effective tax rate for the year:
2017 2016
Group GBPm GBPm
==================================== ===== ======
Profit before tax 81.0 121.5
==================================== ===== ======
Tax at the UK corporation tax
rate of 20% (2016: 20%) 16.2 24.3
Prior year tax adjustments 0.1 (0.3)
Reduction in current year deferred
tax due to rate change 2.6 0.7
Non taxable expense 0.9 0.3
Impact of change in future tax
rates (9.8) (20.5)
==================================== ===== ======
Tax charge for the year 10.0 4.5
Notes to the Financial Statements (continued)
11. Dividends
Amounts recognised as distributions to equity holders in the
year comprise:
2017 2016
Group and Company GBPm GBPm
---------------------------------- ----- -----
Final dividends for the year
ended 31 March 2016 of 3.77
pence per share 18.0 -
Interim dividends for the year
ended 31 March 2017 of 13.21
pence per share (31 March 2016:
6.29 pence) 63.0 30.0
81.0 30.0
In the year ended 31 March 2017 the Company declared interim
dividends of GBP63m, which were paid in December 2016 (31 March
2016: GBP30m). The final dividend for the year ended 31 March 2016
of GBP18m was paid in June 2016. At the Board meeting in May 2017
the Directors proposed a final dividend of GBP12m for the year
ended 31 March 2017, subject to approval by equity holders of the
Company; that is not a liability in the financial statements at 31
March 2017.
Notes to the Financial Statements (continued)
12. Intangible assets and goodwill
Assets
under
the course
Group and Company Goodwill Software of construction Total
GBPm GBPm GBPm GBPm
-------------------- -------- -------- ---------------- -----
Cost
At 1 April 2015 10.1 55.9 11.0 77.0
Additions - 5.9 9.0 14.9
Transfers - 6.6 (6.6) -
Disposals - - - -
At 31 March 2016 10.1 68.4 13.4 91.9
Additions - 2.9 7.2 10.1
Transfers - 3.4 (3.4) -
-------------------- -------- -------- ---------------- -----
At 31 March 2017 10.1 74.7 17.2 102.0
-------------------- -------- -------- ---------------- -----
Amortisation
At 1 April 2015 - 47.6 - 47.6
Charge for the year - 4.8 - 4.8
Disposals - - - -
At 31 March 2016 - 52.4 - 52.4
Charge for the year - 4.1 - 4.1
Disposals - - - -
At 31 March 2017 - 56.5 - 56.5
-------------------- -------- -------- ---------------- -----
Net book value
At 31 March 2017 10.1 18.2 17.2 45.5
-------------------- -------- -------- ---------------- -----
At 31 March 2016 10.1 16.0 13.4 39.5
-------------------- -------- -------- ---------------- -----
In the Company, goodwill arose on the acquisition of assets and
liabilities of Electricity North West Number 1 Company Ltd
(previously Electricity North West Services Ltd, having changed its
name on 21 October 2016) in the year ended 31 March 2011. This
value reflects the excess of the investment over the book value of
the trade and assets at the date of acquisition.
At 31 March 2017, the Group and Company had entered into
contractual commitments for the acquisition of software amounting
to GBP6.3m (2016: GBP11.1m).
At each balance sheet date the Group reviews the carrying
amounts of its goodwill and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss (see note 13).
Notes to the Financial Statements (continued)
13. Property, plant and equipment
Fixtures Assets
Non operational and equipment, under
Operational land and vehicles the course
Group and Company Structures buildings and other of construction Total
GBPm GBPm GBPm GBPm GBPm
------------------ ----------- --------------- --------------- ---------------- -------
Cost or valuation
At 1 April
2015 3,770.1 24.6 70.7 321.3 4,186.7
Additions 138.5 2.4 7.7 57.8 206.4
Transfers 238.9 4.1 14.6 (257.6) -
Disposals (1.4) - (0.8) - (2.2)
At 31 March
2016 4,146.1 31.1 92.2 121.5 4,390.9
Additions 147.4 0.6 7.9 44.5 200.4
Transfers 42.2 0.4 4.1 (46.7) -
Disposals (4.9) - (0.8) - (5.7)
------------------ ----------- --------------- --------------- ---------------- -------
At 31 March
2017 4,330.8 32.1 103.4 119.3 4,585.6
------------------ ----------- --------------- --------------- ---------------- -------
Accumulated
depreciation
and impairment
At 1 April
2015 1,295.3 6.4 48.4 - 1,350.1
Charge for
the year 87.6 0.8 11.9 - 100.3
Disposals (1.4) - (0.8) - (2.2)
At 31 March
2016 1,381.5 7.2 59.5 - 1,448.2
Charge for
the year 92.5 1.0 12.3 - 105.8
Disposals (4.9) - (0.8) - (5.7)
At 31 March
2017 1,469.1 8.2 71.0 - 1,548.3
------------------ ----------- --------------- --------------- ---------------- -------
Net book value
At 31 March
2017 2,861.7 23.9 32.4 119.3 3,037.3
------------------ ----------- --------------- --------------- ---------------- -------
At 31 March
2016 2,764.6 23.9 32.7 121.5 2,942.7
------------------ ----------- --------------- --------------- ---------------- -------
At 31 March 2017, the Group and Company had entered into
contractual commitments for the acquisition of property, plant and
equipment amounting to GBP69.7m (2016: GBP63.2m).
At 31 March 2017, had the property, plant and equipment of the
Group been carried at historical cost less accumulated depreciation
and accumulated impairment losses, the carrying amount would have
been GBP2,925.7m (2016: GBP2,828.5m). The revaluation reserve is
disclosed in note 27, net of deferred tax. The revaluation reserve
arose following North West Water's acquisition of Norweb, in
1997.
Notes to the Financial Statements (continued)
13. Property, plant and equipment (continued)
Impairment testing of intangible assets and property plant and
equipment
At each balance sheet date, the Group reviews the carrying
amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss. An intangible asset with an indefinite useful life
is tested for impairment at least annually and whenever there is an
indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing the value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been
adjusted.
For the purposes of impairment testing the Group have determined
that there is only one cash generating unit (CGU). The key
assumptions for the value in use calculations are those regarding
discount rates and the outcomes of future Ofgem price control
settlements.
The Group has prepared cash flow forecasts for a 30 year period,
which represents the planning horizon used for management purposes
being aligned to the end of an eight year RIIO regulatory period.
The rate used to discount cash flows was 7.11% (2016: 6.08%)
reflecting an assumed level of risk associated with the cash flows
generated from the licence. Cash flow projections for the six year
period to 2023 are based on the Ofgem final determination and the
Company's latest approved business plan (2016: same) and reflect
recent RPI forecasts. Forecasts beyond this point are projected
forward based on expected levels of expenditure to maintain the
health of the network and long-term inflation assumptions. The
forecasts have been sensitised to a change in the discount rate of
1% either way and that analysis indicates that there is sufficient
headroom and that no impairment would be required.
Based on the impairment testing performed, management believe
that sufficient headroom exists between the value in use and the
carrying value of the assets such that no impairment loss is
required to be booked.
Notes to the Financial Statements (continued)
14. Investments
Group Company
GBPm GBPm
------------------------------- ----- -------
Cost and carrying value
At 31 March 2016 and 31 March
2017 - 15.4
Details of the investments as at 31 March 2017, all of which
were incorporated in the UK, are as follows.
Description of Proportion Nature
Company holding held of business
------------------------ ---------------- ----------- -------------
Subsidiary undertakings
Electricity North Ordinary shares 100% Dormant
West Number 1 of GBP1 each
Company Ltd*
ENW (ESPS) Pensions Ordinary shares 100% Dormant
Trustees Limited of GBP1 each
Joint venture
Nor.Web DPL Limited Ordinary shares 50% Dormant
of GBP1 each
* Electricity North West Number 1 Company Ltd was previously
known as Electricity North West Services Ltd having changed its
name on 21 October 2016.
There have been no changes to these shareholdings during the
year and the address of the registered office for all of the
investments noted above is: 304 Bridgewater Place, Birchwood Park,
Warrington, WA3 6XG.
Notes to the Financial Statements (continued)
15. Inventories
Group and Company 2017 2016
GBPm GBPm
============================== ==== =====
Raw materials and consumables 9.6 8.5
16. Trade and other receivables
Group and Company 2017 2016
GBPm GBPm
======================================== ==== =====
Trade receivables 6.1 15.6
Amounts owed by affiliated undertakings 5.4 4.5
Prepayments and accrued income 49.0 47.8
========================================= ==== =====
Balance at 31 March 60.5 67.9
The average credit period taken on sales is 14 days (2016: 14
days). Trade receivables do not carry interest and are stated net
of allowances for doubtful receivables of GBP0.8m (2016: GBP0.7m)
estimated by management based on known specific circumstances, past
default experience and their assessment of the current economic
environment.
16% (2016: 51%) are past due but not impaired. A balance of
GBP0.7m (2016: GBP6.1m) is less than 30 days past due; a balance of
GBP1.0m is greater than 30 days past due at 31 March 2017 (2016:
GBP1.1m), against which an allowance for doubtful debt of GBP0.8m
(2016: GBP0.7m) has been made.
The movement on the provision for impairment of trade
receivables is as follows:
Group and Company 2017 2016
GBPm GBPm
================================ ==== =====
Balance at 1 April 0.7 0.3
Charged to the Income Statement 0.1 0.4
Balance at 31 March 0.8 0.7
Notes to the Financial Statements (continued)
16. Trade and other receivables (continued)
The Group is required by Ofgem to accept any company as a
counterparty that has obtained a trading licence regardless of
their credit status. To mitigate the risk posed by this, all
transactions with customers are governed by a contract which all
customers are required by Ofgem to sign and adhere to the
terms.
Under the terms of the contract, the maximum unsecured credit
that the Group may be required to give is 2% of the Regulatory
Asset Value ('RAV') of the Company. In addition the contract makes
provisions for the credit quality of customers and adjusts the
credit value available to them based on credit ratings and payment
history. Where a customer exceeds their agreed credit level under
the contract the customer must provide collateral to mitigate the
increased risk posed. As at 31 March 2017 GBP1.0m (2016: GBP2.6m)
of cash had been received as security.
The RAV is calculated using the methodology set by Ofgem for
each year of ED1 (1 April 2016 to 31 March 2023) and is GBP1,696m
(2016: GBP1,643m) for the year ended 31 March 2017 based on the
actual retail price index (RPI) for March.
At 31 March 2017 GBP129.0m (2016: GBP103.0m) of unsecured credit
limits had been granted to customers and the highest unsecured
credit limit given to any single customer was GBP13.3m (2016:
GBP10.7m). All of the customers granted credit of this level must
have a credit rating of at least A- from Standard and Poor's and A3
from Moody's Investor Services or a guarantee from a parent company
of an equivalent rating. Alternatively, the customer must be able
to prove their creditworthiness on an ongoing basis.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
Notes to the Financial Statements (continued)
17. Cash and cash equivalents and money market deposits
Group and Company 2017 2016
GBPm GBPm
================================= ===== =====
Cash and cash equivalents 142.7 119.3
Short-term money market deposits
(maturity over 3 months) 10.0 23.5
Balance at 31 March 152.7 142.8
Cash and cash equivalents comprise cash at bank and in hand,
deposits and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity
of three months or less, net of any bank overdrafts which are
payable on demand. Money market deposits with terms to maturity in
excess of three months are not included as cash or cash equivalents
and are separately disclosed on the face of the Statement of
Financial Position.
The effective interest rate on all short-term deposits was a
weighted average of 0.4% (2016: 0.7%) and these deposits had an
average maturity of 15 days (2016: 40 days).
18. Trade and other payables
Group Company Group Company
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
=========================== ===== ======= ===== ========
Trade payables 14.7 14.7 13.4 13.4
Refundable customer
deposits (note 25) 1.0 1.0 2.6 2.6
Other taxation and social
security 15.1 15.1 11.2 11.2
Amounts owed to affiliated
undertakings 3.6 3.6 3.0 3.0
Amounts owed to subsidiary
undertakings - 15.4 - 15.4
Customer contributions
(note 24) 25.4 25.4 23.9 23.9
Accruals and deferred
income 82.9 83.2 83.0 83.3
Balance at 31 March 142.7 158.4 137.1 152.8
Trade payables and accruals principally comprise amounts
outstanding for capital purchases and ongoing costs. The average
credit period in the year was 15 days from receipt of invoice
(2016: 15 days).
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
Notes to the Financial Statements (continued)
19. Borrowings
This note provides information about the contractual terms of
the Group's loans and borrowings. For more information about the
Group's exposure to credit risk, liquidity risk and market risk see
note 20.
2017 2016
Group and Company GBPm GBPm
---------------------------------------- ------- -------
Current liabilities
Bank and other term borrowings 6.4 4.6
Non-current liabilities
Bonds 724.4 711.3
Bank and other term borrowings 249.4 249.0
Amounts owed to parent undertaking 71.2 70.9
Amounts owed to affiliated undertaking 197.7 197.2
1,242.7 1,228.4
Total borrowings 1,249.1 1,233.0
Notes to the Financial Statements (continued)
19. Borrowings (continued)
Carrying value by category
The carrying values by category of financial instruments were as
follows:
Group and Company 2017 2016
Nominal Interest Maturity Carrying Carrying
value rate value value
GBPm % year GBPm GBPm
---------------------------- ------- ----------- -------- -------- --------
Borrowings designated
at fair value through
profit or loss statement
Bond 250.0 8.875% 2026 391.0 380.7
---------------------------- ------- ----------- -------- -------- --------
Borrowings measured
at amortised cost
Bond 200.0 8.875% 2026 196.6 196.4
Index-linked bond 100.0 1.4746%+RPI 2046 136.8 134.3
Index-linked loan 135.0 1.5911%+RPI 2024 157.9 154.0
0.38%
Index-linked loan 50.0 +RPI 2032 47.7 49.5
Index-linked loan 50.0 0%+RPI 2033 50.3 50.0
Amortising costs re:
long-term loan Libor+0.55% 2020 (0.1) -
Amounts owed to parent
undertaking 2023 71.2 70.9
Amounts owed to affiliated
undertaking 200.0 6.125% 2021 197.7 197.2
Other financial liabilities
held at amortised
cost 858.1 852.3
Total borrowings 1,249.1 1,233.0
Affiliated companies are those owned by Companies under common
ownership with Electricity North West Limited in the North West
Electricity Networks (Jersey) Limited consolidation group.
RPI - Retail Prices Index - a UK general index of retail prices
(for all items) as published by the Office for National Statistics
(January 1987 = 100).
Notes to the Financial Statements (continued)
19. Borrowings (continued)
As at 31 March 2016 and at 31 March 2017 all loans and
borrowings are unsecured and are in sterling. As in the prior year,
there were no formal bank overdraft facilities in place in the year
to 31 March 2017. The fair values of the Group's financial
instruments are shown in note 20.
The loan from parent undertaking accrues interest at 2.74 %
(2016:2.74%). The loan from the affiliated undertaking accrues
interest at 6.125% (2016: 6.125%).
Borrowing facilities
The Group and Company had GBP25m (2016: GBP50m) in unutilised
committed bank facilities at 31 March 2017 of GBPnil (2016: GBPnil)
expires within one year, GBPnil (2016: GBP50m) expires after one
year but less than two years and GBP25m (2016: GBPnil) expires in
more than two years.
20. Financial instruments
A financial instrument is a contract that gives rise to a
financial asset in one entity and a financial liability or equity
in another entity. The Group uses financial instruments to invest
liquid asset balances, raise funding and manage the risks arising
from its operations.
The principal risks to which the Group is exposed and which
arise in the normal course of business include credit risk,
liquidity risk and market risk, in particular interest rate risk
and inflation risk. Derivative financial instruments are used to
change the basis of interest cash flows from fixed to either
inflation-linked or an alternative fixed profile to more accurately
match the revenue profile.
The Board has authorised the use of derivatives by the Group to
reduce the risk of loss arising from changes in market risks, and
for economic hedging reasons.
The accounting policy for derivatives is provided in note 2.
Control over financial instruments
The Group has a formal risk management structure, which includes
the use of risk limits, reporting and monitoring requirements,
mandates, and other control procedures. It is currently the
responsibility of the Board to set and approve the risk management
procedures and controls.
Risk management
All of the Group's activities involve analysis, acceptance and
management of some degree of risk or combination of risks. The most
important types of financial risk are credit risk, liquidity risk
and market risk. Market risk includes foreign exchange, interest
rate, inflation and equity price risks.
The only material exposure the Group has to foreign exchange
risk or equity price risk relates to the assets of the defined
benefit pension scheme, which are managed by the pension scheme
investment managers.
The Group's risk management policies are designed to identify
and analyse these risks, to set appropriate risk limits and
controls and to monitor the risks and limits continually by means
of reliable and up to date systems. The Group modifies and enhances
its risk management policies and systems to reflect changes in
markets and products. The Audit Committee is responsible for
independently overseeing the activities in relation to Group risk
management. The Group's treasury function, which is authorised to
conduct the day-to-day treasury activities of the Group, reports on
a regular basis to the Committee. The Group's processes for
managing risk and the methods used to measure risk have not changed
since the prior year. In the year, there have been changes to the
Group's policies in relation to the management of credit risk, risk
limits and minimum credit ratings of counterparties have been
amended to reflect changes to market conditions and the associated
level of perceived risks.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Credit risk
The Group takes on exposure to credit risk, which is the risk
that financial loss arises from the failure of a customer or
counterparty to meet its obligations under a contract as they fall
due. Credit risk arises principally from trade finance and treasury
activities. The Group has dedicated standards, policies and
procedures to control and monitor credit risk.
The counterparties under treasury activities consist of
financial institutions. In accordance with IAS 39, the Directors
have considered and quantified the exposure of the Group to
counterparty credit risk and do not consider there to be a material
credit risk adjustment required. The exposure to counterparty
credit risk will continue to be monitored. Although the Group is
potentially exposed to credit loss in the event of non-performance
by counterparties, such credit risk is controlled through regular
credit rating reviews of the counterparties and by limiting the
total amount of exposure to any one party. Management does not
anticipate any counterparty will fail to meet its obligations.
Significant changes in the economy or in the utilities sector
could result in losses not necessarily provided for at the
Statement of Financial Position date. There are only two (2016:
three) principal customers, see note 4. The credit worthiness of
each of these is closely monitored. Whilst the loss of one of the
principal customers could have a significant impact on the Group,
due to the small number of these, the exposure to such credit
losses would be mitigated in most cases by the protection the
regulator provides to cover such losses. Nonetheless, the credit
management process must be closely adhered to, to avoid such
circumstances, and the Group's management therefore closely monitor
adherence to this process.
Trade receivables
Credit risk in relation to trade receivables is considered to be
relatively low, due to the small number of principal customers, and
the fact that each of these customers has a contract in place with
the Group, and is required to provide collateral in the form of a
cash deposit subject to the amounts due and their credit
rating.
At 31 March 2017 there was GBP1.7m receivables past due (2016:
GBP7.2m) against which an allowance for doubtful debts of GBP0.8m
has been made (2016: GBP0.7m).
Treasury investments
The Directors do not believe that the Group is exposed to any
material concentrations of credit risk in relation to treasury
investments, including amounts on deposit with counterparties.
As at 31 March 2017, none (2016: none) of the Group's treasury
portfolio exposure was either past due or impaired, and no terms
had been re-negotiated with any counterparty. The Group has limits
in place to ensure counterparties have a certain minimum credit
rating, and individual exposure limits to ensure there is no
concentration of credit risk.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
The table below provides details of the ratings of the Group's
treasury portfolio:
Group and Company 2017 2017 2016 2016
GBPm % GBPm %
========================= ===== ===== ===== ====
Credit Rating for cash
and cash equivalents,
including money market
deposits, but excluding
unpresented cheques
========================== ===== ===== ===== =====
AAA 73.2 48.2 52.3 26.4
AA - - --
AA- - - 11.4 5.7
A+ 29.3 19.3 42.1 21.3
A 49.3 32.5 92.3 46.6
151.8 100.0 198.1 100.0
At the Statement of Financial Position date, no collateral is
held in relation to Treasury assets (2016: same).
Exposure to credit risk
The maximum exposure to credit risk is represented by the
carrying amount of each financial asset, in the Statement of
Financial Position. For trade receivables, the value is net of any
collateral held in cash deposits (see note 16 for further
details).
Group and Company 2017 2016
GBPm GBPm
=================================== ===== =====
Credit risk by category
Trade receivables 6.1 15.6
Amounts owed by Group undertakings 5.4 4.5
Money market deposits (maturity
over three months) 10.0 23.5
Cash and cash equivalents 142.7 119.3
==================================== ===== =====
Balance at 31 March 164.2 162.9
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient funds to meet the obligations or commitments resulting
from its business operations or associated with its financial
instruments, as they fall due. The Group manages the liquidity
profile of its assets, liabilities and commitments so that cash
flows are appropriately balanced and all funding obligations are
met when due. This is achieved through maintaining a prudent level
of liquid assets, and arranging funding facilities.
The Board is responsible for monitoring the maturity of
liquidity and deposit funding balances and taking any action as
appropriate. A long-term view of liquidity is provided by Group
financial models which currently project cash flows out 30 years
ahead, to the end of the Regulatory Period ending 31 March 2047. A
medium-term view is provided by the Group business plan covering
the following accounting period, which is updated and approved
annually by the Board. Liquidity is monitored via an 18 month
liquidity projection, updated and reported to the Board monthly.
The Board has approved a liquidity framework within which the
business operates.
Available liquidity at 31 March was as follows:
Group and Company 2017 2016
GBPm GBPm
================================== ===== =====
Cash and cash equivalents 142.7 119.3
Short-term money market deposits
(maturity over 3 months) 10.0 23.5
Committed undrawn bank facilities 25.0 50.0
Balance at 31 March 177.7 192.8
Cash and cash equivalents comprise cash at bank and in hand,
deposits and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity
of less than three months, net of any unpresented cheques. There
was no formal bank overdraft facility in place during the year
(2016: none).
The Group and Company had committed undrawn bank facilities
including GBPnil (2016: GBPnil) of facilities that expire within
one year, GBPnil (2016: GBP50m) that expires after one year but
less than two years and GBP25m (2016: GBPnil) that expires in more
than two years.
The Group gives consideration to the timing of scheduled
payments to avoid the risks associated with the concentration of
large cash flows within particular time periods. The Group uses
economic hedges to ensure that certain cash flows can be
matched.
The following is an analysis of the maturity profile of
contractual cash flows of principal and interest payable under
financial liabilities and derivative financial instruments on an
undiscounted basis. Derivative cash flows have been shown net; all
other cash flows are shown gross.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Group and Company On demand <1 year 1 - 2 years 2 - 3 years 3 - 4 years >4 years Total
At 31 March 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================== ========== ======== ============ ============ ============ ========== ==========
Trade payables (14.7) - - - - - (14.7)
Refundable customer deposits (1.0) - - - - - (1.0)
Amounts owed to parent
undertaking - (1.9) (1.9) (1.9) (1.9) (75.7) (83.3)
Amounts owed to affiliated
companies - (12.2) (12.2) (12.2) (12.2) (206.1) (254.9)
Bonds - (41.9) (41.9) (41.9) (41.9) (841.4) (1,009.0)
Borrowings and overdrafts - (10.9) (10.9) (10.9) (10.8) (357.3) (400.8)
Derivative financial
instruments - net - 6.5 11.8 11.8 11.8 (290.6) (248.7)
============================== ========== ======== ============ ============ ============ ========== ==========
(15.7) (60.4) (55.1) (55.1) (55.0) (1,771.1) (2,012.4)
Group and Company On demand <1 year 1 - 2 years 2 - 3 years 3 - 4 years >4 years Total
At 31 March 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================== ========== ======== ============ ============ ============ ========== ==========
Trade payables (13.4) - - - - - (13.4)
Refundable customer deposits (2.6) - - - - - (2.6)
Amounts owed to parent
undertaking - (2.0) (1.9) (1.9) (1.9) (77.3) (85.0)
Amounts owed to affiliated
companies - (12.2) (12.2) (12.2) (12.2) (218.4) (267.2)
Bonds - (41.9) (41.9) (41.9) (41.9) (877.4) (1,045.0)
Borrowings and overdrafts - (7.3) (8.8) (8.8) (8.8) (241.9) (275.6)
Derivative financial
instruments - net - 12.1 7.5 12.1 12.1 (126.3) (82.5)
============================== ========== ======== ============ ============ ============ ========== ==========
(16.0) (51.3) (57.3) (52.7) (52.7) (1,541.3) (1,771.3)
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Market risk
Market risk is the risk that future cash flows of a financial
instrument, or the fair value of a financial instrument, will
fluctuate because of changes in market prices. Market prices
include foreign exchange rates, interest rates, inflation, equity
and commodity prices. The main types of market risk to which the
Group is exposed are interest rate risk and inflation risk. The
Board is required to review and approve policies for managing these
risks on an annual basis. The Board approves all new interest rate
swaps and index-linked swaps entered into. The management of market
risk is undertaken by reference to risk limits, approved by the
Chief Financial Officer or Treasurer under delegated authority from
the Board. The Group has no significant foreign exchange, equity or
commodity exposure.
The Group has exposure to interest rate risk and inflation risk
and this is explained in the sections below.
The Group borrows in the major global debt markets at fixed,
index-linked and floating rates of interest, using derivatives,
where appropriate, to generate the desired effective interest
basis.
Interest rate risk
Interest rate risk is the risk that either future cash flows of
a financial instrument, or the fair value of a financial
instrument, will fluctuate because of changes in market interest
rates. The Group's floating rate borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
interest rates. The Group's fixed rate borrowings and derivatives
are exposed to a risk of change in their fair value due to changes
in interest rates.
Investments in short-term receivables and payables are not
exposed to interest rate risk due to their short-term nature.
The Group uses derivative financial instruments to change the
basis of interest cash flows from fixed to either inflation-linked
or an alternative fixed profile to more accurately match the
revenue profile. The cash flows exchanged under the derivatives are
calculated by reference to a notional principal amount. The
notional principal reflects the extent of the Group's involvement
in the instruments, but does not represent its exposure to credit
risk, which is assessed by reference to the fair value.
Sensitivity analysis on interest
The Group's fixed rate borrowings and derivatives are exposed to
a risk of change in their fair value due to changes in interest
rates. The following sensitivity analysis is used by Group
management to monitor interest rate risk. The analysis below shows
forward-looking projections of market risk assuming certain market
conditions occur. The sensitivity figures are calculated based on a
downward parallel shift of 0.5% and upward parallel shifts of 0.5%
and 1% in the yield curve.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Group and Company 2017 2016
Change in interest rates -0.5% +0.5% +1% -0.5% +0.5% +1%
GBPm GBPm GBPm GBPm GBPm GBPm
============================== ======= ====== ====== ======= ====== ======
Debt held at fair value (14.1) 13.5 26.4 (14.8) 14.1 27.5
Inflation-linked swaps (64.3) 56.9 92.4 (53.9) 47.8 90.6
Total finance expense impact (78.4) 70.4 118.8 (68.7) 61.9 118.1
The sensitivity analysis above shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given interest rate movement.
As fair value movements are taken to the Income Statement, there
would be a corresponding adjustment to profit in these scenarios
(figures in brackets represent a reduction to profit). However,
there would be no direct cash flow impact arising from these
adjustments.
The Group's floating rate borrowings and derivatives are exposed
to a risk of change in cash flows due to changes in interest rates.
At 31 March 2017, the Group had no floating rate borrowings (2016:
same).
Although the above measures provide an indication of the Group's
exposure to market risk, such measures are limited due to the
long-term nature of many of the financial instruments and the
uncertainty over future market rates.
Index-linked debt is carried at amortised cost and as such the
Statement of Financial Position in relation to this debt is not
exposed to movements in interest rates.
Inflation risk
The Group's revenues are linked to movements in inflation, as
measured by the Retail Prices Index (RPI). To economically hedge
exposure to RPI, the Company links a portion of its funding costs
to RPI by either issuing RPI linked bonds or by using derivative
financial instruments. The Group's index-linked swaps are exposed
to a risk of change in their fair value and future cash flows due
to changes in inflation rates. The Group's revenues are linked to
RPI via returns on the Regulated Asset Value (RAV) and an increase
in RPI would increase revenues, mitigating any increase in finance
expense.
Sensitivity analysis on inflation
The Group's inflation-linked derivatives are exposed to a risk
of change in their fair value due to changes in inflation rates.
The following sensitivity analysis is used by Group management to
monitor inflation rate risk. The analysis below shows
forward-looking projections of market risk assuming certain market
conditions occur. The sensitivity figures are calculated based on a
downward parallel shift of 0.5% and upward parallel shifts of 0.5%
and 1% in the yield curve.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Group and Company 2017 2016
Change in inflation rates -0.5% +0.5% +1% -0.5% +0.5% +1%
GBPm GBPm GBPm GBPm GBPm GBPm
============================== ====== ======= ======== ====== ======= ========
Inflation-linked swaps 75.4 (83.7) (176.7) 65.6 (72.6) (153.4)
Total finance expense impact 75.4 (83.7) (176.7) 65.6 (72.6) (153.4)
The sensitivity analysis above shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given inflation rate
movement. As fair value movements are taken to the Income
Statement, there would be a corresponding adjustment to profit in
these scenarios (figures in brackets represent a reduction to
profit). However, there would be no direct cash flow impact arising
from these adjustments.
The Group's inflation-linked borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
inflation rates. The analysis below shows the impact on profit for
the year if inflation rates over the course of the year had been
different from the actual rates.
Group and Company 2017 2016
Change in inflation rates -0.5% +0.5% +1% -0.5% +0.5% +1%
GBPm GBPm GBPm GBPm GBPm GBPm
=============================================================== ====== ====== ====== ====== ====== ======
Debt held at amortised cost - inflation-linked interest basis 2.0 (2.0) (4.0) 2.0 (2.0) (3.9)
Inflation-linked swaps - - (0.1) - - (0.1)
Total finance expense impact 2.0 (2.0) (4.1) 2.0 (2.0) (4.0)
Hedging
The Group does not use derivative financial instruments for
speculative purposes, and has not pledged collateral in relation to
any of its derivative instruments. At 31 March 2017, the Group's
derivatives are not designated in formal hedging relationships
(2016: none), and instead are measured at fair value through the
Income Statement.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Fair values
The tables below provide a comparison of the book values and
fair values of the Group's financial instruments by category as at
the Statement of Financial Position date.
Where available, market values have been used to determine fair
values (see Level 1 in the fair value hierarchy on page 95).
Where market values are not available, fair values have been
calculated by discounting future cash flows at prevailing interest
and RPI rates sourced from market data (see Level 2 in the fair
value hierarchy on page 95) in accordance with IFRS 13, an
adjustment for non-performance risk has then been made to give the
fair value.
The non-performance risk has been quantified by calculating
either a credit valuation adjustment (CVA) based on the credit risk
profile of the counterparty, or a debit valuation adjustment (DVA)
based on the credit risk profile of the relevant group entity,
using market-available data.
Whilst the majority of the inputs to the CVA and DVA
calculations meet the criteria for Level 2 inputs, certain inputs
regarding the Group's credit risk are deemed to be Level 3 inputs,
due to the lack of market-available data. The credit risk profile
of the Group has been built using the few market-available data
points, e.g. credit spreads on the listed bonds, and then
extrapolated over the term of the derivatives. It is this
extrapolation that is deemed to be Level 3. All other inputs to
both the underlying valuation and the CVA and DVA calculations are
Level 2 inputs.
For certain derivatives, the Level 3 inputs form an
insignificant part of the fair value and, as such, these
derivatives are disclosed as Level 2. Otherwise, the derivatives
are disclosed as Level 3.
The adjustment for non-performance risk, as at 31 March 2017, is
GBP74.4m (2016: GBP93.2m), of which GBP73.3m (2016: GBP91.3m) is
classed as Level 3.
The following table shows the sensitivity of the fair values of
derivatives disclosed as Level 3 to the Level 3 inputs, determined
by applying a 10bps shift to the credit curve used to calculate the
DVA.
Group and Company 2017 2017 2016 2016
-10bps +10bps -10bps -10bps
GBPm GBPm GBPm GBPm
----------------------- ------ ------ ------ ------
Inflation-linked swaps (2.2) 2.0 (3.3) 3.2
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
For cash and cash equivalents, trade and other receivables and
trade and other payables the book values approximate to the fair
values because of their short-term nature.
The fair values of financial assets and liabilities, together
with the carrying amounts shown in the Statement of Financial
Position, are as follows:
Group and Company 2017 2017 2016 2016
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
-------------------------- -------- ------ -------- ------
Current assets
Trade receivables 6.1 6.1 15.6 15.6
Cash and cash equivalents 142.7 142.7 119.3 119.3
Short-term money market
deposits (maturity over
3 months) 10.0 10.0 23.5 23.5
158.8 158.8 158.4 158.4
Group and Company 2017 2017 2016 2016
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
-------------------------- --------- --------- --------- ---------
Non-current liabilities
Borrowings designated
at fair value through
profit and loss (FVTPL) (391.0) (391.0) (380.7) (380.7)
Borrowings measured
at amortised cost (582.8) (777.6) (579.6) (722.5)
Amounts due to parent
undertaking (71.2) (71.2) (70.9) (70.9)
Amounts due to affiliated
companies (197.7) (240.0) (197.2) (239.6)
Derivative financial
instruments (363.5) (363.5) (267.7) (267.7)
(1,606.2) (1,843.3) (1,496.1) (1,681.4)
Current liabilities
Trade and other payables (14.7) (14.7) (13.4) (13.4)
Refundable customer
deposits (1.0) (1.0) (2.6) (2.6)
Borrowings measured
at amortised cost (6.4) (6.4) (4.6) (4.6)
(1,628.3) (1,865.4) (1,516.7) (1,702.0)
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
Fair value measurements recognised in the Statement of Financial
Position
The following table provides an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which
the fair value is observable:
-- Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
-- Level 2 fair value measurements are those derived from inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
-- Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable
inputs).
Group and Company Level Level Level Total
1 2 3
At 31 March 2017 GBPm GBPm GBPm GBPm
----------------------------------------------------- -------- -------- -------- --------
Financial liabilities at
FVTPL
Derivative financial liabilities
* GBP300m notional inflation-linked swaps - (119.3) (244.3) (363.5)
Financial liabilities designated
at FVTPL (391.0) - - (391.0)
----------------------------------------------------- -------- -------- -------- --------
(391.0) (119.3) (244.3) (754.5)
Group and Company Level Level Level Total
1 2 3
At 31 March 2016 GBPm GBPm GBPm GBPm
----------------------------------------------------- -------- ------- -------- --------
Financial liabilities at
FVTPL
Derivative financial liabilities
* GBP300m notional inflation-linked swaps - (99.9) (167.8) (267.7)
Financial liabilities designated
at FVTPL (380.7) - - (380.7)
----------------------------------------------------- -------- ------- -------- --------
(380.7) (99.9) (167.8) (648.4)
Inflation-linked swap liabilities with fair values of GBP8.7m
were transferred from Level 2 to Level 3 at the start of the
current year (2016: GBP131.4m), principally due to a change in the
significance of the unobservable inputs used to derive Electricity
North West's credit curve for the DVA, as described in this section
above.
Notes to the Financial Statements (continued)
20. Financial instruments (continued)
The following table provides a reconciliation of the fair value
amounts disclosed as Level 3.
Group and Company 2017 2016
GBPm GBPm
------------------------------------------------------- ------- -------
At 1 April (167.8) -
Transfers into Level 3 from Level
2 (8.7) (131.4)
Total gains or losses in profit
or loss;
* On transfers into Level 3 from Level 2 4.4 (26.0)
* On new derivatives in the year - (10.4)
* On instruments carried forward in Level 3 (72.2) -
At 31 March (244.3) (167.8)
Fair value measurements disclosed but not recognised in the
Statement of Financial Position
Group and Company Level Level Level Total
1 2 3
At 31 March 2017 GBPm GBPm GBPm GBPm
---------------------------- -------- ------ ------ --------
Financial liabilities with
fair value disclosed
Borrowings measured at
amortised cost (777.6) - - (777.6)
---------------------------- -------- ------ ------ --------
(777.6) - - (777.6)
Group and Company Level Level Level Total
1 2 3
At 31 March 2016 GBPm GBPm GBPm GBPm
---------------------------- -------- ------ ------ --------
Financial liabilities with
fair value disclosed
Borrowings measured at
amortised cost (722.5) - - (722.5)
---------------------------- -------- ------ ------ --------
(722.5) - - (722.5)
Notes to the Financial Statements (continued)
21. Retirement benefit schemes
Group and Company
Nature of Scheme
The Group's defined benefit arrangement is the Electricity North
West Group of the ESPS ("the Scheme") and forms part of the
Electricity Supply Pension Scheme ("ESPS"). Up to 31 March 2011 the
Scheme was split into two sections. However, following the
'hive-up' of the assets and liabilities of Electricity North West
Number 1 Company Ltd (previously Electricity North West Services
Limited, having changed its name on 21 October 2016) to the Company
and the termination of the Asset Services Agreement between the two
companies on 31 March 2011, the two sections were merged as at that
date.
The Scheme contains both a defined benefit section and a defined
contribution section. The defined benefit section of the Scheme
closed to new entrants on 1 September 2006, with new employees of
the Group since then provided instead with access to the defined
contribution section.
The defined benefit section is a UK funded final salary
arrangement providing pensions and lump sums to members and
dependants. The defined benefit section is a separate fund that is
legally separated from the entity. The Trustee board of the Scheme
is composed of representatives from both the employer and members
of the Scheme. Under the Pensions Act 2004 at least one third of
the Trustee Board must be member nominated and the Trustee Board
has made the necessary arrangements to fulfil this obligation. The
Trustee Board of the Scheme is required by law to act in the
interest of the Scheme and all relevant stakeholders of the Scheme,
i.e. active employees, retirees and employers. The Trustee Board is
responsible for the operation, funding and investment strategy of
the Scheme.
During the year the Group made contributions of GBP23.6m (2016:
GBP24.6m) to the defined benefit section of the Scheme. This
includes GBP11.3m of deficit contributions. The Group estimates
that contributions for the year ending 31 March 2018 will amount to
around GBP31.1m which includes GBP17.3m of expected deficit
contribution payments. The total defined benefit pension expense
for the year was GBP13.3m (2016: GBP16.2m). No Executive Directors
were part of the defined benefit scheme.
As at 31 March 2017 contributions of GBP2.1m (2016: GBP2.1m) due
in respect of the current reporting period had not been paid over
to the defined benefit Scheme.
Funding the liabilities
UK legislation requires the Trustee Board to carry out
valuations at least every three years and to target full funding
against a basis that prudently reflects the Scheme's risk exposure.
The most recent valuation was carried out as at 31 March 2016 and
identified a shortfall of GBP142.6m against the Trustee Board's
statutory funding objective. In the event of underfunding the Group
must agree a deficit recovery plan with the Trustee Board within
statutory deadlines. As part of the 2016 Actuarial valuation the
Group agreed to remove the shortfall by paying annual contributions
to 2023.
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
The results of the 2016 funding valuation have been projected
forward by an independent actuary to take account of the
requirements of revised IAS 19 'Employee Benefits' in order to
assess the position as at 31 March 2017 for the purpose of these
financial statements. The present value of the defined benefit
obligation, the related current service cost and the past service
cost were measured using the projected unit credit method. A
pension deficit under IAS 19 (revised 2011) of GBP58.0m is included
in the Statement of Financial Position at 31 March 2017 (2016
deficit of GBP16.2m).
The weighted average duration of the defined benefit obligation
is approximately 17 years (2016: 17 years).
Investment strategy
The Scheme has an investment strategy to aim to match pensioner
and other liabilities with lower risk cash flow investments and to
invest liabilities in respect of active members into return seeking
assets. As active members retire, then a switch of investments
would be carried out.
The Company recognises that the interests of customers, who
ultimately fund pension costs, should be given full recognition in
determining the investment strategy. The Company works in
collaboration with the Independent Scheme Trustee to ensure these
interests are considered alongside those of the members of the
pension scheme.
Other risks
The Scheme exposes the Group to risks, such as longevity risk,
inflation risk, interest rate risk and investment risk. As the
Scheme's obligation is to provide lifetime pension benefits to
members upon retirement, increases in life expectancy will result
in an increase in the Scheme's liabilities. Other assumptions used
to value the defined benefit obligation are also uncertain.
These risks are managed through de-risking and hedging
strategies and are measured and reported at Board level.
Winding up
Although currently there are no plans to do so, the Scheme could
be wound up in which case the benefits would have to be bought out
with an insurance company. The cost of buying-out benefits would be
significantly more than the defined benefit obligation calculated
in accordance with IAS 19 (revised 2011).
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
Defined Contribution arrangements
All assets within the defined contribution section of the Scheme
are held independently from the Group.
The total cost charged to the Income Statement in relation to
the defined contribution section for the year ended 31 March 2017
was GBP3.2m (2016: GBP2.7m) and represents contributions payable to
the Scheme at rates specified in the rules of the Scheme. As at 31
March 2017 contributions of GBPnil (2016: GBPnil) due in respect of
the current reporting period had not been paid over to the defined
contribution Scheme.
Defined Benefits employee benefits
The reconciliation of the opening and closing Statement of
Financial Position is as follows:
Group and Company 2017 2016
GBPm GBPm
--------------------------------- ------ ------
At 1 April (16.2) (33.7)
Expense recognised in the Income
Statement (13.3) (16.2)
Contributions paid 23.6 24.6
Total re-measurement included
in Other Comprehensive Income (52.1) 9.1
At 31 March (58.0) (16.2)
Movements in the fair value of the Group defined benefit
obligations are as follows:
Group and Company 2017 2016
GBPm GBPm
---------------------------------- --------- ---------
At 1 April (1,219.9) (1,276.6)
Current service cost (12.0) (13.7)
Interest expense (41.6) (41.1)
Member contributions (1.9) (2.0)
Augmentation (0.4) (1.0)
Re-measurement:
Effect of changes in demographic
assumptions (24.6) -
Effect of changes in financial
assumptions (221.8) 52.6
Effect of experience adjustments 33.1 -
Benefits paid 58.7 61.9
At 31 March (1,430.4) (1,219.9)
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
The liability value as at 31 March is made up of the following
approximate splits:
Group and Company 2017 2016
GBPm GBPm
------------------------------- ------- -------
Liabilities owing to active
members 439.7 400.6
Liabilities owing to deferred
members 89.0 93.1
Liabilities owing to pensioner
members 901.7 726.2
Total liability at 31 March 1,430.4 1,219.9
Movements in the fair value of the Group Pension Scheme assets
were as follows:
Group and Company 2017 2016
GBPm GBPm
------------------------------ ------- -------
At 1 April 1,203.7 1,242.9
Interest income 41.5 40.4
Return on plan assets (net of
interest income) 161.4 (43.5)
Company contributions 23.6 24.6
Member contributions 1.9 2.0
Benefits paid (58.7) (61.9)
Administration expenses (1.0) (0.8)
At 31 March 1,372.4 1,203.7
Notes to the financial statements (continued)
21. Retirement benefit schemes (continued)
The net pension expense before taxation recognised in the Income
Statement, before capitalisation, in respect of the Scheme is
summarised as follows:
Group and Company 2017 2016
GBPm GBPm
------------------------------------ ------ ------
Current service cost (12.0) (13.7)
Past service cost (0.4) (1.0)
Interest income on plan assets 41.5 40.4
Interest (expense) on Scheme
obligations (41.6) (41.1)
Administration expenses and
taxes (0.8) (0.8)
Net pension expense before taxation (13.3) (16.2)
The above amounts are recognised in arriving at operating profit
except for the interest on Scheme assets and interest on Scheme
obligations which have been recognised within investment
income.
For the year ending 31 March 2017 the past service cost includes
GBP0.4m in respect of augmentations (2016: GBP1.0m).
The main financial assumptions used by the actuary (in
determining the deficit) were as follows:
Group and Company 2017 2016
% %
----------------------------- ---- ----
Discount rate 2.50 3.50
Pensionable salary increases 3.10 3.20
Pension increases 3.05 2.90
Price inflation 3.10 2.95
The mortality rates utilised in the valuation are based on the
standard actuarial tables S2PMA/S2PFA (birth year) tables with a
loading of 95% for male pensioners, 90% for female pensioners, 105%
for male non-pensioners and 100% for female non-pensioners. These
loading factors allow for differences in expected mortality between
the Scheme population and the population used in the standard
tables. A long-term improvement rate of 1.5% p.a. is assumed within
the underlying CMI 2015 model (2016:1.25%).
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
The current life expectancies underlying the value of the
accrued liabilities for the Scheme are:
Group and Company 2017 2016
Male life expectancy at age
60 Years Years
---------------------------- ----- -----
Retired member 27.9 26.9
Non-retired member (current
age 45) 28.7 28.4
In valuing the liabilities of the Scheme at 31 March 2017
mortality assumptions have been made as indicated above.
The following table presents a sensitivity analysis for each
significant actuarial assumption showing how the defined benefit
obligation would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at the Statement
of Financial Position date. This sensitivity analysis applies to
the defined benefit obligation only and not to the net defined
benefit pension liability, the measurement of which depends on a
number of factors including the fair value of Scheme assets. The
calculations alter the relevant assumption by the amount specified,
whilst assuming that all other variables remained the same. This
approach is not necessarily realistic, since some assumptions are
related: for example, if the scenario is to show the effect if
inflation is higher than expected, it might be reasonable to expect
that nominal yields on corporate bonds will also increase.
Group and Company 2017 2016
Increase in Defined Benefit
Obligation GBPm GBPm
------------------------------------ ---- ----
Discount rate: decrease by 25
basis points 61 53
Price inflation: increase by
25 basis points 49 43
Life expectancy: increase longevity
by 1 year 48 34
Notes to the Financial Statements (continued)
21. Retirement benefit schemes (continued)
As at 31 March 2017, the fair value of the Scheme's assets and
liabilities recognised in the Statement of Financial Position were
as follows:
Group and Company Scheme Value Scheme Value
assets assets
2017 2017 2016 2016
At 31 March % GBPm % GBPm
------------------------------ -------- ---------- -------- ----------
Cash and Cash equivalents 6.7 92.6 0.5 5.9
Equity instruments 9.4 128.4 9.3 113.3
Debt instruments 68.6 942.1 68.0 819.1
Real estate 11.0 150.6 12.4 148.5
Distressed debt 2.5 34.7 2.7 32.0
Hedge funds 1.8 24.0 7.1 84.9
============================== ======== ========== ======== ==========
Total fair value of assets 100.0 1,372.4 100.0 1,203.7
Present value of liabilities (1,430.4) (1,219.9)
Net retirement benefit
obligation (58.0) (16.2)
The fair values of the assets set out above are as per the
quoted market prices in active markets.
Notes to the Financial Statements (continued)
22. Provisions
Group and Company 2017 2016
GBPm GBPm
---------------------------------- ----- -----
At 1 April 2.5 6.1
Charged /(credited) to the income
statement 1.9 (1.0)
Utilisation of provision (0.4) (2.6)
At 31 March 4.0 2.5
Group and Company 2017 2016
GBPm GBPm
------------------ ---- ----
Current 1.1 0.6
Non current 2.9 1.9
At 31 March 4.0 2.5
During the year ended 31 March 2013 a provision was created in
connection with a portfolio of retail properties for which the
Company was liable under privity of contract. The combined closing
provision of GBP2.2m at 31 March 2017 which now relates to one High
Street retail property and two out of town retail properties has
been evaluated by management, is supported by relevant external
property specialists, and reflects the Company's best estimate as
at the Statement of Financial Position date of the amounts that
could become payable by the Company, on a discounted basis. The
estimate is a result of a detailed risk assessment process, which
considers a number of variables including the location and size of
the stores, expectations regarding the ability of the Company to
both defend its position and also to re-let the properties,
conditions in the local property markets, demand for retail
warehousing, likely periods of vacant possession and the results of
negotiations with individual landlords, letting agents and tenants,
and is hence inherently judgemental.
The Company is part of a Covenanter Group ('CG') which is party
to a Deed of Covenant with EA Technology Limited (EATL) under which
certain guarantees over the benefits of members of the EATL Group
of the Electricity Supply Pension Scheme have been given. In the
event of EATL having been unable to meet the obligations for its
part of the ESPS pension scheme deficit following a discontinuance
event, the members of the pension scheme can make a claim against
the CG. On the 31 March 2017 EATL entered into a Company Voluntary
Arrangement ("CVA") to ring-fence the pension and historical
employment liabilities, with the agreement of the Pension
Regulator. As the Company represents 6.7% of the liabilities, a
provision of GBP1.8m on a discounted basis was recognised within
the Company during the year ended 31 March 2017.
Notes to the Financial Statements (continued)
23. Deferred tax
The following are the major deferred tax liabilities and assets
recognised by the Group and Company, and the movements thereon,
during the current and prior years.
Group and Company Accelerated Retirement Other Total
tax depreciation benefit
obligations
GBPm GBPm GBPm GBPm
-------------------------------- ------------------ ------------- ------- -------
At 1 April 2015 226.9 (6.8) (36.9) 183.2
Charged/(credited)
to the Income Statement (23.5) (5.5) (29.0)
Deferred tax on re-measurement
of defined benefit
pension schemes - 1.6 - 1.6
Adjustment due to
change in future tax
rates of brought forward
deferred tax OCI - 2.2 - 2.2
================================ ================== ============= ======= =======
At 1 April 2016 203.4 (3.0) (42.4) 158.0
Charged/(credited)
to the Income Statement (9.5) 0.9 (14.8) (23.4)
Deferred tax on re-measurement
of defined benefit
pension schemes - (8.9) - (8.9)
Adjustment due to
change in future tax
rates of brought forward
deferred tax OCI - 1.0 - 1.0
At 31 March 2017 193.9 (10.0) (57.2) 126.7
There are no significant unrecognised deferred tax assets or
liabilities for either the Group or Company in either the current
or prior year. Other deferred tax relates primarily to derivative
financial instruments.
Notes to the Financial Statements (continued)
24. Customer Contributions
Customer contributions are amounts received from a customer in
respect of the provision of a new connection to the network.
Customer contributions are amortised through the Income Statement
over the expected lifetime of the relevant asset.
Group and Company 2017 2016
GBPm GBPm
--------------------------------- ------ ------
At 1 April 584.9 555.9
Additions during the year 45.4 44.3
Amortisation (10.6) (10.7)
Amortised through revenue (IFRIC
18) (5.5) (4.6)
At 31 March 614.2 584.9
Group and Company 2017 2016
GBPm GBPm
----------------------------- ----- -----
Amounts due in less than one
year (see note 18) 25.4 23.9
Amounts due after more than
one year 588.8 561.0
At 31 March 614.2 584.9
25. Refundable customer deposits
Refundable customer deposits are those customer contributions
which may be partly refundable, dependent on contractual
obligations.
Group and Company 2017 2016
GBPm GBPm
----------------------------- ---- ----
Amounts due in less than one
year (see note 18) 1.0 2.6
Amounts due after more than
one year - -
At 31 March 1.0 2.6
Notes to the Financial Statements (continued)
26. Called up share capital
Company 2017 2016
GBP GBP
------------------------------------- ----------- -----------
Authorised:
569,999,996 (2016: same) ordinary
shares of 50 pence each 284,999,998 284,999,998
4 'A' ordinary shares of 50
pence each 2 2
Special rights redeemable preference
share of GBP1 1 1
At 31 March 285,000,001 285,000,001
Company 2017 2016
GBP GBP
---------------------------------- ----------- -----------
Allotted, called up and fully
paid:
476,821,341 (2016: same) ordinary
shares of 50 pence each 238,410,671 238,410,671
4 'A' ordinary shares of 50
pence each 2 2
At 31 March 238,410,673 238,410,673
The 'A' ordinary shares and the ordinary shares rank pari passu
in all respects, save that dividends may be declared on one class
of shares without being declared on the other.
Notes to the Financial Statements (continued)
27. Shareholders' Equity
Called Share Revaluation Capital Retained Total
up share premium reserve redemption earnings Equity
capital account GBPm reserve GBPm GBPm
Group GBPm GBPm GBPm
--------------------- ---------- --------- ------------ ------------ ---------- --------
At 1 April
2016 238.4 4.4 93.5 8.6 473.9 818.8
Profit for
the year - - - - 71.0 71.0
Transfer
from revaluation
reserve - - (1.0) - 1.0 -
Re-measurement
of defined
benefit schemes - - - - (52.1) (52.1)
Tax on components
of comprehensive
expense - - - - 7.8 7.8
--------------------- ---------- --------- ------------ ------------ ---------- --------
Total comprehensive
income for
the year - - (1.0) - 27.7 26.7
Transactions
with owners
recorded
directly
in equity
Equity dividends - - - - (81.0) (81.0)
At 31 March
2017 238.4 4.4 92.5 8.6 420.6 764.5
--------------------- ---------- --------- ------------ ------------ ---------- --------
In 1997 the Company undertook a revaluation of certain assets,
following North West Water's acquisition of Norweb. This resulted
in the creation of a revaluation reserve of GBP234.9m. The
additional depreciation created as a result of the revaluation is
transferred from the revaluation reserve to retained earnings on an
annual basis.
Capital redemption reserve, is a non-distributable reserve
specifically for the purchase of own shares.
Notes to the Financial Statements (continued)
27. Shareholders' equity (continued)
Called Share Revaluation Capital Retained Total
up share premium reserve redemption earnings Equity
capital account GBPm reserve GBPm GBPm
Company GBPm GBPm GBPm
--------------------- ---------- --------- ------------ ------------ ---------- ----------
At 1 April
2016 238.4 4.4 93.5 8.6 473.6 818.5
Profit for
the year - - - - 71.0 71.0
Transfer
from revaluation
reserve - - (1.0) - 1.0 -
Re-measurement
of defined
benefit schemes - - - - (52.1) (52.1)
Tax on components
of comprehensive
expense - - - - 7.8 7.8
--------------------- ---------- --------- ------------ ------------ ---------- --------
Total comprehensive
income for
the year - - (1.0) - 27.7 26.7
Transactions
with owners
recorded
directly
in equity
Equity dividends - - - - (81.0) (81.0)
At 31 March
2017 238.4 4.4 92.5 8.6 420.3 764.2
--------------------- ---------- --------- ------------ ------------ ---------- --------
The profit after tax for the Company for the year ended 31 March
2017 was GBP71.0m (2016: GBP117.0m) and the revenue for the year
was GBP485.6m (2016: GBP450.8m). As permitted by s408 of the
Companies Act 2006, the Company has not presented its own Income
Statement.
Notes to the Financial Statements (continued)
28. Capital structure
Details of the authorised and allotted share capital, together
with details of the movements in the Company's issued share capital
during the year are shown in note 26. The Company has Ordinary
shares, which carry no right to fixed income. Each share carries
the right to one vote at general meetings of the Company. The
Company also has 'A' ordinary shares which rank pari passu in all
respects, save that dividends may be declared on one class of
shares without being declared on the other.
There exists an unissued special rights redeemable preference
share which does not carry any voting rights and can only be held
by one of Her Majesty's Secretaries of State, another Minister of
the Crown, the Solicitor for the affairs of her Majesty's Treasury
or any other person acting on behalf of the Crown. This share is a
legacy from the privatisation of the Company and was issued on 19
November 1990 and redeemed on 31 March 1995.
There are no specific restrictions on the size of a holding or
on the transfer of shares which are both governed by the general
provisions of the Articles of Association and prevailing
legislation. The Directors are not aware of any agreements between
holders of the Company's shares that may result in restrictions in
the transfer of securities or on voting rights.
No person has any special rights of control over the Company's
share capital and all issued shares are fully paid up.
With regard to the appointment and replacement of Directors, the
Company is governed by its Articles of Association, the Companies
Act and related legislation. The Articles themselves may be amended
by special resolution of the shareholders. The powers of Directors
are described in the Articles of Association, copies of which are
available on request, and in the Corporate Governance Report on
pages 25 to 36.
29. Ultimate parent undertaking and controlling party
The immediate parent undertaking is North West Electricity
Networks plc, a company incorporated and registered in the United
Kingdom. The ultimate parent undertaking is North West Electricity
Networks (Jersey) Limited, a company incorporated and registered in
Jersey. The address of the ultimate parent company is: 44
Esplanade, St Helier, Jersey, Channel Islands, JE4 9WG.
This Group is the smallest group in which the results of the
Company are consolidated. The largest group in which the results of
the Company are consolidated is that headed by North West
Electricity Networks (Jersey) Limited.
First State Investments Fund Management S.à.r.l. on behalf of
First State European Diversified Infrastructure Fund FCP-SIF
('EDIF') and IIF Int'l Holding GP Ltd ('IIF') have been identified
as ultimate controlling parties. They are advised by Colonial First
State Global Asset Management (a member of the Commonwealth Bank of
Australia Group) and JP Morgan Investment Management Inc
respectively.
Notes to the Financial Statements (continued)
30. Related party transactions
During the year the following transactions with related parties
were entered into:
Group Company Group Company
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
=========================== ====== ======= ====== ========
Transactions with related
parties
Recharges to Electricity
North West (Construction
and Maintenance) Ltd 1.0 1.0 1.2 1.2
Recharges from Electricity
North West (Construction
and Maintenance) Ltd (0.1) (0.1) (0.2) (0.2)
Recharges to Electricity
North West Services
Ltd 1.2 1.2 - -
Recharges from Electricity
North West Services
Ltd (0.6) (0.6) - -
Directors' remuneration
(note 7) (2.0) (2.0) (1.3) (1.3)
Directors' services (0.2) (0.2) (0.2) (0.2)
Interest payable to
North West Electricity
Networks Plc (1.9) (1.9) (2.6) (2.6)
Interest payable to
ENW Finance plc (12.8) (12.8) (12.4) (12.4)
Dividends paid to North
West Electricity Networks
Plc (81.0) (81.0) (30.0) (30.0)
For disclosure relating to executive directors remuneration see
note 7. The Company's key management personnel comprise solely of
its directors.
Notes to the Financial Statements (continued)
30. Related party transactions (continued)
Amounts outstanding with related parties are as follows:
Group Company Group Company
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
============================ ======= ======= ======= ========
Amounts owed to related
parties
Group tax relief to
North West Electricity
Networks plc (23.6) (23.6) (12.9) (12.9)
Interest payable to
North West Electricity
Networks plc (0.5) (0.5) (0.5) (0.5)
Interest payable to
ENW Finance plc (2.5) (2.5) (2.4) (2.4)
Amounts owed to Electricity
North West Number 1
Company Limited - (15.4) - (15.4)
Amounts owed to Electricity
North West Services
Limited (0.6) (0.6) - -
Borrowings from North
West Electricity Networks
plc (71.2) (71.2) (70.9) (70.9)
Borrowings from ENW
Finance plc (197.7) (197.7) (199.0) (199.0)
Amounts owed by related
parties
Amounts owed by North
West Electricity Networks
plc 3.3 3.3 3.7 3.7
Amounts owed by Electricity
North West (Construction
and Maintenance) Ltd 0.4 0.4 0.5 0.5
Amounts owed by Electricity
North West Services
Limited 1.4 1.4 - -
Amounts owed by North
West Electricity Networks
(Jersey) Limited 0.1 0.1 0.1 0.1
Amounts owed by North
West Electricity Networks
(Holdings) Ltd 0.2 0.2 0.2 0.2
The loan from North West Electricity Networks plc accrues
weighted average interest at 2.74% (2016: 2.74%) and is repayable
in March 2023. The loan from ENW Finance plc accrues interest at
6.125% (2016: 6.125%) and is repayable in July 2021.
Fees of GBP0.1m (2016: GBP0.1m) were payable to Colonial First
State in respect of the provision of Directors' services. Colonial
First State is part of the Commonwealth Bank of Australia which is
identified as a related party as per note 29.
Fees of GBP0.1m (2016: GBP0.1m) were payable to IIF Int'l
Holding GP Ltd ('IIF') in respect of the provision of Directors'
services which is identified as a related party as per note 29.
During the year Electricity North West Services Limited changed
its name to Electricity North West Number 1 Company Limited. A new
operating company was set up by the Group named Electricity North
West Services Limited.
Notes to the Financial Statements (continued)
31. Cash generated from operations
Group and Company Group Company Group Company
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
============================ ====== ======= ====== ========
Operating profit 259.4 259.4 214.6 214.6
Adjustments for:
Depreciation of property,
plant and equipment 105.8 105.8 100.3 100.3
Amortisation of intangible
assets 4.1 4.1 4.8 4.8
Amortisation of customer
contributions (16.1) (16.1) (15.3) (15.3)
Profit on disposal of
property, plant and
equipment (0.1) (0.1) (0.2) (0.2)
Cash contributions in
excess of pension charge
to operating profit (16.5) (16.5) (16.0) (16.0)
============================= ====== ======= ====== ========
Operating cash flows
before movements in
working capital 336.6 336.6 288.2 288.2
Changes in working capital
(Increase)/decrease
in inventories (1.1) (1.1) (1.2) (1.2)
Increase in trade and
other receivables 6.3 6.3 (2.0) (2.0)
(Decrease)/increase
in payables and provisions 6.3 6.3 (14.2) (14.2)
============================= ====== ======= ====== ========
Cash generated from
operations 348.1 348.1 270.8 270.8
Notes to the Financial Statements (continued)
32. Operating leases
The Group and Company are committed to making the following
payments over the lifetime of the lease in respect of
non-cancellable operating leases which expire in:
Group and Company Land and Plant Land and Plant
buildings and machinery buildings and machinery
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
======================= ========== ============== ========== ==============
Within one year - - 0.1 -
In the second to fifth
years inclusive 1.1 - 1.5 -
After five years 2.6 2.9 2.8 2.9
======================== ========== ============== ========== ==============
3.7 2.9 4.4 2.9
Glossary
CI Customer Interruptions
CLASS Customer Load Active System Services
CML Customer Minutes Lost
DNO Distribution Network Operator
DUoS Distribution Use Of System
ENWL Electricity North West Limited
ESPS Electricity Supply Pension Scheme
FVTPL Fair Value Through Profit or Loss
IFRS International Financial Reporting Standard
KPI Key Performance Indicators
Ofgem Office of Gas and Electricity Markets
PPE Property, Plant and Equipment
RAV Regulatory Asset Value
RIIO Revenue using Incentives to deliver Innovation and Outputs
RIIO - ED1 Revenue using Incentives to deliver Innovation and Outputs - Electricity Distribution 1
RPI Retail Price Index
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR OKDDDQBKDFPN
(END) Dow Jones Newswires
May 31, 2017 12:00 ET (16:00 GMT)
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