TIDMBD49
RNS Number : 9890O
Electricity North West Limited
04 June 2020
Electricity North West Limited (the "Company") is pleased to
announce its Annual Financial Report for the year ended 31 March
2020.
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:
https://www.fca.org.uk/markets/primary-markets/regulatory-disclosures/national-storage-mechanism
In accordance with Disclosure and Transparency Rule 6.3.5 the
Annual Financial Report is here reproduced in full unedited text
(the Company has not taken advantage of the exemption afforded in
6.3.5 (2)).
For further information please contact Electricity North West's
press office on 0844 209 1957 or email pressoffice@enwl.co.uk
For the year ended 31 March 2020
Electricity North West Limited
Registered number 02366949
Introduction
Electricity North West Limited (ENWL or "the Company") is the
electricity distributor for the North West of England. We own,
invest in, operate and maintain the network of poles, wires,
transformers and cables which carry electricity from both the
national grid and locally connected generation to homes and
business across the North West. Our job is to keep electricity
flowing safely and reliably to our customers' homes and businesses,
keeping the power on 24 hours a day, seven days a week.
We are proud of who we are, the essential role we play for our
customers and the investment we make locally.
North West - We are champions of the North West and proud that
it is our network that connects communities and will support the
success of the region economically.
Service - We invest in our people and train them to be experts
who ensure we provide exceptional service.
Innovation - We believe in continuous improvement and lead in
energy innovation in our sector.
Move to a low-carbon economy - We are key facilitators in the
UK's drive to become carbon neutral by 2050.
We recognise the role that electricity, and the electricity
distribution networks such as ourselves, play in leading and
facilitating the switch of the UK to a low carbon economy in an
efficient manner, cost effective for customers.
We are pleased to present the Annual Report and Consolidated
Financial Statements of the Company and its subsidiaries (together
referred to as "the Group") to shareholders for the year ended 31
March 2020. Further information on the Company can be found by
visiting our website: www.enwl.co.uk. The Company is limited by
shares and incorporated in England, the United Kingdom under the
Companies Act 2006.
Notice regarding limitations on directors' liability under
English law
The information supplied in the Strategic Report and Directors'
Report has been drawn up and presented in accordance with English
law. The liabilities of the Directors in connection with these
reports shall be subject to the limitations and restrictions
provided by such law.
Strategic Report
In preparing the Strategic Report, the Directors have complied
with s414 of the Companies Act 2006. The Strategic Report has been
prepared for the Electricity North West Group as a whole comprising
Electricity North West Limited ("the Company") and its non-trading
subsidiaries (together, "the Group").
Cautionary statement regarding forward-looking statements
The Chairman's Statement, Chief Executive Officer's Statement
and Strategic Report sections 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 2020
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
2020 are not due for submission to Ofgem until July 2020, and will
be reviewed by Ofgem after their submission.
Website and investor relations
The Company's website, www.enwl.co.uk, gives additional
information on the Company and Group. Notwithstanding the
references we make in this Annual Report to the website, none of
the information made available on the website constitutes part of
this Annual Report or shall be deemed to be incorporated by
reference herein. Interested institutional debt investors can also
gain access to additional financial information by visiting our
website www.enwl.co.uk/about-us/investor-relations .
Contents
Chairman's
Statement..................................................................................................................
1
Chief Executive Officer's
Statement.............................................................................................
2
Strategic
Report............................................................................................................................
5
- Company Background............................................................................................................ 5
- Corporate Social Responsibility............................................................................................. 14
- Key Performance Indicators.................................................................................................. 21
- Financial Performance........................................................................................................... 25
- Risk Management.................................................................................................................. 34
Corporate Governance
Report.....................................................................................................
39
- The Board............................................................................................................................... 39
- Board Committees................................................................................................................. 47
- Report of the Audit Committee............................................................................................. 48
- Report of the Nominations Committee................................................................................. 51
- Report of the Remuneration Committee............................................................................... 51
- Report of the Health, Safety and Environment
Committee................................................... 54
Directors'
Report............................................................................................................................
55
Directors' Responsibilities
Statement.............................................................................................58
Independent Auditor's
Report........................................................................................................
59
Consolidated and Company Statement of Comprehensive
Income.............................................. 71
Consolidated and Company Statement of Financial
Position........................................................
72
Consolidated Statement of Changes in
Equity................................................................................73
Company Statement of Changes in
Equity......................................................................................74
Consolidated and Company Statement of Cash
Flows...................................................................
75
Notes to the Financial
Statements.................................................................................................
76
Chairman's Statement
I am pleased to present the Annual Report and Consolidated
Financial Statements of the Electricity North West Limited (ENWL)
Group for the year ended 31 March 2020, the fifth year of our
eight-year regulatory period.
This report is being published as we face unprecedented times
resulting from the COVID-19 pandemic. The essential service that
the Company provides of maintaining the electricity supply to homes
and business is more important than ever, and highlights the
critical role that we play in the economy and lives of those who
live in the North West.
The year ended 31 March 2020, which was only marginally impacted
by the pandemic, was another successful year, with the Company
demonstrating further improvements, and achieving a number of
best-ever performances, across the critical areas of safety,
network reliability, customer satisfaction and the environmental
impact of the business.
The operational performance of the Company is discussed further
in the Chief Executive Officer's Statement that follows.
Company ownership
Following a strategic review of their investment by the previous
ultimate shareholders of the Group, there was a change in ownership
of our parent undertaking during the year.
We welcome Kansai Electric Power Company, who together with
Mitsubishi and Daiwa formed KDM Power, Equitix and Swingford
Holdings Corporation Limited, as new ultimate shareholders, and are
pleased with their commitment to work with the Company to use
innovation to ensure that the electricity networks, and the Company
in particular, can fully play their role in enabling the transition
to the UK Government's Net-Zero target.
Strategic direction
The move to a low-carbon economy continues to gather momentum,
with wide social and political support. In June 2019, the Climate
Change Act was amended to make the UK the world's first major
economy to enshrine in law its commitment to become carbon neutral
by 2050. Greater Manchester Combined Authority, a significant
stakeholder in our region, has set a challenging target of the
region becoming carbon neutral by 2038 - significantly ahead of the
national timescale. The overwhelming momentum in energy is for
decarbonisation through electrification, and this presents
significant long-term growth opportunities for the sector and,
therefore forms a fundamental element of our strategic plans.
The Company is well placed to respond to the low carbon
challenge. Innovations such as CLASS and our Smart Street project,
for which we won an GBP18m Innovation Rollout Mechanism award from
Ofgem, support the dual challenge of supporting decarbonisation and
ensuring customer bills remain as affordable as possible. Our
significant investment in the next generation Network Management
Systems will enable granular real time control of the network and
will position the business for the transition to a Distribution
System Operator.
Board membership
The change in ultimate shareholders has brought about a
significant change in the composition of Board members. I would
like to thank the outgoing shareholder appointed Board members -
Hamish Lea-Wilson, John Lynch and Niall Mills. In their place we
have five new shareholder appointed directors - Sion Jones,
Shinichiro Sumitomo, Genping Pan, Peter O'Flaherty and Yoichi
Hamada. I welcome these new appointments which both increase the
diversity of the Board and bring expertise in network operation
from across the globe.
I would like to thank all members of the Board, along with the
Executive team for their ongoing support during this successful
year. Finally, I would like to thank all the employees of the
Company for their dedication and continued commitment in delivering
the vital services we provide, particularly at these
extraordinarily challenging times.
Dr John Roberts CBE
Chairman
Chief Executive Officer's Statement
I am pleased to introduce the Annual Report and Consolidated
Financial Statements for the year ended 31 March 2020. Our
operations and investment plans continue to be led by both
stakeholder engagement and our customers' priorities. We have
continued to see improvements in reliability and customer
satisfaction, and we are supporting more customers in vulnerable
situations. In the current Coronavirus pandemic, we know that the
region is relying on us now more than ever to power homes and
businesses. The improvements in operational and network safety seen
in previous years have continued. We are proud to be leading the
transition to a low carbon future, whilst limiting the impact on
customer bills through innovation.
Our Company purpose states that 'Together we have the energy to
transform our communities'. There is no bigger transformation for
the country than the transition to low carbon.
Our leadership role in the region's transition to zero carbon is
very clear. Last year we launched our ambitious plan, 'Leading the
North West to Zero Carbon', setting out how we would decarbonise
our own operations and support the transition to the low carbon
economy for the rest of the region. Through our leadership and
expertise as well as the continued investment in our own network
systems, we are uniquely placed to facilitate the growth in low
carbon technologies. This work has been the focus for much of the
past year.
In February 2020, Ofgem launched its Decarbonisation Action
Plan, offering clear regulatory support to the direction in which
we are travelling.
Innovation remains key to deliver the scale of change needed at
an affordable cost and this continues to be a core value and
strength of the business. We were pleased to see our Smart Street
innovation receive GBP18m of Ofgem funding approval in the year.
The project will now roll out our innovative Smart Street project
to more customers, creating reductions in these customers'
electricity bills of up to GBP70 per year.
The move to a Distribution System Operator
As we move towards the low carbon future, new electrical demands
for electric vehicle charging, heat pumps and increased local
renewable generation will necessitate changes in the way we operate
the network. These changes will minimise the cost by avoiding vast
increases in investment requirements and mitigate the increase in
consumer bills.
We will operate our network more dynamically to ensure the
appropriate flow and availability of power where and when it is
needed in our region. These changes are labelled by the regulator
and Government as reflecting the transition of our role from a
distribution network operator to distribution system operator
(DSO). The development and investment in our new industry-leading
computer-controlled Network Management System (NMS) is testament to
our preparedness and our ambition in this regard.
The drive towards a low carbon future relies on connecting much
more renewable generation and low carbon technology to the network
quickly minimising the need for expensive and disruptive network
reinforcement with new plant and equipment. New types of flexible
connections contracts will allow us to manage flows actively on the
network in real time, enabled by additional load measurement
sensors at strategic points on the network linked to software
algorithms in NMS. We have continued to invest in this operating
technology during the year and will see NMS go live in the
summer.
The commercial deployment of our innovative Customer Load Active
System Services (CLASS) project has successfully completed and we
are now fully participating in the National Grid frequency response
and fast reserve markets. CLASS uses voltage controllers in
substations to manage demand for electricity, reducing the need for
additional generation during periods of peak demand. Through
reducing the need for further traditional generation, CLASS helps
reduce UK carbon emissions as well as contributing to lower
customer bills.
Chief Executive Officer's Statement (continued)
Performance overview
We were pleased that our Company is the only network operator
group in the country to have achieved green ratings from Ofgem in
all categories for the last three consecutive years.
Each year Ofgem rates the networks to show areas of good and
poor performance. The six categories are: reliability and
availability, connections, social obligations, customer service,
environment and safety. Our performance against a wide range of
metrics meets or exceeds Ofgem's expectations, and we are delighted
that this has been recognised.
We continue to strive to improve our performance and provide the
best possible service to our customers in the North West.
The company operates in a high hazard industry and safety
remains a priority. The sustained improvement in incident rates,
this year seeing the lowest ever lost time incident rate, reflects
the enhanced safety culture within the business but we are never
complacent.
Reliability continues to be a key priority for our customers, as
we are ever more dependent on electricity for all aspects of our
lives. Through investment in automation, robust inspection and
maintenance programmes and our focus on operational response times
we continue to provide industry leading reliability, with a network
availability of 99.9%. The numbers of customer interruptions have
now reduced by 25% during the current regulatory period (since the
year ended March 2016). Our Customer Interruptions (CIs) and
Customer Minutes Lost (CMLs) measures were 'best-ever' results at
27.8 and 27.2.
Our customer satisfaction performance has continued to improve
in all areas, achieving a significantly improved overall score of
88.5% for the year (2019: 86.5%), close to Ofgem's maximum
incentive level of 89%. Customer complaints fell 32% compared to
the prior year and complaints resolution performance has also
improved significantly, currently achieving an 84.0% 24-hour
resolution performance (2019: 82.1%).
The investments we have made in recent years are allowing us to
deliver performance improvements for our customers and to realise
cost efficiencies that we share with our customers. Our average
domestic bill for 2019/20 was GBP87, compared to the UK average of
GBP93. Since the start of the regulatory period, we have shared
GBP28m of efficiency savings with our customers.
Our responsibility framework
We have a special position in our region and we believe that it
is important that this is reflected in our behaviours. This year we
became a real living wage employer and, in further recognition of
our activities, were also one of the first six companies to be
awarded membership of Greater Manchester Combined Authority's new
Good Employment Charter.
Through our diversity and inclusion programme, we are working
hard to ensure that our workforce is more representative of the
communities we serve, with a particular emphasis on encouraging
female representation across the business. Women currently make up
25% of our workforce and we are pleased that, by focusing on
supporting women into engineering and leadership roles, 30% of our
Senior Leadership team are female. Working with our local
communities has also seen a rise in people within black, Asian and
minority ethnicities applying for apprenticeships.
On decarbonisation we are working towards achieving a carbon
literacy silver standard, up from our current bronze standard, and
are working with our supply chain to encourage them to follow our
responsible business framework as well as embracing
decarbonisation.
Chief Executive Officer's Statement (continued)
We have a number of local initiatives across our region to help
local communities. Our new employee-led fundraising initiative
focuses on providing grass-roots support to organisations close to
our colleagues' hearts with colleagues nominating those charities
local to them, to receive donations. Our 'Transforming our spaces'
programme to turn substation grounds into usable spaces to brighten
communities has also been a great local initiative that we are
delighted to see make a difference.
Engaging with our customers and stakeholders
We are driven by the needs and requirements of our customers and
other stakeholders. The past year has seen us continue to engage
with customers and stakeholders across our region both in respect
of the activities that we are planning to take place during our
existing price control, RIIO-ED1, as well as increasingly looking
forward to planning for our next price control, RIIO-ED2, which
will run from 2023 for five years.
The Chief Executive Panel has been a success in bringing
together key senior-level stakeholders. We are also pleased to have
appointed independent chairs for our other panels covering
sustainability, and consumer vulnerability.
This year saw us set up our Customer Engagement Group, a new
independent group who will challenge us as we put together our next
business plan. We were one of the first DNOs to set up the group,
which has now met every month since May 2019, and they have already
provided us with some good constructive challenge to our plans. We
look forward to working closely with them over the coming year.
As always, there will be a lot to deliver as our successes
continue to raise expectations, our role in decarbonisation grows,
and yet the pressure on bills remains. For the first time our
engagement programme also includes future customers - a key
development and reminder that the decisions we make in the next
year, based on input from customers, will have a profound effect on
our region for years to come.
We finish the financial year with the country under lockdown due
to coronavirus. Whilst many businesses are forced to close, we
continue to provide the essential service that we deliver every day
of the year, highlighting the absolutely critical role we play in
keeping power flowing for the North West. As our revenues are
collected, in-part, based on the demand over the network, the
economic impact of coronavirus has resulted in a short-term
reduction in cashflows. To the extent that we do not collect all
our allowed revenues in the year, the regulatory framework adjusts
collections in future years, and will not impact our ability to
operate. Further details can be found in Going Concern and
Viability Statement sections of this report.
Finally, I would like to thank all of our employees, and the
trades unions that represent them, who have continued to work to
secure our critical infrastructure during these most challenging of
times.
Peter Emery
Chief Executive Officer
Strategic Report
Electricity North West Limited ("ENWL" or "the Company") is a
private limited company registered in England and Wales, ultimately
owned by investors composed of a fund advised by Equitix, a
consortium led by KDM Power Limited and Swingford Holdings
Corporation Limited, as shown in Note 30.
Company Background
Electricity North West Limited is the electricity distribution
network operator for the North West of England.
The Company serves approximately 5 million customers at 2.4
million domestic and industrial locations, has circa 1,900
employees and provides a safe and reliable electricity supply, 24
hours a day, seven days a week.
We own, invest in, operate and maintain the network of poles,
wires, transformers and cables which carry electricity from both
the national grid and locally connected generation to homes and
business across the North West, together with the increasingly
important telecommunications network that controls the network
remotely.
The role we play in serving our communities continues to evolve
as we seek to transition to a low carbon economy and electricity
generation becomes more distributed across our network.
Network operators are critical to the evolution of the
electricity market and will need to play a more sophisticated role
in managing our network in an environment of multi-directional
electricity flow, as well as allowing for the integration of new
technologies such as electric vehicles, heat pumps and distributed
generation and storage.
How we charge customers
We charge our customers through their electricity suppliers, in
the case of domestic and small customers, or directly for larger
customers.
The prices that we charge our customers for distributing
electricity are regulated by the Gas and Electricity Markets
Authority (GEMA) which operates through the Office of Gas and
Electricity Markets (Ofgem), but we recognise that ultimately it is
our customers that fund the business and its investments in the
network. ENWL's costs are around 15% of the typical domestic
electricity bill charged by suppliers to North West customers,
equivalent to GBP87 per home for the year ended 31 March 2020; this
compared to a national average customer bill impact of GBP93 per
home.
Strategic Report (continued)
Regulatory framework
Charges are regulated by Ofgem through the RIIO model, which
stands for Revenue = Incentives + Innovation + Outputs. This model
determines how much the Company is allowed to charge its customers
to fund network investment and operating costs in the RIIO-ED1
regulatory period from 2015 to 2023 and is designed to drive real
benefits for customers through incentives for good performance.
Ofgem has started consulting on RIIO-ED2 which will govern the next
price control period, from 2023 to 2028.
The RIIO price controls have been developed to ensure that the
revenues collected from customers are linked to company
performance. The base income in each year is largely fixed, being
essentially a return to investors for the capital invested in the
Company. However, income increases or decreases depending on the
Company's performance against the outputs set through a number of
incentive mechanisms.
These mechanisms incentivise good customer service and network
reliability, the latter based upon minimising the number of
interruptions that customers suffer (CIs) and the average length of
those interruptions (CMLs). Performance is assessed each year and
any positive or negative adjustments are fed annually into a
process which will modify revenues for subsequent years.
The RIIO price control model also incentivises cost reductions,
delivering a well maintained and efficiently invested network for
the long term, but at a lower cost, through innovation as well as
efficiency. These are shared between customers and shareholders,
again after an annual review.
The Company also charges separately for new connections to, and
diversions of, the network. This activity is also closely regulated
by Ofgem.
The Company is committed to ensuring the sustainability of the
network for our customers now and in the future. We routinely
inspect the network and these inspections inform our maintenance
and asset replacement programmes taking electrical load and
customer numbers into account.
Investment and innovation continue to ensure the development and
availability of the appropriate technology to meet the changing
demands of electricity supply and to meet the challenge of a low
carbon future, at a price our customers can afford.
COVID-19
The COVID-19 pandemic had a limited impact in the financial year
being reported on, although it continues to have an impact on our
operations at present. As we are deemed a critical service provider
by the UK Government, we are required us to continue to deliver our
essential service to customers. The provision, maintenance and
improvement of power supplies to the public over the lockdown
period, whilst many are in self-isolation, is more important than
ever, particularly for the most vulnerable. To meet this
imperative, we rapidly deployed our well-practised incident
management processes to reorganise our activities and to continue
to operate at the levels of service required, both being cognisant
of the increased impact of planned interruptions on our customers
and the need to keep our people and the public safe and well.
We continue to monitor the situation closely, and to adapt and
respond appropriately. We will continue to ensure that we play our
part in supporting our communities through these unprecedented
times.
Supporting our colleagues
Our priorities in dealing with the exceptional challenges posed
by COVID-19 are ensuring the safety of our colleagues and customers
whilst maintaining the reliability of supply.
We have taken steps to protect those of our colleagues who are
considered by government to be particularly vulnerable to the
effects of the virus. All employees, whose roles permit them to do
so effectively, are working from home, and we have significantly
increased our IT and other processes to support this. For our
colleagues who work in the field, we have
Strategic Report (continued)
COVID-19 (continued)
introduced strict safety and hygiene procedures, with social
distancing measures and use of additional personal protective
equipment where this is appropriate. For those employees who have
not been able to work effectively from home, and to facilitate the
return of others in due course, we continue to adapt and introduce
new measures to ensure we keep our colleagues safe in our offices
and depots
The commitment shown by our colleagues to the business and our
customers throughout the pandemic has been exceptional. At the same
time, we do recognise the impact that these unprecedented times can
have of wellbeing, especially mental wellbeing. In addition to
maintaining regular contact with colleagues using video meetings,
we continue to support colleagues through our mental wellbeing
support mechanisms, including our Employee Assistance Programme
which is available to all employees.
Maintaining supplies
In line with our role as an essential service provider, we have
continued throughout the pandemic with our essential maintenance of
the network, albeit with a view to reducing the length of planned
supply interruptions on Customers, as well as responding to power
cuts. Our robust business continuity plans have enabled us to
respond to the impact of the pandemic quickly and effectively.
During the pandemic, it has been vital that our engineers carry
out maintenance and inspections on the power network, to ensure the
resilience of our network that we will all need over the coming
weeks and months.
We have reviewed our planned programme of essential work and
assessed all work on a case-by-case basis to limit the number and
impact of planned interruptions. Where possible, we have limited
these planned interruptions to last no longer than five hours and
the provision of temporary generation where appropriate.
We continue to work closely with Government and Ofgem as well as
the industry body, the Energy Networks Association, to ensure a
consistent industry-approach.
Supporting our customers and communities
As we normally do 365 days a year, throughout the pandemic we
have continued to respond to issues across the network 24 hours a
day, 7 days a week, to keep power flowing, including responding to
power cuts, wherever and whenever they happen.
We know many of our customers will be facing difficult
situations, and continue to provide additional support to those who
most need it through our Priority Service Register , which gives
free additional support in the event of a power cut. We are also
asking any self-isolating customers if they require any help, such
as food packages, and, with their permission, passing their details
onto trusted partners or befriending services.
Although customers do not pay their bills directly to us, our
customer service teams are working hard to direct customers to the
help available from their Electricity Suppliers.
Our expertise led us to be chosen to deliver the increased
electricity capacity required for the Manchester Nightingale
hospital, the region's specialist field hospital needed to respond
to the Coronavirus outbreak. We are proud to have helped the
Government, the NHS and our community in this work, which we
provided without charge.
Our colleagues have continued to show this commitment to the
communities we serve, with a number of local initiatives including
collecting food and supplies for local foodbanks and hospitals and
working in partnerships with the charities, such as the Bread and
Butter Trust, to deliver food bundles to families in our
region.
Maintaining financial resilience
Our revenues are collected, in-part, based on the demand over
the network. With the lockdown, this has naturally fallen, with a
short-term reduction in cashflows. To the extent that we do not
collect all our allowed revenues in this year, the regulatory
framework adjusts collections in future years,
Strategic Report (continued)
COVID-19 (continued)
and therefore this will not have a lasting economic impact on
us.
As our cash is collected from energy suppliers, rather than end
customers, our exposure to bad debts is more indirect. We continue
to work, at the request of Ofgem, with the Industry to implement
cash payment mechanisms that support liquidity of the industry,
recognising that many customers will be facing financial
difficulty.
Our funding position continues to be strong although naturally
we are carefully monitoring our liquidity and working capital. As
at 31 March 2020, ENWL had GBP51m of available cash and GBP20m
available but undrawn bank facilities, representing available
liquidity of GBP71m. There is also headroom against all compliance
ratios and there are no re-financing obligations due in the next 12
months.
In assessment of the significance and fast developing impact of
COVID-19, the Company has considered a number of financial
scenarios including the impact of revenue demand projections,
supplier payment deferrals, financial performance including
incremental operating costs, liquidity management and ratio
compliance. These scenarios also consider a number of mitigations
that can be deployed including the deferral of capital expenditure
and payment of dividends.
Consideration has been given to these scenarios by the Directors
in making the going concern and viability assessments and in
determining any possible impairment of the Company's assets.
The impact of COVID-19 has
been considered in arriving
at the value of assets held
on the balance sheet at 31
March 2020. Factors considered
include the impact of the non
payment of debt, for which
no adjustments have been made
as their values are supported
by the cash collected since
the year end date, and in valuations
of financial instruments and
pension assets. The pension
asset valuations have been
reviewed by the Company and
the Company's actuaries in
respect of the significant
movements in the financial
markets during March. There
is, as would be expected, an
increased level of uncertainty
on these valuations being reported
by the professional valuers,
in particular in respect of
the property valuations as
at 31 March. The property assets
total GBP146m of the GBP1,292m
pension assets.
The Board continues to monitor
the situation closely, with
flexible plans in place to
support short term liquidity
and ensure the long term stability
of the Company.
Other External Factors
Ofgem consultation on the RIIO-ED2 framework is underway.
Ofgem's statements on RIIO-ED2 clearly reflect the importance of
the electricity distribution sector in enabling the transition to a
low carbon economy and also acknowledge the evolution of DNOs to
perform Distribution System Operations (DSO) as part of this
transition. The next two years will see Ofgem decide on many of the
aspects of the RIIO-ED2 price control framework which are to be
developed to meet these and other strategic challenges. We continue
to engage in, and influence, the RIIO-ED2 process to meet the needs
of our customers and other stakeholders.
We also monitor the continuing environment of political and
economic uncertainty. With the decisive election result in 2019,
there is reduced political uncertainty. Although the outcome from
Brexit remains unknown, this is expected to have a limited direct
impact aside from a modest increase in stock levels to manage
supply chain risk, which has proved helpful in managing the
COVID-19 crisis.
Whilst the amount of revenue that we are permitted to collect is
determined by Ofgem, the actual amount collected in any given year
is significantly driven by demand over the network, with under/
over collections adjusted in subsequent years. The lockdown related
to COVID-19 has reduced demand in the early weeks of our financial
year to 31 March 2021 by around 20%, which will have a
temporary
Strategic Report (continued)
Other External Factors (continued)
impact on cash collections. As the country returns to more
normal life we expect to see a significant amount of this demand
return.
Having considered the factors noted above there are no material
impacts on either the going concern statement or the period covered
by the viability statement.
Purpose, principles and corporate goals
ENWL is operating in a dynamic, rapidly changing environment.
Customers in the North West rely on the services we provide to keep
them connected with friends, family and the wider world, keep their
electric cars running, ensure their homes are heated and enable
them to work smarter and more flexibly. The Company aims to provide
customers with an excellent service at an affordable price through
a safe and reliable electricity network. The Company balances the
priorities of maintaining a reliable network in the near term,
investing to ensure this is sustainable in the long term, whilst
keeping costs as low as reasonably practicable to meet the
affordability challenge for our customers.
Our Purpose 'Together we have the energy to transform our
communities' articulates the contribution we make and the ambition
we have for the communities we serve in our region. This Purpose is
embedded within our business and helps to enable us to effectively
deliver our plan. Our Principles capture the mindsets, heartsets
and skills required for us to deliver the Purpose and they have
played a vital role in the delivery of our improved business
performance.
These principles are now a well-established touchstone for
behaviours within the Company and will continue to be key as we
seek to consolidate and continuously improve the progress we have
made.
We report on our performance against corporate goals that span
these multiple priorities.
-- Safety and Environment
-- Customer
-- Affordability
-- Reliability
-- People
Safety and Environment
The Company operates in a high hazard industry and the safety of
its people and customers and protection of the environment will
always remain priority.
Operational safety
The Company ensures that all people are well trained and able to
operate safely, backed by policy driven procedures and compliance
assurance, alongside a behavioural approach that seeks to ensure
that all staff and contractors approach any task with a strong
behavioural attitude to safety.
In 2017, we embarked on a company-wide initiative to create an
enhanced safety culture, key to managing risk. In the year ended 31
March 2020, we have continued to review our safety management
system and to improve safety performance in our day-to-day
operations.
We finished the year ended 31 March 2020 with a lost time injury
frequency rate 0.024 (2019: 0.047) having had just two lost time
injuries in the year (2019: 4). This contrasts to 2017 when we had
seven lost time injuries and reflects the sustained improvement
since we embarked on our safety initiative. The total recordable
injury rate was 0.13 (2019: 0.13).
Strategic Report (continued)
Purpose, principles and corporate goals (continued)
Operational safety (continued)
In the year to 31 March 2021 we will continue to embed the
changes introduced as well as improving our arrangements for the
selection and management of contractors.
There is a continued focus on the valuable learnings obtained
through the safety observations and positive challenge reports,
leading indicators of safety performance. As our safety journey
continues, we are increasingly focused on the quality of, and
learning from, safety observations and positive challenges, rather
than focusing on the volume of these. Safety observations in the
year were recorded at 11,621 (2019: 12,250), plus 2,048 positive
challenges (2019: 1,580).
Asset safety
The safety of the Company's employees, contractors and the
public from the inherent risks of electrical assets is assured
through the Company's ongoing asset investment programme and the
associated asset risk management policies which define the
programme scope. Safety related investments are reported quarterly
to the Board.
During the year ended 31 March 2020 the Company made significant
progress in further reducing the risks associated with rising and
lateral mains in multi occupancy premises. We have now fitted smart
fuse technology in all the buildings in our region identified as
highest risk.
Environmental performance
The Company is dedicated to achieving the highest standards of
environmental performance, not only by minimising the risks created
by our activities, but also through targeted investment in outputs
that deliver a positive environmental impact. To achieve our
environmental objectives, we monitor environmental related
investments to ensure we are on track.
In terms of our own direct operational impact on the
environment, our principal performance indicator is the level of
carbon dioxide emissions equivalent (tCO(2) e).
This measure covers the environmental impact both from the use
of fossil fuels in vehicles and generators and of energy in
buildings, as well as the impact of Sulphur Hexafluoride (SF6),
which is a strong greenhouse gas historically used as insulation in
electrical equipment.
At the start of the current regulatory period we made a
commitment to our customers to reduce carbon emissions, in tCO(2)
e, by 10% from a 2014/15 base year, by 2020. Through targeted
investment in the efficiency of our buildings and other efficiency
measures, the level of emissions reduction has exceeded this level,
having been reduced by 26% from 2014/15 levels to 18,051 tCO(2) e
in the year ended 31 March 2020. In addition to this reduction, our
CLASS innovation has reduced carbon-based generation in the
economy, saving an estimated 2,424 tCO(2) e.
Even given this performance, we recognise we need to deliver
carbon reduction at a faster rate than our original targets. Our
leadership role in the region's transition to zero carbon is
becoming clearer. Our regional stakeholders are setting ambitious
targets and our carbon reduction plan 'Leading the North West to
Zero Carbon' sets out our own challenging plans to support this
change.
Recognising our role, we have made two depots and two
substations carbon neutral during the year, using a range of low
carbon technologies that we can use as exemplars to other
businesses across the region.
We are rolling out electric vehicle charging points at all of
our depots and incentivising our colleagues to change to electric
vehicles, as well as helping local authorities and businesses
across the region to understand how they can support the mass
adoption of this technology.
Because the transition to carbon neutrality is as much about
behavioural change as it is about technologies, we will become the
first silver accredited carbon literate Distribution Network
Operator. We are currently rolling out carbon literacy training to
all of our
Strategic Report (continued)
Safety and Environment (continued)
leadership team to ensure our people understand how they can
reduce their own carbon emissions both at work and at home.
Our impact is also visual. During the year the Company
undergrounded 7.2km of overhead lines and removed 91 poles to
improve visual amenity, working with regional stakeholders to
identify the schemes of most benefit to our communities, whilst
recognising the increase in customer bills that this causes.
Reliability
As we are ever more dependent on electricity, customers say that
"keeping the lights on" remains one of their top priorities. 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), with both reliability measures improving in
the year.
In the year ended 31 March 2020, the average number of
interruptions per 100 customers (CIs) continues to be industry
leading, and the best level the Company has ever achieved, at 27.8
(2019: 33.7) outperforming the target of 47.2 set by Ofgem.
The average number of minutes for which customers were without
supply during the year (CMLs) to 31 March 2020 was 27.2 (2019:
33.0), which outperformed the target of 43.0 set by Ofgem and was
also a Company best-ever performance.
The reliability of the network has been improved though
proactive investment in the use of network automation and
innovative solutions, and an ongoing focus on operational response
when incidents do occur. Network reliability continued to be high
with a network availability of 99.995%. We continue to focus on
improving reliability and this is an area in which we have
committed additional funds to further increase the level of
automation and thereby reliability of the network.
Most customers enjoy excellent levels of reliability but we
recognise that there is variability in the level of service
experienced by some. A few customers experience a level of service
significantly worse than average, usually by virtue of their
location or due to localised network issues. We have continued to
invest in the year in schemes to aim to reduce the numbers of worst
served customers, with the number of customers meeting this Ofgem
definition being 268 in the year ended 31 March 2020 (2019: 135).
Although we have seen an increase in numbers over the year, we
expect to achieve our target of having no customers meeting the
definition of 'worst served' by 2023.
Key to delivering reliability to customers is proactive
investment to improve the resilience of the network to storm and
flood conditions.
We continue to invest significant funds in flood defences and
interconnectivity at key sites to provide protection to a 1 in
1,000-year flood risk.
Investment in an affordable and sustainable network
In the year ended 31 March 2020, a total network investment
programme of GBP88.8m was delivered (2019: GBP104.7m). The current
network has been installed over many decades and a significant
proportion of the programme relates to replacing existing equipment
at, or approaching, the end of its life with modern
equivalents.
Innovation is essential to maintain network performance and
reliability levels and to meet the increasing demands on
electricity from the decarbonisation of energy, at an affordable
cost. Innovation is a core competence of ENWL, recognising the
increasing reliance on electricity for not only light and power but
for electric cars and heat. The Company deploys the latest
innovative solutions to develop an optimised investment programme
and deliver considerable cost benefits and efficiencies that are
shared with customers. During the year,
Strategic Report (continued)
Reliability (continued)
we were awarded GBP1.2m from Ofgem for discretionary awards
(Smart Street and Respond) and a successful innovation roll out
mechanism bid of GBP18m to transfer the Smart Street project to a
wider range of customers.
Customer
Delivering excellent customer service is a priority for the
Company. Customer satisfaction levels have improved year-on-year
throughout RIIO-ED1, achieving an overall score of 88.5% in 2020
(2019: 86.5%), ahead of our internal target of 88.3% and a highest
ever score for the Company. The relative ranking among the DNOs was
12th out of 14 (2019: 12th) with all DNOs showing very tightly
distributed performance.
The Company is committed to further improve customer
satisfaction levels, with clear actions in place that are monitored
regularly by the Executive Leadership team. The actions focus
around simplification, compliance with the customer journey,
improvement in systems and resourcing strategies.
We maintain a Priority Service Register (PSR) to identify those
customers who are most dependent on our services. In the year ended
31 March 2020, we have continued to promote our PSR and have
developed our strategy to offer more targeted services to higher
risk customers, for example those who are medically dependant on
electricity. Investment in staff training has also been a focus in
order to help facilitate this.
In delivering for our priority customers we have managed to
reach out to over 481,000 customers this year (2019: 520,000) which
exceeded our target. The communications were carried out through
various channels including letters, email and telephony.
We recognise our role in helping to tackle fuel poverty and the
particular challenges this brings in our region. During the year we
have engaged with a variety of partners in a bid to offer extra
support to the customers in our region who are impacted by fuel
poverty. Through the introduction of referral partnerships, we are
now helping to provide our customers with advice on issues such as
energy saving and income maximisation, as well as offering
installation of free energy efficiency measures and referral to
other relevant services.
The number of complaints we receive has reduced significantly
during the year, with complaint volumes down 32% compared to the
prior year. We track the time taken to resolve complaints when we
do receive them. The overall complaints performance within the year
continued to outperform the Ofgem penalty incentive and a
significant year on year reduction, with a complaint metric of 2.00
(2019: 2.16), with 84.0% of complaints resolved in 24 hours (2019:
82.1%), forecasting us to be 8th position in the DNO league table.
The complaint metric reflects the percentage of complaints resolved
within 24 hours, combined with the percentage of complaints
resolved within 31 days.
Our continued focus on Guaranteed Standards of Performance for
Connections during the year has driven a further reduction in the
number of failures. However, we are still not at the level of
service that we want to give to our customers and will be
continuing to focus on making improvements next year.
Strategic Report (continued)
People
The Company is a major employer in the North West of England and
employs circa 1,900 people in the region. The Company also works
with a carefully chosen contractor workforce providing even wider
levels of employment for the region. We are committed to providing
secure, long-term employment and career development opportunities
for our employees.
We look to balance the right skills and people resources to
support the business in the long term.
Our Purpose and Principles were developed with our employees and
set out the required behaviours to deliver our Purpose and achieve
sustained high performance.
These Principles are underpinned by a continued commitment to
our management philosophy encompassing fundamentals of leadership,
ethical standards and securing competitive advantage.
Together, the Purpose and Principles and the 'Management
Philosophy' produce our corporate culture.
Climate is the measure the Company uses to quantify how people
feel about working for the business and, in turn, makes the link
between this 'feeling' and how the Company performs.
The Company continues to make significant investment in training
and development of employees and in developing managers into
leaders to achieve the desired culture. Half yearly surveys are
undertaken to measure both colleague engagement and levels of
agreement with the Company's identified climate priorities. Time is
provided between each survey to allow leadership teams to reflect
on what they have learnt through the survey and then act to address
issues identified.
Levels of colleague engagement are high, with a survey
completion rate of almost 1,500 colleagues. The latest survey in
October 2019 had an overall employee agreement rate of 76.1%,
increasing from 74.9% in April 2019, and 69.4% in September 2018.
There is a demonstrable upward trajectory in employee agreement
scores and we have beaten our target of 75% agreement in the latest
survey.
The Group sets policies and encourages a working culture that
recognises, respects, values and harnesses diversity for the
benefit of the Group and individuals, and we are committed to
integrating equality and diversity into all that the Group
does.
During the year there has been a focus on our diversity and
inclusion programme, working hard to ensure that our workforce is
more representative of the communities we serve, with a particular
emphasis on encouraging female representation across the business.
Working with our local communities, including partnerships with
local mosques, has also seen a rise in black, Asian and minority
ethnic people making apprenticeship applications.
We are committed to rewarding our colleagues equally, regardless
of gender. More information on our gender pay gap reporting is
available at www.enwl.co.uk.
The Group is committed to fulfilling its obligations in
accordance with the Disability Discrimination Act 1995 and best
practice. As an equal opportunities employer, equal consideration
is given to applicants with disabilities in the Group's employment
criteria. The business will modify equipment and practices wherever
it is safe and practical to do so, both for new employees and for
those employees that become disabled during the course of their
employment.
Strategic Report (continued)
Corporate Social Responsibility
Our Responsibility Framework
Following its launch last year and now embedded within the
business our Purpose-Led Responsibility Framework articulates the
Company's Corporate Social Responsibility Strategy. The Framework
demonstrates that we consider the social, environmental and
economic impact in our decision-making and that our activity
delivers a wide, positive, societal impact.
Aligned to our Purpose, the delivery of our Responsibility
Framework further consolidates and embeds our Purpose and
Principles. The framework is structured to deliver responsible
business practices for our people and partners, our communities and
our environment.
It has been informed by the requirements of wider external
Environmental, Social and Governance (ESG) benchmarks and has been
adopted and brought to life by our colleagues.
Highlights from the strategy include:
In our people and partners section, we are proud to have
introduced a step change in our mental health support programme and
a colleague-led diversity and inclusion steering group to support
the implementation of our policy to ensure we are working towards
having a workforce which reflects the communities which we serve.
This year the Company has also become a Real Living Wage employer
and are working with our suppliers to ensure that they also work
towards it, ensuring fair pay for all our colleagues and
partners.
In our communities section, our colleague-led approach to
fundraising has seen our eleven local teams support almost 100
charities and local community organisations and continue to develop
effective mechanisms to support consumer vulnerability and to
prevent fuel poverty through targeted partnerships based on our
social data mapping.
In our environment section, the Company has committed to an
ambitious plan to tackle our operational carbon footprint. We have
continued to engage with local schools and science festivals to
support electricity and STEM (science, technology, engineering and
mathematics) subjects. This year we have introduced a Transforming
our Spaces programme, which has brought wildflower planting to nine
of our substations that were identified by our colleagues and
community, increasing local amenity value and biodiversity.
Responsibility Benchmarks
We have benchmarked our Responsibility approach against the
Business in the Community (BITC) Corporate Responsibility Index for
a number of years. This year BITC have introduced a new Tracker,
which the Company has participated in to continue to inform our
future business improvement in this area.
We also assess our responsibility performance against the Global
Real Estate Sustainability Benchmark (GRESB). In 2019/20 we
achieved a score of 76% (2019: 81%), maintaining our (maximum)
five-star rating. We are proud that we hold 3rd position for those
global network companies benchmarked, an increase from 4th last
year.
Strategic Report (continued)
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.
This year we have continued strong stakeholder engagement during
RIIO-ED1 with our advisory panels and were one of the first DNO's
to appoint our Customer Engagement Group (CEG) to provide oversight
and challenge to our RIIO-ED2 engagement programme.
Ofgem has stated that it is committed to giving customers a
stronger voice in setting outputs and shaping and assessing
business plans. The CEG has met twelve times throughout the year
and we welome the opportunity to work with the CEG over the coming
years to demonstrate how insight from stakeholder engagement is
being used to inform our RIIO-ED2 Business Plan. The CEG will also
fulfil the oversight function for all network reinforcement
decisions in line with the requirements of the Department for
Business, Environment and Industrial Strategy (BEIS).
This year the Company has undertaken a best practice review,
learning from stakeholder engagament in the water industry. We have
also completed reasearch to understand how to best engage with our
stakeholders, how to segment our stakeholders and understand their
priorities before developing our RIIO-ED2 Business Plan.
We have also continued to embed and enhance stakeholder
engagement for RIIO-ED1 working closely with our Consumer
Vulnerability, Sustainability and Chief Executive Advisory Panels.
We have introduced independent Chairs for our consumer
vulnerability and sustainability panels and working with them, have
introduced new members to strengthen strategic involvement in key
areas.
These panels and our three Regional Advisory Panels, held
annually in Greater Manchester, Lancashire and Cumbria have helped
inform our Executive team and business decision-making.
The transition to the low carbon economy and support for
vulnerable consumers continue to be priorities for our
stakeholders. This is reinforced by our RII0-ED2 consumer research
along with reliability of supply and value for money. This insight
will be critical to informing our emerging Business Plan as we
progress to the next stage of willingness to pay testing.
To support adherence to these initiatives, the Company has
engaged auditors for a non-financial assurance of its Stakeholder
Engagement and Customer Vulnerability Submission and its commitment
to Accountability Principles for Sustainable Development
(AA1000APS).
Strategic Report (continued)
Section 172 Statement
Introduction
Throughout this Annual Report, we discuss how we take into
account the likely consequences of long-term decisions; understand
the importance of engaging with our employees; the need to foster
relationships with stakeholders; understand the impact of our
operations on the communities in our region and the environment we
depend upon; attribute importance to behaving as a responsible
business and the desirability of maintaining a reputation for high
standards of business conduct; and the need to act fairly as
between members of the company.
The impact of the COVID-19 pandemic on the operations and
finances of the business, along with the actions taken to support
our employees and communities through these unprecedented times is
discussed on pages 6 to 8 of the Strategic Report.
Statement by the directors in performance of their statutory
duties in accordance with s172(1) Companies Act 2006
The Board of Directors of Electricity North West Limited
consider, both individually and together, that they have acted in a
way they consider to be in good faith and would be most likely to
promote the success of the Company for the benefit of its members
as a whole (having regard to the stakeholders and matters set out
in s172(1)(a-f) of the Act) in decisions taken during the year
ended 31 March 2020. In particular, this can be demonstrated by
reference to our RIIO-ED1 'Well Justified Business Plan' for the
period 2015-2023 and our plans for RIIO-ED2:
-- Our plan was designed to have a long-term beneficial impact
on the Company to contribute to its success in delivering a
first-class service and ensuring the network is more reliable for
customers in the North West of England to 2023 and beyond. We will
continue to operate our business in line with our regulatory
targets. Our plan is centered around four key themes: customer
service, reliability affordability and sustainability (see our
'Well Justified Business Plan' for 2015-2023
https://www.enwl.co.uk/about-us/regulatory-information/business-plan/).
The Directors continue to monitor and approve key strategic
decisions to deliver this plan, and to support the transition to a
low carbon economy.
Employee engagement and reward
Our employees are fundamental to the delivery of our plan. We
aim to be a responsible employer and we are delighted that all our
hard work meant we were selected, along with only five other
employers, to be the first to move from being a supporter to
members of the Greater Manchester Good Employment Charter. Our
values resonate with those of the Charter and the membership
recognises our efforts in providing good workplace practices and
commitment to continually improving employment standards within our
organisation and helping others to do the same.
Our business model is to employ directly with over 90% of our
workforce permanent members of our team with clear and consistent
terms and conditions so our colleagues understand their rights and
benefits whilst in employment with us. We do not use zero-hour
contracts as we recognise the value to our people of ensuring that
they have security of income and are able to manage non-work
commitments.
We are proud to be accredited as a Living Wage employer since
2019. Over the next few years, we will be dedicated to using our
influence to help and support our contractors and suppliers and
other employers in the North West to become Living Wage employers
in turn.
Safety is a key priority, it is embedded in everything we do as
a business. Our Safety Output delivers absolute compliance with all
relevant legislation and regulation - see Chief Executive Officer's
Statement and Strategic Report. We have dedicated Occupational
Health partners, health surveillance, health
Strategic Report (continued)
Section 172 Statement (continued)
checks and both company-funded and voluntary medical plans,
discounted gym memberships and dental care to help our employees
stay physically healthy and support them if they become unwell. In
2018 the Company launched a new approach to mental wellbeing and we
were recognised as a Time to Change employer, with a focus on
tackling discrimination and stigma on mental health in our
workplace. Guidance and support for managers was rolled out and we
had 50 volunteers step forward to become Wellbeing Champions. We
have bought in Cognitive Behavioural Therapy and we are developing
partnerships with mental health charities which can support the
work we want to do. Our Mental Health Steering Group is led by one
of our Executive Team and drives the continual improvement for
mental health that we wish to achieve as an organisation for our
people.
We work closely with our four recognised Trade Unions; Unite,
Prospect, Unison and GMB, and consult and engage with them in
partnership. They are a key means of engaging with our people, but
we also undertake employment surveys twice a year, where
individuals can anonymously rate our performance on a wider range
of issues, which in turn informs and influences the work we do.
Each year our Chief Executive and members of the Executive
Leadership team undertake a roadshow, where they visit every depot
and office to deliver updates on the company performance, our plan
for the year ahead and invite questions and engagement direct from
our employees. Recognition and reward are also fundamental to how
we engage with our people, highlighting our purpose and principles.
Through our spotlight awards we recognise three individuals and one
team every month that have gone above and beyond for their
colleagues and for our communities.
We also make significant investment in training and development
of employees and in developing managers into leaders.
We have a dedicated Steering Group, led by a member of the
Executive Team which focuses on addressing the diversity challenges
we have as a business and as a sector. We have established
partnerships with six local schools and two local mosques to raise
awareness of what we do. We are a Forces Friendly employer, we have
signed the social mobility pledge and we are a disability confident
employer. We are working incredibly hard to encourage those from a
diverse range of backgrounds to potentially consider us as a future
employer and for us to become representative of the communities we
serve.
Engagement with suppliers and customers
Our plan was informed by extensive engagement with customers,
enabling us to gain an understanding of their views and priorities.
We have created an independent customer engagement group to ensure
our future business plans address the needs and preferences of our
customers and puts stakeholder needs at the heart of our
decision-making.
We also aim to act responsibly in how we engage with our
suppliers and regulators which are integral to the successful
delivery of our plan. We operate with openness and transparency to
develop a first-class supply chain; one that is high performing,
ethical and safe, whilst ensuring human rights are adhered to and
supporting a sustainable environment. We aim to conduct all of our
business relationships with integrity and expect the same from our
suppliers. We work closely with a range of suppliers and
contractors from many different countries, all of whom are required
to adhere to our supply chain charter that is available at
www.enwl.co.uk/about-us/information-for-employees/our-supply-chain-charter/
Low carbon initiatives
Our plan takes into account the impact of the Company's
operations on the community and environment and our wider societal
responsibilities, and in particular how we impact the regions we
serve in the North West of England. We are determined to make a
positive contribution to our environment and
Strategic Report (continued)
Section 172 Statement (continued)
our 'Leading the North West to Zero Carbon' plan sets out how we
are investing GBP63.5million between 2019-2023 to drive down our
carbon emissions and help business, our customers and our
colleagues to do the same. Some of the work delivered so far is
summarised below.
In 2019 we became the region's first company to purchase two
state-of-the-art electric mini diggers which have zero exhaust
emissions. Each vehicle reduces our carbon emissions by 65 tonnes
CO equivalent (tCO e) a year. Since then we have purchased two
more. As well as the environmental advantages associated with
reduced carbon emissions, they are also five times quieter than
traditional diesel vehicles which reduces noise disturbance for
customers and allows for better communication between our
engineers; this is safer for them and the public. We are able to
charge these vehicles at our depots using electricity generated
from renewable sources.
To support and encourage colleagues to make the change to
electric vehicles (EVs), we are investing in charging
infrastructure and incentivising colleagues to adopt EVs. 98 new EV
charge points will be installed at our sites for company and
private vehicle use to add to the 15 we already have in place. We
are also working with the landlords of the sites we lease to make
EV charging available there.
Electricity for our operational substations and most of our
offices and depots is 100% renewable and is generated locally at
Walney Wind Farm, off the coast of Cumbria, saving 5,492 tCO e per
year. However, our aim is to achieve 'net zero carbon' by
transforming our estate to be as energy efficient as possible, and
to install onsite generation to meet most of our own energy demand.
Starting with the completion of two zero carbon exemplar depots in
2020, we will test and demonstrate a number of solutions to assess
their suitability and relative benefits, which will help other
businesses in the North West understand what is achievable. More
information can be found at
www.enwl.co.uk/zero-carbon/leading-the-north-west-to-zero-carbon/
Responsible business
As a Board of Directors, our intention is to behave responsibly
and ensure that management operate the business in a responsible
manner, operating within the high standards of business conduct and
good governance expected for a business such as ours (see Corporate
Governance Report ). In doing so, this will contribute to the
delivery of our plan. The intention is to grow and maintain our
reputation, through both the construction and delivery of our plan,
in a way that reflects our responsible behavior.
As the Board of Directors, our intention is to behave
responsibly toward our shareholders and treat them fairly and
equally, so they too may benefit from the successful delivery of
our plan.
COVID-19
The impact of the COVID-19 pandemic is discussed in detail
within the Strategic Report. We have continued to provide support
to our employees and communities through these unprecedented times
as we continue to deliver our essential services to customers. No
employees have been furloughed.
Strategic Report (continued)
Anti-corruption and anti-bribery
At ENWL we are proud of our strong commitment to high ethical
standards in the way that we work. The business takes a
zero-tolerance approach to bribery and corruption, and is committed
to acting professionally, fairly and with integrity in all our
business dealings and relationships wherever we operate,
implementing and enforcing effective systems to counter bribery. It
is important that our regulator and other stakeholders have
confidence in the arrangements and integrity of the
organisation.
The Company operates a number of policies governing the
anti-bribery and anti-corruption matters: Anti-Corruption and
Bribery Policy, Disclosure (Whistleblowing) Policy, Ethics Policy
and Conflict of Interest Policy.
These policies apply to all employees and officers of ENWL and
form part of the employee Code of Conduct. Other individuals
performing functions for the Company, such as agency workers and
contractors, are also required to adhere to our anti-bribery and
anti-corruption policies.
To support our whistleblowing policy, we have in place a
confidential independent reporting line called Safecall.
Gender and diversity
Information on the composition of the workforce at the year end
is summarised below:
Turnover
2020 - 139 leavers (2019: 178 leavers)
Training courses delivered
2020 - 309* (2019: 316*)
Training course attendees
2020 - 8,729 (2019: 9,012)
*These figures include e-learning courses, operational and
non-operational training.
Workforce composition at the year end 31 March:
Total
employees 1,442 486 1,420 482
25
75% 25% 75% %
Senior
managers 34 11 35 15
76% 24% 70% 30%
Executive
leadership
team* 7 1 7 1
87% 13% 87% 13%
Non-Executive
Directors 9 2 9 2
82% 18% 82% 18%
====== ===== ====== =====
* The Executive leadership team figure includes two Executive
Directors.
Environment
We take our responsibility for the protection of the environment
affected by our activities very seriously; indeed, it is one of our
core values. To this end, we are committed to achieving the highest
possible standards of environmental performance.
We minimise emissions and spills, and are investing to remove
potentially damaging equipment, and enhance the environment by
undergrounding overhead cables.
As examples of what we are doing, during the year:
-- 17.1 km of fluid filled cable was removed and replaced with modern equivalent.
-- Overall leakage of oil from cables was 21,616 litres which is
a significant improvement over the previous year's performance of
55,829 litres. This meets the target of less than 30,000 litres per
year by the end of RIIO-ED1 target and will need to be maintained
or improved further.
-- 7.2 km of overhead line in National Parks and Areas of
Outstanding Natural Beauty were replaced with 8.6km of underground
cable.
-- In the previous financial year, we launched our 'Leading the
North West to Zero Carbon' plan, which sets out how we will spend
GBP63.5m in RIIO-ED1 decarbonising
Strategic Report (continued)
Environment (continued)
our own operations, and helping businesses, customers and
colleagues across the region to do the same.
All this is supported though an environmental management system
that is certified to ISO 14001 standard and an energy management
system certified to ISO 50001.
Business carbon footprint
The Company's business carbon footprint (excluding losses) for
the year was 18,051 tCO(2) e (tonnes of CO(2) equivalent), a 12%
reduction on the prior year figure of 20,417 tCO(2) e.
During the year the Company continued to implement energy
efficiency measures, through the refurbishment of its buildings,
and the replacement of fleet vehicles and company cars with more
efficient vehicles. We have also increased the number of electrical
vehicle charging points across our depots.
There has been an increase of 87% for emissions of SF(6) .
However, over 50% of the emissions of SF(6) were from the first
four months of the year, after which the approach to leaks was
adapted and losses started to reduce.
A total of 18,957,071 kWh of electricity, equal to 4,845 tCO(2)
e, was purchased by the Company for its own use, including for the
purposes of transportation. The tCO(2) e was calculated by
multiplying the total consumption in kWh by the UK Government
Conversion Factors for greenhouse gas emissions.
There was 39,515,185 kWh of energy consumed from the combustion
of gas and consumption of fuel for operational transport. This is
calculated by multiplying the litres of gas oil and diesel consumed
by the conversion factor provided in the UK Government Conversion
Factors for greenhouse gas emissions.
The Group's annual emissions are equivalent to 8.77 tCO(2) e per
employee.
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 and we will be taking measures to
reduce losses as part of our commitment to decarbonise our
operations. This is done through installing more efficient assets
in our network, particularly low loss transformers and cables and
through our revenue protection activities, addressing the issue of
theft.
Scope 1
Operational transport 7,393 7,870
Business transport
- road 1,343 1,319
Fugitive emissions 1,788 954
Fuel combustion 2,560 4,435
--------- ---------
13,084 14,578
--------- ---------
Scope 2
--------- ---------
Buildings energy
usage 4,845 5,773
--------- ---------
Scope 3
Business transport
- rail 22 22
Business transport
- air 100 44
--------- ---------
122 66
--------- ---------
Business Carbon
Footprint (excl.
losses) 18,051 20,417
--------- ---------
Electrical losses 293,794 347,010
Business Carbon
Footprint (incl.
losses) 311,845 367,427
========= =========
Strategic Report (continued)
Key Performance Indicators
KPI Definition and comment Performance
Definition: The total number of
reportable incidents in the period
divided by the number of hours
worked in that period by employees
and contractors' employees, multiplied
by 100,000 hours.
Performance: During the year the
Company saw a reduction in lost
time incidents, with two employee
lost time incidents and none involving
Lost time contractor employees (2019: four).
incident The corresponding lost time incident
frequency frequency rate was 0.024 (2019:
Safety rate 0.047). 0.024
--------------- ------------------------------------------- ---------------------------
Safety Definition: Safety observations, 11,261 safety observations
observation including near miss reports, are
reporting collected to provide valuable
information on hazards and behavioural
attitude. Safety observations
reporting is actively encouraged
to promote a safety culture.
Performance: In the year, the
number of safety observations
reported was 11,261 (2019: 12,250),
well above the target of 8,000.
During the year we have continued
to place greater emphasis on improving
the quality and level of 'behavioural
challenge', rather than simply
overall volumes.
--------------- ------------------------------------------- ---------------------------
Definition: The overall customer
satisfaction score is a composite
score from Ofgem surveys that
assesses levels of customer satisfaction
for connections quotations and
delivery, interruptions and general
enquiries.
Performance: Overall satisfaction
improved to 88.5% for the year,
an all-time high and up from 86.5%
Overall in the prior year. It reflects
customer the ongoing focus on improvement
Customer satisfaction actions. 88.5%
--------------- ------------------------------------------- ---------------------------
People Employee Definition: Employee engagement 76.1% Climate score
engagement is measured via an employee survey
which, through a series of questions,
provides details of overall employee
engagement and how employees feel
about the 'working climate'.
Performance: Overall employee
engagement achieved 76.1% for
the year, an increase from 69.4%
in the prior year.
--------------- ------------------------------------------- ---------------------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Reliability Customer Definition: CIs represent the 27.8 CIs
interruptions number of interruptions our
(CIs) 3 customers' experience. It is
calculated by taking the total
number of customers affected
divided by the total number
of customers connected to the
network, multiplied by 100.
It excludes exceptional events.
Performance: The result of 27.8
for the year significantly outperforms
the Ofgem target of 46.9. The
score reflects a Company best
interruptions performance following
significant investment in network
automation.
----------------- ---------------------------------------- ----------------
Customer Definition: CMLs represent the 27.2 CMLs
minutes lost time customers are without power
(CMLs) in the event of an interruption.
It is calculated by taking the
sum of the customer minutes
lost for all restoration stages
for all incidents, excluding
exceptional events, and dividing
by the number of connected customers.
Performance: The result of 27.2
for the year is another Company
best-ever performance, improving
from 33.0 in the prior year
and significantly outperforming
the Ofgem target of 42.0.
----------------- ---------------------------------------- ----------------
Sustainability Carbon footprint Definition: Carbon footprint 18,051 tCO(2) e
(excluding measures the impact of our operations
electrical on the environment and is calculated
losses) in line with Ofgem guidance.
The calculation excludes electrical
losses arising from the operation
of the network which cannot
be directly controlled or accurately
measured.
Performance: Our carbon footprint
continues on a downward trajectory,
reducing by 12% from the prior
year. There may be some year-on-year
volatility in emissions dependant
on levels of generation deployed
on the network as a result of
interruptions or exceptional
events.
----------------- ---------------------------------------- ----------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Affordability Total Expenditure Definition: Totex is a key financial GBP254.2m
measure for the business. It is a
regulatory 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 2020 was GBP254.2m compared
to an Ofgem allowance of GBP274.4m
in outturn prices. Expenditure was
lower than the allowance in the year,
as we are benefitting from proactive
investments made earlier in ED1 to
improve cost and incentives performance.
------------------ --------------------------------------------- ------------
Financial Revenue Definition: Revenue is largely fixed GBP478.1m
KPIs over time, but can vary through over/under
recovery as demand varies against
the forecasts used to set tariffs,
and other adjustments for, for example,
incentive revenues. It is determined
by Ofgem to allow recovery of efficient
costs to maintain the network. This
revenue is profiled over RIIO-ED1.
Additional revenue is generated through
charges for new connections to the
network, along with an opportunity
to earn incentive revenue for delivering
improved performance.
Performance: Revenues have increased
from the prior year reflecting inflation
and adjustments through the regulatory
price setting mechanism. The revenue
over recovery for the year was GBP9.7m
(2019: GBP0.4m). This will be corrected
through adjustments in pricing in
two years' time.
------------------ --------------------------------------------- ------------
Profit Definition: PBTFV is the profit before GBP157.9m
before tax of GBP146m (2019: GBP87m) adding
tax and back the GBP12m FV loss (2019: GBP47m
fair value loss), per Note 9.
movements Performance: PBTFV has increased to
(PBTFV) GBP157.9m (2019: GBP135m), mainly
as a result of higher revenues. PBTFV
excludes the significant capital investment
that we make in the network each year.
Financial performance is better understood
through the Totex measure comparison
with allowances.
------------------ --------------------------------------------- ------------
Strategic Report (continued)
Key Performance Indicators (continued)
KPI Definition and comment Performance
Financial Net debt Definition: Net debt includes the GBP1,149m
KPIs total borrowings of GBP1,206m (2019:
GBP1,169m) per Note 19, net of
cash and cash equivalents and money
market deposits of GBP56m (2019:
GBP23m) per Note 17.
Performance: There is no significant
movement in the net debt position
compared to the prior year.
-------------- ------------------------------------------ ------------
Definition: RAV gearing is measured
as borrowings at nominal value,
plus inflation-linked debt accretion
where applicable, net of cash and
short-term deposits divided by
the estimated RAV of GBP1,896m
at March 2020 (2019: GBP1,820m),
as defined by the Financing Agreements.
Performance: The RAV gearing is
under the targeted Ofgem level
RAV gearing of 65%. 62%
-------------- ------------------------------------------------------ ------------
Interest Definition: Interest cover is the 4.6 times
cover number of times the net interest
expense, adjusted for indexation
and capitalisation of borrowing
costs, is covered by operating
profit from continuing operations,
as defined by the Financing Agreements.
Performance: Interest cover has
increased due to the GBP21m increase
in Operating Profit, with the interest
expense (excluding inflation movements
on inflation-linked instruments
and FV movements) remaining broadly
in-line with the prior year.
-------------- ------------------------------------------------------ ------------
Capital Definition: This represents investment GBP218.5m
expenditure in the network to maintain its
reliability and resilience for
future customers. The figure includes
total additions to property, plant
and equipment and software.
Performance: We continue to invest
to improve the quality and reliability
of the network. The reduction in
spend compared to the prior year
reflects the phasing of our capital
programme across RIIO-ED1.
-------------- ------------------------------------------------------ ------------
Strategic Report (continued)
Financial Performance
Overall performance reporting
Base revenue is fixed at the start of a price review period. It
is set at a level that should meet our efficient operating costs
and expenses over that period, as well as funding efficient
investment, interest on necessary loan funding and taxes. In order
to encourage investment, it allows for a return to shareholders at
a level that rewards past investment and encourages future
investment. This return level has been set by Ofgem at 6% pa real
for the current regulatory period.
Actual expenditures, both capital and operating (referred to by
Ofgem as Totex), vary in any given year from the original
regulatory settlement agreed to be funded by Ofgem, as changes in
customer needs, new innovations, and changes in network investment
delivery priorities change over time. Allowed revenues are a
function of the original allowance and expenditure plans, adjusted
for under or overspend against allowances in earlier years,
including incentives or penalties earned for performance. Actual
revenues in any given year reflect these adjusted allowed revenues,
although as these are collected based upon forecasts of demand over
the network set two years earlier, demand experience means actual
revenues vary from adjusted allowed revenues based upon demand in
the year, as well as the impact of forecast variations arising from
earlier years.
Actual revenues are allowed by Ofgem, not on the profiles of
costs in the period, but based on the long-term cash requirements
of the business. Revenues are therefore the cash funding mechanism
for the business, including current investment requirements as well
as the repayment of past investments, rather than the reflection of
income resulting from activities that financial statements usually
reflect.
In these financial statements, operating profit is, therefore,
the combination of revenues that are only partly related to actual
activity during the year, less those operating costs actually
incurred, but excluding capital expenditure.
Consequently, the profit earned in any given period does not
reflect the return to shareholders, which is more accurately
represented by the Return on Regulated Equity (RoRE) (see section
below).
Whilst the statutory measure that is most closely aligned to the
return to shareholders is cash flow before financing activities
(see page 75), this has a limited correlation to actual returns, as
a result of the factors noted above.
Return on Regulated Equity
Ofgem has been working with the network operators, consumers and
other interested stakeholders, to develop performance reporting
measures that more accurately reflect the return to investors.
Ofgem presents the results of the networks as a Return on
Regulated Equity (RoRE).
The Regulated Equity is a percentage of the Regulated Asset
Value (RAV) which is essentially equivalent to the net book value
of the fixed assets of the business, calculated in regulatory
terms. Ofgem assumes that this RAV is financed 65% by debt and 35%
by equity, hence they calculate the return to shareholders based
upon 35% of the RAV. The Company operates at a lower gearing ratio
than this notional level, so returns based upon actual gearing
levels are also shown.
The Company is allowed to make a return of 6.0% p.a. real (i.e.
before RPI inflation) across the RIIO-ED1 period, on this
element.
Returns above this rate are delivered through above target
performance, in line with the incentive structure set out within
the RIIO framework. This may be, for example, through efficiencies
in the delivery of our services which result in lower Totex (which
savings are shared at a rate of 42% with customers).
Strategic Report (continued)
Financial Performance (continued)
Return on Regulated Equity (continued)
After taking into account the timing of expenditures against the
timing of allowances and outputs (referred to as an enduring value
calculation), our average post-financing RoRE for the first five
years of RIIO-ED1 is at an annual rate of 7.5% on an actual equity
basis.
In broad terms, this figure reflects the 6.0% allowed return,
with incentives for improved performance adding an additional 2.2%
and 1.4% through Totex cost efficiencies. However, the costs of
servicing our debt are higher than Ofgem allow us, with these
actual debt service costs reflecting the prices in the debt markets
at the time our debt was issued.
This is the principal element reducing our performance to the
overall 7.5% per annum, real, after tax and interest.
Notional equity returns
Allowed Equity Return 6.0%
Totex outperformance 1.4%
Incentive performance 2.2%
RoRE - Operational performance
(notional) 9.6%
Debt performance (1.1)%
Tax performance (0.2)%
RoRE (Notional regulatory
equity) 8.3%
Adjustment to actual equity (0.8)%
RoRE (Actual equity) 7.5%
-------------------------------- -------
Profit after tax 102.1 71.8 116.3 71.0 117.0
Adjustments:
RAV (32.8) (57.2) (55.8) (49.6) (60.9)
Deferred Taxation 12.4 (6.9) 5.9 (26.1) (25.6)
Indexation and Fair Value Movements 32.6 70.0 6.0 136.8 50.9
Movement in Other Regulatory Balances (64.9) (14.7) (24.2) (97.5) (54.5)
---------------------------------------- -------- ------- ------- ------- -------
Post - financing return 53.0 63.0 48.2 34.6 26.9
---------------------------------------- -------- ------- ------- ------- -------
Average return for the RIIO-ED1
period 45.2
Average RAV balance 1,739.9
Average debt balance 1,068.7
RoRE (actual regulatory equity) 7.5%
======== ======= ======= ======= =======
*A prior year comparative of RoRE is not provided in the table
above as 2020 represents a five-year trailing average and 2019
represents four-year trailing average (2019: 6.2%).
Strategic Report (continued)
Financial Performance (continued)
Reconciliation of statutory profit to regulatory performance
The calculation used to derive RoRE provides a measure of the
performance of operations within the price control, including the
impacts of interest and taxation, but excludes operations outside
the price control. It adjusts reported profit under IFRS to reflect
the impact of the regulatory framework, outlined above, when
presenting financial performance. The post-financing return
generated reflects the actual regulatory return made in each year
and is used to derive RoRE.
Adjustments in calculating regulatory financial performance
The principal adjustments from reported profit after tax to
regulated financial performance are:
RAV: The regulatory composition of costs incurred is split
between in-year revenue allowances (fast money) and the creation of
additional RAV (slow money). This does not align with the
classification of costs as operating costs and fixed asset
additions under IFRS accounting principles. This adjustment
reflects the impact of the fast and slow money concept in the
regulatory settlement and the impact of regulatory depreciation
which does not form part of the statutory profit.
Deferred taxation: Future revenues are expected to recover cash
taxation costs, including the unwinding of deferred taxation
balances created in the current year (Note 10).
Indexation and fair value movements: Fair value movements on
debt and derivative financial instruments included within statutory
profit are excluded from the regulatory performance calculation and
an adjustment made to remove the inflation component of actual
interest costs.
Movement in other regulatory balances: Regulatory performance
reflects performance on an earned basis, with revenue being
adjusted for this performance in future years. IFRS recognises
these revenues when they flow through bills to customers and not in
the period to which they relate. The principal adjustments are for
incentive revenues earned in the year, under or over recoveries of
allowed revenue in the period, differences in timing of the funding
of pension deficit repair payments and the adjustments for enduring
value. Enduring value adjusts regulatory performance for the impact
of timing differences between the receipt of allowed revenue and
actual expenditure incurred, i.e. timing differences that will
unwind over the regulatory period.
The enduring value adjustment has been calculated by considering
the cumulative expenditure variance by regulatory category and uses
approved Company business plans to assess the extent to which these
timing differences will unwind. The enduring value adjustment
requires a high level of management judgement. Methodologies for
calculating enduring value are evolving as we work with Ofgem and
other network operators to develop a standardised approach.
Equity component:
RoRE performance has been presented on a real equity basis,
representing the balance of the RAV that is not debt funded.
Average equity for the period is 39%, higher than the assumed 35%
notional equity funding. The difference between the actual and
notional equity has the effect of reducing the allowed equity
return from 8.1% to an actual equity return of 7.5%.
Strategic Report (continued)
Financial Performance (continued)
Financial reporting measures
Adoption of IFRS 16 'Leases'
The Group has adopted IFRS 16 'Leases' during the year. IFRS 16
has resulted in an opening reserves adjustment of GBP0.2m, along
with incremental lease liabilities of GBP5.5m and right of use
assets of GBP5.1m at 31 March 2020. More details of the impact of
IFRS 16 can be found in Notes 1 and 20.
Revenue
Revenue has increased to GBP478m (2019: GBP458m) during the
year, in line with the allowed Distribution Use of System (DUoS)
revenue under the RIIO-ED1 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 reflected in the Consolidated Statement of
Comprehensive Income for the period and will be corrected in future
periods through the Ofgem price setting mechanism.
For the year 31 March 2020 there was an over recovery of DUoS
revenue of GBP9.7m against plan before adjustment for RPI
indexation (2019: GBP0.4m over-recovery), reflecting variability
against forecast in consumption volumes year on year. This over
recovery will be corrected through adjustments in revenues to be
received in two years' time, in accordance with Ofgem's
methodology.
Operating profit
Operating profit has increased to GBP212m (2019: GBP191m)
primarily as a result of the increased revenue detailed above.
Profit before tax and fair value movements
Profit before tax and fair value movements has increased to
GBP157m (2019: GBP134m), mainly as a result of the increased
operating profit detailed above.
Taxation
Corporation tax is calculated at 19% (2019: 19%) of the
estimated assessable profit for the period. The deferred tax is
calculated based on the expected future tax rates.
The overall taxation charge for the year has increased from
GBP15m in 2019 to GBP44m in 2020, mainly as a result of an increase
in the deferred tax rates from 17% to 19%.
Dividends and dividend policy
The Group's dividend policy is to distribute the maximum amount
of available cash, whilst maintaining its targeted gearing level,
in each financial year at semi-annual intervals, with reference to
the forecast business needs, the Group's treasury policy on
liquidity, financing restrictions, applicable law in any given
financial year and the Company's licence obligations.
During the year ended 31 March 2020, the Company proposed and
paid a final dividend for the year ended 31 March 2019 of GBP17m,
paid in June 2019, and an interim dividend of GBP21m that was paid
in December 2019. In the year ended 31 March 2019 the Company
declared a final dividend for the year ended 31 March 2018 of
GBP16m, paid in June 2018, and an interim dividend of GBP30m that
was paid in December 2018. The Directors have not proposed a final
dividend of for the year ended 31 March 2020 given the COVID-19
situation.
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 2020 was GBP5,226m (2019: GBP5,014m), with a
net book value of GBP3,362m (2019: GBP3,260m). In the year ended 31
March 2020, the Group invested GBP217m (2019: GBP232m) in property,
plant and equipment in a large number of projects to reinforce and
improve the network, and GBP8m (2019: GBP9m) in IT systems.
Strategic Report (continued)
Financial Performance (continued)
Property, plant and equipment and software (continued)
New investment is financed through a combination of operating
cash flows and increased borrowing capacity against the RAV.
Pension obligations
The Group's pension scheme under IAS 19, has a net deficit at 31
March 2020 of GBP26m (2019: GBP33m surplus). The main reasons for
the movement are reductions in scheme asset values, changes in
financial and future mortality assumptions, and changes driven by
the impact of pensioner buy-in during the year.
During the year, the scheme completed a pensioner buy-in for
around 80% of the its pensioner liabilities. This has the effect of
removing longevity and investment risks for this part of the
membership. The gross liability remains recognised on the balance
sheet, with an equivalent insurance asset recognised. The impact of
the purchase of the pensioner buy-in has been recognised as part of
Other Comprehensive Income in the year.
The most recent triennial funding valuation of the scheme was
carried out as at 31 March 2019 and identified a shortfall of
GBP69.5m against the Trustee Board's statutory funding objective.
In addition to the timing of the two valuations, the contributions
made in the period and the return on assets, the main difference is
due to the different assumptions used by the IAS 19 and the funding
valuation. In the event of underfunding, the Group must agree a
deficit recovery plan with the Trustee Board within statutory
deadlines. As part of the 2019 actuarial valuation, the Group
agreed to eliminate the shortfall by paying additional annual
contributions in the period to March 2023.
Cash flow before financing activities
Net cash inflow before financing activities in the year was
GBP47m (2019: GBP2m inflow), reflecting both the increased revenue
and the decreased asset investment.
Treasury policy and operations
The Group's treasury function operates with the delegated
authority of, and under policies approved by, the Board. The
treasury function does not act as a profit centre and does not
undertake any speculative trading activity. It seeks to ensure that
sufficient funding is available in line with the treasury policy
and to maintain the agreed targeted headroom on key financial
ratios.
Long-term borrowings are mainly at fixed rates that provide
certainty or are indexed to inflation to match the Group's
inflation-linked (RPI) accretion to the RAV and to cash flows.
The Group's use of derivative instruments relates directly to
the conversion of debt instrument raised at fixed rates of interest
to RPI-linked cashflows, better to match the Ofgem debt allowance
structure. 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).
Cash flows are in sterling, other than sundry purchases of plant
denominated in foreign currencies and some assets of the defined
benefit pension scheme which are managed by the pension scheme
investment managers. The Group has no other material exposure to
foreign currency exchange movements.
Liquidity
The Group's primary sources of liquidity are operating cash
flows, cash balances and funding raised through external
borrowings.
Group budgets for the year-ending 31 March 2021, forecasts to
the end of the current price review in 2023 and longer-term
forecasts to 2048 are used to assess the liquidity needs of the
Group.
Strategic Report (continued)
Financial Performance (continued)
Short-term liquidity
Short-term liquidity requirements are met from the Group's
operating cash flows, cash balances, short-term deposits and
unutilised committed borrowing facilities.
As at 31 March 2020, the unutilised committed facilities were
GBP20m (2019: GBP50m) and, together with GBP56m (2019: GBP23m) of
cash and short-term deposits, provide short-term liquidity for the
Group.
Utilisation of undrawn facilities is with reference to
Regulatory Asset Value (RAV) gearing restrictions for the Group.
Actual and forecast RAV gearing is monitored by the Board.
Long-term liquidity
Where a liquidity need cannot be met by existing resources as
outlined above, for example the refinancing of existing debt or a
demand for additional borrowing, the Group treasury function starts
the process of raising the required debt at least 12 months ahead
of the requirement.
The Group's long-term debt is comprised of a combination of
fixed, floating and index-linked debt, taking derivatives into
account, 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; ENWL has been affirmed on a stable outlook basis.
Long-term debt ratings have also remained stable. Currently the
Group is rated BBB+ with stable outlook by Standard and Poor's,
Baa1 with negative outlook by Moody's Investors Service and BBB+
with stable outlook by Fitch Ratings.
Our short-term debt ratings are A-2 and F2 with Standard and
Poor's and Fitch ratings respectively.
Further details are available to credit investors in the
Financial Investor Relations section of the Company's website
www.enwl.co.uk.
Net debt
Cash and deposits 56 23
Borrowings (1,206) (1,169)
Net debt (1,150) (1,146)
======== ========
Included within the total borrowings figure are GBP77m of loans
from the parent company North West Electricity Networks plc (NWEN
plc), due to mature in March 2023 (2019: GBP75m) and a GBP199m loan
from an affiliated company ENW Finance plc, maturing in July 2021
(2019: GBP199m).
Of the external debt, GBP7.0m (2019: GBP6.8m) is due to be
repaid within the next year, comprising European Investment Bank
(EIB) loans that have an amortising repayment profile. GBP1.9m of
leases is due to be repaid within the year.
All other borrowings are repayable after more than one year and
include bonds with long-term maturities of GBP634m (2019: GBP635m),
bank loans of GBP282m (2019: GBP253m) and leases of GBP4m (2019:
nil).
Note 19 provides more details on the borrowings.
Derivatives
The Group uses derivatives economically to hedge exposure to
fluctuations in market rates over the medium to long term;
inflation swaps to convert fixed rate debt to index-linked
borrowing. All derivatives relate directly to underlying debt. At
31 March 2020 there were no formal hedging relationships in the
Group (2019: same).
The proportion of post-hedging borrowings at fixed, floating and
index-linked rates of interest is maintained in line with target
levels set in the Treasury Policy and is monitored by the Board,
with reference to the projected regulatory revenues that are
exposed to inflationary adjustments (index-linked).
Strategic Report (continued)
Financial Performance (continued)
Fair values
The derivatives are accounted for at fair value through profit
or loss ("FVTPL"), with fair value movements going through the
Statement of Comprehensive Income.
These fair value movements are non-cash and will reverse over
the life of the financial instrument, but can be significant and
result in material volatility in the Statement of Comprehensive
Income.
In the current year, net fair value losses totalling GBP31m have
been recognised in the Statement of Comprehensive Income (2019:
losses of GBP47m), which relates entirely to non-cash
movements.
The fair value movements in the year were primarily driven by
the significant changes in market expectations of future interest
rate and inflation rates.
Additionally, the re-measurement of the defined benefit pension
scheme under IAS 19 has resulted in a GBP74m loss (2019: GBP41m
gain) booked directly to equity.
Going concern
When considering whether to continue to adopt the going concern
basis in preparing the Annual Report and Consolidated Financial
Statements, the Directors have taken into account a number of
factors, including the following:
-- The Company's electricity distribution licence includes the
obligation in standard licence condition 40 to maintain an
investment grade issuer credit rating, which has been met.
-- Under section 3A of the Electricity Act 1989, the Gas and
Electricity Markets Authority has a duty, in carrying out its
functions, to have regard to the need to secure that licence
holders are able to finance their activities, which are the subject
of obligations imposed by or under Part 1 of the Electricity Act
1989 or the Utilities Act 2000.
-- Management has prepared, and the Directors have reviewed,
Group budgets for the year ending 31 March 2021 and forecasts
covering the period to the end of the current price review in 2023.
These forecasts include projections and cash flow forecasts,
including covenant compliance considerations. Inherent in
forecasting is an element of uncertainty and our forecasts have
been sensitised for possible changes in the key assumptions,
including RPI and under recoveries of allowed revenue. This
analysis demonstrates that there is sufficient headroom on key
covenants and that there are sufficient resources available to the
Group within the forecast period.
-- Assessment of the significance and rapid development of the
COVID-19 impact. The Directors have considered a number of
financial scenarios including the impact of revenue demand
projections, supplier payment deferrals, financial performance
including incremental operating costs, liquidity management and
ratio compliance.
-- Short-term liquidity requirements are forecast to be met from
the Group's operating cash flows and short-term deposit balances. A
further GBP20m 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 2021
indicate there is sufficient headroom on these covenants.
Consequently, after making appropriate enquiries, the Directors
have a reasonable expectation that the Company and Group have
adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and Consolidated
Financial Statements.
Strategic Report (continued)
Going concern (continued)
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, together with the
updated guidance issued in 2016.
The Board continues to monitor the situation closely, with
flexible plans in place to support short term liquidity and long
term stability of the Company.
Viability statement
In accordance with the provision of C.2.2 of the 2018 UK
Corporate Governance Code the Directors have assessed viability
over a period longer than that required for going concern and have
chosen the duration to the end of the regulatory period in
2023.
Whilst the Board has no reason to believe the Group will not be
viable over a longer period, the period over which the Board
considers it possible to form a reasonable expectation as to the
Group's longer-term viability, based on the risk and sensitivity
analysis undertaken, is the period to 31 March 2023, the end of the
current Regulatory period. The Board has considered whether it is
aware of any specific relevant factors and notes, in particular,
the Ofgem's RIIO-ED2 consultation document, which indicates lower
equity returns and possibly a changed incentive environment for
RIIO-ED2.
The Board has considered the impact of the COVID-19 pandemic on
operations and liquidity and has also considered the current
political environment, including potential changes in future
government policy as well as the impact from Brexit, in making the
viability assessment. In reaching its conclusion, the Board has
taken into account Ofgem's statutory duty to secure that companies
can finance their functions and has assumed that there will be no
changes to the regulatory framework or Government policy that will
affect the Company's viability.
The Directors have conducted a robust assessment of the
principal risks facing the Company and believe that the Company is
in a position to manage these risks.
In arriving at their conclusion, the Directors have considered
the Company's forecast financial performance and cash flow over the
viability period to 2023. The Company is in advanced discussions
regarding refinancing of inter-group debt that is due to mature in
July 2021. Headroom to compliance ratios over the viability period
is considered and the extent to which deviations in financial
performance from the business plan may impact that headroom. The
Directors have considered this headroom in assessing the Company's
long-term viability. The Directors have also considered the
potential impact from a range of possible outcomes from the ongoing
strategic review by the ultimate shareholders of the Group,
including the impact on liquidity from change of control clauses on
the Company's and Group's debt.
On the basis of this assessment, and assuming that the principal
risks are managed or mitigated as expected, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the
three-year period of their assessment.
Strategic Report (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 Risk, Control and Assurance, senior
managers and the Chief Financial Officer;
-- Formal sign-offs from the business area senior managers, the
finance managers and Chief Financial Officer;
-- Group Audit Committee oversight, involving a review of key
financial reporting judgements, review and appropriate challenge on
matters such as any changes to significant accounting policies and
practices during the year, significant adjustments and the going
concern assumption;
-- The involvement of qualified, professional employees with an
appropriate level of expertise and experience throughout the
business; and
-- Engagement of a professional and experienced external
auditor, a framework for full transparent disclosure of information
during the audit process and post audit evaluation.
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 of ENWL
and the in-depth reporting required by Ofgem, both the Audit
Committee of ENWL 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 2020.
Strategic Report (continued)
Risk Management
The Board is responsible for the alignment of strategy and risk,
and for maintaining a sound system of risk management and internal
controls. Our processes and systems are always evolving with the
needs of our business and have been developed in accordance with
the Financial Reporting Council's (FRC's) Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting.
Our Corporate Risk Register currently details a wide range of
risks. These risks are considered in the context of the corporate
goals - Safety, Customer, Affordability, Reliability,
Sustainability and People and monitored by a business wide network
of Risk Champions and Co-ordinators.
The Company's approach to risk appetite goes to the heart of
achieving our company goals.
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 are only accepted
when within the risk appetite criteria, and when further mitigation
of the risk is not considered cost effective (or is not
possible).
Our appetite for risk is measured 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.
Risk appetite varies in these areas, but in line with the
framework, the Company generally operates within a 'cautious' to
'very cautious' risk range, given that the achievement of the
stretching business plan would not be possible without a level of
measured risk taking. In Sustainability, a 'very cautious' risk
appetite is adopted, given our desire to ensure that the company
maintains its reputation for compliance and an ethical way of doing
business, as well as the role the Company has in the low carbon
transition. Similarly, in relation to People, the Company
recognises the value of its people and the organisational climate
in order to deliver effectively for our customers so a cautious to
very cautious approach is adopted. In relation to Safety, the
Company adopts a risk averse position on the basis that sound
working practices that protect our employees and the general public
are a key priority for the business and an important part of
ensuring that we undertake our activities safely.
The key features of the risk management system include:
-- Clear risk management strategy approved by the Board.
-- Risk appetite framework, approved annually by the Board, in
place that forms a key driver of the strategic business plan.
-- Board oversight in identifying and understanding significant
risks (and opportunities) to the Group in achieving strategic
objectives.
-- Dedicated Board and Executive Committees to oversee the management of risks for the Group.
-- Appropriate operational and non-operational risks being
managed within a corporate risk system.
-- Target risk scores are in place for corporate risks, forming
the basis for the production of work plans by risk owners to show
how the target risk scores will be achieved.
-- 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 risk of a widespread outbreak of COVID-19, and the
associated disruption to the business, and cyber/physical security
threat are considered the most significant risks that we face
currently.
Risk Mitigations
COVID-19 COVID-19:
Certain aspects of * ENWL is recognised as a Critical National
ENWL's activities are Infrastructure provider and is in regular dialogue
affected by the impact with both the UK Government and the Regulator to
of Coronavirus/COVID-19 minimise the effect of the mitigation measures on its
and the mitigation abilities to provide an essential service to its
measures put in place customers.
by the UK Government.
* Building on existing Business Continuity and
Emergency plans ENWL began planning for the potential
impact of an outbreak in the UK commencing early in
2020, with further steps then taken as the situation
evolved.
* An Executive steering group is in place, chaired by
the Director responsible for Business Continuity in
the business, and includes representation from across
the organisation, including the CEO.
* Control measures have been implemented to the extent
possible to minimise the potential impact of the
situation on ENWL's activities and are monitored by
this Steering Group.
---------------------------- -------------------------------------------------------------
Safety Health, Safety and
the Environment: * Board Health, Safety and Environment Committee
Risk associated with oversee this area.
unsafe working practices,
man-made or naturally
occurring hazards that * Extensive policy and procedures to ensure a safe
could cause harm to system of work and environmental management.
people or the environment.
* Behavioural safety training programme across all
areas of the organisation.
* Simple 'Golden Rules' to ensure strong safety
approach throughout the Company's operations.
* Robust 'lessons learned' exercises conducted to
identify root causes when safety or environmental
issues occur.
* Robust authorisation process to control who works on
the network and the activities that they can perform.
* Annual programme of audits and an inspection regime.
* Well-established hazard and safety observation
(including near miss) reporting in place.
---------------------------- -------------------------------------------------------------
Customer Meeting our customers'
expectations: * A programme of improvement activities described in
Failure to meet the more detail on page 12 is being co-ordinated by the
required level of customer Executive Leadership Team to optimise the Company's
satisfaction performance position against all elements of the customer
and to achieve output satisfaction measure.
deliverables, costs
and efficiencies against
the commitments made * Robust plans in place to achieve other commitment
to our customers in targets, or outperform where possible.
the RIIO-ED1 period.
* Controls in place regarding the ongoing reporting of
performance against targets.
---------------------------- -------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Risk Mitigations
People Developing our people:
Having an inadequately * Resource and succession plans are in place, which are
skilled and experienced subject to periodic Executive and Board level review.
workforce to deliver
business objectives.
* Training delivered throughout the Company to ensure
employees are equipped to do their roles competently
and effectively.
--------------------------------- -------------------------------------------------------------
Ethical Behaviour:
Inappropriate behaviour * Extensive policies in place regarding ethical conduct
by Board members, within the business, including Anti-Bribery and
executive or senior Corruption; Conflict of Interests; Ethics; Equality;
management bringing Internal Control & Governance; Modern Slavery and
the company into disrepute Whilstleblowing/Disclosure.
* We continue to review and enhance the mitigations in
this area in line with emerging best practice. We are
corporate members of the Institute of Business
Ethics.
--------------------------------- -------------------------------------------------------------
Reliability Cyber and physical
security threat: * Dedicated qualified personnel allocated to Cyber and
Breach of our security IT security.
regime and access
to key network security
systems by an internal/external * A training programme in place to inform all users of
party. the risks of email and social engineering attacks.
* A cyber risk assessment methodology implemented
within the Group.
* Pre-employment screening for critical roles such as
System Administrators.
* A strong governance and inspection regime to protect
infrastructure assets and operational capacity.
* Physical and technological security measures,
including encryption of key laptops, preventing the
loss of data.
* Data Centre infrastructure providing enhanced
security monitoring and management tools, 'next
generation' firewalls and network traffic analysis.
* Ongoing security patching of critical systems.
* Periodic internal and external security reviews.
* Key systems IT disaster recovery testing.
* Physical security measures are in place to limit
access to sites.
* Use of e-learning to promote awareness of Cyber
issues for all employees
--------------------------------- -------------------------------------------------------------
Personal data:
Breach of regulations * We continue to review and enhance the mitigations in
relating to data protection this area, in particular to do with the General Data
and privacy Protection Regulation (GDPR) requirements.
--------------------------------- -------------------------------------------------------------
Strategic Report (continued)
Risk Management (continued)
Sustainability Government and regulator
policy: * The Company has dedicated Regulation, Legal and
The Company is subject Compliance departments that provide advice and
to a high degree of guidance regarding the interpretation of political,
political, regulatory regulatory and legislative change.
and legislative intervention,
which can impact both
the current RIIO-ED1 * There is ongoing engagement by the Company with the
period, and the settlement Regulator and Government.
for RIIO-ED2. The legal
and compliance framework
can change, leading * Parliament, in framing the Electricity Act, imposed
to additional compliance certain duties on Ofgem/GEMA to ensure that the
obligations, market networks remain financeable for the long-term benefit
conditions, and reporting of customers.
requirements. A changing
political focus on
the sector can have * There is regular engagement with the Board on
a significant effect political and regulatory developments which may
on profitability. impact the Company.
Business resilience:
Events outside of our * The Company has comprehensive contingency plans for
control, for example network emergencies, including key contract resources
extreme weather or such as mobile generators and overhead line teams.
medical emergencies,
affecting large areas,
may negatively impact * Business continuity testing on a regular basis.
the business.
* Reciprocal arrangements with other network operators.
------------------------------- -------------------------------------------------------------
Regulation and compliance
risk: * Overall governance and control framework in place,
Compliance failure including established compliance routines and
leading to an adverse accountabilities, owned by the Executive Leadership
effect on the business. Team and ultimately the Board.
* Specialist teams in place to ensure compliance and
assurance is carried out.
* An internal audit programme focusing on the Group's
key risk areas, 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)
Risk Mitigations
Affordability Financial risks:
The business is subject * A formal treasury policy is in place to manage
to treasury, tax and exposure to counterparty, liquidity and market risk,
liquidity risk exposures, overseen by the Audit Committee.
and under performance
of the pension scheme
investments, market * A well-established monthly banking covenant
impacts and/or an increase monitoring process.
in the scheme liabilities
which would give rise
to higher contributions. * Tax risk scoring.
* Active monitoring of the pension scheme's investments
carried out on a quarterly basis.
* The pension scheme Trustee engages professional legal,
actuarial and investment advice for all decisions
taken and regularly consults with the Company, who
also engage professional advisors.
------------------------------ ----------------------------------------------------------------------
Programme delivery
including change programmes: * Established governance controls in place to oversee
Delays in the investment the delivery of business change.
programme or major
business change activity
leading to an adverse * Processes in place to support delivery of change
impact on the Company, programmes, management of risks and achievement of
particularly relating business benefits.
to customer interruptions
(CIs) and customer
minutes lost performance * For activity impacting CIs and CMLs performance, th
(CMLs). e
following mitigation measures are in place:
o Fault response times and team performance
are closely monitored.
o Supply interruptions planned to minimise
customer impact.
o Network automation to minimise the
effect of faults.
o Significant expenditure on routine
maintenance to reduce the causes of
network interruption.
o Initiatives to improve dispatch and
mobilisation of response teams.
------------------------------ ----------------------------------------------------------------------
Macro-economic factors:
Factors, such as Retail * Monitoring the potential exposure to fluctuating
Price Index (RPI), factors through forecasts from a range of financial
may impact negatively institutions.
on the business.
* Inflation sensitivities reported quarterly through
the business valuation process.
* A significant proportion of our Group debt is
RPI-linked to provide an economic hedge between
allowed revenues and some of our financing costs.
------------------------------ ----------------------------------------------------------------------
The Strategic Report, outlined on pages 5 to 38, has been
approved by the Board of Directors and signed on behalf of the
Board on 3 June 2020.
D Brocksom
Director
Corporate Governance Report
As is required by the Company's regulator, Ofgem, the Company
reports on how the principles and provisions of the UK Corporate
Governance Code ("the Code") have been applied during the year.
There are some limited areas of non-compliance, all of which are
considered appropriate to the privately owned status of the Company
and are explained on page 46.
The Board
Board Members at 31 March 2020
John Roberts CBE
Independent Non-Executive Chairman
Appointed on 1 March 2014
John Roberts was Chief Executive of United Utilities plc from
1999 to 2006. He has a wealth of experience and knowledge,
particularly in the utilities sector, having also been Chief
Executive of Manweb from 1992 until 1995. He has also sat on
Ofgem's Environmental Advisory Panel and has chaired the North West
Energy Council. John's excellence in his field has led to many
honours, in particular he was awarded a CBE for his services to the
utilities industry.
Anne Baldock
Independent Non-Executive Director
Appointed on 26 September 2018
Anne Baldock was previously a partner for 22 years and global
head of the Projects, Energy and Infrastructure Group at the
international law firm Allen & Overy LLP. She has extensive
experience in advising energy companies, charities and governmental
boards on significant contracts and projects. Now retired as a
solicitor, Anne has a portfolio of Non-Executive Director
positions, currently sitting on the Board of Low Carbon Contracts
Company Limited and East West Rail Limited.
Alistair Buchanan, CBE
Independent Non-Executive Director
Appointed on 25 July 2018
Alistair Buchanan has over 25 years experience in the energy
industry, including 10 years as Chief Executive of Ofgem. In 2013
he joined KPMG as Partner and UK Chairman of Power & Utilities,
returning to the firm where he trained as a Chartered Accountant.
During his career, Alistair became an award-winning energy sector
analyst and head of research for banks in New York and London. With
experience at Board level on various companies, he currently also
serves as an Independent Non-Executive on the Board of Thames Water
Utilities Limited, W.H. Ireland Group plc and Atlas Holdings
plc.
Susan Cooklin
Independent Non-Executive Director
Appointed on 25 July 2018
Susan Cooklin is the Managing Director of Route Services at
Network Rail running a portfolio of 60 services and leading a
directorate of 5,000 staff. Over the last 15 years she has held
senior executive roles in both IT and business operations within
FTSE top 20 companies in the UK, specialising in transformational
change. She has worked at Board level for over 8 years with
Non-Executive Director positions on the Board of Leeds Beckett
University and Leeds Building Society. She is currently Chair of
Network Rail Consulting Limited. Susan was listed by Computer
Weekly as the seventh most influential woman in UK IT. From 2013 -
2017 she ran the Could IT Be You campaign to raise awareness of IT
as a career for young women.
Chris Dowling
Independent Non-Executive Director
Appointed on 1 May 2014
Chris Dowling was, until December 2015, 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. Chris has a degree in Economics and
qualified as a Chartered Accountant with Deloitte Haskins &
Sells (now PricewaterhouseCoopers LLP 'PwC'). He has substantial
experience in general management, investment banking and private
equity in the manufacturing and infrastructure sectors.
Corporate Governance Report (continued)
The Board (continued)
Rob Holden
Independent Non-Executive Director
Appointed on 1 January 2016
Rob Holden combines a portfolio of Non-Executive Directorships
with consultancy roles. As well as his Board role with the Nuclear
Decommission Authority, he is currently Chairman of London City
Airport and the Submarine Delivery Authority. His advisory
assignments in the UK have included work on HS2, Thames Tideway
Tunnel, the Type 26 Global Combat Ship 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.
Rob is a Chartered Accountant who qualified with Arthur Young &
Co (now Ernst & Young LLP).
Achal Bhuwania
Non-Executive Director
Appointed on 23 January 2020
Achal Bhuwania is employed by Equitix Limited as Deputy Chief
Investment Officer. Achal has more than 14 years experience in the
finance and infrastructure sector with additional experience in the
transport, social infrastructure, utility infrastructure, waste-to
energy and renewables sectors. He holds a first-class BCom (Hons)
degree in Accounting, Economics and Commerce from Shri Ram College
of Commerce (Delhi University, India) and completed his Chartered
Accountancy qualification with the Institute of Chartered
Accountants of India.
Sion Jones
Non-Executive Director
Appointed on 20 August 2019
Sion Jones is employed by Equitix Limited as Chief Operating
Officer. He is approved by the Financial Conduct Authority and
oversees the portfolio of managed funds. Prior to joining Equitix,
Sion was a partner at King Sturge where he was responsible for
asset and project company management. There he established the
Corporate Finance division of King Sturge with responsibility for
creating institutional and private equity real estate investment
vehicles. Sion has a BSc Honours in Chemistry from the University
of Southampton. He is a CFA charter holder and holds an Investment
Management Certificate and a Certificate in Securities from the
Chartered Institute for Securities & Investment.
Genping Pan
Non-Executive Director
Appointed 12 December 2019
Genping Pan is the Chief Investment Officer at CNIC. He has been
actively involved in overseas investment projects and business
operations and management for over 10 years, and has gained
extensive experience in investment management, capital operation
and financial management. Positions previously held by Pan include
Finance Manager of Oasis Oil Co. Ltd, Chief Accountant of
PetroChina (Venezuela) and Financial Director of China Huaming
International Investment Corporation.
Shinichiro Sumitomo
Non-Executive Director
Appointed 8 January 2020
Shinichiro Sumitomo is employed by the Kansai Electric Power
Company which is one of the leading electric utility companies
based in Osaka, Japan. He is the General Manager for Asset
Management of European and American Assets. Since he joined Kansai
Electric 25 years ago, he has gained 15 years experience in
overseas investment in power assets including a hydropower project
in the Phillippines, fossil power projects in the south-east Asia
region and in the United States, and renewable power projects in
Europe.
Corporate Governance Report (continued)
The Board (continued)
Yoshihiro Yamabayashi
Non-Executive Director
Appointed 20 August 2019
Yoshihiro Yamabayashi is employed by the Kansai Electric Power
Company where he is the Executive Officer of International Business
and the Co-operation Division. He has more than 30 years experience
in the power industry, both in Japan and overseas, including 16
years in business development in countries outside Japan. He was
also the managing director of an IPP hydro project in Lao PDR for
five years. He holds a B.E in Civil Engineering from the University
of Tokyo.
Peter Emery
Chief Executive Officer
Appointed on 27 May 2016
Peter is a graduate engineer with 35 years' experience in the
Energy Sector. He spent twenty years with Esso and ExxonMobil
specialising in strategic planning and operational management,
culminating in the appointment to the position of Operations
Manager at Fawley Refinery, with full operational responsibility
for the UK's largest refinery (330k barrels per day) and a member
of ExxonMobil's European Leadership Team for Refining and
Supply.
In 2004 he joined the Board of Drax Power Limited, the owner of
the largest power station in the UK (4,000 MW), as Production
Director. He was a member of the executive team which completed the
successful IPO (Initial Public Offering) on the London Stock
Exchange in December 2005. After the flotation, Peter played a
leading role in converting Drax into a major renewable generator
and was Chairman of Capture Power, the joint venture vehicle
responsible for the development of the White Rose Carbon Capture
and Storage Project.
In 2016 he was appointed as Chief Executive Officer of
Electricity North West Limited. The focus of his work is to improve
customer service and the operational performance of the business,
whilst reducing the cost to serve. He is also leading the change to
a Distribution System Operator (DSO) enabling the transition to a
low carbon economy in the North West. He is a member of the Greater
Manchester Green City Region Partnership and the Greater Manchester
Strategic Infrastructure Board which are helping the City region
secure carbon neutrality by 2038.
In September 2012, Peter was appointed as a Non-Executive
Director of N.G. Bailey Group Limited, a privately owned major
electrical and mechanical contractor based at Denton near Ilkley,
West Yorkshire. In 2014 he was appointed to the Board of The York,
North Yorkshire and East Riding Local Enterprise Partnership (LEP)
where he is currently the Vice Chair. He is a Fellow of the
Institute of Materials, Minerals and Mining.
David Brocksom
Chief Finance Officer
Appointed on 5 October 2015
David Brocksom joined the Company as interim Chief Financial
Officer in September 2013 and has, with a short break at the start
of 2015, been with the Company since then, becoming a Director in
October 2015. Previously he has held a number of Chief Financial
Officer roles including at UK Coal plc and Pace plc. He qualified
as a Chartered Accountant with Price Waterhouse (now
PricewaterhouseCoopers LLP 'PwC') and is also a member of the
Institute for Turnaround.
Shareholder appointed directors
Sion Jones, Yoshihiro Yamabayashi, Shinichiro Sumitomo and
Genping Pan are shareholder appointed directors and have appointed
alternate directors during their time as Board members. Sion
Jones's alternate is Peter O'Flaherty. Yoshihiro Yamabayashi's
alternate is Fukashi Kumara and Hisatugu Nakamura is the alternate
to Shinichiro Sumitomo. Genping Pan's alternate is Hailin Yu.
Alternate directors attend board meetings where the principal
director would be otherwise unable to attend.
Attendance at Board meetings
The Company Secretary attended all Board meetings during the
year.
Corporate Governance Report (continued)
The Board (continued)
Attendance at Board meetings (continued)
At the discretion of the Board, senior management were invited
to attend meetings when appropriate specific items were subject to
discussions.
Where a Director was unable to attend a Board meeting, their
views were canvassed by the Chairman prior to the meeting.
The table below shows Board and Board Committee attendance
during the year, for committee members only. Informal meetings to
discuss board member replacements are not included nor are
attendances by Directors at committee meetings where they are not
formal members.
Board Member ENWL Audit Remuneration Nominations Health,
Board Committee Committee Committee Safety and
Attended / Scheduled Environment
Committee
========================= ======= =========== ============= ============ =============
John Roberts 7/7 3/3 2/3 1/1 -
------------------------- ------- ----------- ------------- ------------ -------------
Anne Baldock 7/7 - 2/3 - 3/3
------------------------- ------- ----------- ------------- ------------ -------------
Alistair Buchanan 5/7 - - - -
------------------------- ------- ----------- ------------- ------------ -------------
Susan Cooklin 7/7 3/3 - - -
------------------------- ------- ----------- ------------- ------------ -------------
Chris Dowling 6/7 3/3 - 1/1 -
------------------------- ------- ----------- ------------- ------------ -------------
Rob Holden 6/7 - - - 3/3
------------------------- ------- ----------- ------------- ------------ -------------
Achal Bhuwania 1/1 - - - 1/1
------------------------- ------- ----------- ------------- ------------ -------------
Sion Jones** 4/4 1/1 - - 1/1
------------------------- ------- ----------- ------------- ------------ -------------
Genping Pan *** 1/1 1/1 - - -
------------------------- ------- ----------- ------------- ------------ -------------
Shinichiro Sumitomo**** 1/1 1/1 - - 1/1
------------------------- ------- ----------- ------------- ------------ -------------
Yoshihiro Yamabayashi
**** 4/4 1/1 - - 1/1
------------------------- ------- ----------- ------------- ------------ -------------
Hamish Lea-Wilson 3/3 2/2 2/3 - -
------------------------- ------- ----------- ------------- ------------ -------------
John Lynch 3/3 1/1 3/3 1/1 -
------------------------- ------- ----------- ------------- ------------ -------------
Niall Mills* 5/7 - 2/3 1/1 1/1
------------------------- ------- ----------- ------------- ------------ -------------
Mark Scarsella 3/3 1/1 - - -
------------------------- ------- ----------- ------------- ------------ -------------
Peter Emery 7/7 - - - 3/3
------------------------- ------- ----------- ------------- ------------ -------------
David Brocksom 7/7 - - - -
========================= ======= =========== ============= ============ =============
Corporate Governance Report (continued)
The Board (continued)
Attendance at Board meetings (continued)
*At two Board meetings and the 1 April 2019 Nomination Committee
meeting Hamish Lea-Wilson attended as an alternate Director in
place of Niall Mills.
**At the 7(th) February 2020 Board meeting and Audit Committee
meeting Peter O'Flaherty attended as an alternate Director in place
of Sion Jones. Peter also attended as alternate Director in place
of Sion Jones and Achal Bhuwania at the 23(rd) March 2020 Health,
Safety and Environment Committee meeting.
***At the 7(th) February 2020 Audit Committee Zechao Liu
attended as alternate Director in place of Genping Pan.
****At the 25(th) October 2019 meeting Toru Kuwahara attended as
an alternate Director in place of Yoshihiro Yamabayashi. At the
23(rd) March 2020 Health Safety and Environment Committee meeting
Fukashi Kumura attended as an alternate Director in place of
Yoshihiro Yamabayashi and Shinichiro Sumitomo.
Corporate Governance Report (continued)
The Board (continued)
Diversity
The Board supports diversity in its broadest sense and
accordingly aims to ensure that its number is made up of a diverse
range of experience, independence and expertise appropriate to the
industry in which it operates, its operational business model and
the extensive financial, governance, regulatory risk management and
legal expertise required.
Diversity of the Board continues to be assessed on a case by
case basis as vacancies arise. This is principally a matter for the
Nominations Committee.
Composition
The Board comprises six Non-Executive Directors considered under
the Code to be independent, one of whom is the Chairman, and five
Non-Executive Directors representing the four shareholders,
together with two Executive Directors. The Directors' biographies
are on pages 39 to 41.
Two of the Independent Non-Executive Directors, Chris Dowling
and John Roberts have been named to Ofgem as fulfilling the role of
Sufficiently Independent Directors as required by Ofgem. The role
of the Sufficiently Independent Director was introduced from 1
April 2014 as part of a range of enhancements made to the
ring-fence conditions in the Company's licence to protect
consumers, should a distribution operator experience financial
distress.
Leadership
The Board provides leadership of the Company, ensuring it
continues to balance the needs of stakeholders while delivering the
Company's strategy. Individually the Directors act in a way that
they consider will promote the long-term success of the
Company.
The role of the Chairman and the Chief Executive Officer is
separate, defined by clear role descriptions set out in writing and
agreed by the Board.
The Chairman is responsible for the leadership and governance of
the Board, and the Chief Executive Officer for the operational
management of the Company and implementation of the strategy on the
Board's behalf. The Chief Executive Officer is assisted by his
Executive Leadership Team that comprises the operational unit
directors.
Advice
All Directors are able to consult with the Company Secretary,
and the appointment and removal of the Company Secretary is a
matter reserved for the Board.
Any individual Director, or the Board as a whole, may take
independent professional advice relating to any aspect of their
duties at the Company's expense. This is clearly stated in the
Terms of Reference of the Board and of its Committees.
How the Board operates
The Board's role is to promote the long-term success of the
Company and provide leadership within a framework of effective
controls. The Board is responsible for approving the strategy and
for ensuring that there are suitable resources to achieve it. In
doing so, the Board takes into account all stakeholders, including
its shareholders, employees, suppliers and the communities in which
it operates.
The Board has Terms of Reference that detail matters
specifically reserved for its decision, including the approval of
budgets and financial results, assessment of new Board
appointments, dividend decisions, litigation which is material to
the Group, and Directors' remuneration.
Corporate Governance Report (continued)
The Board (continued)
Evaluation
The Board participate in an internal questionnaire-based
evaluation process conducted by the Company Secretary every
year.
During March 2018, an externally facilitated evaluation was
undertaken by Lintstock Ltd, who had no previous connection with
the Company. Following the completion of the sale of the shares by
the Shareholders to new shareholders, Linstock Ltd have been
engaged to undertake a second evaluation from November 2020. This
will constitute the first evaluation of the Board and its
composition under the new ownership.
Training
The Chairman is responsible for ensuring that all Directors
update their skills, knowledge and familiarity of the Company.
Following feedback from Board evaluations, each member of the Board
is enrolled as a member of the Non-Executive Directors Association
who provide regular training to the directors on a range of
topics.
Directors regularly receive reports facilitating greater
awareness and understanding of the Company, its regulatory
environment and the industry. The Board held two workshops and two
strategy meetings during the year aimed at developing a greater
understanding of the Company's operations and to explore strategic
matters in detail.
Committee members received detailed presentations at meetings
focusing on areas of relevance to the Committee and Board members
are invited to workshops with shareholder representatives which are
able to delve into areas of interest in greater detail.
The Chairman is also responsible for ensuring that all new
Directors receive a tailored induction programme that reflects
their experience and position as either an Executive or
Non-Executive Director. This involves meetings with the Board, the
Company Secretary, other members of the Executive and Senior
Leadership Teams and site visits. Additional documentation is
provided as appropriate.
Appointments
The six independent Non-Executive Directors are provided with a
detailed letter of appointment and are appointed for an initial
three-year term, to be reviewed every three years thereafter, if
they are reappointed.
The five other Non-Executive Directors are appointed by the
Company's shareholders as their representatives. The expected time
commitment required from Non-Executive Directors is (minimum) six
to ten days per year and is detailed in their letter of
appointment.
On his appointment, Peter Emery was a Non-Executive Director of
NG Bailey Group Limited, the Board agreed to his remaining a
Non-Executive Director with the proviso that when he is due for
re-election, this will be discussed again with the ENWL Board.
Conflicts of interest
The Board has appropriate processes in place to assess and
manage any potential conflicts of interest. As part of these
procedures the Board:
-- Considers conflicts of interest as part of the agenda for all meetings.
-- Asks Directors annually if there are any changes to their
conflict of interest declarations, including appointments to the
Boards of other entities.
-- Keeps records and Board minutes regarding any decisions made.
-- Maintains a company-wide conflicts of interest register.
Corporate Governance Report (continued)
The Board (continued)
Areas of non-compliance with the UK Corporate Governance
Code
There are some areas where the Company does not comply with the
UK Corporate Governance Code, all of which are due to its
privately-owned status and are discussed below. The Company has
endeavoured to comply with the spirit of the Code throughout the
accounts; there are areas where compliance with the provision is
either impractical or inappropriate, outlined below.
Senior Independent Director
The Board has not appointed a Non-Executive Director as a Senior
Independent Director under the Code. The Board meets the objectives
behind this requirement through its shareholder representation on
the Board.
Constitution of the Board
The Code states that half the Board should be Independent
Non-Executive Directors. As the Company is privately-owned and all
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 are four further Independent Non-Executive
Directors. The Board considers that the six Independent
Non-Executive Directors offer an appropriate perspective, allowing
for the refreshment of its Committees, meaningful individual
participation and effective collective decision making.
Annual election of Directors
The Board does not subject its Directors to annual elections as
the shareholder representation on the Board allows the opportunity
to challenge a Director's performance directly rather than at an
Annual General Meeting.
Publication of the terms and conditions of Non-Executive
Directors
As a privately-owned company, the Company 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 met directly.
Engagement with stakeholders
As a privately-owned company, the Company does not have a large
or dispersed shareholder base with which to communicate formally,
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 all
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.
Workforce:
The Board has not utilised the methods in the code for
engagement with the workforce. However, the workforce has a strong
Trades Union representation and regular meetings of engagement take
place both with representatives and directly through workforce
meeting with the leadership team.
Corporate Governance Report (continued)
Engagement with stakeholders (continued)
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, along with research of customers'
opinions.
Our stakeholder engagement strategy is outlined on page 15.
The Company has appointed Jeff Halliwell to Chair our Customer
Engagement Group (CEG). Jeff appointed the members of the Group and
held its inauguration meeting in May 2019, since which time it has
met monthly.
The role of the CEG is to independently scrutinise our
stakeholder engagement work. In doing so, the Group has access to
the Board and the Executive Leadership Team and can question them
about how stakeholder engagement insight is being used to inform
our RIIO-ED2 Business Plan. The CEG also fulfils the oversight
function for all reinforcement decisions in line with the
requirements of the Department for Business, Environment and
Industrial Strategy.
Board Committees
The Board has an extensive workload and, therefore, has
delegated the detailed oversight of certain items to five standing
Committees and one ad-hoc Committee:
Audit Committee*
Remuneration Committee*
Nominations Committee*
Health, Safety and Environment
Committee*
Use of Systems Pricing Committee
Financing Committee
The minutes of each Committee are made available to the
Board.
The Use of Systems Pricing Committee and the Financing Committee
meet annually (or more frequently as necessary) to approve detail
about system pricing contained in Licence Condition 14 and
financing transactions respectively.
*The terms of reference and membership of all these Committees
were reviewed and amended during the year to ensure effective
operation.
Corporate Governance Report (continued)
Report of the Audit Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference which are reviewed by the Committee and
approved by the Board annually. The Terms of Reference are
available on the Electricity North West website.
Membership and meetings
The Committee members are all Non-Executive Directors. The Board
is satisfied that the Committee Chair, Chris Dowling, as a
Chartered Accountant, has relevant financial experience. Attendance
by individual members is detailed in the table on page 42.
There were a number of regular attendees, by invitation, at
appropriate Committee meetings in whole or in part, including the
Chief Executive Officer, the Chief Financial Officer, the Head of
Risk, Control and Assurance and the external auditor.
Over the course of the year, the Committee Chair held separate
meetings with both the lead external audit partner at Deloitte LLP
and with the Head of Risk, Control and Assurance.
The Committee also met as a whole with the external auditor
without management present.
The role of the Committee
The key responsibilities of the Audit Committee are to:
-- Monitor the integrity of the financial statements, including
its annual and half-yearly reports and to report to the Board
significant financial reporting issues and judgements which they
contain.
-- Monitor the independence, effectiveness and remuneration of the external auditor.
-- Review the adequacy and effectiveness of the Company's
internal financial controls and internal control and risk
management systems and compliance with the UK Corporate Governance
Code.
-- 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 2020 Annual Report and Consolidated
Financial Statements and the September 2019 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.
-- Review of the length of tenure of the current external audit
firm and making a recommendation as to the timeline for
re-tendering this service.
-- Factors emerging from the Covid-19 pandemic, including the
impact on the internal control framework, including the potential
for enhanced cyber risk, and a review of the going concern and
viability disclosures in this context.
During the year ended 31 March 2020, the Committee revised its
terms of reference and its membership to reflect the changing
requirements of the Corporate Governance Code and to ensure that
the membership of the Committee consists of independent
non-executive directors, and that the Chair of the Board was not a
member of the Committee.
Corporate Governance Report (continued)
The significant issues considered by the Committee during the
approval of the financial statements to 31 March 2020 were:
-- 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 this area and
compliance with appropriate accounting standards in valuation and
disclosure.
-- Management override of controls (In accordance with ISA 240)
with particular consideration of controls surrounding journal
entries, accounting estimates for bias of material misstatement and
fraud, adjustments made in the preparation of the Group financial
statements and the potential manipulation of any incentive or
performance targets.
-- The risk of material misstatement and fraud in revenue
recognition where considerations included specific testing on
unbilled income and analytical review.
-- Capital and revenue allocations and ensuring the appropriate
treatment of fixed asset expenditure. The Committee considered the
management's key controls and assumptions applied to the
capitalisation of overhead costs. The assumptions, policies and
procedures in this area were considered reasonable.
-- The level of estimation in assessing the balance disclosed
for group pension scheme assets, the valuation of which was
negatively impacted by COVID-19 effect on asset prices immediately
prior to the balance sheet date.
-- The adoption of the new IFRS 16 accounting standard effective
during the year and the impact on the financial statements.
External audit
The external auditor is engaged to express an opinion on the
Company and Group financial statements. The audit includes the
review and testing of the data contained in the financial
statements to the extent necessary for expressing an audit opinion
on the truth and fairness of the financial statements. This year's
audit is the eighteenth conducted by Deloitte LLP.
In accordance with UK regulations, the Company's auditor adheres
to a mandatory rotation policy and a new Group lead engagement
partner is appointed once their predecessors have completed a term
of five years. A new lead engagement partner was appointed in the
year ended 31 March 2018 due to his predecessor completing her
five-year term.
The Company have commenced the process to appoint new external
auditors, with a view to making a new appointment for the
year-ending 31 March 2022.
To assess the effectiveness of the previous year's external
audit, the Committee reviewed the audit approach and strategy and
received a report of Deloitte LLP's performance from the Board.
Auditor independence and the provision of non-audit services
The Company has a formal policy on the use of the auditor for
non-audit work and the awarding of such work is managed in order to
ensure that the auditor is able to conduct an independent audit and
is perceived to be independent by our stakeholders.
In keeping with professional ethical standards, Deloitte LLP
also confirmed their independence to the Committee and set out the
supporting evidence in their report to the Committee prior to the
publication of the Annual Report and Consolidated Financial
Statements.
The non-audit services provided by Deloitte LLP during the year
were in connection to Ofgem regulatory requirements and consultancy
to the ultimate parent company, North West Electricity Networks
(Jersey) Limited.
Corporate Governance Report (continued)
Internal control framework
The Committee, on behalf of the Board, is responsible for
reviewing the Company's internal control framework. This review is
consistent with the Code and covers all material areas of the
Group, including risk management and compliance with controls.
Further details of risk management and internal controls are set
out on pages 34 to 38.
Whistleblowing arrangements
The Committee is responsible for reviewing the Company's
Disclosure (Whistleblowing) policy and any concerns raised through
these channels and management actions taken in response. A revised
policy was approved by the Committee in January 2019. A
confidential service is provided by an external company whereby
employees can raise concerns by email or telephone in confidence.
Any matters reported are investigated and escalated as
appropriate.
Committee effectiveness
The Committee formally reviewed its Terms of Reference and its
membership during the year to ensure both remain fit for purpose
and were considered effective by the Board.
Fair, balanced and understandable
The Audit Committee was requested to assist the Board in
confirming that the Annual Report is fair, balanced and
understandable. As part of its review, the Audit Committee took
into account the preparation process for the Annual Report and
Consolidated Financial Statements:
-- Detailed review and appropriate challenge from key internal
Group functions, such as Risk, Control and Assurance, senior
managers and the Chief Financial Officer;
-- Formal sign-offs from the business area senior managers, the
finance managers and Chief Financial Officer;
-- Group Audit Committee oversight, involving a review of key
financial reporting judgements, review and appropriate challenge on
matters such as any changes to significant accounting policies and
practices during the year, significant adjustments and the going
concern assumption;
-- The involvement of qualified, professional employees with an
appropriate level of expertise and experience throughout the
business; and
-- Engagement of a professional and experienced external
auditor, a framework for full transparent disclosure of information
during the audit process and post audit evaluation.
The Directors' statement on a fair, balanced and understandable
Annual Report and Consolidated Financial Statements is set out on
page 50.
Corporate Governance Report (continued)
Report of the Nominations Committee
The role and responsibilities of the Committee are set out in
its Terms of Reference and these are available on the Company
website. The Committee's responsibilities include keeping under
review the composition of the Board and senior executives,
identifying and nominating candidates for approval by the Board to
fill any vacancies and succession planning for Directors and other
senior executives.
Membership and meetings
The Committee Chair is Chris Dowling, Independent Non-Executive
Director. Composition of the Committee and attendance by individual
members at meetings is detailed on page 42.
The Chief Executive Officer and external advisors attend
meetings at the invitation of the Chairman of the Committee.
Diversity
As described in the Corporate Governance report on page 44, the
Board is committed to diversity in its broadest sense and the
Nominations Committee ensures this remains central to recruitment
and succession planning. Progress is reviewed periodically by the
Board.
Report of the Remuneration Committee
The Committee's role is to determine the remuneration structure
for the Executive Directors to ensure that it balances appropriate
reward with the creation of long-term value and sustainability of
the network. The Terms of Reference for the Committee are available
on the Electricity North West website.
It is also responsible for the review of the remuneration of
other members of the Executive Leadership Team to ensure the
structure and levels of remuneration appropriately incentivise
these individuals to achieve the Company's strategic
objectives.
The Committee has been joined by invitation during the year by
the Chief Executive Officer and the Chief Financial Officer. They
do not attend for any discussions in which they are individually
discussed.
Membership and meetings
The Committee Chair is Sion Jones, Non-Executive Director.
Composition of the Committee and attendance by individual members
is detailed on page 42.
Role of the Committee
The Committee reviews and approves the overall remuneration
levels of employees below senior management level, but does not set
remuneration for these individuals. This oversight role allows the
Committee to take into account pay policies and employment
conditions across the Group.
The Committee is of the opinion that the remuneration structure,
designed for the RIIO-ED1 period, reflects the strategic direction
of the business and will promote the long-term success of the
Company.
Share options are not offered as an incentive to either
Executive or Non-Executive Directors as the Company is
privately-owned.
Corporate Governance Report (continued)
The table below sets out the nature of the remuneration of the
Executive Directors:
Basic Salary Basic salary provides the core reward for External advice is taken on all
the role. Salaries are set at a remuneration to ensure that it remains
sufficient level effective and appropriate.
to attract and retain high calibre Levels of basic salary are benchmarked
individuals who can deliver the Group's and will also reflect the Director's
strategic objectives. experience and
time at Director level.
========================================== =========================================
Benefits Other benefits provided are designed, as In addition to basic salary, Directors
with basic salary, to provide a are provided with a car allowance and
competitive but not private medical
excessive reward package. insurance.
========================================== =========================================
Executive Incentive Plan (EIP) Executive Directors are members of the The EIP works on a balanced scorecard
Executive Incentive Plan which was approach, containing short-term metrics
introduced in April to evaluate
2015 to reward both in-year performance in-year performance and longer-term
and incentivise strategic and innovative measures promoting a strategic focus and
behaviours sustainable performance.
over the longer-term, aligned to Partial payments are made each year
shareholder objectives. based on achievement against the
balanced scorecard, with
additional payments made following years
4 and 8 of the regulatory period to
ensure the balance
of short and long-term incentivisation
is retained.
Following Health & Safety best practice,
Safety is considered to be an essential
part of any
role and Directors, therefore, receive
no Health & Safety related incentives.
However, a range
of safety performance measures act as a
gateway to the earning of bonuses.
========================================== =========================================
Pension Directors are offered the same level of No Director is a member of the defined
defined contribution benefits as all benefit scheme which is now closed to
other employees, new members.
or a taxable payment in lieu.
========================================== =========================================
Corporate Governance Report (continued)
CEO pay ratio
Under new regulations, effective for financial years commencing
on or after 1 January 2019, companies with more than 250 employees
and which are quoted on the UK Official List are required to
publish information on their CEO pay ratio. The requirement is to
publish total CEO remuneration compared to the 25(th) , 50(th) and
75(th) percentile total remuneration of full-time equivalent UK
employees.
There are three methodologies that companies can choose to
report their pay ratio, known as Option A, B and C. The government
preference, and most accurate reporting method, is Option A. ENWL
have elected to use this method, which enables us to compare total
remuneration for the financial year ended 31 March 2020, in line
with the pay gap requirements.
The table below sets out this information for total remuneration
(which is inclusive of bonus, long term incentive payments,
additional allowances or payments, benefit in kind and employer
pension contributions).
Bonus payments are linked closely to Company performance and the
timing of maturity of long term incentive arrangements, so may
fluctuate year on year. We have, therefore, also included a
comparison of total remuneration excluding bonus and long-term
incentive awards.
The movement in the ratio from the prior year represents the
timing of awards under long term incentive bonus plans, with a
significant element of these awards linked to Company performance.
The pay excluding bonus is consistent with the prior year
ratio.
25(th) 50(th) 75(th)
percentile percentile percentile
2020 Pay
excluding
bonus 1:12 1:9 1:6
2020 Total
remuneration
including
bonus 1:41 1:29 1:21
2019 Pay
excluding
bonus 1:12 1:9 1:6
2019 Total
remuneration
including
bonus 1:21 1:15 1:11
============ ============ ============
This is the first year we have published our Executive Pay Gap,
and we will benchmark this against other similar organisations when
the data becomes publicly available to be consistent with our
remuneration policy.
Employee total remuneration is shown in the table below.
25(th) 50(th) 75(th)
percentile percentile percentile
2020 Pay GBP36,279 GBP52,093 GBP71,597
excluding
bonus
2020 Total GBP37,687 GBP53,829 GBP74,598
remuneration
2019 Pay GBP36,278 GBP51,780 GBP72,522
excluding
bonus
2019 Total GBP37,473 GBP53,504 GBP74,341
remuneration
============ ============ ============
Corporate Governance Report (continued)
Report of the Health, Safety and Environment Committee
The Committee continues to develop the Company's health, safety
and environment strategies, agrees targets and monitors Company
performance in these areas. It regularly challenges the executive
and the health, safety and environment team to look at new
initiatives and work with other organisations.
Membership and meetings
The Committee Chair is Rob Holden, Independent Non-Executive
Director. Composition of the Committee and attendance by individual
members is detailed on page 42.
Meetings are also attended by executives in charge of
operationally focused directorates.
The role of the Committee
The Committee has designated authority from the Board set out in
its Terms of Reference which are published on the Company
website.
The primary purpose of the Committee is to:
-- Set the corporate health, safety and environment strategy,
objectives, targets and programmes.
-- Monitor performance in these areas with a view to:
- minimising risk;
- ensuring legal compliance;
- responding to significant events; and
- ensuring significant resources are allocated for the control
of health, safety and environmental risks.
-- Report to the Board developments, trends and/or forthcoming
legislation in relation to the health, safety and environmental
matters which may be relevant to the Company's operations, assets
or employees.
-- Review the Company's external reporting in this area and regulatory disclosures.
At every meeting, the Committee receives and discusses in detail
a Health, Safety and Environment performance report for the
preceding period, prepared and presented by the Head of Safety and
Policy who attends every meeting.
The Health and Safety committee, when it met on 23 March 2020,
received and considered an update on the Company's evolving
Covid-19 health and safety strategy. The Board continue to be
regularly updated on the situation.
At each meeting the Committee reviews Health and Safety risks
recorded on the Company's risk register.
Directors' Report
The Directors present their Annual Report and Consolidated
Financial Statements of Electricity North West Limited ("the
Company") and its subsidiaries (together referred to as "the
Group") for the year ended 31 March 2020.
Information contained in Strategic Report
As permitted by section 414C of the Companies Act 2006, certain
information required to be included in the Directors' Report has
been included in the Strategic Report. Specifically, this relates
to:
-- information in respect of employee matters (including actions
taken to introduce, maintain or develop arrangements aimed at
employees, details on how the directors have engaged with employees
and had regard to employee interests, our approach to investing in
and rewarding the workforce, employee diversity and the employment,
training and advancement of disabled persons)
-- likely future developments
-- risk management
-- details on how the directors have had regard to the need to
foster business relationships with stakeholders
-- greenhouse gas emissions
Dividends
During the year ended 31 March 2020, the Company proposed and
paid a final dividend for the year ended 31 March 2019 of GBP17m,
paid in June 2019, and an interim dividend of GBP21m that was paid
in December 2019. In the year ended 31 March 2019 the Company
declared a final dividend for the year ended 31 March 2018 of
GBP16m, paid in June 2018, and an interim dividend of GBP30m that
was paid in December 2018. The Directors have not proposed a final
dividend for the year ended 31 March 2020.
Details of the Group's dividend policy can be found in the
Strategic Report.
Ultimate parent undertaking and controlling party
The immediate parent undertaking is NWEN plc, a company
incorporated and registered in the United Kingdom. The ultimate
parent undertaking is North West Electricity Networks (Jersey)
Limited ("NWEN (Jersey)"), a company incorporated and registered in
Jersey. Following a staged acquisition, there was a change in
ownership of the shares in NWEN (Jersey) during the year and,
therefore, a change in the ultimate controlling parties of the
Company.
Following completion of the sale on 3 December 2019, the
ultimate shareholdings are:
-- KDM Power Limited (40.0%);
-- Equitix ENW 6 Limited (25.0%)
-- Equitix MA North HoldCo Limited (15.0%)
-- Swingford Holding Corporation Limited (20.0%)
Directors
The Directors of the Company during the year ended 31 March 2020
and to date are set out below. Directors served for the whole year,
and to the date of this report, except where otherwise
indicated.
Executive Directors
D Brocksom
P Emery
Non-executive Directors
Dr J Roberts
A E Baldock
A Buchanan
S Cooklin
C B Dowling
R D Holden
S Jones (appointed 20 August 2019)
G Pan (appointed 12 December 2019)
S Sumitomo (appointed 8 January 2020)
P O'Flaherty (appointed 1 April 2020)
Y Hamada (appointed 1 April 2020)
Directors' Report (continued)
Non-executive Directors (continued)
H Lea-Wilson (resigned 20 August 2019)
J E Lynch (resigned 10 September 2019)
N P Mills (resigned 12 December 2019)
M Scarsella (appointed 10 September 2019, resigned 12 December
2019)
Y Yamabayashi (appointed 20 August 2019, resigned 1 April
2020)
A Bhuwania (appointed 23 January 2020, resigned 1 April
2020)
Alternate Directors during the year were:
A Bhuwania
G Blackburn
K Fukushima
F Kumura
T Kuwahara
H Lea-Wilson
Z Liu
H Nakamura
T Pedraza
H Yu
Sion Jones, Yoichi Hamada, Shinichiro Sumitomo and Genping Pan
are shareholder appointed directors and have appointed alternate
Directors during their time as Board members. Sion Jones's
alternate is Achal Bhuwania. Yoichi Hamada's alternate is Kaoru
Fukushima and Shinichiro Sumitomo's alternate is Fukashi Kumura.
Hailin Yu is the alternate to Genping Pan.
At no time during the year did any Director have a material
interest in any contract or arrangement which was significant in
relation to the Group's business.
Directors' and Officers' insurance
The Group maintains an appropriate level of directors' and
officers' insurance whereby Directors are indemnified against
liabilities to third parties to the extent permitted by the
Companies Act.
The insurance is a group policy, held in the name of the
ultimate parent North West Electricity Networks (Jersey) Ltd ("NWEN
(Jersey)") and is for the benefit of that company and all its
subsidiaries.
People
The Group's policies on employee consultation and involvement,
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.
Engagement with employees
Details of Director engagement with employees can be found
within the Strategic Report.
Engagement with suppliers, customers and others
Details of the Directors' approach to fostering the Company's
business relationships with suppliers, customers and others can be
found within 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 2020 the
Group incurred GBP3.1m of expenditure on research and development
(2019: GBP2.9m), see Note 5.
Greenhouse gas emissions
Further details on greenhouse gas emissions are provided in the
Business Carbon Footprint section of the Strategic Report.
Directors' Report (continued)
Adoption of IFRS 16 'Leases'
The Group has adopted IFRS 16 during the year. IFRS 16 has
resulted in an opening reserves adjustment of GBP0.2m, along with
incremental lease liabilities of GBP5.5m and right of use assets of
GBP5.1m at 31 March 2020. More details of the impact of IFRS 16 can
be found in Notes 1 and 12.
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 21.
Capital structure
The Company's capital structure is set out in Note 29.
Events after the Balance Sheet date
Since the balance sheet date, the COVID-19 situation has
continued to unfold. We have outlined our responses to the pandemic
within the Strategic Report. The financial impact will be a
short-term reduction to revenue and cashflows, but allowed revenues
will be adjusted in future years to collect any shortfall. On 2
June 2020, Ofgem issued an open letter on relaxing payment charges,
intended to provide support where necessary for energy suppliers
who face cash flow challenges as a result of COVID-19. ENWL will
follow the guidance in the letter which may result in the deferral
of some cash collections from electricity suppliers due over the
summer period 2020. The impact of the scheme has been considered in
the scenarios reviewed to determine the going concern and viability
of the Company. The impact of the scheme will be to defer cash
payments within the financial year ending 30 March 2020, with an
estimated impact of up to GBP20m in timing of cash collections in
year.
Future developments
Details of the future developments of the Group can be found in
the Chief Executive Officer's Statement and Strategic Report.
Information given to the auditor
Each of the persons who are a Director at the date of approval
of this Annual Report confirms that:
(1) so far as the Director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
(2) each Director has taken all the steps that they ought to
have taken as a Director in order to make themselves aware of any
relevant audit information and to establish that the Company's
auditor is aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies Act
2006.
Independent auditor
The Audit Committee have decided to commence a procurement
exercise to review the provision of audit services for the Group.
Deloitte LLP, Statutory Auditor, Manchester, United Kingdom has
expressed its willingness to continue in office as auditor of the
Group until such appointment is made. In accordance with section
487 of the Companies Act 2006, Deloitte LLP is deemed to be
re-appointed as auditor of the Company.
Registered address
The Company is registered in England, the United Kingdom at the
following address:
Electricity North West Limited
Borron Street
Stockport
Cheshire
SK1 2JD
Registered number: 02366949
Approved by the Board on 3 June 2020 and signed on its behalf
by:
D Brocksom
Director
Directors' Responsibilities Statement
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. Under company law the Directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the company's ability to continue as a going concern.
The Directors are responsible for the Company keeping adequate
accounting records that are sufficient to show and explain the
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Company and enable them to
ensure that the financial statements comply with the Companies Act
2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
This responsibility statement was approved by the Board of
Directors on 3 June 2020 and is signed on its behalf by:
D Brocksom
Director
Independent Auditor's Report to the Members of Electricity North
West Limited
Opinion on financial statements of Electricity North West
Ltd
In our opinion:
-- the financial statements of Electricity North West Limited
(the 'parent company', 'ENWL') and its subsidiaries (the 'Group')
give a true and fair view of the state of the Group's and of the
parent company's affairs as at 31 March 2020 and of the Group's
profit for the year then ended;
-- the group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
-- the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies
Act 2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
-- the consolidated and company statement of profit or loss and other comprehensive income;
-- the consolidated and company statements of financial position;
-- the consolidated and company statements of changes in equity;
-- the consolidated and company cash flow statements; and
-- the related notes 1 to 32.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the parent company financial statements, as
applied in accordance with the provisions of the Companies Act
2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the parent company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the
Financial Reporting Council's (the 'FRC's') Ethical Standard as
applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by
the FRC's Ethical Standard were not provided to the Group or the
parent company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Summary of our audit approach
Key audit matters The key audit matters that we identified in
the current year were:
* Treasury - accounting
* Inappropriate capitalisation of costs
* Valuation of pension assets
Within this report, key audit matters are identified
as follows: Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality The materiality that we used for the Group
financial statements was GBP5.2m which was
determined on the basis of 3.3% of adjusted
profit before tax.
------------------- -----------------------------------------------------
Scoping All audit work for the Group was performed
directly by the Group engagement team.
------------------- -----------------------------------------------------
Significant changes The timing of the Group's year end, relative
in our approach to the Covid-19 pandemic related UK lock-down,
means the impact of the pandemic in the Group
was not significant in the financial year being
audited.
Covid-19 has however increased the level of
risk and volatility as at the year-end of certain
markets to which ENWL is exposed. This includes
property markets where the Group's pension
scheme assets are partially invested. As a
result we have considered the valuation of
pension assets as a key audit matter due to
external valuers including material uncertainty
clauses in property asset valuations as at
31 March 2020 in response to the market volatility
and uncertainty caused by Covid-19. There are
no other changes in our approach except for
the addition of the new key audit matter in
the current year.
------------------- -----------------------------------------------------
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Conclusions relating to going concern
We are required by ISAs (UK) to report in respect of the We have nothing to report in respect of these
following matters where: matters.
* the directors' use of the going concern basis of
accounting in preparation of the financial statements
is not appropriate; or
* the directors have not disclosed in the financial
statements any identified material uncertainties that
may cast significant doubt about the Group's or the
parent company's ability to continue to adopt the
going concern basis of accounting for a period of at
least twelve months from the date when the financial
statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Treasury accounting
Key audit matter Treasury is a complex area and includes the accounting
description for material financial instruments including index-linked
swaps. 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.
We focus our work on the assumptions in management's
derivative valuation model and a recalculation of
fair value of the index-linked swap portfolio, including
any credit adjustment made under IFRS 13.
As at 31 March 2020 ENWL held derivative financial
instruments, being a portfolio of index-linked swaps,
with a fair value of GBP416.9m (2019: GBP404.6m)
as disclosed in note 21 to the financial statements.
Total fair value movements in the year were GBP12.3m
loss (2019: GBP47.3m loss) as per note 9 to the financial
statements.
See also the Audit Committee's Report on page 49
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 to the financial
statements.
How the scope We obtained an understanding of the relevant controls
of our audit responded over the inputs used within the calculation of the
to the key audit fair value of derivatives.
matter In performing the procedures below, we involved our
financial instrument specialists due to the complexity
of the financial instruments held in the Group.
We performed work on management's derivative valuation
model and the assumptions employed, and performed
a recalculation of fair value of the index-linked
swap portfolio, including an assessment of the application
of credit risk under IFRS 13.
----------------------- -----------------------------------------------------------
Key observations From the work performed we are satisfied that the
valuation of the Group's portfolio index-linked swaps
is appropriately stated as at 31 March 2020.
----------------------- -----------------------------------------------------------
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Inappropriate capitalisation of costs
Key audit matter This key audit matter relates to the judgmental overhead
description absorption percentage rates applied to costs initially
recorded as overhead expenditure and subsequently
capitalised into fixed assets. In particular we focus
on those judgmental areas of overhead absorption,
for example employee costs and fault costs, where
the split between capital projects and repair and
maintenance is judgemental.
Given the significant level of judgement involved,
we considered this a potential fraud risk area. The
effect of inappropriate capitalisation of costs from
a financial statement perspective is that items which
are capital in nature are expensed, whilst items
which are expenditure in nature are, conversely,
capitalised. Given the magnitude of overheads capitalised
in the business the impact could be material. Total
employee costs are GBP130.2m in the year (2019: GBP126.3m),
of which GBP73.2m (2019: GBP68.2m) has been capitalised
directly to fixed assets. Fault costs totalled GBP33.0m
(2019: GBP35.7m) of which GBP21.3m (2019: GBP22.9m)
had been capitalised.
See also the Audit Committee's Report on page 49
where overhead absorption is discussed as a significant
issue, the accounting policy for tangible fixed assets
in note 2 to the financial statements and the associated
critical accounting judgement and key sources of
estimation uncertainty in note 3.
How the scope We obtained an understanding of the relevant controls
of our audit responded over the inputs used within the calculation of overhead
to the key audit absorption rates for employee costs and judgemental
matter areas such as fault costs.
We have reviewed the Company's assumptions, policies
and procedures with regards to overhead absorption
and compared these to the balances capitalised. In
respect of overhead absorption we have considered
the relative percentage capitalisation by function/operational
area in the business and reviewed 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
as at 31 March 2020.
----------------------- ---------------------------------------------------------------
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Pension asset valuation
Key audit matter The retirement benefit obligation includes assets
description totalling GBP1,291.7m of which GBP146.4m (11.3%)
are property assets.
Consistent with guidance provided by the Royal Institute
of Chartered Surveyors, the external valuers' reports
to the investment managers, which management uses
to estimate the fair value of the assets in the Group's
balance sheet, have reported a "material valuation
uncertainty" in their valuation reports for property
assets. This uncertainty clause is based on Covid-19
bringing an increased level of risk and volatility
to certain markets as at 31 March 2020.
Given the range of estimation uncertainty, we identified
a key audit matter associated with the valuation
of property assets.
The Audit Committee also considered this as a significant
issue as discussed in the Audit Committee Report
on page 49. See also the accounting policy for retirement
benefit obligations in note 2 to the financial statements,
the key source of estimation uncertainty in note
3 and the further detail provided in note 22 to the
financial statements.
----------------------- ------------------------------------------------------------
How the scope We obtained an understanding of management's relevant
of our audit responded controls over the valuation of the pension scheme
to the key audit assets.
matter We obtained specific details from the investment
managers for the property funds of the material uncertainty
clause in the valuers' reports, and reviewed a summary
of the assets in the funds, analysed by sector and
also by length of unexpired leases.
We read the valuation reports in order to assess
whether the valuation approach was in accordance
with RICS guidance and suitable for use in determining
the carrying value in the balance sheet.
We obtained explanations from the valuers and management,
relating to specific considerations regarding to
the Covid-19 pandemic, and any events subsequent
to 31 March 2020 of relevance to the market and associated
valuation trends.
We involved our real estate specialist in reviewing
the material uncertainty clause used by the Valuers,
where relevant, and considered the assets in the
fund by sector and also by length of unexpired income.
----------------------- ------------------------------------------------------------
Key observations From the work performed we are satisfied that the
valuations of the property assets within the retirement
benefit pension asset funds are reasonable as at
31 March 2020.
----------------------- ------------------------------------------------------------
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Our application of materiality
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:
Group financial statements Parent company financial statements
---------------------------------------
Materiality GBP5.2m (2019: GBP5.05m) GBP5.19m (GBP5.04m)
----------------------------------- --------------------------------------- ----------------------------------------
Basis for determining materiality 3.3% of adjusted pre-tax profit, being Parent company materiality equates to
profit pre-tax and fair value movements 99% of net assets (2019: same), which is
(2019: 3.6% capped at 99%
of adjusted pre-tax profit). of Group materiality (2019: same).
----------------------------------- --------------------------------------- ----------------------------------------
Rationale for the benchmark applied Adjusted pre-tax profit is deemed As the parent company contains almost
suitable as this removes the volatile all net assets, this is deemed a
fair value movements suitable benchmark
of the financial derivatives held, for for the determination of materiality.
which no formal hedge accounting is
applied, and therefore
creates a stable basis for the
determination or our materiality.
Adjusted pre-tax profit is further
determined to be a key metric used by
the users of the
financial statements of regulated
utilities.
----------------------------------- --------------------------------------- ----------------------------------------
Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole. Group performance materiality was set at 70%
of Group materiality for the 2020 audit (2019: 70%). In determining
performance materiality, we considered the following factors:
-- our risk assessment, including our assessment of the group's overall control environment; and
-- our past experience of the audit, which has indicated a low
number of corrected and uncorrected misstatements identified in
prior periods.
Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP0.1m (2019:
GBP0.1m), 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.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
An overview of the scope of our audit
The scope of our audit work was determined by obtaining an
understanding of the group and its environment, and assessing the
risks of material misstatement at the group level. Audit work to
respond to the risks of material misstatement was performed
directly by the group audit engagement team.
Given the nature of the Group's corporate structure where all
evidence relating to each entity is compiled at the Group's head
office and statutory audits are required for the non-dormant
entities within the Group, we performed a full scope audit covering
100% of the Group's companies and accordingly our audit work
achieved coverage of 100% of the Group's total assets, revenue and
profit.
Component materiality level was capped at GBP5.19m.
We have also tested the consolidation process.
Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether there
is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the
work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact.
We have nothing to report in respect of these matters.
Responsibilities of directors
As explained more fully in the directors' responsibilities statement,
the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine
is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, the directors are responsible
for assessing the Group's and the parent company's ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
Group or the parent company or to cease operations, or have
no realistic alternative but to do so.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud and non-compliance
with laws and regulations are set out below.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
-- the nature of the industry and sector, control environment
and business performance including the design of the Group's
remuneration policies, key drivers for directors' remuneration,
bonus levels and performance targets;
-- results of our enquiries of management, internal audit and
the audit committee about their own identification and assessment
of the risks of irregularities;
-- any matters we identified having obtained and reviewed the
Group's documentation of their policies and procedures relating
to:
o identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances of
non-compliance;
o detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged fraud;
o the internal controls established to mitigate risks of fraud
or non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team and
involving relevant internal specialists, including tax, valuations,
pensions, IT, real estate and financial instrument specialists
regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the inappropriate
capitalisation of costs. In common with all audits under ISAs (UK),
we are also required to perform specific procedures to respond to
the risk of management override.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the financial
statements. The key laws and regulations we considered in this
context included the UK Companies Act, pensions legislation and tax
legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty. These
included the Group's operating licence.
Audit response to risks identified
As a result of performing the above, we identified the
inappropriate capitalisation of costs as a key audit matter related
to the potential risk of fraud. The key audit matters section of
our report explains the matter in more detail and also describes
the specific procedures we performed in response to that key audit
matter.
In addition to the above, our procedures to respond to risks
identified included the following:
-- reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the financial statements;
-- enquiring of management, the audit committee and external
legal counsel concerning actual and potential litigation and
claims;
-- performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
-- reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence with
the licensing authority Ofgem; and
-- in addressing the risk of fraud through management override
of controls, testing the appropriateness of journal entries and
other adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the strategic report and the
directors' report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
-- the strategic report and the directors' report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
strategic report or the directors' report.
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required 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.
We have nothing to report in respect of these matters.
Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors' remuneration have
not been made.
We have nothing to report in respect of this matter.
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were
appointed by the Shareholders in 2002 to audit the financial
statements for the year ending 31 March 2003 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm
is 18 years, covering the years ending 31 March 2003 to 31
March 2020.
Consistency of the audit report with the additional report
to the audit committee
Our audit opinion is consistent with the additional report
to the audit committee we are required to provide in accordance
with ISAs (UK).
Independent Auditor's Report to the Members of Electricity North
West Limited (continued)
Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Christopher Robertson (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
3 June 2020
Financial Statements
Consolidated and Company Statement of Profit or Loss and Other
Comprehensive Income
for the year ended 31 March 2020
Group and Company Group and Company
2020 2019
Note
GBPm GBPm
========================================================================== ==== ================= =================
Revenue 4 478.1 458.3
-------------------------------------------------------------------------- ---- ----------------- -----------------
Employee costs 5,6 (57.0) (58.1)
Depreciation and amortisation expense 5 (121.4) (116.9)
Other operating costs (87.5) (92.8)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Total operating expenses (265.9) (267.8)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Operating profit 5 212.2 190.5
Investment income 8 0.1 0.4
Finance expense 9 (66.7) (103.9)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Profit before taxation 145.6 87.0
Taxation 10 (43.5) (15.2)
-------------------------------------------------------------------------- ---- ----------------- -----------------
Profit for the year attributable to equity shareholders of the Company 102.1 71.8
Other comprehensive (expense)/ income:
Items that will not be reclassified subsequently to profit or loss:
Re-measurement of net defined benefit scheme 23 (74.1) 41.4
Deferred tax on re-measurement of defined benefit scheme 24 14.0 (7.0)
Adjustment of brought forward deferred tax due to change in future tax
rates 24 1.7 -
Other comprehensive (expense)/ income for the year (58.4) 34.4
-------------------------------------------------------------------------- ---- ----------------- -----------------
Total comprehensive income for the year attributable to shareholders of
the Company 43.7 106.2
========================================================================== ==== ================= =================
The results for the current and prior year are derived from
continuing operations.
Consolidated and Company Statement of Financial Position
as at 31 March 2020
Group Company Group Company
2020 2020 2019 2019
Note GBPm GBPm GBPm GBPm
--------------------------------- ----- --------- --------- --------- ---------
ASSETS
Non-current assets
Intangible assets and goodwill 12 53.8 53.8 52.3 52.3
Property, plant and equipment 13 3,361.6 3,361.6 3,259.7 3,259.7
Retirement benefit surplus 22 - - 32.8 32.8
Investments 14 - 15.4 - 15.4
--------------------------------- ----- --------- --------- --------- ---------
3,415.4 3,430.8 3,344.8 3,360.2
--------------------------------- ----- --------- --------- --------- ---------
Current assets
Inventories 15 10.8 10.8 12.2 12.2
Trade and other receivables 16 63.4 63.4 57.7 57.7
Cash and cash equivalents 17,21 56.2 56.2 22.7 22.7
130.4 130.4 92.6 92.6
--------------------------------- ----- --------- --------- --------- ---------
Total assets 3,545.8 3,561.2 3,437.4 3,452.8
================================= ===== ========= ========= ========= =========
LIABILITIES
Current liabilities
Trade and other payables 18 (126.2) (141.9) (120.6) (136.3)
Current income tax liabilities (4.8) (4.8) (6.6) (6.6)
Borrowings 19 (8.9) (8.9) (6.8) (6.8)
Provisions 23 (0.1) (0.1) (0.8) (0.8)
--------------------------------- ----- --------- --------- --------- ---------
(140.0) (155.7) (134.8) (150.5)
--------------------------------- ----- --------- --------- --------- ---------
Net current liabilities (9.6) (25.3) (42.2) (57.9)
Non-current liabilities
Borrowings 19 (1,196.7) (1,196.7) (1,161.8) (1,161.8)
Derivative financial instruments 21 (416.9) (416.9) (404.6) (404.6)
Provisions 23 (1.7) (1.7) (2.2) (2.2)
Retirement benefit deficit 22 (26.3) (26.3) - -
Deferred tax 24 (155.8) (155.8) (150.1) (150.1)
Customer contributions 25 (656.1) (656.1) (637.2) (637.2)
--------------------------------- ----- --------- --------- --------- ---------
(2,453.5) (2,453.5) (2,355.9) (2,355.9)
--------------------------------- ----- --------- --------- --------- ---------
Total liabilities (2,593.5) (2,609.2) (2,490.7) (2,506.4)
================================= ===== ========= ========= ========= =========
Total net assets 952.3 952.0 946.7 946.4
================================= ===== ========= ========= ========= =========
EQUITY
Called up share capital 27,28 238.4 238.4 238.4 238.4
Share premium account 28 4.4 4.4 4.4 4.4
Revaluation reserve 28 84.1 84.1 88.2 88.2
Capital redemption reserve 28 8.6 8.6 8.6 8.6
Retained earnings 28 616.8 616.5 607.1 606.8
--------------------------------- ----- --------- --------- --------- ---------
Total equity 952.3 952.0 946.7 946.4
================================= ===== ========= ========= ========= =========
The financial statements of Electricity North West Limited
(registered number 02366949) were approved and authorised for issue
by the Board of Directors on 3 June 2020 signed on its behalf
by:
D Brocksom
Director
Consolidated Statement of Changes in Equity
for the year ended 31 March 2020
Group
Capital
Called up Share premium Revaluation redemption Retained
share capital account reserve reserve earnings Total Equity
GBPm GBPm GBPm GBPm GBPm GBPm
================ =============== =============== =============== =============== =============== ===============
At 31 March
2018 238.4 4.4 90.3 8.6 486.1 827.8
Opening
adjustment on
transition to
IFRS 9 - - - - 71.0 71.0
Tax impact on
opening
adjustment - - - - (12.0) (12.0)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserves 238.4 4.4 90.3 8.6 545.1 886.8
Profit for the
year - - - - 71.8 71.8
Other
comprehensive
income for the
year - - - - 34.4 34.4
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
- - (2.1) - 108.3 106.2
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (46.3) (46.3)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2019 238.4 4.4 88.2 8.6 607.1 946.7
================ =============== =============== =============== =============== =============== ===============
Opening
adjustment on
transition to
IFRS 16 (Note
1) - - - - 0.2 0.2
Tax impact on
opening
adjustment - - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserves 238.4 4.4 88.2 8.6 607.3 946.9
Profit for the
year - - - - 102.1 102.1
Other
comprehensive
expense for
the year - - - - (58.4) (58.4)
Transfer from
revaluation
reserve - - (4.1) - 4.1 -
- - (4.1) - 47.8 43.7
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (38.3) (38.3)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2020 238.4 4.4 84.1 8.6 616.8 952.3
================ =============== =============== =============== =============== =============== ===============
Company Statement of Changes in Equity
for the year ended 31 March 2020
Company
Capital
Called up Share premium Revaluation redemption Retained
share capital account reserve reserve earnings Total Equity
GBPm GBPm GBPm GBPm GBPm GBPm
================ =============== =============== =============== =============== =============== ===============
At 31 March
2018 238.4 4.4 90.3 8.6 485.8 827.5
Opening
adjustment on
transition to
IFRS 9 - - - - 71.0 71.0
Tax impact on
opening
adjustment - - - - (12.0) (12.0)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserves 544.8 886.5
Profit for the
year - - - - 71.8 71.8
Other
comprehensive
income for the
year - - - - 34.4 34.4
Transfer from
revaluation
reserve - - (2.1) - 2.1 -
- - (2.1) - 108.3 106.2
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (46.3) (46.3)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2019 238.4 4.4 88.2 8.6 606.8 946.4
================ =============== =============== =============== =============== =============== ===============
Opening
adjustment on
transition to
IFRS 16 (Note
1) - - - - 0.2 0.2
Tax impact on
opening
adjustment - - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Opening
reserves 238.4 4.4 88.2 8.6 607.0 946.6
Profit for the
year - - - - 102.1 102.1
Other
comprehensive
expense for
the year - - - - (58.4) (58.4)
Transfer from
revaluation
reserve - - (4.1) - 4.1 -
- - (4.1) - 47.8 43.7
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(Note 11) - - - - (38.3) (38.3)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March
2020 238.4 4.4 84.1 8.6 616.5 952.0
================ =============== =============== =============== =============== =============== ===============
Consolidated and Company Statement of Cash Flows
for the year ended 31 March 2020
Group and Group and
Company Company
Note 2020 2019
GBPm GBPm
====================================================== ==== ========= =========
Operating activities
Cash generated from operations 32 297.6 267.6
Interest paid (48.9) (48.3)
Tax paid (23.8) (27.1)
------------------------------------------------------ ---- --------- ---------
Net cash generated from operating activities 224.9 192.2
Investing activities
Interest received and similar income 0.1 0.4
Purchase of property, plant and equipment (202.6) (224.2)
Purchase of intangible assets (8.0) (8.9)
Customer contributions received 32.9 37.8
Proceeds from sale of property, plant and
equipment 0.6 0.4
Net cash used in investing activities (177.0) (194.5)
------------------------------------------------------ ---- --------- ---------
Net cash flow before financing activities 47.9 (2.3)
Financing activities
Proceeds from external borrowings 30.0 -
Repayment of external borrowings (7.0) (6.7)
Repayment of lease liabilities - (Note
1) (1.2) -
Movement of inter-company loan from parent 2.1 1.6
Movement in cash collateral held - (10.6)
Dividends paid 11 (38.3) (46.3)
Net cash used in financing activities (14.4) (62.0)
------------------------------------------------------ ---- --------- ---------
Net increase/(decrease) in cash and cash
equivalents 33.5 (64.3)
------------------------------------------------------ ---- --------- ---------
Cash and cash equivalents at the beginning
of the year 17 22.7 87.0
Cash and cash equivalents at the end of
the year 17 56.2 22.7
====================================================== ==== ========= =========
Notes to the Financial Statements
Electricity North West Limited is a company incorporated in the
United Kingdom and registered in England and Wales under the
Companies Act 2006.
The financial statements are presented in sterling, which is the
functional currency of the Company and Group. All values are
rounded to the nearest million pounds (GBP'm) unless otherwise
indicated.
The financial statements are prepared on the going concern
basis. Further detail on the going concern assessment is contained
in the Strategic Report.
1. Adoption of new and revised Standards
New and amended IFRS Standards that are effective for the
current year
IFRS 16: Leases
In the current year, the Group has applied IFRS 16 (as issued by
the IASB in January 2016) which is effective for annual periods
that begin on or after 1 January 2019.
IFRS 16 introduces new or amended requirements with respect to
lease accounting. It introduces significant changes to lessee
accounting by removing the distinction between operating and
finance leases and requiring the recognition of a right-of-use
asset and a lease liability at commencement for all leases, except
for short-term leases and leases of low value assets. The impact of
the adoption of IFRS 16 on the Group's consolidated financial
statements is described below.
The date of initial application of IFRS 16 for the Group is 1
April 2019.
The Group has applied IFRS 16 using the modified retrospective
approach, with no restatement of the comparative information.
Impact of the new definition of a lease
The change in definition of a lease mainly relates to the
concept of control. IFRS 16 determines whether a contract contains
a lease on the basis of whether the customer has the right to
control the use of an identified asset for a period of time in
exchange for consideration. This is in contrast to the focus on
'risks and rewards' in IAS 17 and IFRIC 4.
The Group applies the definition of a lease and related guidance
set out in IFRS 16 to all contracts entered into or changed on or
after 1 April 2019. In preparation for the first-time application
of IFRS 16, the Group carried out an implementation project. The
project has shown that the new definition in IFRS 16 does not
significantly change the scope of contracts that meet the
definition of a lease for the Group.
Impact on Lessee Accounting
Lease incentives (e.g. rent-free period) are recognised as part
of the measurement of the right-of-use assets and lease liabilities
whereas under IAS 17 they resulted in the recognition of a lease
incentive, amortised as a reduction of rental expenses generally on
a straight-line basis.
Under IFRS 16, right-of-use assets are tested for impairment in
accordance with IAS 36.
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
The tables below show the amount of adjustment for each
financial statement line item affected by the application of IFRS
16 for the current year.
Impact on profit or loss 2020
GBPm
===================================================== ==========
Increase in depreciation of right-of-use asset (Note
13) (1.2)
Increase in finance costs (Note 9) (0.3)
Decrease in other expenses - total lease payments,
capital and interest 1.4
===================================================== ==========
(Decrease) in profit for the year (0.1)
===================================================== ==========
Impact on assets, liabilities and equity 31 March
2020
GBPm
===================================================== ==========
Opening right-of-use assets (Note 13) 6.3
Depreciation (Note 13) (1.2)
----------------------------------------------------- ----------
Net impact on total assets (Note 13) 5.1
===================================================== ==========
Opening lease liabilities (Note 19) (6.7)
Finance costs - interest payable on leases (Note
9) (0.3)
Lease payments - capital (Note 20) 1.2
Lease payments - interest 0.3
Net impact on total liabilities (Note 20) (5.5)
===================================================== ==========
Opening reserves 0.2
===================================================== ==========
Expenses relating to short-term leases which are kept off the
balance sheet for the year were GBP0.2m (2019: nil).
Notes to the Financial Statements (continued)
1. Adoption of new and revised Standards (continued)
The application of IFRS 16 has an impact on the consolidated statement of cash flows of the
Group.
Under IFRS 16, lessees must present: Cash paid for the interest portion of a lease liability
as either operating activities or financing activities, as permitted by IAS 7 (the Group has
opted to include interest paid as part of financing activities); and Cash payments for the
principal portion for a lease liability, as part of financing activities.
The adoption of IFRS 16 did not have an impact on net cash flows.
Amendments to other standards:
Amendments to other IFRS Standards and interpretations issued by the International Accounting
Standards Board (IASB) that are effective in the year are listed below; their adoption has
not had any material impact on the disclosures or the amounts reported in these financial
statements:
* IFRS 9 (amendments) Prepayment Features with Negative
Compensation,
* IAS 28 (amendments) Long-term Interests in Associates
and Joint Ventures,
* Annual Improvements to IFRS Standards 2015-2017 Cycle,
* IAS 19 (amendments) Employee Benefits Plan Amendment,
Curtailment or Settlement,
* IFRIC 23 Uncertainty over Income Tax Treatments.
New and revised IFRS Standards in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the
following new and revised IFRS Standards that have been issued but are not yet effective (and,
in some cases, had not yet been adopted by the EU):
* IFRS 17 Insurance Contracts,
* Amendments to IFRS 10 and IAS 28: Sale or
Contribution of Assets between an Investor and its
Associate or Joint Venture,
* Amendments to IFRS 3: Definition of business,
* Amendments to IAS 1 and IAS 8: Definition of material,
* Conceptual Framework: Amendments to References to the
Conceptual Framework in IFRS Standards.
The Directors do not expect that the adoption of the Standards listed above will have a material
impact on the financial statements of the Group in future periods.
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, therefore, comply with Article 4 of the EU
IAS Regulation.
The financial statements have been prepared on the historical
cost basis, except for certain 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 21.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries), made up to 31 March each year.
Consolidation of a subsidiary begins when the Company obtains
control over the subsidiary and ceases when the Company loses
control of the subsidiary. There have been no acquisitions or
disposals of subsidiaries in the current or prior year.
Accounting policies are consistent in all Group companies.
All intra-group assets and liabilities, equity, income, expenses
and cash flows relating to transactions between Group members are
eliminated on consolidation.
Business combinations and goodwill
Acquisitions of subsidiaries are accounted for using the
acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the
sum of the acquisition-date fair values of assets transferred by
the Group, liabilities incurred by the Group to the former owners
of the acquiree and the equity interest issued by the Group in
exchange for control of the acquiree. Acquisition related costs are
recognised in profit or loss as incurred.
Goodwill is measured as the excess of the consideration
transferred over the net of the acquisition-date amounts of the
identifiable assets acquired and liabilities assumed and is
recognised as an asset. If, after reassessment, the net of the
acquisition-date amounts of the identifiable assets acquired and
liabilities assumed exceeds the consideration transferred, the
excess is recognised immediately in profit or loss.
Goodwill is allocated to cash-generating units and is not
amortised, but is reviewed for impairment annually, or more
frequently when there is an indication that it may be impaired.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
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.
Incentive income earned or adjustments for under or over spend
on Totex, or over or under delivery of outputs, all in the
financial year are not adjusted as adjustments to revenues in the
period. These are adjusted through the regulatory mechanism in
revenues two years later. Similarly, adjustments in respect of
comparable performance measures are reflected in the current year's
financial statements.
The Group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. Payments received in advance of revenue recognition are
recorded as deferred revenue. The treatment of revenue from
distribution of electricity remains the same under provisions of
IFRS 15 and is, therefore, not impacted by the transition to the
new standard.
Customer contributions
The current accounting treatment for customer contributions
towards distribution system assets is to defer revenue and release
over the life of the asset. The income is released to the statement
of profit or loss on a straight line basis, in line with the useful
economic life of the distribution system assets. This amortisation
of contributions received is recognised in revenue.
Under IFRS 15, revenue is recognised as each performance
obligation within the contract is satisfied. If performance
obligations are not satisfied over time, revenue will not be
recognised.
Identification of contract with customer : The written quotation
provided by ENWL and accepted by the customer (the Agreement), has
commercial substance in that ENWL's future cash flows are expected
to change as a result, and it is considered probable that ENWL will
collect the consideration to which it is entitled under the
Agreement in exchange for completion of the connection.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Revenue recognition (continued)
Customer contributions (continued)
Identification of performance obligation: As the performance
obligation relating to the ongoing maintenance is not covered by
the Agreement, in relation to the revenue arising from the customer
contribution, there is only one performance obligation. This
obligation is considered to be distinct because the following
criteria are met:
-- the customer can benefit from the good or service either on
its own or together with other resources that are readily available
to the customer; and readily available other resources being the
existing network
-- the entity's promise to transfer the good or service to the
customer is separately identifiable from other promises in the
contract. The connection is separately identifiable from
maintenance as maintenance is not covered by the Agreement.
The existing distribution network is considered to be a readily
available resource.
Determination of transaction price: All other factors being
equal and the completion of the job is on budget, the expected
transaction price will be that of the quoted price in the
Agreement. Generally the price is fixed by Ofgem regulations.
Variations may arise when the customer has certain specifications
and changes are reviewed on a contract by contract basis to
establish whether they should be treated as variable consideration.
Variable consideration is accounted for based on the best estimate
of the transaction price if it is highly probable that the revenue
will be received. Given the variations on contracts are relating to
a single performance obligation and do not constitute distinct
services, these should be accounted for as a continuation of the
original contract resulting in additional or reduced revenue.
Allocation of transaction price: For the Agreements being
considered there is only one performance obligation to allocate the
transaction price to. The transaction price is stated within the
Agreement.
Recognition of revenue when performance obligation is satisfied:
The performance obligation is regarded as satisfied over time as
ENWL creates a bespoke asset for which they have no alternative use
other than to provide electricity to the customer's premises. ENWL
has an enforceable right to payment for the performance completed
to date. Revenue is, therefore, recognised over the life of the
asset.
Refundable customer deposits
Refundable customer deposits received in respect of property,
plant and equipment are held as a liability until repayment
conditions come into effect and the amounts are repaid to the
customer or otherwise credited to customer contributions.
Dividend income
Dividend income is recognised when the Company's right to
receive payment is established.
Investment income
Interest income is accrued on a time basis, by reference to the
principal outstanding and the effective interest rate.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Leases
The Group has adopted IFRS 16 ('Leases') during the year. The
Group assesses whether a contract is or contains a lease, at
inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term
leases and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a
straight-line basis over the term of the lease unless another
systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value
of the lease payments that are not paid at the commencement date,
discounted by using either the rate implicit in the lease, or our
incremental borrowing rate.
The lease liability is subsequently measured by increasing the
carrying amount to reflect interest on the lease liability and by
reducing the carrying amount to reflect the lease payments
made.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the
commencement day, less any lease incentives received and any
initial direct costs. They are subsequently measured at cost less
accumulated depreciation and impairment losses.
Right-of-use assets are depreciated over the shorter period of
lease term and useful life of the underlying asset. The
depreciation starts at the commencement date of the lease.
The right-of-use assets are presented as a separate line in the
consolidated statement of financial position.
The Group applies IAS 36 to determine whether a right-of-use
asset is impaired and accounts for any identified impairment loss
as described in the 'Property, Plant and Equipment' policy.
The related payments are recognised as an expense in the period
in which the event or condition that triggers those payments occurs
and are included in the line "Other expenses" in profit or
loss.
Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets
that necessarily take a substantial period of time to get ready for
their intended use or sale, are added to the cost of those assets,
until such time as the assets are substantially ready for their
intended use or sale.
All other borrowing costs are recognised in profit or loss in
the period in which they are incurred.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
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 2019; 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 22. Actual experience may differ from the
assumptions made, for example, due to changing market and economic
conditions and longer or shorter lives of participants.
Defined benefit costs are split into three categories:
-- current service cost, past service cost and gains and losses
on curtailments and settlements, recognised in employee costs (see
Note 6) in the Consolidated Income Statement;
-- net interest expense or income, recognised within finance
costs (see Note 9) in the Consolidated Income Statement; and
-- re-measurement comprising actuarial gains and losses and the
return on scheme assets (excluding interest) are recognised
immediately in the Statement of Financial Position with a charge or
credit to the Statement of Comprehensive Income in the period in
which they occur.
Defined benefit assets are measured at fair value while
liabilities are measured at present value. The difference between
the two amounts is recognised as a surplus or obligation in the
Statement of Financial Position.
IFRIC14: 'The limit on a defined benefit asset, minimum funding
requirements and their interaction' was published by the
interpretations committee of the International Accounting Standards
Board in July 2007 and was adopted during the year ended 31 March
2008. IFRIC14 provides guidance on the extent to which a pension
scheme surplus should be recognised as an asset and may also
require additional liabilities to be recognised where minimum
funding requirements exist. Legal opinion was obtained that a
pension surplus could be recovered on wind up of the scheme and
could, therefore, be recognised, along with associated
liabilities.
The Group has concluded that, when a defined benefit asset
exists, as was the case in the prior year, it can recognise the
full amount of this surplus on the grounds that it could gain
sufficient economic benefit from the refund of the surplus assets
that would be available to it following the final payment to the
last beneficiary of the Scheme.
The COVID-19 pandemic began to unfold in early 2020 and
continues to progress. The negative impact on asset valuations
through March was significant. For traded asset classes, a value as
at 31 March was available and has been used in the pension scheme
asset valuation. However, the scheme also contains a number of
unquoted asset classes, especially in real estate, the valuation of
which is less certain. Independent investment manager expertise has
guided the asset valuations used for these less liquid assets.
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.
Intangible assets
Intangible assets with finite useful economic lives are measured
initially at cost and are amortised on a straight-line basis over
their estimated useful lives. The carrying amount is reduced by any
provision for impairment where necessary.
Amortisation periods for categories of intangible assets
are:
Computer software 1-12 years
Intangible assets under construction are not amortised.
Amortisation commences from the date the intangible asset is
available for use.
The Licence has an indefinite useful economic life and,
therefore, is tested annually for impairment.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
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 a
result of the revaluation, it is transferred from the revaluation
reserve to retained earnings on an annual basis.
Assets other than operational structures
All other property, plant and equipment is stated at historical
cost less accumulated depreciation.
Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Subsequent costs are
included in the asset's carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group
and the cost of the item can be measured reliably. All other
repairs and maintenance are charged to the Income Statement during
the financial year in which they are incurred.
Freehold land and assets in the course of construction are not
depreciated until the asset is available for use.
Other assets are depreciated by writing off their cost evenly
over their estimated useful lives, based on management's judgement
and experience, which are principally as follows:
Buildings 30-60 years
Fixtures and equipment, vehicles and other 2-40 years
Depreciation methods and useful lives are re-assessed annually
and, if necessary, changes are accounted for prospectively.
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sale proceeds and
the carrying amount of the asset and is recognised in the Income
Statement.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
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.
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.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
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 regular way purchases or sales of financial assets are
recognised and derecognised on a trade date basis. Regular way
purchases or sales are purchases or sales of financial assets that
require delivery of assets within the time frame established by
regulation or convention in the marketplace.
All recognised financial assets are measured subsequently in
their entirety at either amortised cost or fair value, depending on
the classification of the financial assets.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Classification of financial assets
Financial assets that meet the following conditions are measured
subsequently at amortised cost:
-- the financial asset is held within a business model whose
objective is to hold financial assets in order to collect
contractual cash flows; and
-- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
Financial assets that meet the following conditions are measured
subsequently at fair value through other comprehensive income
(FVTOCI):
-- the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and
selling the financial assets; and
-- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
By default, all other financial assets are measured subsequently
at fair value through profit or loss (FVTPL).
Amortised cost and effective interest method
The effective interest method is a method of calculating the
amortised cost of a debt instrument and of allocating interest
income over the relevant period.
The effective interest rate is the rate that exactly discounts
estimated future cash receipts (including all fees and points paid
or received that form an integral part of the effective interest
rate, transaction costs and other premiums or discounts) excluding
expected credit losses, through the expected life of the debt
instrument, or, where appropriate, a shorter period, to the gross
carrying amount of the debt instrument on initial recognition.
The amortised cost of a financial asset is the amount at which
the financial asset is measured at initial recognition minus the
principal repayments, plus the cumulative amortisation using the
effective interest method of any difference between that initial
amount and the maturity amount, adjusted for any loss allowance.
The gross carrying amount of a financial asset is the amortised
cost of a financial asset before adjusting for any loss
allowance.
Income is recognised using the effective interest method for
debt instruments measured subsequently at amortised cost and at
FVTOCI. For financial assets other than purchased or originated
credit-impaired financial assets, interest income is calculated by
applying the effective interest rate to the gross carrying amount
of a financial asset, except for financial assets that have
subsequently become credit-impaired. The Group has no financial
assets purchased or originated credit-impaired, or that have
subsequently become credit-impaired.
Interest income is recognised in profit or loss and is included
in the 'Investment income' line item.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Financial assets at FVTPL
Financial assets that do not meet the criteria for being
measured at amortised cost or FVTOCI are measured at FVTPL.
Specifically, the financial assets held by the Group classified as
at FVTPL are derivatives and are stated at fair value, with any
fair value gains or losses recognised in profit or loss to the
extent they are not part of a designated hedging relationship. Fair
value is determined in the manner described in Note 21.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses
on investments in debt instruments that are measured at amortised
cost or at FVTOCI, trade receivables and contract assets; the Group
holds no lease receivables or financial guarantee contracts. The
amount of expected credit losses is updated at each reporting date
to reflect changes in credit risk since initial recognition of the
respective financial instrument.
The Group always recognises lifetime expected credit losses
(ECL) for trade receivables and contract assets. The expected
credit losses on these financial assets are estimated using a
provision matrix based on the Group's historical credit loss
experience, adjusted for factors that are specific to the debtors,
general economic conditions and an assessment of both the current
as well as the forecast direction of conditions at the reporting
date, including time value of money where appropriate.
For all other financial instruments, the Group recognises
lifetime ECL when there has been a significant increase in credit
risk since initial recognition. However, if the credit risk on the
financial instrument has not increased significantly since initial
recognition, the Group measures the loss allowance for that
financial instrument at an amount equal to 12-month ECL.
Lifetime ECL represents the expected credit losses that will
result from all possible default events over the life of a
financial instrument. In contrast, 12-month ECL represents the
portion of lifetime ECL that is expected to result from default
events on a financial instrument that are possible within 12 months
after the reporting date.
a) Significant increase in credit risk
In assessing whether the credit risk on a financial instrument
has increased significantly since initial recognition, the Group
compares the risk of a default occurring on the financial
instrument at the reporting date with the risk of a default
occurring on the financial instrument at the date of initial
recognition. In making this assessment, the Group considers both
quantitative and qualitative information that is reasonable and
supportable, including historical experience and forward-looking
information that is available without undue cost or effort.
Irrespective of the outcome of the above assessment, the Group
presumes that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments
are more than 30 days past due, unless the Group has reasonable and
supportable information that demonstrates otherwise.
Despite the foregoing, the Group assumes that the credit risk on
a financial instrument has not increased significantly since
initial recognition if the financial instrument is determined to
have low credit risk at the reporting date. A financial instrument
is determined to have low credit risk if the financial instrument
has a low risk of default and the debtor has a strong capacity to
meet its contractual cash flow obligations in the near term.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
The Group regularly monitors the effectiveness of the criteria
used to identify whether there has been a significant increase in
credit risk and revises them as appropriate to ensure that the
criteria are capable of identifying a significant increase in
credit risk before the amount becomes past due.
b) Definition of default
The Group considers that default has occurred when a financial
asset is more than 90 days past due, unless the Group has
reasonable and supportable information to demonstrate that a more
lagging default criterion is more appropriate.
c) Credit-impaired financial assets
A financial asset is credit-impaired when one or more events
that have a detrimental impact on the estimated future cash flows
of that financial asset have occurred.
d) Measurement and recognition of expected credit losses
The measurement of expected credit losses is a function of the
probability of default, loss given default and the exposure at
default. The assessment of the probability of default and loss
given default is based on historical data adjusted by
forward-looking information. The exposure at default is represented
by the assets' gross carrying amount at the reporting date.
For financial assets, the expected credit loss is estimated as
the difference between all contractual cash flows that are due to
the Group in accordance with the contract and all the cash flows
that the Group expects to receive, discounted at the original
effective interest rate.
If the Group has measured the loss allowance for a financial
instrument at an amount equal to lifetime ECL in the previous
reporting period but determines at the current reporting date that
the conditions for lifetime ECL are no longer met, the Group
measures the loss allowance at an amount equal to 12-month ECL at
the current reporting date, except for assets for which the
simplified approach was used.
The Group recognises an impairment gain or loss in profit or
loss for all financial instruments with a corresponding adjustment
to their carrying amount through a loss allowance account.
Derecognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire, or when
it transfers the financial asset and substantially all the risks
and rewards of ownership of the asset to another entity.
On derecognition of a financial asset measured at amortised
cost, the difference between the asset's carrying amount and the
sum of the consideration received and receivable is recognised in
profit or loss.
Cash and cash equivalents
In the consolidated cash flow statement and related notes, cash
and cash equivalents includes cash at bank and in hand, deposits,
other short-term highly liquid investments which are readily
convertible into known amounts of cash and have a maturity of three
months or less and which are subject to an insignificant risk of
change in value.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Money market deposits
Money market deposits with terms to maturity in excess of three
months are not included as cash or cash equivalents and are
separately disclosed on the face of the Statement of Financial
Position.
Financial liabilities and equity
Debt and equity instruments are classified as either financial
liabilities or as equity in accordance with the substance of the
contractual arrangements and the definitions of a financial
liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by the Group are recognised
at the proceeds received, net of direct issue costs.
Financial liabilities
All financial liabilities are measured subsequently at amortised
cost using the effective interest method or at FVTPL.
Financial liabilities at FVTPL
Financial liabilities at FVTPL are measured at fair value, with
any gains or losses arising on changes in fair value recognised in
profit or loss to the extent that they are not part of a designated
hedging relationship. The Group has no financial liabilities
designated at FVTPL. Fair value is determined in the manner
described in Note 21.
Financial liabilities measured subsequently at amortised
cost
Financial liabilities that are not at FVTPL are measured
subsequently at amortised cost using the effective interest
method.
The effective interest method is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is
the rate that exactly discounts estimated future cash payments
(including all fees and points paid or received that form an
integral part of the effective interest rate, transaction costs and
other premiums and discounts) through the expected life of the
financial liability, or (where appropriate) a shorter period, to
the amortised cost of a financial liability.
Trade payables
Trade payables are initially recorded at fair value and
subsequently at amortised cost.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or have
expired. The difference between the carrying amount of the
financial liability derecognised and the consideration paid and
payable is recognised in profit or loss.
When the Group exchanges with the existing lender one debt
instrument into another one with the substantially different terms,
such exchange is accounted for as an extinguishment of the original
financial liability and the recognition of a new financial
liability. Similarly, the Group accounts for substantial
modification of terms of an existing liability, or part of it, as
an extinguishment of the original financial liability and the
recognition of a new liability. It is assumed that the terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective rate is at
least 10% different from the discounted present value of the
remaining cash flows of the original financial liability.
Derivative financial instruments
The Group enters into a variety of derivative financial
instruments to manage its exposure to interest rate and inflation
risk. Further details of derivative financial instruments are
disclosed in Note 21.
Derivatives are recognised initially at fair value at the date a
derivative contract is entered into and are subsequently
re-measured to their fair value at each reporting date. The
resulting gain or loss is recognised in profit or loss immediately
unless the derivative is designated in a hedging relationship.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is
recognised as a financial liability. A derivative is presented as a
non-current asset or a non-current liability if the remaining
maturity of the instrument is more than 12 months and it is not
expected to be realised or settled within 12 months. Other
derivatives are presented as current assets or current
liabilities.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that
also includes a non-derivative host, with the effect that some of
the cash flows of the combined instrument vary in a way similar to
a stand-alone derivative.
Derivatives embedded in hybrid contracts with a financial asset
host within the scope of IFRS 9 are not separated. The entire
hybrid contract is classified and subsequently measured as either
amortised cost or fair value as appropriate.
Derivatives embedded in hybrid contracts with hosts that are not
financial assets within the scope of IFRS 9 are treated as separate
derivatives when they meet the definition of a derivative, their
risks and characteristics are not closely related to those of the
host contracts and the host contracts are not measured at
FVTPL.
An embedded derivative is presented as a non-current asset or
non-current liability if the remaining maturity of the hybrid
instrument to which the embedded derivative relates is more than 12
months and is not expected to be realised or settled within 12
months.
Notes to the Financial Statements (continued)
2. Significant accounting policies (continued)
Hedge accounting
The Group considers hedge accounting when entering any new
derivative, however, there are currently no formal hedging
relationships in the Group.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the
reporting date, taking into account the risks and uncertainties
surrounding the obligation. Where a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows (when the effect of
the time value of money is material).
3. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are
described in Note 2, the directors are required to make judgements
(other than those involving estimations) that have a significant
impact on the amounts recognised and to make estimates and
assumptions about the carrying amounts of assets and liabilities
that are not readily apparent from other sources. The estimates and
associated assumptions are based on historical experience and other
factors that are considered to be relevant. Actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period; or in the period of the revision and future
periods if the revision affects both current and future
periods.
Critical judgements in applying the group's accounting
policies
The following are the critical judgements, apart from those
involving estimations (which are presented separately below), that
the directors have made in applying the Group's accounting policies
and that have the most significant effect on the amounts recognised
in the financial statements.
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. See Note 6 for details on value of
employee costs capitalised in the year.
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 (Level 1 and 2
inputs) to the extent it is available. Where such data is not
available, certain estimates (Level 3 inputs) regarding inputs to
the valuation are required to be made. Level 3 inputs form a
significant part of the fair value of the financial instruments
held by the Group. Information about the valuation techniques and
inputs used are disclosed in Note 21.
Retirement benefit schemes
The Group's defined benefit obligation is derived using various
assumptions, as disclosed in Note 22. Results can be affected
significantly by the assumptions used, which management decide
based on advice by a firm of actuaries.
The valuation of the assets held within the scheme has been
impacted by the COVID-19 pandemic. Where available, market data is
used to value assets, however for some less liquid assets,
up-to-date data is not available, certain estimates regarding
inputs to the valuation are required to be made, as disclosed in
Note 22.
Notes to the Financial Statements (continued)
4. Revenue
2020 2019
Group GBPm GBPm
======== ===== =====
Revenue 478.1 458.3
======== ===== =====
Predominantly all Group revenues arise from electricity
distribution in the North West of England and associated
activities. Only one operating segment is, therefore, regularly
reviewed by the Chief Executive Officer and Executive Leadership
Team. Included within the above are revenues from three customers
(2019: three), each of which represented more than 10% of the total
revenue. Revenue from these customers totalled GBP171.7m (2019:
GBP174.3m). No other customer represented more than 10% of revenues
either this year or in the prior year.
In the current year GBP18.3m (2019: GBP17.3m) of customer
contributions amortisation has been amortised through revenue in
line with IFRS 15.
Notes to the Financial Statements (continued)
5. Operating profit
The following items have been included in arriving at the
Group's operating profit:
2020 2019
Group GBPm GBPm
=============================================================== ===== =====
Employee costs (Note 6) 57.0 58.1
--------------------------------------------------------------- ----- -----
Depreciation and amortisation expense
Depreciation of property, plant and equipment
Owned and right-of-use assets (Note 13) 114.9 110.7
Amortisation of intangible assets
Software (see Note 12) 6.5 6.2
Depreciation and amortisation expense 121.4 116.9
--------------------------------------------------------------- ----- -----
Other income
Profit on disposal of property, plant and equipment (0.6) (0.4)
--------------------------------------------------------------- ----- -----
Provision (credit)/charge (Note 23) (0.2) 0.5
--------------------------------------------------------------- ----- -----
Other operating costs include:
Research and development 3.1 2.9
=============================================================== ===== =====
Analysis of the auditor's remuneration is as follows:
2020 2019
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
Total fees 0.2 0.2
===================================================================================================== ===== =====
Notes to the Financial Statements (continued)
6. Employee costs
2020 2019
Group GBPm GBPm
============================================================== ====== ======
Wages and salaries 97.8 94.8
Social security costs 10.7 10.3
Pension costs (see Note 22) 21.7 21.2
-------------------------------------------------------------- ------ ------
Employee costs (including Directors' remuneration) 130.2 126.3
Costs transferred directly to fixed assets (73.2) (68.2)
-------------------------------------------------------------- ------ ------
Charged to operating expenses 57.0 58.1
============================================================== ====== ======
The average monthly number of employees during the year
(including Executive Directors):
2020 2019
Group Number Number
==================================== ======= =======
Electricity distribution 1,913 1,880
==================================== ======= =======
7. Directors' remuneration
2020 2019
Group GBPm GBPm
================================================================ ===== =====
Salaries and other short-term employee benefits 1.2 1.2
Accrued bonus 0.5 0.4
Amounts receivable under long-term incentive schemes 0.5 0.4
---------------------------------------------------------------- ----- -----
Total fees 2.2 2.0
================================================================ ===== =====
The aggregate emoluments of the Directors in 2020 amounted to
GBP2,171,000 (2019: GBP2,043,000). Emoluments comprise salaries,
fees, taxable benefits, and the value of short-term and long-term
incentive awards. The aggregated emoluments of the highest paid
Director in 2020 in respect of services to the Group amounted to
GBP1,025,000 (2019: GBP955,000). 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 (2019: GBPnil). Not
included in the amounts shown above are further payments made in
respect of Directors' services, as detailed in Note 31.
The pension contributions for the highest paid Director for 31
March 2020 were GBPnil (2019: GBPnil). The accrued pension at 31
March 2020 for the highest paid Director was GBPnil (2019:
GBPnil).
As at 31 March 2020 the Directors have no interests in the
ordinary shares of the Company (2019: same).
Notes to the Financial Statements (continued)
8. Investment income
2020 2019
Group GBPm GBPm
================================================ ===== =====
Interest receivable on short-term bank deposits 0.1 0.4
------------------------------------------------ ----- -----
Total investment income 0.1 0.4
================================================ ===== =====
9. Finance expense
2020 2019
Group GBPm GBPm
============================================================== ===== =====
Interest payable:
Interest payable on Group borrowings (Note 31) 14.5 14.7
Interest on borrowings held at amortised cost 41.2 41.2
Net interest settlements on derivatives (9.7) (9.9)
Indexation of index-linked debt (Note 19) 10.2 11.4
Interest payable on leases 0.3 -
Interest cost/ (credit) on pension plan obligations (Note 22) (1.0) 0.3
Capitalisation of borrowing costs under IAS 23 (1.1) (1.1)
============================================================== ===== =====
Total interest expense 54.4 56.6
Fair value movements on financial instruments:
Fair value movement on derivatives 12.3 47.3
============================================================== ===== =====
Total fair value movements 12.3 47.3
Total finance expense 66.7 103.9
============================================================== ===== =====
Borrowing costs capitalised in the year under IAS 23 were
GBP1.1m (2019: GBP1.1m), using an average annual capitalisation
rate of 4.0% (2019: 4.1%), derived from the total general borrowing
costs for the year divided by the average total general borrowings
outstanding for the year.
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 21 provides more detail on this.
There has been GBPnil (2019: GBPnil) accretion payments on the
index-linked swaps in the year; these are scheduled five-yearly,
seven-yearly and ten-yearly with the next payment due in July 2022.
No swaps have been entered or closed out in the year (2019:
same).
Notes to the Financial Statements (continued)
10. Taxation
2020 2019
Group GBPm GBPm
===================================== ===== =====
Current tax
Current year 23.5 21.9
Adjustments in respect of prior year (1.5) (1.6)
===================================== ===== =====
22.0 20.3
===================================== ===== =====
Deferred tax (Note 24)
Current year 0.6 (5.4)
Adjustments in respect of prior year 1.5 0.3
Impact of change in future tax rates 19.4 -
===================================== ===== =====
21.5 (5.1)
===================================== ===== =====
Tax charge for the year 43.5 15.2
===================================== ===== =====
Corporation tax is calculated at 19% (2019: 19%) of the
estimated assessable profit for the year. The rate applicable from
1 April 2020 now remains at 19%, rather than the previously enacted
reduction to 17%. This was substantively enacted on 17 March
2020.
Deferred tax is calculated using the rate at which it is
expected to reverse. Accordingly, the deferred tax has been
calculated on the basis that it will reverse in future at the 19%
(2019: 17%) rate.
The table below reconciles the notional tax charge at the UK
corporation tax rate to the effective tax rate for the year:
2020 2019
Group GBPm GBPm
========================================================== ===== =====
Profit before tax 145.6 87.0
========================================================== ===== =====
Tax at the UK corporation tax rate of 19% (2019: 19%) 27.7 16.5
Non-taxable (income) (0.5) (0.6)
Reduction in current year deferred tax due to rate change - 0.6
Prior year tax adjustments - (1.3)
Impact from change in future tax rates 19.4 -
Release of provision (3.1) -
Tax charge for the year 43.5 15.2
========================================================== ===== =====
Notes to the Financial Statements (continued)
11. Dividends
Amounts recognised as distributions to equity holders in the
year comprise:
2020 2019
Group and Company GBPm GBPm
=========================================================================================== ===== =====
Final dividends for the year ended 31 March 2019 of 3.54 (31 March 2018 of 3.36 pence per
share) 16.9 16.0
Interim dividends for the year ended 31 March 2020 of 4.49 pence per share (31 March 2019:
6.35 pence) 21.4 30.3
------------------------------------------------------------------------------------------- ----- -----
38.3 46.3
=========================================================================================== ===== =====
In the year ended 31 March 2020, the Company declared interim
dividends of GBP21.4m, which were paid in December 2019 (2019:
GBP30.3m). The final dividend for the year ended 31 March 2019 of
GBP16.9m was paid in June 2019; the final dividend for the year
ended 31 March 2018 of GBP16.0m was paid in June 2018.
The Directors do not propose a final dividend for the year ended
31 March 2020.
Notes to the Financial Statements (continued)
12. Intangible assets and goodwill
Goodwill Software Assets under the course of construction Total
Group and Company GBPm GBPm GBPm GBPm
==================== ======== ======== ======================================= =====
Cost
At 1 April 2018 10.1 78.0 23.5 111.6
Additions - 1.6 7.3 8.9
Transfers - 2.7 (2.7) -
At 31 March 2019 10.1 82.3 28.1 120.5
Additions - 1.0 7.0 8.0
Transfers - 6.9 (6.9) -
-------------------- -------- -------- --------------------------------------- -----
At 31 March 2020 10.1 90.2 28.2 128.5
-------------------- -------- -------- --------------------------------------- -----
Amortisation
At 1 April 2018 - 62.0 - 62.0
Charge for the year - 6.2 - 6.2
At 31 March 2019 - 68.2 - 68.2
Charge for the year - 6.5 - 6.5
At 31 March 2020 - 74.7 - 74.7
-------------------- -------- -------- --------------------------------------- -----
Net book value
At 31 March 2020 10.1 15.5 28.2 53.8
-------------------- -------- -------- --------------------------------------- -----
At 31 March 2019 10.1 14.1 28.1 52.3
==================== ======== ======== ======================================= =====
In the Company, goodwill arose on the acquisition of assets and
liabilities of Electricity North West Number 1 Company Ltd in the
year ended 31 March 2011. This value reflects the excess of the
investment over the book value of the trade and assets at the date
of acquisition.
At 31 March 2020, the Group and Company had entered into
contractual commitments for the acquisition of software amounting
to GBP9.2m (2019: GBP9.5m).
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 12).
Notes to the Financial Statements (continued)
13. Property, plant and equipment
Fixtures, Assets under the
Non- operational equipment, course of
Operational land and vehicles and construction Right of use
Structures buildings other assets* Total
Group and Company GBPm GBPm GBPm GBPm GBPm GBPm
================= ================= ================ ================ ================ ================= =======
Cost or valuation
At 1 April 2018 4,506.8 33.5 116.5 131.4 - 4,788.2
Additions 176.5 0.2 9.5 46.3 - 232.5
Transfers 26.8 - 3.3 (30.1) - -
Disposals (5.7) - (1.3) - - (7.0)
At 31 March 2019 4,704.4 33.7 128.0 147.6 - 5,013.7
Adoption of IFRS
16 - - - - 6.3 6.3
Additions 174.4 0.3 13.4 22.4 - 210.5
Transfers 40.5 0.2 9.0 (49.7) - -
Disposals (3.8) - (0.8) - - (4.6)
----------------- ----------------- ---------------- ---------------- ---------------- ----------------- -------
At 31 March 2020 4,915.5 34.2 149.6 120.3 6.3 5,225.9
----------------- ----------------- ---------------- ---------------- ---------------- ----------------- -------
Accumulated
depreciation and
impairment
At 1 April 2018 1,558.7 9.3 82.3 - - 1,650.3
Charge for the
year 97.4 1.1 12.2 - - 110.7
Disposals (5.7) - (1.3) - - (7.0)
At 31 March 2019 1,650.4 10.4 93.2 - - 1,754.0
Charge for the
year 100.3 1.0 12.4 - 1.2 114.9
Disposals (3.8) - (0.8) - - (4.6)
At 31 March 2020 1,746.9 11.4 104.8 - 1.2 1,864.3
----------------- ----------------- ---------------- ---------------- ---------------- ----------------- -------
Net book value
At 31 March 2020 3,168.6 22.8 44.8 120.3 5.1 3,361.6
----------------- ----------------- ---------------- ---------------- ---------------- ----------------- -------
At 31 March 2019 3,054.0 23.3 34.8 147.6 - 3,259.7
================= ================= ================ ================ ================ ================= =======
*IFRS 16 was implemented by the Group on 1 April 2019
recognising opening right-of-use assets of GBP6.3m and depreciation
on those assets of GBP1.2m (see Note 1).
At 31 March 2020, the Group and Company had entered into
contractual commitments for the acquisition of property, plant and
equipment amounting to GBP99.6m (2019: GBP86.6m).
At 31 March 2020, had the property, plant and equipment of the
Group been carried at historical cost less accumulated depreciation
and accumulated impairment losses, the carrying amount would have
been GBP3,257.9m (2019: GBP3,153.3m). The revaluation reserve is
disclosed in Note 28, net of deferred tax. The revaluation reserve
arose following North West Water's acquisition of Norweb, in
1997.
Notes to the Financial Statements (continued)
13. Property, plant and equipment (continued)
Impairment testing of intangible assets and property plant and
equipment
At each balance sheet date, the Group reviews the carrying
amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss. An intangible asset with an indefinite useful life
is tested for impairment at least annually and whenever there is an
indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing the value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been
adjusted.
For the purposes of impairment testing the Group have determined
that there is only one cash generating unit (CGU). The key
assumptions for the value in use calculations are those regarding
discount rates and the outcomes of future Ofgem price control
settlements.
The Group has prepared cash flow forecasts for a 28 year period,
including a terminal value, which represents the planning horizon
used for management purposes being aligned to the end of an eight
year RIIO regulatory period. The rate used to discount cash flows
was 5.84% (2019: 6.20%) reflecting an assumed level of risk
associated with the cash flows generated from the licence. Cash
flow projections for the three-year period to 2023 are based on the
Ofgem final determination and the Company's latest approved
business plan (2019: 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, excluding any long-term growth
factors that we'd normally assume in future regulatory periods. The
forecasts have been sensitised to an increase in the discount rate
of 0.5%, and that analysis indicates that there is sufficient
headroom and that no impairment would be required.
Based on the impairment testing performed, management believe
that sufficient headroom exists between the value in use and the
carrying value of the assets such that no impairment loss is
required to be booked.
Notes to the Financial Statements (continued)
14. Investments
Group Company
GBPm GBPm
=================================== ===== =======
At 31 March 2019 and 31 March 2020 - 15.4
=================================== ===== =======
Investments in subsidiary undertakings are stated at cost less
any provisions for permanent diminution in value. Cost of
investment relates wholly to the shareholding in the Company's
direct subsidiary, Electricity North West Number 1 Company
Limited.
Details of the investments as at 31 March 2020, all of which
were incorporated in the UK, and the principal place of business of
each is in the UK, are as follows.
Proportion Nature of business
Company Description of holding held
-------------------------------------------- ----------------------------- ----------- -------------------
Subsidiary undertakings
Electricity North West Number 1 Company Ltd Ordinary shares of GBP1 each 100% Dormant
ENW (ESPS) Pensions Trustees Limited Ordinary shares of GBP1 each 100% Dormant
Joint venture
Nor.Web DPL Limited Ordinary shares of GBP1 each 50% Dormant
============================================ ============================= =========== ===================
There have been no changes to these shareholdings during the
year and the address of the registered office of the investments
above is Borron Street, Stockport, SK1 2JD, with the exception of
Nor.Web DPL Limited whose registered office is 304 Bridgewater
Place, Birchwood Park, Warrington, WA3 6XG.
15. Inventories
2020 2019
Group and Company GBPm GBPm
============================= ===== =====
Raw material and consumables 10.8 12.2
============================= ===== =====
Notes to the Financial Statements (continued)
16. Trade and other receivables
Group and Company 2020 2019
GBPm GBPm
Trade receivables 7.9 5.3
Amounts owed by affiliated undertakings (Note 31) 5.8 4.5
Prepayments and accrued income 49.7 47.9
================================================== ===== =====
Balance at 31 March 63.4 57.7
================================================== ===== =====
The average credit period taken on sales is 14 days (2019: 14
days). Trade receivables do not carry interest and are stated net
of allowances for doubtful receivables of GBP1.3m (2019: GBP1.3m)
estimated by management based on known specific circumstances, past
default experience and their assessment of the current economic
environment.
At 31 March 2020, 44% of the Group trade receivables are past
due but not impaired (2019: 69%). A balance of GBP2.4m (2019:
GBP1.7m) is less than 30 days past due; a balance of GBP2.2m is
greater than 30 days past due (2019: GBP3.1m), against which an
allowance for doubtful debt of GBP1.3m (2019: GBP1.3m) has been
made.
The movement on the provision for impairment of trade
receivables is as follows:
2020 2019
Group and Company GBPm GBPm
=========================================== ===== ====
Balance at 1 April 1.3 0.9
Amounts written off in the year (0.3) -
Amounts recognised in the income statement 0.3 0.4
=========================================== ===== ====
Balance at 31 March 1.3 1.3
=========================================== ===== ====
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.
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 2020 GBP3.3m (2019: GBP2.2m)
of cash had been received as security.
The RAV is calculated using the methodology set by Ofgem for
each year of RIIO-ED1 (1 April 2016 to 31 March 2023) and for the
year ended 31 March 2020 is GBP1,896m (2019: GBP1,820m) based on
the actual retail price index (RPI) for March .
Notes to the Financial Statements (continued)
16. Trade and other receivables (continued)
At 31 March 2020 GBP132.0m (2019: GBP133.8m) of unsecured credit
limits had been granted to customers and the highest unsecured
credit limit given to any single customer was GBP7.2m (2019:
GBP6.9m). All of the customers granted credit of this level must
have a credit rating of at least A- from Standard and Poor's and A3
from Moody's Investor Services or a guarantee from a parent company
of an equivalent rating. Alternatively, the customer must be able
to prove their creditworthiness on an ongoing basis.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
17. Cash and cash equivalents and money market deposits
2020 2019
Group and Company GBPm GBPm
========================== ==== =====
Cash and cash equivalents 56.2 22.7
Balance at 31 March 56.2 22.7
========================== ==== =====
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 0.48% (2019: 0.79%) and these deposits had an
average maturity of 1 day (2019: 1 day).
Notes to the Financial Statements (continued)
18. Trade and other payables
Group Company Group Company
2020 2020 2019 2019
GBPm GBPm GBPm GBPm
================================================== ===== ======= ===== ========
Trade payables 13.8 13.8 13.9 13.9
Amounts owed to affiliated undertakings (Note 31) 3.9 3.9 3.8 3.8
Amounts owed to subsidiary undertakings (Note 31) - 15.4 - 15.4
Other taxation and social security 13.7 13.7 8.5 8.5
Customer contributions (Note 25) 20.3 20.3 24.6 24.6
Refundable customer deposits (Note 26) 3.3 3.3 2.2 2.2
Accruals and deferred income 71.2 71.5 67.6 67.9
================================================== ===== ======= ===== ========
Balance at 31 March 126.2 141.9 120.6 136.3
================================================== ===== ======= ===== ========
Trade payables and accruals principally comprise amounts
outstanding for capital purchases and ongoing costs. The average
credit period in the year was 19 days from receipt of invoice
(2019: 19 days).
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
19. Borrowings
This note provides information about the contractual terms of
the Group's loans and borrowings. For more information about the
Group's financial risk management and exposure to credit risk,
liquidity risk and market risk see Note 21.
2020 2019
Group and Company GBPm GBPm
================================================= ======= =======
Current liabilities
Bank and other term borrowings 7.0 6.8
Lease liabilities (Note 20) 1.9 -
------------------------------------------------- ------- -------
8.9 6.8
------------------------------------------------- ------- -------
Non-current liabilities
Bonds 634.4 634.8
Bank and other term borrowings 282.0 253.0
Lease liabilities (Note 20) 3.6 -
Amounts owed to parent undertaking (Note 31) 77.4 75.3
Amounts owed to affiliated undertaking (Note 31) 199.3 198.7
------------------------------------------------- ------- -------
1,196.7 1,161.8
Total borrowings 1,205.6 1,168.6
================================================= ======= =======
Notes to the Financial Statements (continued)
19. Borrowings (continued)
Carrying value by category
The carrying values by category of financial instruments were as
follows:
2020 2019
Nominal value Interest rate Maturity Carrying Carrying
value value
Group and Company GBPm % year GBPm GBPm
======================================= ============= ============= ======== ======== ========
Borrowings measured at amortised cost:
Bond 200.0 8.875% 2026 197.5 197.1
Bond 250.0 8.875% 2026 286.5 291.5
Index-linked bond 100.0 1.4746%+RPI 2046 150.4 146.3
Index-linked loan 135.0 1.5911%+RPI 2024 172.5 168.8
Index-linked loan 50.0 0.38% +RPI 2032 41.8 44.1
Index-linked loan 50.0 0%+RPI 2033 44.8 46.9
Revolving credit facility 50.0 Libor+0.35% 2022 29.9 (0.1)
Lease liabilities (Note 20) 5.5 -
Amounts owed to parent undertaking 125.0 2.65% 2023 77.4 75.3
Amounts owed to affiliated undertaking 200.0 6.125% 2021 199.3 198.7
--------------------------------------- ------------- ------------- -------- -------- --------
Total borrowings 1,205.6 1,168.6
======================================= ============= ============= ======== ======== ========
The following table provides a reconciliation of the opening and
closing debt amounts.
Group and Company 2020 2019
GBPm GBPm
==================================================================== ======== ========
At 1 April 1,168.6 1,237.3
Remeasurement on transition to IFRS 9 - (71.0)
Recognition of lease liabilities on transition to IFRS 16 (Note 1) 6.7 -
Proceeds from external borrowings 30.0 -
Repayments of external borrowings (7.0) (6.7)
Repayments of lease liabilities - capital (Note 1) (1.2) -
Movement of inter-company loan from parent 2.1 1.6
Indexation (Note 9) 10.2 11.4
Amortisation of transaction costs, bond discounts and premiums (3.8) (4.0)
At 31 March 1,205.6 1,168.6
==================================================================== ======== ========
Notes to the Financial Statements (continued)
19. Borrowings (continued)
As at 31 March 2020 all loans and borrowings are unsecured and
are in sterling (2019: same). There were no formal bank overdraft
facilities in place (2019: same). The fair values of the Group's
financial instruments are shown in Note 21.
Borrowing facilities
The Group and Company had GBP20m (2019: GBP50m) unutilised
committed bank facilities at 31 March 2020; GBPnil (2019: GBPnil)
expires within one year, GBP20.0m (2019: GBPnil) expires after one
year but less than two years and GBPnil (2019: GBP50m) expires in
more than two years.
20. Leases
Group Company Group Company
2020 2020 2019 2019
GBPm GBPm GBPm GBPm
============================ ===== ======= ===== =======
Lease assets:
Land and buildings 2.5 - - -
Telecom 0.2 - - -
Vehicles 2.4 - - -
---------------------------- ----- ------- ----- -------
Total assets (Note 13) 5.1 - - -
============================ ===== ======= ===== =======
Lease liabilities:
Land and buildings 2.9 - - -
Telecom 0.2 - - -
Vehicles 2.4 - - -
---------------------------- ----- ------- ----- -------
Total liabilities (Note 21) 5.5 - - -
============================ ===== ======= ===== =======
IFRS 16 was adopted on 1 April 2019 and the modified
retrospective approach has been applied, without restatement of
comparatives. The lease liabilities have been discounted at 5% for
telecom, land and buildings, and at 6% for vehicles.
The following is an analysis of the maturity profile of the
lease liabilities.
<1 year 1 - 2 years 2 - 3 years 3 - 4 years >4 years Total
Group and Company GBPm GBPm GBPm GBPm GBPm GBPm
=================== ======== ============ ============ ============ ========= ======
At 31 March 2020:
Total liabilities 1.9 2.0 0.7 0.2 0.7 5.5
=================== ======== ============ ============ ============ ========= ======
Notes to the Financial Statements (continued)
21. Financial instruments
The Group uses financial instruments to invest liquid asset
balances, raise funding and manage the risks arising from its
operations.
The principal risks to which the Group is exposed and which
arise in the normal course of business include credit risk,
liquidity risk and market risk, in particular interest rate risk
and inflation risk. Derivative financial instruments are used to
change the basis of interest cash flows from fixed to either
inflation-linked or an alternative fixed profile to more accurately
match the revenue profile.
The Board has authorised the use of derivatives by the Group to
reduce the risk of loss arising from changes in market risks, and
for economic hedging reasons.
The accounting policy for derivatives is provided in Note 2.
Categories of financial instruments
Group Company Group Company
2020 2020 2019 2019
Group and Company GBPm GBPm GBPm GBPm
=================================================== ========= ========= ========= =========
Financial assets:
Cash and cash equivalents (Note 17) 56.2 56.2 22.7 22.7
Trade and other receivables (Note 16) 50.3 50.3 47.3 47.3
Financial liabilities:
Derivative instruments at FVTPL (416.9) (416.9) (404.6) (404.6)
Financial liabilities at amortised costs (Note 19) (1,205.6) (1,205.6) (1,168.6) (1,168.6)
Trade and other payables (Note 18) (64.2) (64.2) (66.0) (66.0)
=================================================== ========= ========= ========= =========
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
significant types of financial risk are credit risk, liquidity risk
and market risk. Market risk includes foreign exchange, interest
rate, inflation and equity price risks.
The only material exposure the Group has to foreign exchange
risk or equity price risk relates to the assets of the defined
benefit pension scheme, that are managed by the pension scheme
investment managers.
The Group's risk management policies are designed to identify
and analyse these risks, to set appropriate risk limits and
controls and to monitor the risks and limits continually by means
of reliable and up to date systems. The Group modifies and enhances
its risk management policies and systems to reflect changes in
markets and products. The Audit Committee is responsible for
independently overseeing the activities in relation to Group risk
management. The Group's treasury function, which is authorised to
conduct the day-to-day treasury activities of the Group, reports on
a regular basis to the Committee.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
The Group's processes for managing risk and the methods used to
measure risk have not changed since the prior year. In the year,
the Group's policies in relation to the management of credit risk,
risk limits and minimum credit ratings of counterparties have been
reviewed and updated as appropriate to reflect changes to market
conditions and the associated level of perceived risks.
Credit risk
The Group takes on exposure to credit risk, which is the risk
that financial loss arises from the failure of a customer or
counterparty to meet its obligations under a contract as they fall
due. Credit risk arises principally from trade finance and treasury
activities. The Group has dedicated standards, policies and
procedures to control and monitor credit risk.
Treasury activities
The counterparties under treasury activities consist of
financial institutions. In accordance with IFRS, the Directors have
considered and quantified the exposure of the Group to counterparty
credit risk and a credit risk adjustment is made where required
(see the section on Fair Values below). The exposure to
counterparty credit risk is updated at each reporting date.
Although the Group is potentially exposed to credit loss in the
event of non-performance by counterparties, such credit risk is
controlled through regular credit rating reviews of the
counterparties and by limiting the total amount of exposure to any
one party. Management does not anticipate any counterparty will
fail to meet its obligations.
The Directors do not believe that the Group is exposed to any
material concentrations of credit risk in relation to treasury
investments, including amounts on deposit with counterparties. As
at 31 March 2020, none (2019: none) of the Group's treasury
portfolio exposure was either past due or impaired, and no terms
had been re-negotiated with any counterparty. The Group has limits
in place to ensure counterparties have a certain minimum credit
rating, and individual exposure limits to ensure there is no
concentration of credit risk.
The table below provides details of the ratings of the Group's
treasury portfolio, including cash and cash equivalents, money
market deposits and derivative asset positions (prior to IFRS 13
credit risk adjustment):
2020 2020 2019 2019
Group and Company GBPm % GBPm%
================== ==== ===== ==== ====
AAA 23.2 29.7 13.3 25.7
AA - - --
AA- 1.7 2.1 3.7 7.2
A+ 33.7 43.1 10.0 19.3
A 19.7 25.1 24.7 47.8
================== ==== ===== ==== =====
78.3 100.0 51.7 100.0
================== ==== ===== ==== =====
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Trade receivables
Significant changes in the economy or in the utilities sector
could result in losses not necessarily provided for at the
Statement of Financial Position date. Credit risk in relation to
trade receivables is considered to be relatively low, due to the
small number of principal customers; there are only three (2019:
three) principal customers, see Note 4. Each of these customers has
a contract in place with the Group, and is required to provide
collateral in the form of a cash deposit subject to the amounts due
and their credit rating. Whilst the loss of one of the principal
customers could have a significant impact on the Group, due to the
small number of these, the exposure to such credit losses would be
mitigated in most cases by the protection the regulator provides to
cover such losses. Nonetheless, the credit management process must
be closely adhered to, to avoid such circumstances, and the Group's
management, therefore, closely monitor adherence to this process,
including closely monitoring the credit worthiness of each of these
customers.
At 31 March 2020 there was GBP4.6m receivables past due (2019:
GBP4.8m) against which an allowance for doubtful debts of GBP1.3m
has been made (2019: GBP1.3m).
Exposure to credit risk
The table below shows the maximum exposure to credit risk,
represented by the carrying value of each financial asset in the
Statement of Financial Position. For trade receivables, the value
is net of any collateral held in cash deposits (see Note 16 for
further details).
2020 2019
Group and Company GBPm GBPm
============================================= ==== =====
Trade receivables (Note 16) 7.9 5.3
Amounts owed by Group undertakings (Note 16) 5.8 4.5
Cash and cash equivalents (Note 17) 56.2 22.7
============================================= ==== =====
Balance at 31 March 69.9 32.5
============================================= ==== =====
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient funds to meet the obligations or commitments resulting
from its business operations or associated with its financial
instruments, as they fall due. The Group manages the liquidity
profile of its assets, liabilities and commitments so that cash
flows are appropriately balanced and all funding obligations are
met when due. This is achieved through maintaining a prudent level
of liquid assets, and arranging funding facilities.
The Board is responsible for monitoring the maturity of
liquidity and deposit funding balances and taking any action as
appropriate. A long-term view of liquidity is provided by Group
financial models which currently project cash flows out 28 years
ahead, to the end of the Regulatory Period ending 31 March 2048. A
medium-term view is provided by the Group business plan covering
the remainder of the current Regulatory Period ending 31 March
2023, which is updated and approved annually by the Board. The
Board has approved a liquidity framework within which the business
operates, including the maintenance of a minimum of 18 months
liquidity, subject to excluding any ENWL and ENW Finance plc debt
maturing between 12 and 18 months whilst maintaining appropriate
credit ratings.
Available liquidity at 31 March was as follows:
2020 2019
Group and Company GBPm GBPm
================================== ==== =====
Cash and cash equivalents 56.2 22.7
Committed undrawn bank facilities 20.0 50.0
================================== ==== =====
Balance at 31 March 76.2 72.7
================================== ==== =====
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
(2019: none).
At 31 March 2020, the Group and Company had committed undrawn
bank facilities of GBP20.0m (2019: GBP50.0m), including GBPnil
(2019: GBPnil) expiring within one year, GBP20.0m (2019: GBPnil)
expiring after one year but less than two years and GBPnil (2019:
GBP50.0m) expiring in more than two years.
The Group gives consideration to the timing of scheduled
payments to avoid the risks associated with the concentration of
large cash flows within particular time periods. The Group uses
economic hedges to ensure that certain cash flows can be
matched.
The following is an analysis of the maturity profile of
contractual cash flows of financial liabilities, including
principal and interest payable under financial liabilities and
derivative financial instruments on an undiscounted basis.
Derivative cash flows have been shown net; all other cash flows are
shown gross.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
<1 year 1 - 2 years 2 - 3 years 3 - 4 years >4 years Total
Group and Company GBPm GBPm GBPm GBPm GBPm GBPm
====================================== ======== ============ ============ ============ ========== ==========
At 31 March 2020:
Trade payables (13.8) - - - - (13.8)
Refundable customer deposits (3.3) - - - - (3.3)
Amounts owed to parent undertaking (2.0) (2.0) (80.0) - - (84.0)
Amounts owed to affiliated companies (12.3) (206.1) - - - (218.4)
Bonds (42.2) (42.2) (42.2) (42.2) (731.8) (900.6)
Borrowings and overdrafts (39.9) (9.9) (9.9) (182.4) (59.6) (301.7)
Derivative financial instruments 9.6 4.1 (9.6) (42.1) (264.1) (302.1)
(103.9) (256.1) (141.7) (266.7) (1,055.5) (1,823.9)
====================================== ======== ============ ============ ============ ========== ==========
At 31 March 2019:
Trade payables (13.9) - - - - (13.9)
Refundable customer deposits (2.2) - - - - (2.2)
Amounts owed to parent undertaking (2.0) (2.0) (2.0) (77.9) - (83.9)
Amounts owed to affiliated companies (12.3) (12.3) (206.1) - - (230.7)
Bonds (42.1) (42.1) (42.1) (42.1) (769.1) (937.5)
Borrowings and overdrafts (9.6) (9.6) (9.6) (9.6) (236.3) (274.7)
Derivative financial instruments 9.8 9.8 4.7 (8.0) (266.2) (249.9)
(72.3) (56.2) (255.1) (137.6) (1,271.6) (1,792.8)
====================================== ======== ============ ============ ============ ========== ==========
Market risk
Market risk is the risk that future cash flows of a financial
instrument, or the fair value of a financial instrument, will
fluctuate because of changes in market prices. Market prices
include foreign exchange rates, interest rates, inflation, equity
and commodity prices. The main types of market risk to which the
Group is exposed are interest rate risk and inflation risk, and
these are explained below.
The Board is required to review and approve policies for
managing these risks on an annual basis. The Board approves all new
interest rate swaps and index-linked swaps entered into. The
management of market risk is undertaken by reference to risk
limits, approved by the Chief Financial Officer or Treasurer under
delegated authority from the Board.
The Group has no significant foreign exchange, equity or
commodity exposure.
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.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Interest rate risk
Interest rate risk is the risk that either future cash flows of
a financial instrument, or the fair value of a financial
instrument, will fluctuate because of changes in market interest
rates. The Group's floating rate borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
interest rates. The Group's fixed rate borrowings and derivatives
are exposed to a risk of change in their fair value due to changes
in interest rates. Investments in short-term receivables and
payables are not exposed to interest rate risk due to their
short-term nature.
The Group uses derivative financial instruments to change the
basis of interest cash flows from fixed to either inflation-linked
or an alternative fixed profile to more accurately match the
revenue profile. The cash flows exchanged under the derivatives are
calculated by reference to a notional principal amount. The
notional principal reflects the extent of the Group's involvement
in the instruments, but does not represent its exposure to credit
risk, which is assessed by reference to the fair value.
Sensitivity analysis on interest
The following sensitivity analysis is used by Group management
to monitor interest rate risk and shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given interest rate movement.
As fair value movements are taken to the Income Statement, there
would be a corresponding adjustment to profit in these scenarios
(figures in brackets represent a reduction to profit). However,
there would be no direct cash flow impact arising from these
adjustments.
The sensitivity figures are calculated based on a downward
parallel shift of 0.5% and upward parallel shifts of 0.5% and 1% in
the yield curve, a range in outcomes that management deem
reasonably possible within the next financial year.
Group and Company 2020 2019
+1% +1%
GBPm GBPm
====== ======
Change in interest rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
============================== ======= ====== ====== ======= ====== ======
Inflation-linked swaps (57.7) 52.0 99.0 (66.7) 46.3 94.5
Total finance expense impact (57.7) 52.0 99.0 (66.7) 46.3 94.5
============================== ======= ====== ====== ======= ====== ======
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 2020, the Group had GBP30.0m floating rate borrowings
(2019: GBPnil). The analysis below shows the impact on profit for
the year if interest rates over the course of the year had been
different from the actual rates.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Group and Company 2020 2019
+1% +1%
GBPm GBPm
====== ======
Change in interest rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
========================= ====== ====== ====== ====== ====== ======
Floating rate borrowings - - - - - -
========================= ====== ====== ====== ====== ====== ======
Total cash flow impact - - - - - -
========================= ====== ====== ====== ====== ====== ======
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, a range in outcomes that management deem
reasonably possible within the next financial year.
Group and Company 2020 2019
+1% +1%
GBPm GBPm
======== ========
Change in inflation rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
============================== ====== ======= ======== ====== ======= ========
Inflation-linked swaps 66.7 (73.2) (153.7) 42.8 (45.3) (100.6)
------------------------------ ------ ------- -------- ------ ------- --------
Total finance expense impact 66.7 (73.2) (153.7) 42.8 (45.3) (100.6)
============================== ====== ======= ======== ====== ======= ========
The sensitivity analysis above shows the amount by which the
fair value of items recorded on the Statement of Financial Position
at fair value would be adjusted for a given inflation rate
movement. As fair value movements are taken to the Income
Statement, there would be a corresponding adjustment to profit in
these scenarios (figures in brackets represent a reduction to
profit). However, there would be no direct cash flow impact arising
from these adjustments.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
The Group's inflation-linked borrowings and derivatives are
exposed to a risk of change in cash flows due to changes in
inflation rates. The analysis below shows the impact on profit for
the year if inflation rates over the course of the year had been
different from the actual rates. The change in indexation has a
corresponding impact on the carrying value of the inflation-linked
debt.
Group and Company 2020 2019
+1% +1%
GBPm GBPm
====== ======
Change in inflation rates -0.5% +0.5% -0.5% +0.5%
GBPm GBPm GBPm GBPm
================================================= ====== ====== ====== ====== ====== ======
Inflation-linked borrowings - indexation charge 2.1 (2.1) (4.0) 2.1 (2.1) (4.0)
Inflation-linked borrowings - interest charge - - (0.1) - - (0.1)
Inflation-linked swaps - interest charge 0.1 (0.1) (0.1) 0.1 (0.1) (0.1)
------------------------------------------------- ------ ------ ------ ------ ------ ------
Total finance expense impact 2.2 (2.2) (4.2) 2.2 (2.2) (4.2)
================================================= ====== ====== ====== ====== ====== ======
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Change in liabilities arising from financing activities
The table below shows changes in the Group's liabilities arising
from financing activities, including both cash and non-cash
changes. Liabilities arising from financing activities are those
for which cash flows were, or future cash flows will be, classified
in the Group's consolidated cash flow statement as cash flows from
financing activities.
Non-cash changes
Group and Amounts on
Company At 31 March Financing transition Fair value Other At 31 March
2019 cash flows to IFRS 16 movement Indexation changes 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ============= ============= ============ ============= =========== ============= =============
Bonds 634.8 - - - 4.1 (4.5) 634.4
Bank
borrowings 259.8 23.0 - - 6.1 0.1 289.0
Lease
liabilities - (1.2) 6.7 - - - 5.5
Amounts owed
to parent 75.3 2.1 - - - - 77.4
Amount owed
to affiliate 198.7 - - - - 0.6 199.3
Derivatives 404.6 - - 12.3 - 416.9
1,573.2 23.9 6.7 12.3 10.2 (3.8) 1,622.5
============== ============= ============= ============ ============= =========== ============= =============
Non-cash changes
Group and Amounts on
Company At 31 March Financing transition Fair value Other At 31 March
2018 cash flows to IFRS 9 movement Indexation changes 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ============= ============= ============ ============= =========== ============= =============
Bonds 705.6 - (71.0) - 4.6 (4.4) 634.8
Bank
borrowings 259.8 (6.7) - - 6.8 (0.1) 259.8
Lease - - - - - - -
liabilities
Amounts owed
to parent 73.7 1.6 - - - - 75.3
Amount owed
to affiliate 198.2 - - - - 0.5 198.7
Derivatives 357.3 - - 47.3 - - 404.6
1,594.6 (5.1) (71.0) 47.3 11.4 (4.0) 1,573.2
============== ============= ============= ============ ============= =========== ============= =============
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Derivative financial instruments
The Group uses derivative financial instruments to change the
basis of interest cash flows from fixed to inflation-linked to more
accurately match the revenue profile. The table below summarises
the various external derivatives held by the Group at 31 March 2020
(2019: same); each category includes multiple instruments and the
pay leg rate stated is the aggregate rate for that category.
Notional Number Type Maturity Pay Leg Receive Leg Accretion
========== ======= ============= ========= ============= ============= ====================
GBP200m* 14 Index-linked 2038 3.56% + RPI, 6.125%, 5-yearly,
semi-annual semi-annual next due July 2022
7-yearly,
next due July 2023
GBP100m** 4 Index-linked 2050 1.51%+RPI, 8.875%, 10-yearly,
semi-annual annual next due Sept 2030
========== ======= ============= ========= ============= ============= ====================
*6.125% up to and including the 21 July 2021 settlement date,
then changes to 6m Libor for the remaining term of the
instruments.
**8.875% up to and including the 26 March 2026 settlement date,
then changes to 6m Libor for the remaining term of the
instruments.
The Company also has two inter-company swaps with ENW Finance
plc. The first is a back-to-back swap, mirroring the terms of the
GBP200m notional external swaps. The second is a mirror of that
back-to-back swap, the terms of which are defined in the GBP200m
inter-company loan between the two entities; this is an embedded
derivative that is bifurcated from the host contract and recorded
as a separate instrument.
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 2020, the Group's
derivatives are not designated in formal hedging relationships
(2019: same), and instead are measured at fair value through the
Income Statement.
Notes to the Financial Statements (continued)
21. 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. Cash and cash
equivalents, trade and other receivables and trade and other
payables are excluded as the book values approximate to the fair
values because of their short-term nature.
2020 2020 2019 2019
Carrying value Fair Carrying value Fair
GBPm value GBPm value
GBPm GBPm
================ ========== ================ ==========
Group and Company
================================================= ================ ========== ================ ==========
Non-current liabilities:
Borrowings measured at amortised cost (Note 19) (928.9) (1,180.8) (894.6) (1,134.3)
Amounts due to parent undertaking (Note 19) (77.4) (77.4) (75.3) (75.3)
Amounts due to affiliated companies (Note 19) (199.3) (212.3) (198.7) (221.2)
Derivative financial instruments (416.9) (416.9) (404.6) (404.6)
================================================= ================ ========== ================ ==========
(1,622.5) (1,887.4) (1,573.2) (1,835.4)
================================================= ================ ========== ================ ==========
The value of derivatives is disclosed gross of any collateral
held. At 31 March 2020, the group held GBPnil (2019: GBPnil) as
collateral in relation to derivative financial instruments,
included within current liabilities (see Note 18). The cash
collateral does not meet the offsetting criteria in IAS 32:42, but
it can be set off against the net amount of the derivatives in the
case of default and insolvency or bankruptcy, in accordance with
associated collateral arrangements.
Fair value measurements recognised in the Statement of Financial
Position
Financial instruments that are measured subsequent to initial
recognition at fair value are grouped into Levels 1 to 3 based on
the degree to which the fair value is observable:
-- Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
-- Level 2 fair value measurements are those derived from inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
-- Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable
inputs).
Where available, market values have been used to determine fair
values (see Level 1 in the fair value hierarchy above).
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Fair value measurements recognised in the Statement of Financial
Position (continued)
Where market values are not available, fair values have been
calculated by discounting future cash flows at prevailing interest
and RPI rates sourced from market data (see Level 2 in the fair
value hierarchy above) in accordance with IFRS 13, an adjustment
for non-performance risk has then been made to give the fair
value.
The non-performance risk has been quantified by calculating
either a credit valuation adjustment (CVA) based on the credit risk
profile of the counterparty, or a debit valuation adjustment (DVA)
based on the credit risk profile of the relevant group entity,
using market-available data.
Whilst the majority of the inputs to the CVA and DVA
calculations meet the criteria for Level 2 inputs, certain inputs
regarding the Group's credit risk are deemed to be Level 3 inputs,
due to the lack of market-available data. The credit risk profile
of the Group has been built using the few market-available data
points, e.g. credit spreads on the listed bonds, and then
extrapolated over the term of the derivatives. It is this
extrapolation that is deemed to be Level 3. All other inputs to
both the underlying valuation and the CVA and DVA calculations are
Level 2 inputs.
For certain derivatives, the Level 3 inputs form an
insignificant part of the fair value and, as such, these
derivatives are disclosed as Level 2. Otherwise, the derivatives
are disclosed as Level 3.
The adjustment for non-performance risk, as at 31 March 2020, is
GBP106.8m (2019: GBP100.5m), of which GBP106.3m (2019: GBP100.3m)
is classed as Level 3.
On entering certain derivatives, the valuation technique used
resulted in a fair value loss. As this, however, was neither
evidenced by a quoted price nor based on a valuation technique
using only data from observable markets, this loss on initial
recognition was not recognised. This was supported by the
transaction price of nil. This difference is being recognised in
profit or loss on a straight-line basis over the life of the
derivatives. The aggregate difference yet to be recognised in
profit or loss is GBP56.6m (2019: GBP60.7m). The movement in the
period all relates to the straight-line release to profit or
loss.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
Group 2020 2019
GBPm GBPm
========================================== ======== ========
FV of derivatives pre IFRS 13 adjustment (580.3) (565.8)
CVA/DVA adjustment 106.8 100.5
Day 1 adjustment 56.6 60.7
IFRS 13 FV of derivatives (416.9) (404.6)
========================================== ======== ========
The following table provides an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which
the fair value is observable:
Group and Company Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
=========================================== ========= ======== ======== ========
At 31 March 2020:
Derivative financial liabilities:
-GBP300m notional inflation-linked swaps - (12.6) (404.3) (416.9)
- (12.6) (404.3) (416.9)
----------------------------------------------------- -------- -------- --------
At 31 March 2019:
Derivative financial liabilities:
-GBP300m notional inflation-linked swaps - (9.2) (395.4) (404.6)
- (9.2) (395.4) (404.6)
===================================================== ======== ======== ========
The following table provides a reconciliation of the fair value
amounts disclosed as Level 3.
Group and Company 2020 2019
GBPm GBPm
============================================== ======== ========
At 1 April (395.4) (322.7)
Transfers into Level 3 from Level 2 - (30.0)
Transfers from Level 3 into Level 2 - 2.3
Total gains or losses in profit or loss;
- On transfers into Level 3 from Level 2 - (8.2)
- On instruments carried forward in Level 3 (8.9) (36.8)
============================================== ======== ========
At 31 March (404.3) (395.4)
============================================== ======== ========
The movement in the fair values of the derivative portfolio was
solely due to fair value movements; there were no additional swaps
entered, nor any swaps closed out, during the year.
Notes to the Financial Statements (continued)
21. Financial instruments (continued)
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.
2020 2020 2019 2019
-10bps +10bps -10bps -10bps
GBPm GBPm GBPm GBPm
======== ======== ======== ========
Group and Company
======================== ======== ======== ======== ========
Inflation-linked swaps (2.0) 1.9 (2.2) 2.1
======================== ======== ======== ======== ========
Fair value measurements disclosed but not recognised in the
Statement of Financial Position
Group and Company Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
======================================= ========== ======== ======== ==========
At 31 March 2020:
Borrowings measured at amortised cost (1,180.8) - - (1,180.8)
Amounts due to affiliated companies (212.3) - - (212.3)
======================================= ========== ======== ======== ==========
(1,393.1) - - (1,393.1)
At 31 March 2019:
Borrowings measured at amortised cost (1,127.5) - - (1,127.5)
Amounts due to affiliated companies (221.2) - - (221.2)
======================================= ========== ======== ======== ==========
(1,348.7) - - (1,348.7)
======================================= ========== ======== ======== ==========
Notes to the Financial Statements (continued)
22. Retirement benefit schemes
Group and Company
Nature of Scheme
The Group's defined benefit arrangement is the Electricity North
West Group of the ESPS ("the Scheme") and forms part of the
Electricity Supply Pension Scheme (ESPS). Up to 31 March 2011 the
Scheme was split into two sections. However, following the
'hive-up' of the assets and liabilities of Electricity North West
Number 1 Company Ltd to the Company and the termination of the
Asset Services Agreement between the two companies on 31 March
2011, the two sections were merged as at that date.
The Scheme contains both a defined benefit section and a defined
contribution section. The defined benefit section of the Scheme
closed to new entrants on 1 September 2006, with new employees of
the Group subsequently provided with access to the defined
contribution section.
The defined benefit section is a UK funded final salary
arrangement providing pensions and lump sums to members and
dependants. The defined benefit section is a separate fund that is
legally separated from the entity. The Trustee board of the Scheme
is composed of representatives from both the employer and members
of the Scheme. Under the Pensions Act 2004 at least one third of
the Trustee Board must be member nominated and the Trustee Board
has made the necessary arrangements to fulfil this obligation. The
Trustee Board of the Scheme is required by law to act in the
interest of the Scheme and all relevant stakeholders of the Scheme,
i.e. active employees, retirees and employers. The Trustee Board is
responsible for the operation, funding and investment strategy of
the Scheme.
During the year, the scheme completed a pensioner buy-in for
around 80% of the its pensioner liabilities. This has the effect of
removing longevity and investment risks for this part of the
membership. The gross liability remains recognised on the balance
sheet, with an equivalent insurance asset recognised. The impact of
the purchase of the pensioner buy-in has been recognised as part of
Other Comprehensive Income in the year.
During the year the Group made contributions of GBP30.3m (2019:
GBP30.8m) to the defined benefit section of the Scheme. This
includes GBP18.3m (2019: GBP17.8m) of deficit contributions. The
Group estimates that contributions for the year ending 31 March
2021 will amount to around GBP29.8m which includes GBP18.9m of
expected deficit contribution payments. The total defined benefit
pension expense for the year was GBP15.2m(2019: GBP21.2m). No
Executive Directors were part of the defined benefit scheme.
As at 31 March 2020 contributions of GBP2.5m (2019: GBP2.5m)
relating to the current reporting period had not been paid over to
the defined benefit Scheme.
Defined benefit assets are measured at fair value while
liabilities are measured at present value. The difference between
the two amounts is recognised as a surplus or obligation in the
Statement of Financial Position.
The most recent triennial funding valuation of the scheme was
carried out as at 31 March 2019 and identified a shortfall of
GBP69.5m against the Trustee Board's statutory funding objective.
In addition to the timing of the two valuations, the contributions
made in the period and the return on assets, the main difference is
due to the different assumptions used by the IAS 19 and the funding
valuation. In the event of underfunding, the Group must agree a
deficit recovery plan with the Trustee Board within statutory
deadlines. As part of the 2019 actuarial valuation, the Group
agreed to eliminate the shortfall by paying additional annual
contributions in the period to March 2023.
Notes to the Financial Statements (continued)
22. Retirement benefit schemes (continued)
Funding the liabilities
UK legislation requires the Trustee Board to carry out
valuations at least every three years and to target full funding
against a basis that prudently reflects the Scheme's risk exposure.
The most recent valuation was carried out as at 31 December 2019
and identified a shortfall of GBP69.5m 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 2019 actuarial valuation the
Group agreed to remove the shortfall by paying annual contributions
to 2023.
The results of the 2019 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 2020 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 GBP26.2m is included
in the Statement of Financial Position at 31 March 2020 (2019:
surplus of GBP32.8m).
The weighted average duration of the defined benefit obligation
is approximately 17 years (2019: 19 years).
Investment risks
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 Scheme Trustee to ensure these interests are
considered alongside those of the members of the pension
scheme.
Other risks
In addition to investment risks, the Scheme exposes the Group to
other risks, such as longevity risk, inflation risk, interest rate
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. In
particular in October 2019 the Scheme completed a pensioner buy-in
with Scottish Widows for around 80% of the Scheme's pensioner
liabilities. This had the effect of removing longevity and
investment risks for this part of the membership.
COVID-19 risks
The COVID-19 pandemic began to unfold in early 2020 and
continues to progress. The negative impact on asset valuations
through March was significant. For traded asset classes, a value as
at 31 March was available and has been used in the pension scheme
asset valuation. However, the scheme also contains a number of
unquoted asset classes, especially in real estate, the valuation of
which is less certain. Independent investment manager expertise has
guided the asset valuations used for these less liquid assets. As
such there is an increased level of estimation uncertainty around
certain valuations as at 31 March 2020.
Notes to the Financial Statements (continued)
22. Retirement benefit schemes (continued)
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).
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 2020
was GBP5.7m (2019: GBP4.9m) and represents contributions payable to
the Scheme at rates specified in the rules of the Scheme. As at 31
March 2020 contributions of GBPnil (2019: 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 2020 2019
GBPm GBPm
============================================================ ====== ======
At 1 April 32.8 (18.2)
Expense recognised in the Income Statement (15.2) (21.2)
Contributions paid 30.3 30.8
Total re-measurement included in Other Comprehensive Income (74.1) 41.4
At 31 March (26.2) 32.8
The balance recognised in the Statement of Financial Position is
as follows:
Group and Company 2020 2019
GBPm GBPm
Present value of defined benefit obligations (1,317.9) (1,372.1)
Fair value of plan assets 1,291.7 1,405.9
Net (liability)/ asset arising from defined benefit obligation (26.2) 32.8
Notes to the Financial Statements (continued)
22. Retirement benefit schemes (continued)
Movements in the fair value of the Group defined benefit
obligations are as follows:
Group and Company 2020 2019
GBPm GBPm
At 1 April 1,372.1 1,388.2
Current service cost 15.0 15.5
Interest expense 32.3 35.4
Member contributions 1.6 1.7
Past service costs:
Augmentation - 0.6
GMP equalisation - 4.1
Re-measurement:
Effect of changes in demographic assumptions 12.4 (68.2)
Effect of changes in financial assumptions (43.4) 71.3
Effect of experience adjustments (6.5) -
Benefits paid (65.6) (76.5)
At 31 March 1,317.9 1,372.1
The liability value as at 31 March is made up of the following
approximate splits:
Group and Company 2020 2019
GBPm GBPm
Liabilities owing to active members 394.0 473.6
Liabilities owing to deferred members 83.0 70.5
Liabilities owing to pensioner members 840.9 828.0
Total liability at 31 March 1,317.9 1,372.1
Movements in the fair value of the Group Pension Scheme assets
were as follows:
Group and Company 2020 2019
GBPm GBPm
At 1 April 1,404.9 1,370.0
Interest income 33.3 35.1
Return on plan assets (net of interest income) (111.6) 44.5
Employer contributions 30.3 30.8
Member contributions 1.6 1.7
Benefits paid (65.6) (76.5)
Scheme administration expenses (1.2) (0.7)
At 31 March 1,291.7 1,404.9
Notes to the Financial Statements (continued)
22. 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 2020 2019
GBPm GBPm
======
Current service cost (15.0) (15.5)
Past service cost:
Augmentation - (0.6)
GMP equalisation - (4.1)
Interest income on plan assets 33.3 35.1
Interest (expense) on Scheme obligations (32.3) (35.4)
Administration expenses (1.2) (0.7)
Net pension expense before taxation (15.2) (21.2)
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 finance expense (Note
9).
The amounts recognised in Other Comprehensive Income is as
follows:
Group and Company 2020 2019
GBPm GBPm
Return on scheme assets excluding interest income (111.6) 44.4
Actuarial (losses)/ gains arising from changes in demographic assumptions (12.4) 68.4
Actuarial gains/ (losses) arising from changes in financial assumptions 43.4 (71.3)
Experience gains on liabilities 6.5 -
Total (loss)/ gain recognised in Other Comprehensive Income (74.1) 41.5
Notes to the Financial Statements (continued)
22. Retirement benefit schemes (continued)
In the prior year, past-service costs of GBP4.1m have been
recognised relating to the estimated cost of equalising Guaranteed
Minimum Pensions (GMPs) earned after 17 May 1990 between men and
women. The Scheme has to provide GMPs which, as a result of
statutory rules, have been calculated differently for men and
women. Although equal treatment in pension provision for males and
females has been required since 1990, there has been uncertainty on
whether, and how, pension schemes are required to equalise GMPs. A
High Court judgement on the Lloyds Banking Group hearing was
published on 26 October 2018. The judgement confirmed that GMPs
earned from 1990 must be equalised and highlighted an acceptable
range of methods. The estimated cost of this equalisation is
GBP4.1m. This represents the Directors' best estimate of the cost,
based on actuarial advice. However, the final cost will differ from
this amount when the actual method of equalisation is agreed with
the Trustee and subsequently implemented.
The main financial assumptions used by the actuary (in
determining the deficit) were as follows:
Group and Company 2020 2019
% %
Discount rate 2.20 2.40
Pensionable salary increases 2.70 3.25
Pension increases 2.70 3.10
Price inflation (RPI) 2.70 3.25
The mortality rates utilised in the valuation are based on the
standard actuarial tables SAPS S2 (birth year) tables with a
loading of 100% for male pensioners (2019: 95%), 95% for female
pensioners (2019: 90%), 110% for male non-pensioners/future
pensioners (2019: 105%) and 105% for female non-pensioners/future
pensioners (2019: 100%). 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 2019 model
(2019: CMI 2018 model).
The current life expectancies underlying the value of the
accrued liabilities for the Scheme are:
Group and Company 2020 2019
Male life expectancy at age 60 Years Years
Retired member 27.1 26.8
Non-retired member (current age 45) 27.6 27.3
Notes to the Financial Statements (continued)
22. Retirement benefit schemes (continued)
The following table presents a sensitivity analysis for each
significant actuarial assumption, showing how the defined benefit
obligation would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at the Statement
of Financial Position date. This sensitivity analysis applies to
the defined benefit obligation only and not to the net defined
benefit pension deficit, 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 2020 2019
Increase in Defined Benefit Obligation GBPm GBPm
Discount rate: decrease by 25 basis points 57.9 65.0
Price inflation: increase by 25 basis points 52.5 60.6
Life expectancy: increase longevity by 1 year 59.0 52.5
As at 31 March 2020, the fair value of the Scheme's assets and
liabilities recognised in the Statement of Financial Position were
as follows:
Scheme assets Quoted on exchange/ liquid Unquoted Total Scheme assets
Value Value
Group and Company 2020 2020 2019 2019
At 31 March % GBPm % GBPm
Cash and Cash equivalents 0.8 10.6 - 10.6 1.0 13.6
Equity instruments 2.7 35.3 - 35.3 2.7 38.3
Debt instruments 32.1 321.2 93.3 414.5 84.5 1,187.1
Real estate 11.3 - 146.4 146.4 10.0 140.6
Distressed debt 1.3 - 16.2 16.2 1.7 23.5
Hedge funds 0.0 - - - 0.1 1.8
Pensioner buy-in 51.8 - 668.7 668.7 - -
Total fair value of assets 100.0 367.1 924.6 1,291.7 100.0 1,404.9
Present value of liabilities (1,317.9) (1,372.1)
Net retirement benefit
obligation (26.2) 32.8
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)
23. Provisions
Group and Company 2020 2019
GBPm GBPm
At 1 April 3.0 3.1
Amounts charged to the income statement (Note 5) - 0.7
Amounts released to the income statement (Note 5) (0.2) (0.2)
Reclassified under IFRS 16 as property lease liabilities (0.6) -
Utilisation of provision (0.4) (0.6)
At 31 March 1.8 3.0
Group and Company 2020 2019
GBPm GBPm
Current 0.1 0.8
Non-current 1.7 2.2
At 31 March 1.8 3.0
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 closing provision
of GBP0.1m at 31 March 2020 (2019: GBP1.1m), which now relates to
one out of town retail property, 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. During the year, GBP0.6m of the
provision was reclassified under IFRS 16 as property lease
liabilities. The estimate is a result of a detailed risk assessment
process, which considers a number of variables including the
location and size of the stores, expectations regarding the ability
of the Company to both defend its position and also to re-let the
properties, conditions in the local property markets, demand for
retail warehousing, likely periods of vacant possession and the
results of negotiations with individual landlords, letting agents
and tenants, and is hence inherently judgemental.
The Company is part of a Covenanter Group (CG) which is party to
a Deed of Covenant under which certain guarantees over the benefits
of members of the EATL Group of the Electricity Supply Pension
Scheme have been given. The closing provision at 31 March 2020 of
GBP1.7m (2019: GBP1.9m) on a discounted basis relates to the
Company's 6.7% share of the liabilities.
Notes to the Financial Statements (continued)
24. Deferred tax
The following are the major deferred tax liabilities and assets
recognised by the Group and Company, and the movements thereon,
during the current and prior years.
Other Total
Retirement benefit obligations
Group and Company Accelerated tax depreciation GBPm GBPm GBPm GBPm
At 1 April 2018 194.2 (3.3) (54.9) 136.0
Opening reserve adjustment on
transition to IFRS 9 - - 12.2 12.2
Charged/(credited) to the Income
Statement 0.8 1.6 (7.6) (5.2)
Deferred tax on re-measurement of
defined benefit pension scheme - 7.0 - 7.0
At 31 March 2019 195.0 5.3 (50.3) 150.0
Charged/(credited) to the Income
Statement 24.3 5.2 (8.0) 21.5
Deferred tax on re-measurement of
defined benefit pension scheme - (14.0) - (14.0)
Adjustment due to change in future
tax rates brought forward deferred
tax in OCI - (1.7) - (1.7)
At 31 March 2020 219.3 (5.2) (58.3) 155.8
There are no significant unrecognised deferred tax assets or
liabilities for either the Group or Company in either the current
or prior year.
Other timing differences relates primarily to derivative
instruments, but also includes general provision, pension
contributions not paid, rollover relief, IFRS9 and IFRS16
transitional adjustments.
Notes to the Financial Statements (continued)
25. 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 2020 2019
GBPm GBPm
=======
At 1 April 661.8 641.3
Additions during the year 32.9 37.8
Amortised through revenue (18.3) (17.3)
At 31 March 676.4 661.8
=======
Split:
Amounts due in less than one year (see Note 18) 20.3 24.6
Amounts due after more than one year 656.1 637.2
=======
At 31 March 676.4 661.8
=======
26. Refundable customer deposits
Refundable customer deposits are those customer contributions
which may be partly refundable, dependent on contractual
obligations.
Group and Company 2020 2019
GBPm GBPm
Amounts due in less than one year (see Note 18) 3.3 2.2
Amounts due after more than one year - -
At 31 March 3.3 2.2
Notes to the Financial Statements (continued)
27. Called up share capital
Company 2020 2019
GBP GBP
Authorised:
569,999,996 ordinary shares of 50 pence each 284,999,998 284,999,998
4 'A' ordinary shares of 50 pence each 2 2
Special rights redeemable preference share of GBP1 1 1
At 31 March 285,000,001 285,000,001
Company 2019 2018
GBP GBP
Allotted, called up and fully paid:
476,821,341 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)
28. Shareholders' Equity
Called up Share premium Revaluation Capital Retained Total equity
share capital account reserve redemption earnings
reserve
GBPm GBPm GBPm GBPm GBPm GBPm
Group:
At 1 April 2019 238.4 4.4 88.2 8.6 607.1 946.7
Opening
adjustment on
transition to
IFRS 16 - - - - 0.2 0.2
Tax impact on
opening
adjustment - - - - - -
Opening reserves 238.4 4.4 88.2 8.6 607.3 946.9
Profit for the
year - - - - 102.1 102.1
Other
comprehensive
expense for the
year - - - - (58.4) (58.4)
Transfer from
revaluation
reserve - - (4.1) - 4.1 -
- - (4.1) - 47.8 43.7
Transactions
with owners
recorded
directly in
equity
Equity dividends
(Note 11) - - - - (38.3) (38.3)
At 31 March 2020 238.4 4.4 84.1 8.6 616.8 952.3
Company:
At 1 April 2019 238.4 4.4 88.2 8.6 606.8 946.4
Opening
adjustment on
transition to
IFRS 16 - - - - 0.2 0.2
Tax impact on - - - - - -
opening
adjustment
Opening reserves 238.4 4.4 88.2 8.6 607.0 946.6
Profit for the
year - - - - 102.1 102.1
Other
comprehensive
expense for the
year - - - - (58.4) (58.4)
Transfer from
revaluation
reserve - - (4.1) - 4.1 -
- - (4.1) - 47.8 43.7
Transactions
with owners
recorded
directly in
equity
Equity dividends
(Note 11) - - - - (38.3) (38.3)
At 31 March 2020 238.4 4.4 84.1 8.6 616.5 952.0
Notes to the Financial Statements (continued)
28. Shareholders' Equity (continued)
In 1997 the Company undertook a revaluation of certain assets,
following North West Water's acquisition of Norweb. This resulted
in the creation of a revaluation reserve of GBP234.9m. The
additional depreciation created as a result of the revaluation is
transferred from the revaluation reserve to retained earnings on an
annual basis.
The capital redemption reserve is a non-distributable reserve
specifically for the purchase of own shares.
29. 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 28. 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 39 to 54.
Notes to the Financial Statements (continued)
30. Ultimate parent undertaking and controlling party
The immediate parent undertaking is NWEN plc, a company
incorporated and registered in the United Kingdom. The address of
the immediate parent undertaking is Borron Street, Stockport,
Cheshire SK1 2JD.
The ultimate parent undertaking is NWEN (Jersey), a company
incorporated and registered in Jersey. The address of the ultimate
parent company is: 44 Esplanade, St Helier, Jersey, Channel
Islands, JE4 9WG.
This Group is the smallest group in which the results of the
Company are consolidated. The largest group in which the results of
the Company are consolidated is that headed by NWEN (Jersey).
Following a staged acquisition, there was a change in ownership
of the shares in NWEN (Jersey) during the year and, therefore, a
change in the ultimate controlling parties of the Company.
Following completion of the sale on 3 December 2019, the
ultimate shareholdings are:
-- KDM Power Limited (40.0%);
-- Equitix ENW 6 Limited (25.0%)
-- Equitix MA North HoldCo Limited (15.0%)
-- Swingford Holding Corporation Limited (20.0%)
31. Related party transactions
During the year the following transactions with related parties
were entered into:
Group Company Group Company
2020 2020 2019 2019
GBPm GBPm GBPm GBPm
Recharges to:
Electricity North West (Construction and Maintenance) Ltd 1.6 1.6 1.6 1.6
Electricity North West Services Ltd 1.8 1.8 1.8 1.8
Recharges from:
Electricity North West (Construction and Maintenance) Ltd (0.1) (0.1) (0.1) (0.1)
Electricity North West Services Ltd (6.7) (6.7) (7.6) (7.6)
Interest payable to:
North West Electricity Networks plc (2.0) (2.0) (2.0) (2.0)
ENW Finance plc (12.5) (12.5) (12.7) (12.7)
Total interest payable (Note 9) (14.5) (14.5) (14.7) (14.7)
Dividends paid to North West Electricity Networks plc (38.3) (38.3) (46.3) (46.3)
Directors' remuneration (Note 7) (2.2) (2.2) (2.0) (2.0)
Directors' services - - (0.2) (0.2)
For disclosure relating to executive directors' remuneration see
Note 7. The Company's key management personnel comprise solely of
its directors.
Notes to the Financial Statements (continued)
31. Related party transactions (continued)
Amounts outstanding with related parties are as follows:
Group Company Group Company
2020 2020 2019 2019
GBPm GBPm GBPm GBPm
======== ========
Amounts owed by:
North West Electricity Networks plc 3.4 3.4 3.5 3.5
Electricity North West (Construction and Maintenance) Ltd 0.6 0.6 0.4 0.4
Electricity North West Services Ltd 0.6 0.6 0.3 0.3
Electricity North West Property Ltd 0.1 0.1 - -
North West Electricity Networks (Jersey) Ltd 0.9 0.9 0.1 0.1
North West Electricity Networks (Holdings) Ltd 0.2 0.2 0.2 0.2
Total (Note 16) 5.8 5.8 4.5 4.5
Amounts owed to subsidiaries:
Electricity North West Number 1 Company Ltd (Note 18) - (15.4) - (15.4)
Interest payable to Group:
North West Electricity Networks plc (0.6) (0.6) (0.6) (0.6)
ENW Finance plc (2.5) (2.5) (2.5) (2.5)
Transaction costs (0.4) (0.4) - -
Other amounts payable to Group:
Electricity North West Services Ltd (0.4) (0.4) (0.7) (0.7)
Total amounts owed to Group (Note 18) (3.9) (3.9) (3.8) (3.8)
Borrowings payable to:
North West Electricity Networks plc (Note 19) (77.4) (77.4) (75.3) (75.3)
ENW Finance plc (Note 19) (199.3) (199.3) (198.7) (198.7)
Group tax relief to:
North West Electricity Networks plc (7.9) (7.9) (5.0) (5.0)
Electricity North West Services Ltd - - - -
======== ========
The loan from NWEN plc accrues weighted average interest at
2.70% (2019: 2.70%) and is repayable in March 2023. The loan from
ENW Finance plc accrues interest at 6.125% (2019: 6.125%) and is
repayable in July 2021.
Fees of GBPnil (2019: 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 was
identified as a related party in the prior year and for a portion
of the current year, prior to the acquisition as per Note 30.
Fees of GBP0.1m (2019: GBP0.1m) were payable to IIF Int'l
Holding GP Ltd ('IIF') in respect of the provision of Directors'
services. IIF was identified as a related party in the prior year
and for a portion of the current year, prior to the acquisition as
per Note 30.
Notes to the Financial Statements (continued)
32. Cash generated from operations
Group and Company 2020 2019
GBPm GBPm
======= =======
Operating profit 212.2 190.5
Adjustments for:
Depreciation of property, plant and equipment 114.9 110.7
Amortisation of intangible assets 6.5 6.2
Amortisation of customer contributions (18.3) (17.6)
Profit on disposal of property, plant and equipment (0.6) (0.4)
Cash contributions in excess of pension charge to operating profit (22.5) (18.0)
======= =======
Operating cash flows before movements in working capital 292.2 271.4
Changes in working capital:
Decrease/(increase) in inventories 1.5 (1.8)
(Increase)/decrease in trade and other receivables (5.7) 5.0
Increase/(decrease) in payables 9.6 (7.0)
======= =======
Cash generated from operations 297.6 267.6
======= =======
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KKQBQKBKDBAK
(END) Dow Jones Newswires
June 04, 2020 06:54 ET (10:54 GMT)
Elc. N 8.875%26 (LSE:BD49)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Elc. N 8.875%26 (LSE:BD49)
Historical Stock Chart
Von Jul 2023 bis Jul 2024
