RPT FPR 2000-2001

Contents 1
List of tables and figures 2

Foreword 3
Summary 5
1. Introduction 8
Scope of the report 8
Indexation 8
Sources of information 8
2. Financial performance 9
Aggregate industry performance 9
Turnover and operating profits 13
Cash flow 15
Balance sheet 18
Debt and gearing 19
Return on capital 20
Dividends 24
3. Operating expenditure 27
Performance in 2000-01 27
Where savings are being achieved 27
4. Capital investment 30
Performance in 2000-01 30
Investment by output purpose category 33
Measuring investment by outputs 35
Investment by service area 40
Activity 41
Serviceability to customers 45
Infrastructure renewals and accounting charges 49
5. Transfer pricing 51
Compliance with RAG 5 in 1999-2000 51
6. Property development and land disposal 53
Appendix 1 Inflation indices used in this report 54
Appendix 2 Reconciliation of current cost and historic cost operating profits 55
Appendix 3 Activity based cost analysis for 200001 56
Appendix 4 The Ofwat framework for assessing water company capital
maintenance needs 57
Appendix 5 Glossary of terms and definitions 59
CSC Regions 63
CONTENTS
Financial performance and expenditure of the water companies in England and Wales 2000 - 2001
1
Published July 2001
List of tables
Table 1 Current cost profit and loss account 9
Table 1a Effect of provisions on reported profits and costs 10
Table 2 Financial indicators 10
Table 3 Current cost turnover and operating profit by service 12
Table 4 Current cost turnover and operating profit by service for
individual companies 14
Table 5 Cash flow statement 16
Table 6 Cash flows for individual companies 17
Table 7 Current cost balance sheet 18
Table 8 Net debt and gearing for individual companies 19
Table 9 Return on capital measured by regulatory capital value
for individual companies 21
Table 10 Dividends reported plus interest payable as a percentage
of capital value 22
Table 11 Return on capital by service measured by average MEA industry 23
Table 12 Return on capital measured by average MEA - individual companies 23
Table 13 Dividends reported and dividend covers for individual companies 25
Table 13a Analysis of special dividends reported 26
Table 14 Total operating expenditure by service 27
Table 15 Total operating expenditure by service for individual companies 28
Table 16 Percentage change in operating expenditure since 1995-96 29
Table 17 Gross capital investment by service 30
Table 18a Gross capital investment by service for individual
water and sewerage companies 31
Table 18b Gross capital investment by service for individual water only companies 32
Table 19 Gross capital investment by purpose category 33
Table 20a Gross capital investment by purpose category 2000-01
water and sewerage companies 34
Table 20b Gross capital investment by purpose category 2000-01
water only companies 35
Table 21 Gross capital investment by service area industry 40
Table 22 Gross capital investment by service area 2000-01 only
individual companies 41
Table 23a Activity in 2000-01 - water and sewerage companies 42
Table 23b Activity in 2000-01 - water only companies 43
Table 24 Maintenance activity on underground assets industry 43
Table 25 Maintenance activity on underground assets - individual
companies 1990-91 to 2000-01 44
Table 26 Water & sewerage infrastructure serviceability assessments
for 2000-01 48
Table 27 Infrastructure renewals 50
Table 28 Trade with other companies within the group 52
Table 29 Number of, and gross proceeds from, disposals of land by CSC region 53
Table 30 Retail price indices used in this report 54
List of figures
Figure 1 Programme for intermittent discharges 38
Figure 2 Programme for Bathing Water Directive 38
Figure 3 Programme for UWWTD 39
Figure 4 Programme for Shellfish Water Directive 39
Figure 5 Serviceability - Water mains networks 46
Figure 6 Serviceability - Sewer networks 46
Figure 7 Serviceability - Water treatment works 47
Figure 8 Serviceability - Sewage treatment works 47
LIST OF TABLES AND FIGURES
2
2000-01 was the first year of the five covered by
the price limits for water companies set out in
Final determinations: future water and
sewerage charges 2000-05 (November 1999).
This report compares financial performance and
investment with the expectations which
underlay those price limits.
Operating expenditure is now lower in real
terms than at any time since privatisation in
1989. Total operating expenditure in 2000-01
was 2.6 billion. This was 4% lower than the
previous year and lower than the 2.7 billion
projected when price limits were set. Some of
the reduction is no doubt due to greater
efficiency. Some may be a reallocation of work
to capital expenditure.
Capital expenditure in 2000-01 was 2.7 billion.
This was less than in 1999-2000 and significantly
below the 3.4 billion projected in price limits.
Some of the reduction was due, companies say,
to greater capital efficiency. But more was due
to the need for extra time to establish quality
programmes, especially for drinking water, and
some to slippage.
An even greater dip in capital expenditure
occurred at the equivalent time of the previous
periodic review. I would like to see future
reviews remove these peaks and troughs in the
general expenditure trend as far as possible.
Nonetheless, capital investment remains at
approximately double the average level of
expenditure in the 1980s prior to privatisation.
Over 38 billion has been spent since 1989.
The three regulators, the Drinking Water
Inspectorate, the Environment Agency and
Ofwat are concerned both with the achievement
and maintenance of quality targets and with
value for money for customers. We shall
continue to monitor progress closely.
The Drinking Water Inspectorate reported that
water companies have continued overall to
improve the quality of drinking water in 2000-01.
After a slow start to some compliance
programmes, partly due to confirmation of the
policy on meeting new lead standards,
companies have made progress on improving
treatment works and service reservoirs and in
renovating water distribution mains.
The Environment Agency report that
performance against environmental standards
remains good overall and most of the expected
improvements in the first year have been
realised. However, a small number of
companies show a slight deterioration in
performance in certain areas, for example
sewage treatment works discharge consents.
Delivery of the National Environment
Programme for waste water is also behind what
was expected in some areas. Ofwat and the EA
will follow this up with the relevant companies.
Total expenditure on capital maintenance fell by
19% compared with 1999-2000. Companies
reported that this was partly due to the severe
autumn weather. The trends in the levels of
service performance on numbers of mains
bursts, pressure and interruptions for water
and on flooding and collapses of sewers
suggest that there has been no overall
deterioration in underground assets. This
may be the case, but the decline in expenditure
does not seem consistent with the suggestion
by companies that higher levels of capital
maintenance are required. We will pursue this
with companies.
Because of the fall in both operating and
capital expenditure, the cashflow position
of companies was better than expected in
the year.
Over the last few years borrowing by companies
has increased to accommodate the large capital
programmes. There have also been changes in
the capital structures of some companies. This
resulted in higher levels of gearing and, for
some companies, deteriorating trends in
financial indicators. The companies report a
further increase in gearing in 2000-01.
It is not for us to determine the capital structure
of the industry. This is a matter for the
management of the companies and the capital
markets. But I am concerned that the structure
in each case should be sustainable in the long
term, taking full account of the significant
capital programmes which companies are
obliged to undertake. We shall continue to
monitor this trend closely.
I recognise that companies need to maintain
investor confidence. Nonetheless, I note that
whilst profits after interest but before tax for the
industry fell by 36% (in real terms) in 2000-01,
dividends fell by only 12%.
The price limits for 2000-01 enabled customers
to benefit from a general reduction in their
water and sewerage bills for the first time since
privatisation. In setting price limits, we allowed
for continuing improvements to the drinking
FOREWORD
3
water and waste water services and
improvements to the environment. We also
assumed that water companies would continue
to make significant efficiency gains.
Overall, the financial performance of the
industry in 2000-01 suggests that the companies
are responding to the challenge of the price
limits. So the early signs here are encouraging.
Performance on quality targets is more mixed.
However, this is the first year of five. While it
provides helpful early indications of trends, it is
too soon to draw any firm conclusions about
future performance.
PHILIP FLETCHER
Director General of Water Services
HEADING
4
This report summarises the financial position,
the performance and the operating expenditure
and capital investment made by the companies
in the year ended 31 March 2001 and in previous
years. This is the first report under the price
limits set by the Director General of Water
Services (the Director) in 1999.
This report:
Shows where customers money has been
spent and how the significant capital
investment programme is financed. This is
directly linked to the cash position and the
industrys ability to finance its functions
which is a key concern for the companies.
It is a statutory duty of the Director
General that companies can finance their
functions.
Sets out the companies progress in
achieving the outputs required by the
Drinking Water Inspectorate (DWI) and
Environment Agency (EA).
Includes Ofwats assessment on the
serviceability to customers of the network
assets.
Compares the actual performance of the
industry with Ofwats expectations when we
set price limits in 1999. The regulatory
regime creates strong incentives for
companies to become more efficient and
minimise their costs within those limits. At
Periodic Reviews, Ofwat resets price limits
and takes account of companies
achievements.
The information in this report is set out in
200001 prices. Information for comparative
years on financial performance, operating
expenditure and capital investment has been
adjusted to 200001 prices by reference to the
Retail Price Index (RPI). For an explanation of
the indexation basis used in this report see the
section on indexation in the Introduction and in
Appendix 1.
Financial performance
In 2000-01, aggregate turnover fell by 12%
compared with 19992000 (after adjusting for
inflation). This is consistent with the industry
average initial price reduction (or K factor) set
by the Director of minus 12.3%.
Turnover from the water service has fallen by
9%, while that from the sewerage service has
decreased by 15%.
The total operating expenditure of 2.6 billion in
200001 is 5% lower than in 1999-2000. This is
also 4% lower than the 2.7 billion projected
when price limits were set in 1999. It continues
an established trend of reducing expenditure in
each of the last five years. Operating
expenditure is now lower than at any time since
privatisation in 1989.
Current cost depreciation was 5% higher than
1999-2000 at 1,464 million. Current levels of
current cost depreciation are a reflection of the
large capital programme undertaken over the
last decade. The current cost charge for
depreciation in companies regulatory accounts
in 2001 is more than 20% higher than was
projected in the price limits. This has no impact
on their cash position, although it does reduce
reported current cost profits (and the return on
capital).
The depreciation charge in 2000-01 on a historic
cost basis (the basis on which profits are
reported to the City and investors) is similar to
Ofwats assumptions in the financial projection
underlying price limits. We will be discussing
the basis of current cost depreciation charges
with companies. The infrastructure renewals
charge was similar to 1999-2000 and equivalent
to expenditure.
Companies profitability declined markedly in
2000-01 largely as a consequence of the new
price limits. Current cost operating profit for the
year ended 31 March 2001 amounted to 1,942
million. This is a decrease of 663 million (25%)
compared with 19992000. The previous four
years had been broadly flat after a rising trend
in the early years following privatisation.
The industry has had to borrow to fund its
capital expenditure programmes since
privatisation. Net borrowing at 31 March 2001
amounted to nearly 13.9 billion.
The continuing capital expenditure contributed
to the fact that the industry spent 1,191 million
more than it earned in 2000-01, before
financing. The industry has borrowed to fund its
operations every year for the last five years.
Reducing operating and capital expenditure has
improved the net cash flow before financing,
and the net cash flow from operations. The cash
flow position is better than was anticipated in
price limits.
The regulated water companies reported
dividends fell by 12% compared to 19992000.
This was a decrease from 1,230 million to
SUMMARY
5
1,079 million, despite a more significant fall in
profitability. The abolition of Advanced
Corporation Tax from 1999-2000 gave the
companies a cash flow benefit which does not
seem to have affected the levels of dividend.
Special dividend payments have been a feature
of the last five years, amounting to 2,958
million. Special dividends are those made in
addition to normal dividend payments. The high
level of dividends in 199798 and 1998-99
included special dividends of 1,227 million and
1,115 million respectively. These special
dividends largely related to the windfall tax
and companies trying to achieve more
efficient balance sheets through higher levels of
gearing. There was only one special dividend in
2000-01, of 98 million, paid by Yorkshire Water
which it stated was related to past efficiency
savings.
The pre-tax return on capital in 200001, based
on the current cost operating profit and the
regulatory capital value, was 6.6%. This
compared with 9.2% in 19992000. Returns
calculated on this basis have been slowly
declining over the previous four years, from
10.8% in 199697 before falling sharply in
2000-01 following the price review. For 2000-01,
the projected return was 7.2%, compared with
the actual return of 6.6%. The lower operating
expenditure means the rate of return is higher
than expected. But this has been offset by
companies higher-than-expected current cost
depreciation charges. The depreciation charge
will depress the reported return on capital
but it has no impact on the companies cash
position.
Returns actually received by providers of
finance, through dividends and interest, have
varied between 4.0% and 25.7% over the five-
year period. This is a more volatile distribution
than shown on the return on capital. Returns
measured in relation to assets employed
(essentially the cost of replacing the assets) are
far lower, around 1.0%, for the five-year period.
Capital investment and outputs
Capital investment in 2000-01 totalled 2.7
billion - 1.2 billion on water and 1.5 billion on
sewerage. This is a decrease of 27% in real
terms compared with 1999-2000. Investment is
below the annual average of 3.5 billion for the
first 11 years since privatisation. But it is far
higher than the levels in the 1980s when annual
investment averaged 1.8 billion. The water
industry investment programme in 2000-01
amounts to around 43% of its turnover - a far
greater proportion than in many industries.
The level of capital maintenance investment in
2000-01 is also lower than anticipated in price
limits by around 20% in real terms. The main
reasons are delays in getting planning
permission, rescheduling of projects, bad
weather (particularly flooding) and the foot and
mouth disease outbreak. Some companies have
also claimed efficiency savings. This pattern of
expenditure is similar to that seen at the start of
the last five-year period but the difference is less
marked.
Companies maintained the high quality of
drinking water in England and Wales in 2000,
with 99.83% of sample tests meeting standards.
The DWIs annual report Drinking Water 2000
(published on 11 July 2000) sets out each
companys performance in detail. It shows that
improvement programmes to treatment works
and mains that were required in the five years
1995-2000 have been delivered with minor
exceptions. The programmes set for 2000-05 are
at an early stage. The DWI believe that progress
towards fulfilling these obligations is generally
satisfactory. The DWI reviewed the strategies for
complying with new standards for lead and
cryptosporidium during 2000. As a result, some
companies started this work later than
expected.
The EA reports that water companies have
continued to deliver improvements. These
include a significant increase in the number of
compliant bathing waters. There has been a
reduction in the number of major and significant
pollution incidents. But the overall level of
incidents has increased, along with the number
of prosecutions.
Most improvements to meet new standards
for sewage treatment works discharges in
1995-2000 have been completed. Those
schemes outstanding are being monitored
jointly by Ofwat and the EA. This year, however,
has seen a slight deterioration in the
performance of sewage treatment works
particularly in some companies. Compliance is
still very high, but the EA expects full
compliance and will enforce the standards.
Companies made a slower than expected start
to the National Environment Programme in
some areas, and reported lower than expected
expenditure. We will continue to report
completions and also seek assurance that key
schemes are progressing satisfactorily for
completion by the required dates.
HEADING
6
Ofwat has assessed the serviceability to
customers of companies assets. At an industry
level, the non-infrastructure assets (ie above
ground assets) are assessed as stable for both
water and sewerage. For infrastructure assets
(the underground network) the water and
sewerage services are also both stable.
The trend to renew water mains rather than
relining them has continued. The overall level of
mains activity is below the 1999-2000 peak. The
length of critical sewers either renovated or
replaced in 200001 is below the average level
that has been carried out annually since
privatisation.
The reduced level of water mains activity in
2000-01 has led to a 4% decrease in
infrastructure renewals expenditure on the
water service, compared with 1999-2000.
This is because companies had been working to
meet their obligations on distribution systems
as part of the quality enhancement programme.
Ofwat will discuss the implications for long-
term capital maintenance needs with
companies. On the sewerage service,
infrastructure renewals expenditure has
decreased by 13% compared to 1999-2000.
Transfer pricing
In 2000-01 the value of trade with other
companies in the same group has fallen by
almost 17% (in real terms). Capital and operating
expenditure amounts to 608 million, compared
with 707 m in 1999-2000. In percentage terms,
the value of trade in 200001 remains similar to
19992000 at about 10% of turnover.
Overall, only one company needs to make
significant improvement to ensure full
compliance with Ofwats transfer pricing
guidelines (RAG5). Six companies provided
examples of best practice of compliance.
HEADING
7
Scope of the report
This report analyses the financial performance
together with other aspects of the activities of
the appointed water and sewerage businesses
for the year ended 31 March 2001 and the four
previous years.
Analyses, on a current cost basis, of operating
expenditure, operating profits, cash flows,
balance sheets and capital investment of the
appointed water and sewerage companies are
included in this report. It covers only the
appointed water and sewerage business and does
not include the performance of other associated
companies within the group. Analysis of the
volume of trade undertaken by the appointed
business with associated companies is also
included. As companies have a wide spectrum of
operations, it is important to distinguish the
performance of the appointed business.
Companies prepare their regulatory accounts,
from which the majority of the figures are
drawn, on a current cost basis. Assets in the
water industry are characterised by their very
long lives and reporting on a historic cost basis
would not appropriately reflect this.
This report covers on an industry-wide basis:
The extent of companies capital investment
programmes.
Progress on outputs.
The trends in operating expenditure.
The levels of current cost operating profits.
The cash position of the companies.
Returns on capital.
Certain balance sheet information.
Financial indicators.
Trading activities with other group
companies.
Land disposals.
Key information on an individual company basis
is also published in the main body of the report.
Ofwat will publish full summaries of individual
companies financial performance in an
accompanying volume entitled Report on
company performance in 2000-01. This will be
available from the Ofwat Library from October
2001.
Indexation
The information in this report is set out in
2000-01 prices. Unless otherwise stated, figures
for earlier years have been indexed by reference
to RPI. This is consistent with the indexation
base in the pricing formula (ie RPI+K) and the
fundamental principle underlying the regulatory
accounts, where profits are calculated after the
maintenance of real financial capital.
Sources of information
The data has been drawn from the June Return
1
and regulatory accounts submitted to the
Director by the 10 water and sewerage
companies and the 12 water only companies
2
.
The June Returns provide breakdowns and
commentaries on actual operating expenditure,
capital investment and activity in the years up to
and including 2000-01.
1. INTRODUCTION
8
1
Each of the companies sends an annual return to Ofwat in June. It includes a report on the companies actual
capital investment expenditure.
2
The reported results for Northumbrian Water Ltd include those of North East Water plc (merged in 1996) and
Essex and Suffolk Water plc (merged in 2000). Similarly the results for Sutton District Water plc and East Surrey
Water plc are combined as Sutton & East Surrey Water plc following their merger in 1996. The results for
Chester Waterworks company and Wrexham Water plc are combined as Dee Valley Water plc following their
merger in 1998 and, the results of Mid Southern Water plc and South East Water Ltd are combined as South East
Water plc following their merger in 1999. Following mergers or takeovers in 2000 Anglian Water Services Ltd
includes the results of Hartlepool Water plc, Three Valleys Water plc includes North Surrey Water plc and
Yorkshire Water Services Ltd includes York Waterworks plc. United Utilities Water Ltd formerly traded as North
West Water Ltd. Cholderton & District Water Company Ltd, which is an exceptionally small company, has not
been included but does not have a material effect on any of the summary tables.
Aggregate industry performance
Ofwat regulates the water industry by limits on
price, rather than on profits or rates of return.
This provides incentives to companies to pursue
their objectives, including meeting their
statutory obligations, as efficiently as possible.
Customers benefit from these efficiency savings
when price limits are reset, as they were in 1994
and 1999. In order for companies to finance their
functions, profits need to be sufficient to
remunerate investors and lenders and to attract
additional funds with which to finance capital
programmes. Funds may be difficult to raise
should returns to investors be inadequate
compared with returns available elsewhere in
the capital markets.
Under price cap regulation, and in the absence
of direct competitive pressures, companies
must expect to justify any increases in prices (in
real terms) and, consequently, the level of
profits and dividends achieved. In essence, this
justification should answer the question where
does customers money go?
Table 1 shows the industry aggregate current
cost profit and loss account for 200001 and for
the four previous years. Turnover (ie income
from customers) is largely determined by the
price limits set by the regulator. It is used to pay
for the ongoing operating expenditure, to cover
capital maintenance charges and to provide
returns to investors and lenders. Capital
maintenance charges consist of the
infrastructure renewals charge and current cost
depreciation.
Turnover in 200001 fell by 12% in real terms
compared with 19992000. This is consistent
with the industry average K of minus 12.3 for
200001.
2. FINANCIAL PERFORMANCE
9
Table 1 Current cost profit and loss account
1999-00 to
2000-01
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 change
m m m m m m
Turnover 6,958 6,972 7,067 7,221 6,357 (864)
Operating expenditure (2,881) (2,762) (2,743) (2,860) (2,556) (304)
Capital maintenance charges:
Current cost depreciation (1,274) (1,354) (1,393) (1,388) (1,464) 76
Infrastructure renewals charge (394) (395) (400) (384) (412) 28
Working capital adjustment
1
29 31 20 16 17 1
Current cost operating
profit 2,438 2,492 2,551 2,605 1,942 (663)
Other income 17 16 14 15 12 (3)
Net interest (442) (527) (671) (752) (878) 126
Financing adjustment
1
161 246 206 300 310 10
Current cost profit
before tax 2,174 2,227 2,100 2,168 1,386 (782)
Taxation (209) (503) (534) (258) (293) 35
Dividends reported
2
(1,462) (2,291) (2,209) (1,230) (1,079) (151)
Current cost profit retained 503 (567) (643) 680 14 (666)
1
The working capital adjustment accounts for the impact of general inflation on the real value of working capital to the
business. The financing adjustment accounts for the impact of general inflation on the real value of net finance for the
business.
2
Dividends reported exclude the capital restructuring dividends. These total 8 million in 1996-97, 1,067 million in 1997-98
and 799 million in 2000-01 (all in 2000-01 prices). No such dividends were paid in 1998-99 and 1999-2000.
In 200001, operating expenditure and capital
maintenance charges accounted for 40% and
30% respectively of turnover (ie 70% in total).
Current cost profits before tax in 200001
amounted to 1,386 million, a decrease of 782
million or 36% compared with 19992000.
Trends in operating expenditure and
profitability can be distorted by provisions for
restructuring or other items. Table 1a sets out
the effects on operating expenditure of these
provisions and the adjusted current cost profit
before tax. The adjusted profits before tax show
a decrease of around 36% since 1996-97 and
40% since last year.
Provisions for restructuring totalled 32 million
in 2000-01, compared with 160 million in
19992000. Excluding these items, operating
profits in 2000-01 are still lower than in
19992000 and 199899 (by 30% and 24%
respectively) compared to the sharp increase in
the earlier years.
The trends in operating expenditure are set out
in more detail in the section on total operating
expenditure later in the report.
Returns to providers of finance, ie interest
payments and dividends, accounted for 14%
and 17% of turnover respectively in 200001.
Special dividends have been made in the last
five years totalling 2,958 million or 8.5% of
turnover. Interest payable rose sharply in the
early years after privatisation and has increased
from 6% of turnover in 199697 to 14% in
200001.
Table 2 shows some key financial indicators for
the water industry as a whole over the five year
period.
Financial indicators provide a snapshot of the
financial health of companies. Dividend cover
relates the level of dividend payable to
profitability. Interest cover is a similar measure
relating interest payable to profitability. Gearing
HEADING
10
Table 1a Effect of provisions on reported profits and costs
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m
Operating expenditure including
charges for provisions 2,881 2,762 2,743 2,860 2,556
Restructuring provisions (61) (41) (23) (160) (32)
Drought costs 4
Year 2000 compliance (44) (25)
Other (21) (4)
Operating expenditure excluding
charges for provisions 2,824 2,721 2,676 2,654 2,520
Current cost profit before tax
excluding charges for provisions 2,231 2,268 2,167 2,374 1,422
Table 2 Financial indicators
1996-97 1997-98 1998-99 1999-00 2000-01
Historic cost dividend cover 2.2 1.9 1.7 1.9 1.2
Current cost dividend cover 1.8 1.5 1.4 1.7 1.0
Interest cover 6.9 5.9 4.7 4.1 2.8
Gearing % 28.3 36.3 42.7 44.2 48.3
Cash interest cover 7.5 8.4 6.9 6.4 4.7
Debt payback period (years) 1.6 2.2 2.6 2.9 3.7
Cash flow to capital expenditure % 86.7 65.7 73.1 72.7 68.2
Dividend covers will not reconcile to those reported in Table 13. Dividend covers in the above table exclude all special
dividends, thereby eliminating distortions to the industry trend.
(calculated as net debt divided by the sum of net
debt and equity) shows the effect of borrowing
on the balance sheet.
The assessment of the financial health of
companies made by the credit rating agencies
and lenders places great emphasis on the trend
in cash based financial indicators as well as the
accounting based ones described above. The
most common ones used are cash interest
cover, debt payback periods and the ratio of
cashflow to capital expenditure. These are also
shown in Table 2.
Dividend cover (excluding all special dividends),
calculated on a current cost basis in 200001, is
1.0 for the industry as a whole. This is a marked
decline compared to previous years. Current
cost dividend cover provides a measure of the
long-term sustainability of dividend payments
and the ability of the companies to raise
additional equity capital.
Dividend cover (excluding all special dividends),
calculated on a historic cost basis exhibits a
similar trend. Historic cost dividend covers are
higher than current cost dividend covers,
principally due to the difference between
current and historic cost depreciation and,
consequently, higher operating profits
calculated on a historic cost basis.
Interest cover on an accounting basis at an
industry level has fallen sharply in 200001
compared to that in 19992000. The cash based
financial indicators for 2000-01 are also not as
strong as 1999-2000. However, they remain at
stronger levels than the minimum expected by
Ofwat in setting prices in 1999.
The levels of interest cover and cash indicators
have decreased from 199697 onwards, as
companies have utilised the green dowry
3
from privatisation and had to increase
borrowings to fund their capital expenditure
programmes. The water only companies have
had lower interest covers principally because
they did not receive green dowries at
privatisation and have funded capital
expenditure programmes from borrowings.
Gearing and interest cover are related financial
performance measures and hence show similar
but inverse trends. Gearing in 200001 has
increased sharply to almost 49% from 44% in
19992000. This shift is primarily due to four
companies who have geared up more than
would have been expected if they had only been
funding the capital programme. D
^
wr Cymrus
gearing has increased by 22%, mainly because
of the new capital structure arising from its
takeover by Glas Cymru. Southern have had a
technical accounting policy change in respect of
deferred taxation, causing an increase in
gearing of 10%. Sutton and East Surrey have
had a bond issue this year of 86.5 million,
though 37 million was to repay inter-company
debt, hence a 38% rise. Northumbrian have also
geared up by about 5%, following an increase in
borrowing.
SUMMARY
11
3
The green dowry is the term used for the 1.5 billion cash injection into the water and sewerage companies and
the 4.9 billion write-off of debts (in 1989 prices) prior to privatisation.
HEADING
12
Table 3 Current cost turnover and operating profit by service
2000-01 prices 1999-00 to
2000-01
1996-97 1997-98 1998-99 1999-00 2000-01 change
Water service: m m m m m m
Turnover:
Measured water revenue 1,095 1,123 1,190 1,251 1,002 (249)
Unmeasured water revenue 2,169 2,109 2,074 2,068 1,850 (218)
Large Users
1
N/A N/A N/A N/A 169 N/A
Other 140 148 142 124 117 (7)
Total turnover water 3,404 3,380 3,406 3,443 3,138 (305)
Current cost depreciation (585) (607) (617) (605) (624) 19
Working capital adjustment 12 12 7 6 7 1
Current cost operating profit 854 878 935 948 775 (173)
Sewerage service:
Turnover:
Measured sewerage revenue 831 906 996 1,079 983 (96)
Unmeasured sewerage revenue 2,455 2,417 2,400 2,435 2,003 (432)
Trade effluent revenue 207 205 201 204 173 (31)
Other 61 64 64 60 60 0
Total turnover sewerage 3,554 3,592 3,661 3,778 3,219 (559)
Current cost depreciation (689) (747) (775) (783) (839) 56
Working capital adjustment 17 19 13 10 10 0
Current cost operating profit 1,584 1,613 1,616 1,657 1,167 (490)
1
Large Users are identified for measured water revenue for the first time in 2000-2001.
Turnover and operating profits
Table 3 shows an analysis of current cost
turnover and operating profit by service for
200001 and for the four previous years.
The proportion of water revenue derived from
metered customers (including large users) has
risen over the five-year period from around 32%
in 1996-97 to 37% in 2000-01. This reflects the
increase in the numbers of households
receiving measured water, but this has been
partly offset by the decline in measured
industrial demand over this period. For
sewerage, the proportion of measured revenue
is lower than for water but has increased from
23% to 31% over the five-year period.
Current cost operating profit for the year ended
31 March 2001 amounted to 1,942 million, a
decrease of 663 million or 25% in real terms
compared with 19992000.
Current cost operating profits are higher for
sewerage services than for water, even after
adjusting for provisions. The sewerage service
has contributed 60% of operating profits in
200001. In past years, the sewerage
contribution was even higher. These higher
profits need to be assessed in relation to the
capital employed, which is discussed in the
section on returns on capital later in this report.
The infrastructure renewals charge for 2000-01
of 412 million is similar to that in 19992000
and the four previous years. A fairly constant
charge is to be expected under infrastructure
renewals accounting if the networks are
operating as expected. This is discussed in more
detail in the section on infrastructure renewals
later in this report but if, as suggested by some
companies, the network requires higher levels
of expenditure on a long-term basis, then we
would expect this to be reflected in a higher
level of infrastructure renewals charge than
occurred in 2000-01.
Current cost depreciation, which is the most
significant component of capital maintenance
charges, has steadily increased in real terms
over the five year period, reflecting the capital
programme during this time. The 200001
charge is 5% higher than in 19992000 and 15%
higher than in 199697.
Companies have charged against profits
a higher level of current cost depreciation in
2000-01. It is more than 20% higher compared
with that allowed in price limits. This has
contributed to the reduction in operating profits
reported by companies.
However, the charge made by companies has
no impact on their cash position. It is the current
cost depreciation allowed by Ofwat in price
limits that companies receive in cash (ie through
customers bills).
There are large differences in depreciation
charges between companies with apparently
similar asset stocks. Consequently, Ofwats
approach in setting price limits in 1999 linked
the current cost depreciation charge for capital
maintenance to the long-term assessment of
expenditure on maintaining serviceability to
customers.
We note that the depreciation charge on a
historic cost basis (which is the basis on which
profits are reported in statutory accounts to the
City and investors) in 2000-01 is similar to that
assumed by Ofwat in the financial projections
underlying price limits.
As noted above, although we prefer current cost
accounting as the basis for reporting in the
water industry, companies prepare their
statutory accounts on an historic cost basis.
Appendix 2 reconciles historic cost operating
profit with the current cost operating profit for
200001 and 19992000. Historic cost operating
profits are greater than current cost operating
profits in each year. This reflects higher
depreciation charges on a current cost basis of
accounting.
Table 4 shows current cost turnover and
operating profit by service for each company for
the five years to 200001. The water and
sewerage companies in 200001 accounted for
91% of industry turnover and 93% of operating
profit. This share has remained largely
unchanged since privatisation.
Operating costs and capital maintenance
charges are reported in the regulatory accounts
by detailed function. An industry aggregate
analysis for 200001 is shown in Appendix 3,
which shows the distribution of costs within
each service. Water distribution accounts
for 11% more costs than water resources and
treatment. In the sewerage service, sewage
treatment is by far the most costly operation.
HEADING
13
HEADING
14
Table 4 Current cost turnover and operating profit by service for individual companies
Turnover Current cost operating profit
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m m m m m m
Water service:
Anglian 327.1 322.9 315.5 305.1 273.5 102.5 114.6 86.3 85.6 68.7
D
^
wr Cymru 249.8 248.6 247.3 234.2 222.4 54.3 40.8 44.6 19.2 29.3
Northumbrian 278.6 279.0 280.2 268.4 232.2 80.3 84.5 98.1 88.0 55.6
Severn Trent 437.8 429.8 432.4 458.6 441.2 103.4 107.6 127.1 117.2 158.8
South West 117.7 115.6 114.0 109.8 98.0 37.2 32.1 33.6 33.9 20.5
Southern 134.7 135.5 136.2 143.7 118.7 22.3 40.8 45.0 55.6 33.6
Thames 424.6 432.6 456.2 464.8 432.4 85.5 99.7 130.2 127.3 84.9
United Utilities 420.6 416.6 418.3 426.9 430.0 83.6 68.5 68.7 80.5 91.1
Wessex 89.8 90.1 90.8 93.0 80.5 32.1 34.0 35.0 36.7 24.2
Yorkshire 305.3 297.2 303.8 318.8 268.4 77.6 74.6 82.7 105.5 70.6
Total water
service 2,786.0 2,767.9 2,794.7 2,823.3 2,597.3 678.8 697.2 751.3 749.5 637.3
Sewerage service:
Anglian 447.2 452.7 456.5 447.3 413.9 197.0 212.4 190.9 169.5 140.4
D
^
wr Cymru 223.9 226.9 229.6 252.5 215.1 86.0 71.7 75.1 102.4 71.0
Northumbrian 179.4 187.7 199.5 222.5 172.9 74.9 87.3 103.8 111.6 64.9
Severn Trent 586.6 576.5 563.9 552.4 443.2 281.1 281.1 250.0 224.7 123.3
South West 151.6 151.7 163.9 173.0 145.4 85.8 80.9 94.9 101.1 73.3
Southern 297.0 307.5 317.4 335.1 297.4 91.2 114.8 121.0 142.4 117.6
Thames 664.0 663.6 664.0 670.4 569.8 306.8 286.2 289.2 276.1 220.5
United Utilities 513.4 540.2 566.6 608.4 515.2 232.9 252.6 258.3 280.9 185.4
Wessex 180.6 182.3 186.4 192.0 171.0 89.7 98.3 100.3 103.5 77.9
Yorkshire 310.6 302.6 313.4 324.1 275.2 138.7 128.0 132.3 145.5 92.4
Total sewerage
service 3,554.3 3,591.7 3,661.2 3,777.7 3,219.1 1,584.1 1,613.3 1,615.8 1,657.7 1,166.7
Water and sewerage service:
Anglian 774.3 775.6 772.0 752.4 687.4 299.5 327.0 277.2 255.1 209.1
D
^
wr Cymru 473.7 475.5 476.9 486.7 437.5 140.3 112.5 119.7 121.6 100.3
Northumbrian 458.0 466.7 479.7 490.9 405.1 155.2 171.8 201.9 199.6 120.5
Severn Trent 1,024.4 1,006.3 996.3 1,011.0 884.4 384.5 388.7 377.1 341.9 282.1
South West 269.3 267.3 277.9 282.8 243.4 123.0 113.0 128.5 135.0 93.8
Southern 431.7 443.0 453.6 478.8 416.1 113.5 155.6 166.0 198.0 151.2
Thames 1,088.6 1,096.2 1,120.2 1,135.2 1,002.2 392.3 385.9 419.4 403.4 305.4
United Utilities 934.0 956.8 984.9 1,035.3 945.2 316.5 321.1 327.0 361.4 276.5
Wessex 270.4 272.4 277.2 285.0 251.5 121.8 132.3 135.3 140.2 102.1
Yorkshire 615.9 599.8 617.2 642.9 543.6 216.3 202.6 215.0 251.0 163.0
Total WaSCs 6,340.3 6,359.6 6,455.9 6,601.0 5,816.4 2,262.9 2,310.5 2,367.1 2,407.2 1,804.0
Water service:
Bournemouth &
W Hants 27.5 27.3 27.0 27.7 26.5 6.7 7.3 7.6 7.0 6.1
Bristol 66.7 66.9 67.7 69.5 63.3 13.8 14.0 15.3 15.4 12.8
Cambridge 16.8 16.7 16.0 15.6 13.6 6.0 6.0 5.0 3.8 3.2
Dee Valley 19.9 19.5 18.6 18.5 16.3 5.0 6.9 7.3 7.5 4.6
Folkestone &
Dover 12.0 11.9 11.7 12.1 12.1 3.0 2.4 3.1 4.2 3.9
Mid Kent 40.9 40.8 40.6 41.7 33.8 16.4 17.5 16.5 17.2 8.0
Portsmouth 30.9 30.3 29.3 29.6 28.4 8.0 9.0 9.4 9.5 8.9
South East 106.6 104.6 103.3 102.6 85.0 39.2 36.6 35.4 40.2 29.8
South
Staffordshire 61.4 60.9 60.8 61.2 58.3 12.8 9.3 11.4 13.1 11.7
Sutton &
East Surrey 46.1 44.9 44.1 42.3 35.3 13.6 12.9 14.0 10.5 7.9
Tendring Hundred 13.3 12.5 12.3 12.2 10.9 5.8 5.0 4.9 5.0 3.9
Three Valleys 175.7 176.0 179.5 187.1 157.4 45.0 54.2 53.7 64.8 37.6
Total WOCs 617.8 612.3 610.9 620.1 540.9 175.3 181.1 183.6 198.2 138.4
Cash flow
The cash flow statement in Table 5 shows the
aggregate cash position
4
of the companies in
each year.
The net cash flow before financing for 2000-01,
that is the cash expenditure on interest,
dividends and capital assets compared with that
generated from operating activities, showed an
outflow of 1,191 million, a rise in cash outflow
of 361 million compared with 19992000. There
have been significant net cash outflows in each
of the last five years. In the five year period,
aggregate net cash outflow before financing
was 8,762 million.
Over the five year period this cash outflow has
been very largely financed by borrowings.
Shareholders have financed the remainder
through retained profits (in the form of retained
cash, cash equivalents and liquid resources).
The profile of the capital expenditure
programme largely dictates the pattern of cash
outflows. Where this is combined with a high
level of special dividend payments, such as in
1997-98 and 1998-99, the net cash outflow is at
its greatest.
Dividend payments (both equity and non-
equity) represent the largest cash flow after
capital expenditure, amounting to 8,188
million over the five year period (excluding
capital restructuring dividends). Dividends are
discussed in more detail later in this report.
Interest payments have increased significantly
since 199697 as a result of the heavy
investment in the capital programme and
capital restructuring by some companies to
increase their levels of debt and gearing. In
200001 interest payments are at their highest
since privatisation but still represent less than a
quarter of net cash flow from operations.
The payments for taxation have also increased
substantially over the period as the companies
become liable for mainstream corporation tax.
In 2000-01, the proceeds of share issues was 22
million. However, during the year D
^
wr Cymru
carried out a share buy back of 166 million
shares at a cost of 429 million as a part of their
capital restructuring prior to its acquisition by
Glas Cymru. Table 5 consequently shows a cash
outflow of 407 million for share issues in
2000-01.
Table 6 shows key cash flow totals for each
company. The majority of companies have net
cash outflows before financing in every year. A
number of water only companies, however, are
self financing, ie have net cash inflows before
financing.
HEADING
15
4
The timing of cash payments in respect of capital expenditure compared with the recording of investment in the
Regulatory Accounts and grant receipts means that the amounts shown in the cash flow for purchase of fixed
assets cannot be directly reconciled to the gross capital expenditure discussed later in the report.
HEADING
16
Table 5 Cash flow statement
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 1999-00 to
2000-01
change
m m m m m m
Net cash flow from
operating activities
1
4,057 4,046 4,313 4,348 3,776 (572)
Returns on investment and
servicing of finance:
Net interest (542) (484) (623) (679) (800) (121)
Dividends paid on
non-equity shares
2
(6) (6) (27) (19) (18) 1
(547) (490) (650) (698) (818) (120)

Taxation paid (97) (212) (461) (462) (374) 88
Investing activities:
Purchase of fixed assets
and subsidiaries (2,782) (3,323) (3,089) (3,128) (2,249) 879
Infrastructure renewals
expenditure (481) (470) (511) (448) (415) 33
Disposal of fixed assets 257 62 55 52 91 39

(3,007) (3,732) (3,545) (3,524) (2,573) 951
Dividends paid on
equity shares
2
(1,275) (2,280) (2,139) (1,216) (1,202) 14
Net cash flow before
financing (869) (2,668) (2,482) (1,552) (1,191) 361
Financing:
Net loans 95 2,456 2,200 1,469 1,731 262
Finance lease capital payments 177 46 60 (45) (55) (10)
Proceeds of share issues
2,3
32 18 145 106 (407) (513)

303 2,520 2,405 1,530 1,269 (261)
Management of liquid resources 164 52 80 166 (326) (492)
Increase/(decrease) in
cash and cash equivalents (402) (97) 3 144 (248) (392)
1
Net cash flow from operating activities is calculated by adjusting the current cost operating profit shown in Table 1 for
items which are not direct cash flows, ie depreciation and the change in the components of working capital, ie stocks,
debtors, short-term creditors and unutilised provisions. It is also adjusted for infrastructure renewals expenditure which is
shown as an investing activity.
2
The dividends paid exclude capital restructuring dividends of 8 million in 1996-97, 1,067 million in 1997-98 and 799
million in 2000-01 (all at 2000-01 prices). Corresponding adjustments have been made to financing. No such payments
were made in 1998-99 and 1999-2000.
3
For 2000-01, the proceeds of share issues had a negative value because D
^
wr Cymru purchased back shares at a cost of
428.7 million.
HEADING
17
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Table 6 Cash flows for individual companies
Balance sheet
Table 7 sets out the aggregate current cost
balance sheet for the industry at 31 March for
each of the last five years.
Net assets employed at 31 March 2001 totalled
175 billion. By comparison, the net asset value
on a historic cost basis at 31 March 2001 is
15 billion.
The balance sheet is dominated by the tangible
assets included at Modern Equivalent Asset
(MEA) valuation. Tangible assets totalled
194 billion at 31 March 2001, an increase of
795 million compared to 31 March 2000,
reflecting capital expenditure net of depreciation
during the year plus the small impact of any
revaluation.
An MEA value is the cost of replacing an old
asset with a technically up-to-date asset, with
the same service capability, but allowing for the
remaining service potential of the old asset
compared with a new one.
Tangible assets reflect not only new capital
investment (net of depreciation) but also
revaluations following a reassessment by
companies of their MEAs for the purposes of the
periodic reviews. These are incorporated into
the regulatory accounts of companies. Most
companies carried out a similar reassessment of
MEAs for the 1999 Periodic Review. This
revaluation was largely responsible for the
reduction of nearly 11 billion in the MEA at
1999-2000, compared with 1998-99.
The movement in profit and loss reserves
between 2000-01 and 1999-2000 of 941 million
is not consistent with the level of retained
profits for 2000-01. This is because five
companies have reflected prior year
adjustments through the profit and loss
reserves and not in the profit and loss for the
year. These adjustments reflect accounting
changes for deferred tax, capital restructuring
and the treatment of loan notes.
HEADING
18
Table 7 Current cost balance sheet (at 31 March)
1999-00 to
2000-01
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 change
m m m m m m
Fixed assets
Tangible assets 200,117 202,095 204,063 193,302 194,097 795
Third party contributions
since 1989-90 (2,230) (2,415) (2,612) (2,787) (2,937) (150)
197,887 199,680 201,451 190,515 191,160 645
Total working capital (918) (976) (597) (727) (780) (53)
Net operating assets 196,969 198,704 200,855 189,788 190,380 592
Cash and investments 738 785 523 273 574 301
Borrowings (7,225) (9,706) (11,798) (12,743) (14,445) (1,702)
Non-trade debtors less creditors (1,166) (1,287) (1,739) (1,305) (1,457) (152)
Provisions for liabilities
and charges (119) (48) (40) (88) (56) 32
Net assets employed 189,197 188,448 187,801 175,925 174,996 (929)
Capital and reserves
Called up share capital 4,813 5,706 5,723 5,682 5,377 (305)
Share premium 919 889 871 847 852 5
Profit and loss account 4,558 2,824 2,052 2,662 1,721 (941)
Current cost reserve 178,682 178,821 178,941 166,529 166,693 164
Other reserves 225 208 214 205 353 148
Total capital and reserves 189,197 188,448 187,801 175,925 174,996 (929)
Debt and gearing
The reported net debt position at 31 March 2001
was 13,871 million, an increase of 1,400
million compared with 31 March 2000 of 12,471
million. This is more than double the net debt at
31 March 1997. This reflects the considerable
cash outflow from both capital investment and
capital restructuring of the companies over the
five year period.
The proportion of total industry net debt held by
the water and sewerage companies is 97% and by
the water only companies is 3%. This reflects the
relative levels of capital expenditure and, to some
extent, the special dividend payments made
principally by water and sewerage companies.
Net debt for each company for the five years is
set out in Table 8. The level of net debt within
the water and sewerage companies has
increased by 11%, from 12,033 million at
31 March 2000 to 13,392 million at 31 March
2001. The level of net debt in the water only
companies has increased by 9% from 438
million to 479 million.
Table 8 also shows the gearing for each
company. For the purposes of this report,
gearing is calculated as net debt divided by the
sum of net debt and equity
5
. In the early years
after privatisation, industry levels of gearing
were very low. This was principally due to the
debt write-off and the cash injection into the
water and sewerage companies at privatisation.
Average gearing in the industry has rapidly
increased in recent years and is almost 49% in
200001. This reflects the high levels of capital
expenditure and special dividends declared.
HEADING
19
Table 8 Net debt and gearing for individual companies (at 31 March)
Net debt Gearing
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m % % % % %
Anglian 947.5 1,198.4 1,245.1 1,501.1 1,583.6 33.4 38.6 42.0 47.0 48.8
D
^
wr Cymru 342.3 700.6 832.6 875.4 1,362.5 21.4 39.5 43.1 43.4 65.4
Northumbrian
1
496.1 637.1 671.0 757.6 932.6 35.2 39.3 38.9 40.6 45.8
Severn Trent 860.6 1,382.8 1,686.6 1,899.5 2,035.5 25.6 38.5 42.8 46.6 48.1
South West 330.4 455.4 587.1 540.2 587.6 23.7 32.3 38.4 34.3 36.6
Southern 517.9 602.3 775.6 936.9 1,026.5 39.8 43.3 46.5 48.8 58.8
Thames 713.6 1,085.6 1,967.4 2,001.6 2,173.7 20.7 29.7 50.6 49.1 52.0
United
Utilities 1,135.2 1,568.0 1,864.8 2,111.4 2,149.0 32.3 40.8 44.9 47.0 47.7
Wessex 347.8 380.9 544.9 556.8 580.6 34.6 40.5 47.7 48.1 48.7
Yorkshire 436.3 523.0 657.0 852.6 960.7 22.0 24.8 28.3 33.0 37.0
Bournemouth
& West Hants 9.6 13.6 17.5 15.9 14.6 13.0 17.3 20.7 18.9 17.6
Bristol 48.2 52.7 69.7 68.1 62.6 41.4 41.9 48.4 46.3 43.5
Cambridge 15.4 15.1 15.3 14.7 11.8 39.4 36.7 35.7 34.0 28.8
Dee Valley 2.5 (2.7) (2.9) (5.3) (4.6) 11.3 N/A N/A N/A N/A
Folkestone 9.1 8.8 11.6 9.0 7.7 42.0 39.4 50.1 41.1 35.7
Mid Kent 23.3 41.5 37.2 34.4 37.5 26.7 45.9 39.5 35.4 36.8
Portsmouth 17.1 16.0 15.4 13.1 10.1 33.2 31.5 29.0 24.0 18.2
South East
Water 100.2 90.4 131.3 136.7 123.4 39.4 33.9 48.6 46.3 41.7
South
Staffordshire 15.5 17.4 15.8 13.1 16.2 20.6 21.7 19.1 15.5 18.1
Sutton &
East Surrey (0.6) (6.3) (4.8) 3.9 45.6 N/A N/A N/A 6.3 44.4
Tendring
Hundred 7.1 8.5 8.1 8.5 11.4 29.4 31.9 30.1 32.3 39.3
Three Valleys 112.0 131.8 128.7 125.7 142.6 42.8 45.4 44.3 40.4 46.2
Industry 6,487.1 8,920.9 11,275.0 12,470.9 13,871.2 28.3 36.3 42.7 44.2 48.3
1
Northumbian excludes loan note of 176 million issued to purchase the assets and liabilities of Essex and
Suffolk Water plc on 1st April 2000.
5
Equity is defined as the aggregate of share capital (both preference and ordinary) and reserves on a historic cost basis.
Levels of gearing for individual companies,
particularly water only companies, cover a wide
range. Dee Valley Water has net cash (ie zero
gearing) whilst Three Valleys Water has gearing
of over 46%. The increase in gearing from 43%
to 65% for D
^
wr Cymru reflects the recent
restructuring prior to its sale to Glas Cymru. The
significant increase in gearing for Southern
Water Services Ltd for the current year from
49% to 59% reflects the early adoption of the
change in accounting policy for deferred tax
rather than any underlying change in capital
structure.
Return on capital
Although the current cost regulatory accounts
provide a useful framework for monitoring
performance, they do not provide a meaningful
measure of the capital base to be remunerated.
Ofwat established a more appropriate
measure of the capital base during the
1994 Periodic Review. It used the market
valuation (including debt) of the companies
around the time of the initial price setting.
This was then adjusted to take account of the
net (ie after allowing for current cost
depreciation) new capital expenditure assumed
at the time of initial price setting and at
subsequent periodic reviews. The measured
returns based on this regulatory capital value
for each company are set out in Table 9 for the
five year period.
The approach to regulatory capital values for
the period 2000-05 used in the 1999 Periodic
Review followed that from the 1994 review but
was refined in MD145, The framework for
setting prices (March 1999). The regulatory
capital values for 2000 onwards are adjusted to
reflect past capital efficiencies and, in this way,
the benefits of these efficiencies are passed
back to customers. In order to preserve
incentives for companies to achieve further
efficiencies, the benefit of past capital
efficiencies is retained by them for five years
and then captured in the regulatory capital value
through a rolling adjustment.
The regulatory capital values for the four years
to 1999-2000 in Table 9 are those underlying the
1994 Periodic Review. Consequently, they will
not reflect the actual performance of the
companies in that period. The regulatory capital
values for 2000-01 however reflects the
approach refined in the 1999 Periodic Review
and captures capital efficiencies achieved in
years prior to 1995.
The overall return achieved, before tax, on the
regulatory capital value in 200001, was 6.6%,
substantially lower than the 9.2% achieved in
19992000. This reflects the impact of the price
reductions for 2000-01. The returns in each of
the four previous years declined slowly, from a
high of 10.8% in 199697.
The projected return on regulatory capital value
before interest and tax for 2000-01 underlying
the price limits was 7.2%. This is higher than the
actual returns achieved because the benefits of
better than expected operating expenditure
have been offset by high levels of depreciation
charges by companies.
The returns achieved by individual companies
in 200001 ranged from 5.1% for D
^
wr Cymru to
11.4% for Folkestone & Dover Water Services
Ltd. The average return for water and sewerage
companies was 6.6% (19992000: 9.1%) and
averaged 8.1% (19992000: 12.1%) for water
only companies.
Table 10 shows the returns actually received by
investors and lenders, ie dividends and interest
as a percentage of the regulatory capital value.
This measure is similar to the dividend yield
measure used by equity investors and stock
market analysts. The majority of companies fall
within a range of 5% to 8% in 200001. A
number of water and sewerage companies
show exceptionally high returns in previous
years (over 20% in some instances), reflecting
the payment of special dividends.
Returns on capital employed based on the
average net MEA values during the five years are
shown in Table 11. This shows a sharp drop in
the return for 2000-01 after progressively higher
levels of return have been achieved over the
previous four years. In the earlier years, greater
returns have been made on the water assets.
Returns measured on this basis are very low at
1.0% compared with returns earned on the
regulatory capital values of 6.6%. This is due to
the large difference between the current cost net
asset values of the companies and the market
value of the companies at privatisation, which is
the basis of the regulatory capital value.
Table 12 shows the average MEA for each
company and the return achieved. There is a
much wider spread of returns compared with
those measured by regulatory capital values.
The range in 200001 runs from 0.8% for D
^
wr
Cymru to 2.2% for Folkestone and Dover Water
Services Ltd.
HEADING
20
HEADING
21
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1
7
.
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,
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4
6
.
4
3
,
5
6
6
.
1
1
1
.
0
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8
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9
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.
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5
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9
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^
w
r
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y
m
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u
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1
4
0
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3
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9
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,
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n
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e
v
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r
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r
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t
3
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4
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3
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3
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t
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3
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4
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h
a
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s
3
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2
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3
3
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4
1
9
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4
4
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3
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4
3
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4
3
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2
6
8
.
6
3
,
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1
4
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4
3
,
9
3
3
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2
3
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2
4
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3
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0
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7
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6
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9
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n
i
t
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d

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t
i
l
i
t
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e
s
3
1
6
.
5
3
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.
1
3
2
7
.
0
3
6
1
.
4
2
7
6
.
5
3
,
9
6
7
.
4
4
,
3
6
6
.
7
4
,
6
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3
.
4
4
,
6
6
3
.
3
4
,
5
8
1
.
8
8
.
0
7
.
4
7
.
1
7
.
8
6
.
0
W
e
s
s
e
x
1
2
1
.
8
1
3
2
.
3
1
3
5
.
3
1
4
0
.
2
1
0
2
.
1
8
6
4
.
5
9
4
2
.
2
1
,
0
2
9
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0
1
,
1
0
4
.
5
1
,
2
1
8
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8
1
4
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4
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3
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2
.
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8
.
4
Y
o
r
k
s
h
i
r
e
2
1
6
.
3
2
0
2
.
6
2
1
5
.
0
2
5
1
.
0
1
6
3
.
0
1
,
9
2
1
.
3
2
,
1
1
4
.
7
2
,
3
1
3
.
1
2
,
4
8
6
.
7
2
,
4
7
9
.
4
1
1
.
3
9
.
6
9
.
3
1
0
.
1
6
.
6
B
o
u
r
n
e
m
o
u
t
h

&

W

H
a
n
t
s
6
.
7
7
.
3
7
.
6
7
.
0
6
.
1
7
3
.
8
8
1
.
8
8
4
.
7
8
7
.
3
8
8
.
7
9
.
0
9
.
0
8
.
9
8
.
0
6
.
9
B
r
i
s
t
o
l
1
3
.
8
1
4
.
0
1
5
.
3
1
5
.
4
1
2
.
8
1
2
1
.
3
1
2
6
.
5
1
3
1
.
2
1
3
5
.
1
1
5
8
.
6
1
1
.
4
1
1
.
1
1
1
.
6
1
1
.
4
8
.
0
C
a
m
b
r
i
d
g
e
6
.
0
6
.
0
5
.
0
3
.
8
3
.
2
3
8
.
1
3
9
.
2
4
0
.
0
4
0
.
3
4
0
.
0
1
5
.
6
1
5
.
4
1
2
.
6
9
.
5
8
.
1
D
e
e

V
a
l
l
e
y
5
.
0
6
.
9
7
.
3
7
.
5
4
.
6
3
8
.
9
4
0
.
6
4
2
.
3
4
3
.
8
4
1
.
3
1
2
.
9
1
6
.
9
1
7
.
3
1
7
.
2
1
1
.
2
F
o
l
k
e
s
t
o
n
e

&

D
o
v
e
r
3
.
0
2
.
4
3
.
1
4
.
2
3
.
9
3
1
.
0
3
3
.
1
3
4
.
1
3
4
.
9
3
4
.
4
9
.
7
7
.
3
9
.
2
1
2
.
2
1
1
.
4
M
i
d

K
e
n
t
1
6
.
4
1
7
.
5
1
6
.
5
1
7
.
2
8
.
0
1
0
7
.
4
1
1
4
.
0
1
2
0
.
2
1
2
5
.
4
1
2
6
.
7
1
5
.
3
1
5
.
4
1
3
.
7
1
3
.
7
6
.
3
P
o
r
t
s
m
o
u
t
h
8
.
0
9
.
0
9
.
4
9
.
5
8
.
9
5
7
.
9
6
3
.
0
6
8
.
2
7
0
.
7
7
9
.
3
1
3
.
9
1
4
.
3
1
3
.
8
1
3
.
4
1
1
.
3
S
o
u
t
h

E
a
s
t
3
9
.
2
3
6
.
6
3
5
.
4
4
0
.
2
2
9
.
8
2
8
5
.
3
3
1
0
.
2
3
3
4
.
0
3
5
7
.
3
3
8
0
.
2
1
3
.
7
1
1
.
8
1
0
.
6
1
1
.
2
7
.
8
S
o
u
t
h

S
t
a
f
f
o
r
d
s
h
i
r
e
1
2
.
8
9
.
3
1
1
.
4
1
3
.
1
1
1
.
7
1
0
6
.
2
1
1
2
.
5
1
1
5
.
7
1
1
9
.
4
1
2
1
.
1
1
2
.
0
8
.
2
9
.
8
1
1
.
0
9
.
6
S
u
t
t
o
n

&

E
a
s
t

S
u
r
r
e
y
1
3
.
6
1
2
.
9
1
4
.
0
1
0
.
5
7
.
9
9
3
.
5
9
3
.
3
9
2
.
1
9
1
.
2
9
5
.
4
1
4
.
5
1
3
.
8
1
5
.
2
1
1
.
5
8
.
2
T
e
n
d
r
i
n
g

H
u
n
d
r
e
d
1
5
.
8
5
.
0
4
.
9
5
.
0
3
.
9
4
0
.
1
4
2
.
7
4
4
.
5
4
6
.
1
4
7
.
7
1
4
.
5
1
1
.
7
1
1
.
0
1
0
.
8
8
.
2
T
h
r
e
e

V
a
l
l
e
y
s
4
5
.
0
5
4
.
2
5
3
.
7
6
4
.
8
3
7
.
6
4
4
7
.
9
4
7
6
.
1
4
8
5
.
5
4
9
0
.
1
4
9
5
.
7
1
0
.
1
1
1
.
4
1
1
.
1
1
3
.
2
7
.
6
I
n
d
u
s
t
r
y
2
,
4
3
8
.
3
2
,
4
9
1
.
6
2
,
5
5
0
.
7
2
,
6
0
5
.
4
1
,
9
4
2
.
4
2
2
,
6
2
5
.
0
2
4
,
7
2
4
.
8
2
6
,
6
1
1
.
2
2
8
,
1
9
6
.
0
2
9
,
3
2
4
.
0
1
0
.
8
1
0
.
1
9
.
6
9
.
2
6
.
6
1

T
h
e

v
a
l
u
e
s

f
o
r

D
^
w
r

C
y
m
r
u

a
n
d

T
e
n
d
r
i
n
g

H
u
n
d
r
e
d

r
e
f
l
e
c
t

t
h
e
i
r

i
n
t
e
r
i
m

d
e
t
e
r
m
i
n
a
t
i
o
n
s

a
n
d

a
f
f
e
c
t

p
r
i
c
e

l
i
m
i
t
s

f
r
o
m

2
0
0
1
-
0
2

t
o

2
0
0
4
-
0
5
.
Table 9 Return on capital measured by regulatory capital value for individual companies
HEADING
22
D
i
v
i
d
e
n
d
s

r
e
p
o
r
t
e
d
I
n
t
e
r
e
s
t

p
a
y
a
b
l
e
D
i
v
i
d
e
n
d
s

p
l
u
s

i
n
t
e
r
e
s
t

p
a
y
a
b
l
e

a
s

a
p
e
r
c
e
n
t
a
g
e

o
f

c
a
p
i
t
a
l

v
a
l
u
e
2
0
0
0
-
0
1

p
r
i
c
e
s
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
m
%
%
%
%
%
A
n
g
l
i
a
n
1
1
3
0
.
8
2
1
3
.
6
3
5
1
.
4
1
5
3
.
3
1
2
4
.
2
6
6
.
3
8
3
.
9
9
6
.
0
9
9
.
8
9
5
.
1
7
.
2
1
0
.
1
1
4
.
3
7
.
8
6
.
1
D
^
w
r

C
y
m
r
u
1
,
2
8
8
.
0
2
6
0
.
0
6
0
.
7
2
9
.
9
1
4
.
0
2
4
.
4
4
1
.
2
5
6
.
7
5
8
.
1
9
2
.
0
8
.
1
2
0
.
0
7
.
3
5
.
0
5
.
4
N
o
r
t
h
u
m
b
r
i
a
n
6
3
.
0
4
8
.
7
6
6
.
3
7
1
.
6
6
5
.
0
2
8
.
3
3
7
.
7
4
5
.
1
4
6
.
0
6
4
.
4
7
.
4
6
.
3
7
.
5
7
.
3
6
.
8
S
e
v
e
r
n

T
r
e
n
t
3
0
6
.
5
4
7
4
.
2
1
4
4
.
3
2
7
8
.
0
1
3
5
.
5
3
9
.
1
5
1
.
7
7
6
.
2
8
7
.
0
1
1
7
.
7
1
0
.
9
1
5
.
3
5
.
9
9
.
1
6
.
3
S
o
u
t
h

W
e
s
t
6
1
.
8
1
7
7
.
5
6
2
.
5
6
5
.
9
6
0
.
4
1
2
.
6
1
4
.
6
3
4
.
0
3
9
.
9
4
0
.
3
6
.
0
1
4
.
4
6
.
9
7
.
3
7
.
1
S
o
u
t
h
e
r
n
4
4
.
4
4
5
.
3
4
5
.
8
4
7
.
1
4
7
.
8
4
5
.
7
4
3
.
3
5
3
.
8
5
9
.
1
6
6
.
2
6
.
3
5
.
6
5
.
6
5
.
3
5
.
6
T
h
a
m
e
s
1
1
5
0
.
6
4
0
2
.
3
9
3
1
.
0
1
1
8
.
7
1
1
8
.
6
4
9
.
6
5
4
.
7
8
1
.
2
1
2
6
.
9
1
4
0
.
4
6
.
1
1
2
.
6
2
5
.
7
5
.
8
5
.
9
U
n
i
t
e
d

U
t
i
l
i
t
i
e
s
3
9
2
.
1
3
1
8
.
4
3
2
9
.
3
1
9
8
.
7
1
9
7
.
8
9
6
.
0
1
1
2
.
1
1
2
3
.
7
1
2
9
.
2
1
3
9
.
0
1
2
.
3
9
.
9
9
.
8
7
.
0
7
.
4
W
e
s
s
e
x
6
9
.
1
1
7
3
.
8
5
1
.
2
8
8
.
0
4
7
.
7
2
1
.
8
2
5
.
3
3
0
.
1
2
9
.
5
3
0
.
8
1
0
.
5
2
1
.
1
7
.
9
1
0
.
6
6
.
4
Y
o
r
k
s
h
i
r
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HEADING
23
Table 11 Return on capital by service measured by average MEA - industry
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01
Water service:
Current cost operating profit m 854 878 935 948 775
Average net MEA value m 68,667 69,457 70,143 69,675 69,208
Return on capital employed % 1.24 1.26 1.33 1.36 1.12
Sewerage service:
Current cost operating profit m 1,584 1,613 1,616 1,657 1,167
Total:
Current cost operating profit m 2,438 2,491 2,551 2,605 1,942
Table 12 Return on capital measured by average MEA - individual companies
Average MEA Return
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m % % % % %
Anglian 16,142.2 16,321.8 16,480.3 17,158.8 17,793.0 1.86 2.00 1.68 1.49 1.18
D
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wr Cymru 13,930.1 14,175.3 14,337.9 13,752.2 13,137.4 1.01 0.79 0.84 0.88 0.76
Northumbrian 10,480.9 10,531.9 10,590.6 10,710.0 10,863.3 1.48 1.63 1.91 1.86 1.11
Severn Trent 27,538.2 27,848.0 28,198.4 25,859.3 23,368.6 1.40 1.40 1.34 1.32 1.21
South West 6,057.8 6,176.7 6,256.9 6,152.8 6,069.3 2.03 1.83 2.05 2.19 1.55
Southern 13,390.6 13,508.7 13,687.6 12,933.7 12,153.5 0.85 1.15 1.21 1.53 1.24
Thames 39,703.6 39,659.6 39,976.7 39,096.2 38,110.7 0.99 0.97 1.05 1.03 0.80
United Utilities 35,971.8 36,180.7 36,481.3 35,477.4 34,386.7 0.88 0.89 0.90 1.02 0.80
Wessex 9,288.4 9,351.6 9,436.7 9,392.8 9,259.7 1.31 1.41 1.43 1.49 1.10
Yorkshire 16,894.0 17,058.5 17,241.4 17,774.3 18,245.1 1.28 1.19 1.25 1.41 0.89
Bournemouth &
W Hants 415.0 419.6 424.8 465.5 505.3 1.61 1.75 1.78 1.50 1.21
Bristol 1,453.8 1,458.8 1,468.3 1,443.8 1,416.2 0.95 0.96 1.04 1.07 0.90
Cambridge 233.2 234.6 263.8 293.0 294.0 2.55 2.58 1.90 1.30 1.10
Dee Valley 294.5 294.9 296.1 279.2 261.9 1.71 2.33 2.47 2.69 1.76
Folkestone &
Dover 184.9 187.1 188.9 182.5 175.3 1.63 1.29 1.65 2.33 2.24
Mid Kent 613.7 619.5 629.3 620.8 610.2 2.68 2.83 2.63 2.77 1.30
Portsmouth 465.1 467.0 470.5 519.2 567.5 1.73 1.94 2.00 1.83 1.57
South East 1,903.5 1,919.1 1,932.5 1,943.0 1,946.0 2.06 1.91 1.83 2.07 1.53
South
Staffordshire 1,106.8 1,117.2 1,125.6 1,145.0 1,164.4 1.15 0.83 1.01 1.14 1.00
Sutton &
East Surrey 619.9 614.8 613.8 592.3 570.3 2.19 2.10 2.28 1.77 1.38
Tendring Hundred 201.8 203.3 204.7 195.8 187.2 2.88 2.46 2.38 2.54 2.09
Three Valleys 2,285.7 2,305.3 2,327.7 2,238.1 2,381.9 1.97 2.35 2.31 2.89 1.58
Industry 199,175.5 200,654.2 202,633.9 198,225.5 193,467.5 1.22 1.24 1.26 1.31 1.00
HEADING
24
Dividends
Table 13 sets out dividends reported for each
company (adjusted for capital restructuring
dividends) for the last five years and also the
related dividend covers on both a current cost
and historic cost basis.
This shows that total dividends declared in the
year ended 31 March 2001 are 12% lower than
those in the year ended 31 March 2000; 1,079
million and 1,230 million respectively.
Although in most instances the dividends
declared by the regulated companies are paid to
parent companies (and not to the ultimate
shareholders), the regulated companies are
expected to adopt appropriate and sustainable
dividend policies.
The Director has suggested that such a dividend
policy should comply with two principles. These
are firstly, that the companys ability to finance
its regulated business should not be impaired
and secondly, that, under a system of incentive
regulation, dividends would be expected to
reward efficiency and the management of
economic risk.
The abolition of Advanced Corporation Tax by
the government from 1999-2000 gave the
companies a cash flow benefit, which does not
seem to have affected the levels of dividend
paid. Dividends fell by only 12% in 2000-01
despite current cost profits after tax falling by
43%. This is reflected in the deterioration in the
levels of dividend cover (on both a current cost
and historic cost basis) in 2000-01. Ofwat
recognises that investor confidence must be
maintained but the level of dividends needs also
to be sustainable over the long-term. Dividends
from the regulated business should reflect the
cost of capital and distribution to shareholders
of a proper portion of the benefits of greater
efficiency.
In real terms, dividends have decreased by
26% since 199697 (excluding the capital
restructuring dividends), but when special
dividends are excluded, the decrease is only 9%.
Dividends in 2000-01 include a 98 million
special dividends declared by Yorkshire Water
and payable to its holding company, which it
justified by reference to efficiency gains. Special
dividends have been a feature of the past five
years and have totalled 2,958 million. An
analysis of them is set out in Table 13a.
The dividends in Table 13 and Table 13a exclude
capital restructuring dividends where a special
dividend is paid but the parent company
subscribes for additional new shares in the
company for the same amount. Such
transactions do not change the net debt position
of the company and for this reason are
excluded. Anglian Water Services Ltd has
declared a capital restructuring dividend for
2000-01 of 799 million and a number of
companies have paid dividends for this purpose
in prior years. These are set out in the footnote
to Table 13.
HEADING
25
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Table 13 Dividends reported and dividend covers for individual companies
HEADING
26
Table 13a Analysis of special dividends
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 Total
m m m m m m
Efficiency savings 168 98 266
Increased gearing 910 129 1,039
Windfall tax 1,227 205 1,432
Benefit sharing 221 221
Total 389 1,227 1,115 129 98 2,958
Companies breakdown:
1996-97 168m Severn Trent for efficiency savings, 221m United Utilities for benefit sharing.
1997-98 211m Anglian, 215m United Utilities Water, 583m Thames, 111m South West, 107m Wessex for
windfall tax.
1998-99 784m Thames and 126m Anglian for gearing, 69m Anglian and 136m United Utilities for windfall tax.
1999-00 129m Severn Trent for gearing.
2000-01 98m Yorkshire for efficiency savings.
Performance in 2000-01
Total water industry operating expenditure in
2000-01 was 2.6 billion, excluding exceptional
items (see notes to Table 14). This was 107
million less than in 19992000, or 4% in real
terms. It is also 120 million or 4% less than that
assumed in price limits for 2000-01. It was 293
million or 10% less than companies projected in
their 1999 Business Plans.
This performance continues an established
trend of reducing expenditure in each of the last
five years. Table 14 shows this trend at the
industry level, by service. Total operating
expenditure in 2000-01 was 303 million lower
than in 199596, the first year of the previous
periodic review, or 11%, in real terms. It includes
the annual cost of operating new treatment
plant to meet European Union directives on
drinking water quality and sewage effluent
standards.
Table 15 shows the performance of individual
companies. Table 16 shows the overall
movement in total operating expenditure
between 199596 the first year of the previous
periodic review and 2000-01 expressed as
percentages, for individual companies.
Comparisons of cost savings across companies
should be treated with caution, in particular
because they may be affected by one-off costs.
Operating costs shown in Tables 14, 15 and 16
exclude exceptional items. However, other
significant oneoff costs affect comparisons for
some companies, for example where
restructuring costs have not been declared as
exceptional.
3. OPERATING EXPENDITURE
27
Table 14 Total Operating expenditure by service
1999-00 to
2000-01 prices 2000-01
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 change
m m m m m m m
Water Service 1,742 1,702 1,651 1,592 1,563 1,479 (83)
Sewerage Service 1,129 1,105 1,088 1,097 1,112 1,089 (23)
Total 2,871 2,807 2,739 2,689 2,675 2,568 (107)
The numbers above do not reconcile to Table 1a, due to:
Exceptional items, excluded from the above, are as reported in June returns, and do not correspond to those stated in
Table 1a which are reported under the Financial Reporting Standards.
Table 1a operating costs are net of operating income.
Where savings are being achieved
When comparing 1995-96 with 2000-01, the
largest savings are being made in the support
costs for direct activities. These mainly
comprise of administrative staff costs and the
operating costs of vehicles, the maintenance of
buildings, land and equipment. Costs have
fallen by around 170 million, in real terms, or
25%, compared with 199596 the first year of
the previous periodic review.
Considerable savings are also being made in
direct activities with a large element arising
from the 90 million reduction (24%) in labour
costs since 1995-96.
The cost of pumping water and sewage has
been reduced by 57 million in real terms, or
22%, as companies take advantage of
increasing competition in the electricity
industry.
These savings are partially offset by the rise
in agency costs (principally hired and
contracted work with a large labour content) of
47 million. Other movements in direct costs
are small.
Savings have not been achieved equally across
the various direct activities. The greatest
savings, of around 20%, are for water
distribution, provision of sewerage and sewage
treatment. Savings on water resources and
treatment amount to less than 15%, while
sludge disposal costs have increased by more
than 36% since 199596.
In contrast with direct costs, indirect costs have
remained broadly stable in real terms. Indirect
costs include customer services, scientific
services, regulation, local authority rates and
doubtful debts. Costs of services to third parties
have fallen by 55 million, or 41%.
HEADING
28
Table 15 Total Operating expenditure by service for individual companies
2000-01 prices 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m m
Water and Sewerage Companies
Water service:
Anglian 149.2 141.8 132.6 133.4 128.7 123.4
D
^
wr Cymru 142.8 134.0 129.0 133.7 124.5 120.8
Northumbrian 141.8 141.2 135.7 128.4 129.9 119.8
Severn Trent 219.3 217.2 206.3 187.5 192.4 178.1
South West 61.4 56.7 54.0 51.4 50.2 47.4
Southern 76.2 74.3 60.9 59.2 57.8 48.7
Thames 261.9 252.4 247.2 236.8 231.2 228.9
United Utilities 205.8 203.5 208.8 196.4 196.1 179.5
Wessex 37.2 35.8 34.5 32.7 31.9 31.1
Yorkshire 140.6 147.8 138.0 133.6 125.5 121.6
Sub total 1436.2 1404.7 1347.0 1293.1 1268.2 1199.3
Sewerage service:
Anglian 146.1 140.4 134.1 140.6 143.9 151.1
D
^
wr Cymru 77.1 77.3 81.9 86.5 83.5 84.7
Northumbrian 52.4 50.0 50.1 49.5 54.2 59.3
Severn Trent 182.7 177.5 171.6 173.2 179.5 182.5
South West 40.7 39.6 39.8 40.0 39.4 42.3
Southern 106.2 102.2 92.6 89.0 90.3 76.6
Thames 247.2 237.2 231.8 226.3 221.8 204.2
Wessex 48.3 46.1 44.1 45.1 43.8 44.5
Yorkshire 96.0 102.0 102.0 101.5 92.6 97.7
Sub total 1129.4 1105.2 1088.2 1097.1 1112.3 1089.0
Total:
Anglian 295.3 282.2 266.7 274.0 272.6 274.5
D
^
wr Cymru 219.9 211.3 210.9 220.2 208.0 205.5
Northumbrian 194.2 191.2 185.8 177.9 184.1 179.1
Severn Trent 402.0 394.7 377.9 360.7 371.9 360.6
South West 102.1 96.3 93.8 91.4 89.6 89.7
Southern 182.4 176.5 153.5 148.2 148.1 125.3
Thames 509.1 489.6 479.0 463.1 453.0 433.1
Wessex 85.5 81.9 78.6 77.8 75.7 75.6
Yorkshire 236.6 249.8 240.0 235.1 218.0 219.3
Total WaSCs 2565.6 2509.9 2435.2 2390.2 2380.5 2288.3
Water Only Companies
Water service:
Bournemouth & W Hants 14.3 13.8 14.3 13.8 14.5 14.2
Bristol 38.3 36.6 36.2 35.4 35.9 33.9
Cambridge 8.4 7.9 7.9 7.9 7.7 7.8
Dee Valley 9.1 8.3 8.0 6.9 7.2 7.7
Folkestone & Dover 5.7 6.3 6.3 6.4 6.3 6.0
Mid Kent 17.6 17.5 17.6 17.0 17.6 18.0
Portsmouth 15.9 15.5 15.4 14.9 14.9 14.7
South East 48.1 44.6 47.5 47.2 44.2 39.3
South Staffordshire 37.4 37.1 37.5 37.1 35.6 34.2
Sutton & East Surrey 22.3 21.1 21.0 20.2 20.8 18.3
Tendring Hundred 4.8 5.0 5.2 5.1 5.3 4.7
Three Valleys 83.6 83.1 87.1 86.6 84.6 81.3
Total WOCs 305.5 296.8 304.0 298.5 294.6 2288.3
Industry: 2871.1 2806.7 2739.2 2688.7 2675.1 2568.4
Excludes exceptional items but includes third party expenditure.
HEADING
29
Table 16 Percentage change in operating expenditure since 1995-96
Water Sewerage Total
% change since % change since % change since
1995-96 1995-96 1995-96
Water & sewerage companies
Anglian (17) 3 (7)
D
^
wr Cymru (15) 10 (7)
Northumbrian (16) 13 (8)
Severn Trent (19) 0 (10)
South West (23) 4 (12)
Southern (36) (28) (31)
Thames (13) (17) (15)
United Utilities (13) 10 (4)
Wessex (16) (8) (12)
Yorkshire (14) 2 (7)
WaSC total (17) (4) (11)
Water only companies
Bournemouth & W Hants (1) (1)
Bristol (11) (11)
Cambridge (8) (8)
Dee Valley (15) (15)
Folkestone & Dover 4 4
Mid Kent 2 2
Portsmouth (8) (8)
South East (18) (18)
South Staffordshire (9) (9)
Sutton & East Surrey (18) (18)
Tendring Hundred (2) (2)
Three Valleys (3) (3)
WOC total (8) (8)
Industry total (15) (4) (11)
Notes:
1 Numbers may not add up due to rounding.
2 All numbers exclude exceptionals.
3 The total column gives the percentage change in total operating expenditure.
The water and sewerage services do not necessarily each provide 50% of this expenditure.
Performance in 2000-01
For both the water and sewerage services, total
annual investment in 2000-01 decreased
significantly by comparison with the last four
years. Table 17 shows capital investment since
199697. The aggregate investment in 2000-01
was 2.7 billion compared to 3.8 billion in
1999-2000. It comprised 2.3 billion of additions
to current cost fixed assets and 0.4 billion of
expenditure on infrastructure renewals.
However, investment remains high. Since
privatisation in 1989, the industry has continued
to invest at unprecedented levels. In total this
has amounted to over 38 billion equating to an
average annual capital investment in the water
industry of 3.5 billion over the last eleven
years. This compares with an equivalent
investment figure of around 1.8 billion in the
1980s.
Water industry investment in 2000-01, excluding
infrastructure renewals expenditure, accounts
for 1.5% of the gross domestic fixed capital
formation (GDFCF) in England and Wales.
Historically annual investment by water
companies has accounted for between 2% and
3% of GDFCF since privatisation.
In recent years the water industry has invested
over 50% of its turnover in new assets. In
2000-01, this reduced to 43%, but still remains at
a high level when compared with other industries.
The average annual level of gross investment
assumed in price limits for the five year period
from 2000-01 to 2004-05 was 3.4 billion.
The expectation for 2000-01 was 3.4 billion,
compared to actual investment of 2.7 billion.
Companies state that some of the difference
was due to capital efficiency, but more was due
to the need for extra time to establish quality
programmes. Consequently, a number of
companies rescheduled elements of their
capital investment programmes with the result
that the profiling of investment has differed
from that assumed by the Director when price
limits were set.
The extent of savings made varies by company
and across services. At an industry level,
efficiency savings of around 5% have been
reported.
Individual company investment is given in Table
18a for the water and sewerage companies and
Table 18b for the water only companies.
4. CAPITAL INVESTMENT
30
Table 17: Gross capital investment by service
5 year
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01 total
m m m m m m
Water service:
Total new fixed asset
formation 1,492 1,593 1,358 1,323 935 6,701
expenditure 315 269 301 281 270 1,436

1,807 1,862 1,659 1,604 1,205 8,137
Sewerage service:
Total new fixed asset
formation 1,604 1,889 1,968 1,986 1,393 8,840
expenditure 178 201 211 167 146 903

1,782 2,090 2,179 2,153 1,539 9,743

Total 3,589 3,952 3,838 3,757 2,744 17,880
Infrastructure renewals expenditure is stated net of capital contributions from customers.
HEADING
31
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Table 18a Gross capital investment by service for individual water and sewerage companies
HEADING
32
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.
Table 18b Gross capital investment by service for individual water only companies
Investment by output purpose category
Ofwat categorises capital expenditure by water
companies according to the following four
purposes:
the continuing provision of the base service;
legally required outputs to improve water
and environmental quality;
improvements to the levels of service to
customers; and
for maintaining the balance between supply
and demand.
A breakdown of capital investment by output
purpose category was initially obtained from
companies in their 1994 Strategic Business
Plans and remains the basis for the annual
reporting of capital investment for the current
price limit period.
Table 19 shows the expenditure breakdown by
purpose for the industry.
Base service
Total capital maintenance expenditure in
2000-01 decreased when compared with
1999-2000 and previous years. Both
infrastructure renewals expenditure and
expenditure on the maintenance of surface
assets decreased in 2000-01. A number of
companies reported that the foot and mouth
outbreak and the severe weather in Autumn
2000 impacted upon their capital maintenance
work programmes.
Quality enhancements
Quality enhancements expenditure has
reduced from the high expenditure levels
reported in recent years when companies
accelerated investment in the run-up to
statutory deadlines at the end of the year 2000.
Companies cite delays in obtaining planning
permission and the review of priorities by
the quality regulators as contributing to the
reduced expenditure on quality enhancements
in 2000-01.
Levels of service improvements
Some companies have continued to invest in
projects to alleviate water pressure problems
and reduce the risk of flooding from sewers in
advance of the programme assumed in price
limits.
HEADING
33
Table 19 Gross capital investment by purpose category
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m
Maintenance of underground assets 493 470 511 448 416
Maintenance of surface assets 966 1,184 1,047 1,132 857
Quality enhancement programmes 1,351 1,549 1,642 1,681 1,136
Enhanced service levels 259 173 130 90 22
Supply/demand balance 453 521 454 364 288

Total 3,522 3,897 3,784 3,715 2,719
Tables 19 to 22 do not agree with Table 17 because of the inclusion of adopted assets at nil cost in fixed
asset additions for some companies. Assets adopted at nil cost are excluded from gross capital investment
in Tables 19, 20a, 20b, 21 and 22.
Improving the supply/demand balance
Having shown a steady increase from 1994-95 to
1997-98, capital investment on the
supply/demand balance fell in the last two years
of AMP2. In 2000-01 supply/demand balance
capital investment fell again. For the period
2000-01 to 2004-05 price limits assume that
companies will spend less on this output
purpose category than in the last five years.
For many companies, the investment
programmes to improve security of supply that
began following the hot, dry summer of 1995
have been completed. However, an allowance
has been made in current price limits for a small
number of companies to continue improving
their deficient security of supply. The outputs of
these programmes vary depending on the
companys preferred strategy, and they include
mains reinforcement, metering, development of
new resources and leakage reduction.
Tables 20a and 20b show capital investment by
purpose category in 2000-01 for individual
companies.
HEADING
34
Table 20a Gross capital investment by purpose category 2000-2001 water and
sewerage companies
2000-01 prices Base service: Base service:
maintenance maintenance Quality Enhanced Supply/
of underground of surface enhancement service demand Total
assets assets programmes levels balance investment
m m m m m m
Water service:
Anglian 23.5 30.3 21.4 0.2 24.9 100.3
D
^
wr Cymru 20.7 23.0 28.9 0.0 7.4 80.0
Northumbrian 19.3 24.2 23.5 1.6 11.2 79.8
Severn Trent 32.3 46.4 33.5 0.6 24.6 137.4
South West 11.0 16.7 25.4 0.0 8.9 62.0
Southern 12.9 21.5 6.0 1.1 7.1 48.6
Thames 32.1 77.6 33.9 1.3 61.1 206.0
Wessex 5.7 12.8 6.5 1.3 8.6 34.9
Yorkshire 23.1 43.0 38.9 0.6 9.4 115.0
Total 231.6 337.2 284.3 7.3 175.6 1,036.0
Sewerage service:
Anglian 14.0 49.3 89.9 1.4 8.3 162.9
D
^
wr Cymru 9.0 20.1 94.6 1.1 2.7 127.5
Northumbrian 10.6 12.5 105.8 0.0 6.6 135.5
Severn Trent 26.8 96.7 26.3 0.0 17.6 167.4
South West 3.8 17.9 62.9 0.2 7.6 92.4
Southern 9.1 95.0 133.8 1.1 2.1 241.1
Thames 10.7 82.5 42.9 4.4 8.6 149.1
Wessex 9.5 18.9 59.1 0.8 4.8 93.1
Yorkshire 12.4 27.1 95.5 2.9 9.4 147.3
Total 145.7 469.9 815.4 12.5 70.4 1,513.9
Measuring investment by outputs
The Director continues to focus on the delivery
of outputs. The data supplied to Ofwat by both
the companies and the quality regulators
enables a better understanding of the
relationship between service to customers,
company activity and expenditure.
When price limits were set in 1999 for the five
year period beginning at 2000-01, a large
element of the assumed capital programme was
the investment necessary to enable companies
to maintain the current service performance of
their existing assets to customers and the
environment. A substantial level of expenditure
was also needed to enable companies to meet
new quality standards. This expenditure was
particularly significant for the sewerage
service, in order to meet European and
domestic statutory requirements on
environmental quality and to be consistent with
UK government policy.
A summary of the outputs associated with the
investment in 2000-01 is given below including
the DWI and EAs assessments of progress
made by the companies.
Base service
The output required from base service capital
investment is to maintain serviceability to
customers and the continued compliance with
existing quality standards. Base service consists
of infrastructure renewals expenditure (relating
to underground assets such as mains) and the
maintenance of surface assets (such as water
treatment works).
The trends in levels of service performance on
pressure and interruptions of water supply, and
on flooding and collapses of sewers in 2000-01,
continue to suggest that overall there has been
no deterioration in the industrys underground
assets. Similarly, performance against existing
treatment quality standards for the water service
has been generally sustained in 2000. Companies
must strive to maintain full compliance with
sewage treatment consents in future years.
Further details on the serviceability to
customers from base service investment are set
out in the subsequent section. Reports on
performance from both the DWI and the EA
covering base service and quality
enhancements are set out overleaf.
HEADING
35
Table 20b Gross capital investment by purpose category 2000-2001 water only
companies
2000-01 prices Base service: Base service:
maintenance maintenance Quality Enhanced Supply/
of underground of surface enhancement service demand Total
assets assets programmes levels balance investment
m m m m m m
Water service:
Bournemouth & W Hants 0.9 2.7 0.3 1.4 1.8 7.1
Bristol 5.5 5.0 6.7 0.0 3.3 20.5
Cambridge 1.0 0.3 0.0 0.0 1.7 3.0
Dee Valley 0.8 0.8 0.9 0.1 1.0 3.6
Folkestone & Dover 0.5 0.9 0.8 0.2 1.1 3.5
Mid Kent 2.8 4.7 3.8 0.0 9.1 20.4
Portsmouth 2.5 2.9 0.8 0.0 0.8 7.0
South East 5.6 6.4 6.6 0.0 5.8 24.4
South Staffs 6.2 5.1 1.5 0.0 6.8 19.6
Sutton & East Surrey 0.7 5.9 3.2 0.0 2.5 12.3
Tendring Hundred 0.5 2.1 0.0 0.0 1.0 3.6
Three Valleys 11.1 13.4 11.2 0.3 7.6 43.6
Total 38.1 50.2 35.8 2.0 42.5 168.6
Quality enhancements
The outputs under quality enhancements are
those necessary to implement new legislative
requirements relating to drinking water quality
and waste water treatment by the statutory due
dates. Outputs also include the continuation of
investment programmes to meet current
legislative requirements.
Water service
The high quality of drinking water in England
and Wales was maintained in 2000, with 99.83%
of tests on samples from treatment works,
service reservoirs and customers taps meeting
standards. This is virtually identical to 1999
when overall compliance was 99.82%. The DWIs
annual report, Drinking Water 2000 published
on 11 July 2001, contains a record of each
companys performance against drinking water
quality standards, as well as an overall summary
for England and Wales. The DWI reports that the
number of tests that infringe a standard is now
less than one eleventh of that in 1992.
Improvement programmes at more than 400
treatment works to comply with current and
new quality standards and on distribution
systems to rectify quality deficiencies were
assumed in price limits set in 1999.
Improvement programmes at treatment works
during the five years beginning April 2000 are
principally to meet new standards for lead,
cryptosporidium, trihalomethanes and
bromate.
6
Early in 2000 the DWI reviewed the strategies
for complying with the new standards for lead
and cryptosporidium. Companies agreed
revised timescales with DWI for programmes
of plumbosolvency control to comply with
the new lead standards, and for installing
new treatment plants to minimise the risk
from cryptosporidium. Consequently, some
companies were later than expected in starting
the programmes of work. DWI will assess
companies progress towards delivering agreed
programmes, and publish its findings in
October 2001.
Companies have given undertakings to
renovate more than 20,000km of distribution
mains over the five years beginning April 2000
in order to improve the quality of water at the
tap, particularly to reduce the incidence of
discolouration. The undertakings require
companies to deliver outputs against
intermediate milestone dates. The first
milestone dates fall at the end of 2001 for most
companies, and it is therefore too early to
determine whether companies are delivering
the required outputs. However, although some
companies have ground to make up, progress
towards fulfilling obligations is generally
satisfactory. The total length renovated during
the year was 3,800km.
Substantial mains renovation programmes to
improve water quality were also assumed in
price limits set in 1994. These programmes were
due to be completed by 31 March 2000. The DWI
has now audited the efficacy of work carried out
as part of these undertakings. Over 99% of the
renovation programme of 24,000km was
delivered.
These programmes to renovate water mains
that give rise to quality deficiencies are a major
factor in the ongoing improvements in
compliance with the standard for iron. The DWI
reports that the percentage of water supply
zones breaching the iron standard fell for the
fifth successive year. However, one of the main
causes of non-compliance in 2000 was
contravention of the iron standard, associated
with the condition of water mains. The
continuing renovation programme will address
this problem.
Sewerage service
The statutory date for completion of many
schemes under the Urban Waste Water
Treatment Directive (UWWTD) was
31 December 2000. An assessment of the
delivery of the 1995-2000 quality obligations can
now be made. This reveals that the majority of
the required construction work has been
completed although it will not be possible to
determine whether this additional treatment is
meeting compliance targets until a years
sampling has been undertaken. Where there
have been significant delays to continuous
discharge projects these can usually be
attributed to problems in obtaining planning
permission or other reasons not within the
direct control of the water companies. Planning
and land acquisition issues have delayed some
coastal projects in Southern Water, South West
Water and D
^
wr Cymru (Welsh Water).
HEADING
36
6
Cryptosporidium is an organism that can cause a gastrointestinal illness in humans.
Trihalomethanes are formed by the combination of chlorine and organic matter naturally present in water.
Bromate is formed by the action of ozone on compounds present in raw water.
Companies have started to carry out the 2000-05
quality programme. However, as with any large
new capital investment programme the tangible
benefits (works construction and
commissioning) are often not apparent until
later on in the process. In the early stages of the
programme, expenditure is directed at
feasibility and design work. Ministers confirmed
the programme of work for April 2000 to
December 2005 and it is detailed in the annex to
the EAs publication Achieving the Quality
(June 2000). It lists almost 2,000 sewage
treatment works and over 4,500 intermittent
discharges that require improvement.
In the first year, the EA expected that 299
intermittent discharges would be improved. In
fact, 326 were reported as completed, although
while the majority of companies met or
exceeded the EAs targets, both Northumbrian
Water and South West Water fell short of their
expectations. For the continuous discharge
programmes, measurement of the progress
against expectation is based on the population
equivalent served by sewage treatment works
(as opposed to absolute numbers of
improvements). On this basis the targets for the
industry were met for the Bathing Water,
Freshwater Fish and Habitats Directives.
There were marginal shortfalls against the
completion of River Quality Objectives (95%
complete) and the UWWTD programme (82%
complete). Although the Shellfish Water
Directive programme appears to be only 14%
complete against first year targets, the small
scale of the target (four schemes of which two
were completed) has exaggerated this position.
The expected timescales for completion, together
with actual progress in 2000-01 for intermittent
discharges, the Bathing Water Directive, the
UWWTD and the Shellfish Waters Directive are
shown in Figures 1 to 4 respectively.
The industry has reported capital expenditure of
815 million for quality enhancements in the
sewerage service, which is approximately 25%
lower than assumed in price limits. Companies
have reported that some of this underspend is
efficiency savings and some due to reprofiling
of the quality programme resulting in a lower
than expected need for capital investment.
There has also been some delay to the
completion of projects.
Both Ofwat and the EA need assurances that the
National Environment Programme will be
delivered on time. As part of the annual June
Return process, we asked the companies to report
on progress for some schemes. This is so that we
can identify any potential problems with the
completion of the priority environmental projects
in the longer term. This information allows us to
track progress with these schemes against
milestones (e.g. feasibility, design, construction,
commission and completion) and be aware of the
extent of any slippage each year. The information
from companies in their 2001 June Returns
suggests that they can still achieve the quality
improvements. However, some companies
appear already to have utilised all the contingency
built into the plans. We will be monitoring the
companies and asking for assurance that the due
dates will be met in future years.
The first year of the 2000-2005 period has seen
a slight deterioration in the performance of
sewage treatment works against their consents
both in terms of the numbers of works failing
and the population equivalent they serve. The
industry average has been lowered by Anglian
Water, D
^
wr Cymru, South West Water and
United Utilities Water which have fallen behind
the high standard set by the rest of the industry.
Although the industry performance against
these measures is still good the EA still requires
full compliance with the standards at all sewage
treatment works.
There is a continued downward trend in serious
pollution incidents but most incidents are
avoidable since they result from operational
deficiencies or inadequate maintenance. There
has been a significant rise in court actions
brought by the EA against companies for
pollution offences. While this may be partly due
to the timing and duration of legal proceedings,
the industry should be aware that the EA will not
hesitate to carry out the necessary enforcement
action.
Bathing water quality in England and Wales in
2000 improved further with fewer than 5% of
designated coastal bathing waters failing the
European mandatory bacteriological standards.
As the remaining bathing water improvement
schemes take effect, it is becoming clearer that a
growing proportion of the outstanding shortfall
in compliance may be due in part to non-water
company sources of pollution such as
agricultural run-off and urban surface drainage.
Ofwat and the EA will be writing to several
companies to be reassured that compliance
with sewage treatment consents and sewerage
asset performance are given a high priority and
that completion of the National Environment
Programme is achievable.
HEADING
37
HEADING
38
5000
4000
3000
2000
1000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Expected nr Actual nr Cumulative expected Cumulative Actual
N
u
m
b
e
r

c
o
m
p
l
e
t
e
d
L N
L
L
L
L
L
L
N
Figure 1 Programme for intermittent discharges
Figure 2 Programme for the Bathing Water Directive
100
80
60
40
20
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Expected % Actual % Cumulative expected Cumulative Actual
%

C
o
m
p
l
e
t
i
o
n
L N
L
L
L
L
L L
N
The total programme serves a
population equivalent of 5.6m
HEADING
39
Figure 3 Programme for completion of UWWTD
Figure 4 Programme for Shellfish Water Directive
100
80
60
40
20
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
%

C
o
m
p
l
e
t
i
o
n
L N
L
L
L
L
L
L
N
100
80
60
40
20
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
%

C
o
m
p
l
e
t
i
o
n
L N
L
L
L
L
L L
N
Levels of service improvements
Outputs in this category are those that achieve a
demonstrable, permanent improvement in
existing levels of service to customers,
aggregated over the entire customer base.
Some companies have invested in projects to
alleviate water pressure problems and reduce
the risk of flooding from sewers.
The number of properties at risk of receiving
low pressure has fallen again this year,
continuing the downward trend established
since privatisation.
The number of properties subject to internal
flooding from sewers fell this year despite
rainfall significantly above average across
England and Wales. Companies have made
some further progress in reducing the number of
properties at risk of flooding due to overloaded
sewers although this remains an important issue
for customers. Further details on company
performance against these and other customer
service measures have been reported in The
levels of service for the water industry in
England and Wales 2000-2001 Report.
Improving the supply/demand balance
Outputs in this category are those that serve to
deliver an improvement to companies
supply/demand balance position. Following the
hot, dry summer of 1995 and the associated
problems that continued in 1996, many
companies undertook significant expenditure
programmes to improve the security of supply
offered to customers. Most of those
programmes are now complete.
Allowance was made in the 1999 final
determination for a small number of companies
to further improve the security of their supplies.
In the period to 2004-05, the performance of
these companies will be monitored to ensure
that the improvements in security of supply are
delivered. All other companies will be expected
to maintain security of supply at no less than
prevailing levels.
Investment by service area
Table 21 shows the aggregate industry
investment by service area. Descriptions of the
types of assets under each heading are set out
in the Glossary of terms and definitions
(Appendix 5).
Investment in the water service is lower than
that seen in 1999-2000. Investment on the
distribution system to comply with legal
undertakings continued to take up the majority
of expenditure on the water service.
Investment in the sewerage service is below the
high level seen in 1999-2000. The majority of
this investment continued to be associated with
sewage treatment projects required to meet
companies UWWTD obligations.
Investment in the sewer network in 2000-01 has
also reduced from the levels seen in previous
years.
The 2000-01 expenditure by each company by
service area is given in Table 22.
HEADING
40
Table 21 Gross capital investment by service area - industry
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m
Water service:
resources 183 113 94 69 45
treatment 374 319 215 204 208
distribution 1,031 1,146 1,133 1,111 791
general 212 274 217 220 161

Water service total 1,800 1,852 1,659 1,604 1,205
Sewerage service:
sewerage 646 645 675 626 467
sewage treatment 886 1,185 1,260 1,293 895
sewerage general 190 215 190 192 152

Sewerage service total 1,722 2,045 2,125 2,111 1,514

Industry total 3,522 3,897 3,784 3,715 2,719

Tables 19 to 23 do not agree with Table 17 because of the inclusion of adopted assets at nil cost in fixed asset
additions for some companies. Assets adopted at nil cost are excluded from gross capital investment in
Tables 19, 20a, 20b, 21 and 22.
Activity
Tables 23a and 23b show the amount of activity
carried out in 2000-01.
On infrastructure assets, the industry
rehabilitated over 4,000km of water main and
270km of sewer. Of the total capital investment
reported in 2000-01, 15% has been on
infrastructure renewals.
Activity carried out on assets such as treatment
works and pumping stations has been
requested for the first time in the 2000-01 June
Return. Only substantive activity is reported by
companies and shown in the tables. Ofwat
defines substantive activity as 25% or more of
the Gross Modern Equivalent (GMEA) value of
the asset involved.
The 25% threshold ensures that only the largest
capital projects are reported on and so avoids
the need for companies to report activity for the
many hundreds of smaller projects completed
each year.
The tables show that the majority of substantive
activity carried out in 2000-01 was associated
with the quality enhancements programmes.
The industry completed 56 new or enhanced
water treatment work schemes and over
230 new or enhanced sewage treatment
works schemes to meet new quality
obligations allowed for in the 1999 Periodic
Review.
Under their capital maintenance programmes,
the industry carried out substantive
refurbishment schemes at 22 water treatment
works and 51 sewage treatment works. The
industry substantively refurbished 39 pumping
stations and 176 sewage pumping stations in
2000-01.
HEADING
41
Table 22 Gross capital investment by service area 2000-2001 - individual companies
2000-01 prices Water Water Water Water Water Sewage Sewerage Sewerage
resources treatment distribution general total Sewerage treatment general total
m m m m m m m m m
Anglian 2.7 11.0 72.8 13.8 100.3 31.1 111.1 20.7 162.9
D
^
wr Cymru 0.4 23.2 50.7 5.7 80.0 51.4 73.2 2.9 127.5
Northumbrian 7.0 13.9 51.6 7.3 79.8 23.7 107.7 4.1 135.5
Severn Trent (0.1) 20.2 83.1 34.2 137.4 47.8 85.1 34.5 167.4
South West 0.5 8.3 44.6 8.6 62.0 22.4 62.3 7.7 92.4
Southern 1.8 10.9 24.6 11.3 48.6 78.1 144.1 18.9 241.1
Thames 8.5 22.8 151.9 22.8 206.0 40.7 84.2 24.2 149.1
United Utilities 5.8 32.8 119.0 14.4 172.0 78.2 103.8 15.6 197.6
Wessex 0.7 4.0 23.9 6.3 34.9 27.9 54.9 10.3 93.1
Yorkshire 8.1 25.5 68.4 13.0 115.0 66.2 68.2 12.9 147.3
Total 35.4 172.6 690.6 137.4 1,036.0 467.5 894.6 151.8 1,513.9
Bournemouth &
W Hants 1.7 1.2 3.0 1.2 7.1
Bristol 0.7 5.1 12.1 2.6 20.5
Cambridge 0.1 0.0 2.2 0.7 3.0
Dee Valley 0.0 0.3 2.9 0.4 3.6
Folkestone & Dover 0.1 1.1 1.7 0.6 3.5
Mid Kent 0.3 4.8 13.0 2.3 20.4
Portsmouth 0.6 2.3 3.4 0.7 7.0
South East 5.0 2.4 15.2 1.8 24.4
South Staffs 0.9 0.8 14.9 3.0 19.6
Sutton & East Surrey 0.3 4.2 5.8 2.0 12.3
Tendring Hundred 0.0 1.6 1.3 0.7 3.6
Three Valleys 0.1 11.5 24.4 7.6 43.6
Total 9.8 35.3 99.9 23.6 168.6
HEADING
42
Table 23a: Activity in 2000-01 - water and sewerage companies
Existing New or Service
Dams & water enhanced reservoirs
Mains Length of impounding treatment water Pumping & water
renewed & refurbished reservoirs works treatment stations towers
relined aqueducts refurbished refurbished works refurbished refurbished
km km nr nr nr nr nr
Water service:
Anglian 327 0 0 3 0 0 1
D
^
wr Cymru 312 0 0 0 0 7 1
Northumbrian 524 0 0 0 5 6 1
Severn Trent 409 0 0 3 12 3 1
South West 225 2 0 1 7 0 1
Southern 72 0 0 0 0 1 1
Thames 328 1 0 2 0 3 0
United Utilities 840 3 1 5 7 4 2
Wessex 127 0 0 1 1 2 2
Yorkshire 508 0 0 0 5 4 5
Total 3,673 6 1 15 37 30 15
New or
Sewage enhanced Sludge
Sewers Intermittent treatment sewage treatment Pumping Sea
renovated discharges works treatment works stations outfalls
& replaced refurbished refurbished works refurbished refurbished refurbished
km nr nr nr nr nr nr
Sewerage service:
Anglian 27 0 3 12 1 39 0
D
^
wr Cymru 4 0 0 40 0 0 0
Northumbrian 15 0 1 7 0 3 1
Severn Trent 16 0 17 50 3 21 0
South West 1 1 4 14 0 1 0
Southern 3 18 9 4 0 3 1
Thames 29 0 4 38 0 67 0
United Utilities 128 0 6 10 1 0 0
Wessex 35 0 0 20 0 18 0
Yorkshire 13 0 7 37 0 24 0
Total 271 19 51 232 5 176 2
Notes:
Activity shown represents 25% or more of the gross replacement cost of the asset involved.
Table 24 shows that over 44,000 km of mains
have been renewed or relined since 199293,
out of the industrys total of 329,700 km. The
overall level of activity on water mains in 2000-01
has reduced from the peak seen in 1999-2000
when companies strove to fulfil their obligations
in respect of distribution undertakings as part of
the quality enhancements programme.
The significant reduction in the number of
communication pipes replaced reflects the
refocusing of the DWI strategy for meeting the
lead standards or plumbosolvency control
before identifying the need for lead
communication pipe replacement.
The overall level of activity on critical sewers
has reduced slightly compared to 1999-2000
although the length of critical sewers renovated
has increased.
Table 25 shows the network activity for
individual companies.
HEADING
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Table 23b Activity in 2000-01 - water only companies
Existing New or Service
Dams & water enhanced reservoirs
Mains Length of impounding treatment water Pumping & water
renewed & refurbished reservoirs works treatment stations towers
relined aqueducts refurbished refurbished works refurbished refurbished
km km nr nr nr nr nr
Water service:
Bournemouth & W Hants 1 0 0 1 0 0 0
Bristol 88 0 0 2 11 1 0
Cambridge 11 0 0 0 0 0 0
Dee Valley 21 0 0 0 0 1 0
Folkestone & Dover 4 0 0 0 0 0 0
Mid Kent 21 0 0 0 0 1 0
Portsmouth 23 0 0 1 0 0 0
South East 88 0 0 0 1 0 0
South Staffs 58 0 0 0 0 1 0
Sutton & East Surrey 9 0 0 1 0 1 0
Tendring Hundred 5 0 0 1 0 0 0
Three Valleys 82 0 0 1 7 4 0
Total 413 0 0 7 19 9 0
Notes:
Activity shown represents 25% or more of the gross replacement cost of the asset involved.
Table 24 Maintenance activity on underground assets - industry
Industry totals 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
Water mains relined (km) 2,099 2,011 2,037 1,380 1,896 2,380 1,899 2,115 1,597
Water mains renewed (km) 2,361 2,187 2,330 2,739 3,329 3,499 3,893 4,082 2,489
Communication pipes
replaced (number) 253,519 215,582 193,879 209,590 233,936 249,404 258,191 239,189 156,520
Critical sewers renovated (km) 89 59 80 104 143 178 182 104 112
Critical sewers replaced (km) 146 111 68 76 105 92 80 85 54
HEADING
44
Table 25: Maintenance activity on underground assets - individual companies 1990-91
to 2000-01
Comm-
Water Water unication Critical Critical
mains mains pipes sewers sewers
relined renewed replaced renovated replaced
1
km km number km km
Anglian 164 4,770 232,196 81 69
D
^
wr Cymru 689 3,131 188,261 46 112
Northumbrian 2,236 2,136 193,712 286 20
Severn Trent
2
6,551 5,994 506,351 106 345
South West 1,526 682 56,921 34 17
Southern 519 654 70,989 27 16
Thames 4,528 575 109,177 342 137
United Utilities 187 6,929 538,753 269 212
Wessex 596 775 40,233 98 21
Yorkshire 2,238 2,340 114,950 44 31
Bournemouth & W Hants 20 81 26,969
Bristol 107 365 42,507
Cambridge 24 172 4,368
Dee Valley 175 109 22,661
Folkestone & Dover 165 17 8,461
Mid Kent 145 261 21,894
Portsmouth 8 363 37,390
South East 1,638 446 60,443
South Staffs 2 517 29,725
Sutton & East Surrey 75 280 8,787
Tendring Hundred 90 102 5,979
Three Valleys 355 570 126,056
1
The figure for critical sewers replaced are from 1991-92 only.
2
East Worcestershire data for 1990-91, 1991-92 and 1992-93 is included in Severn Trents totals.
Serviceability to customers
Concept of serviceability
The water and sewerage companies have to
maintain their non-infrastructure assets and
networks of water mains and sewers so that
they can provide services to current and future
customers. At each periodic review of price
limits, Ofwat assesses each companys outputs
in recent years and its plans for future
maintenance. Future price limits are set at a
level that we believe allows for sufficient
maintenance of the asset systems.
We examine the overall trends in a range of
indicators that describe the performance of the
asset systems in delivering services to the
customer. These trends inform our judgement
as to whether the capital maintenance activity
carried out by a company over the period has
resulted in stable, improving or deteriorating
serviceability to customers.
Our framework for assessing capital
maintenance needs is described in Appendix 4.
This report includes our current assessment of
serviceability to customers both at industry and
company level. We intend to repeat this in
future years.
Serviceability of the water main networks
The key indicators that we use to decide
whether a company has maintained
serviceability are:
Number of bursts.
Quality compliance in respect of the level of
iron in water.
Scale of interruptions of supplies to
customers (DG3): unplanned interruptions
to supplies greater than 12 hours.
Extent of low pressure problems (DG2).
Figure 5 sets out the overall trends in water
mains serviceability.
Serviceability of the sewer networks
The key indicators that we use to decide whether
a company has maintained serviceability are:
Number of sewer collapses.
Number of pollution incidents occurring at
combined sewer overflows and sewers.
Properties flooded because of insufficient
sewer capacity (DG5).
Figure 6 sets out the overall trends in sewer
serviceability.
Serviceability of water service non-
infrastructure assets
The percentage of the total number of
determinations taken at water treatment
works containing coliforms.
The number of water treatment works where
enforcement action was considered because
of contraventions of the coliforms standard.
Figure 7 sets out the overall trends in these
indicators. The DWI has published information
on both these indicators in its annual report
since 1990.
Serviceability of sewerage non-infrastructure
assets
The percentage of sewage treatment works
failing numeric consents.
The percentage of equivalent population
served by non-compliant works failing look-
up table consents.
Figure 8 sets out the overall trends in these
indicators.
HEADING
45
HEADING
46
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
79-80 81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00
Pressure (DG2) Interruptions (DG3) Bursts Water quality (Fe zonal failures)
R
a
t
i
o

t
o

A
v
e

o
f

A
c
t
u
a
l
s
Note: The trends in bursts (emboldened line) provides the strongest guide to the state of the assets
Incomplete datasets
for 87/88 and 88/89
Improving
Stable
Year
Figure 5 Serviceability Water mains networks
Figure 6 Serviceability Sewer networks
4.0
3.0
2.0
1.0
0
79-80 81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00
Flooding Pollution incidents Sewer collapses
R
a
t
i
o

t
o

A
v
e

o
f

A
c
t
u
a
l
s
Note: The trends in sewer collapses (emboldened line) provides the strongest guide to the state of the assets
Incomplete datasets for
87/88, 88/89 and 89/90
Improving
Stable
Year
Worsening
HEADING
47
Figure 7 Serviceability Water treatment works
Figure 8 Serviceability Sewage treatment works
88-89 90-91 92-93 94-95 96-97 89-99 00-01
Determinations containing coliforms at WTWs
Possible enforcement actions at WTWs
R
a
t
i
o

t
o

A
v
e

o
f

A
c
t
u
a
l
s
Improving
Stable
Year
Worsening
87-88 89-90 91-92 93-94 95-96 97-98 99-00
Population served by non-compliant works
Percentage of STWs failing numeric consents
R
a
t
i
o

t
o

A
v
e

o
f

A
c
t
u
a
l
s
Improving
Stable
Year
Worsening
4.0
3.0
2.0
1.0
0.0
4.0
3.0
2.0
1.0
0.0
Assessment of serviceability to customers
Table 26 summarises the assessments of
serviceability of the asset systems at a company
level for the year 2000-01.
At the industry level water infrastructure
serviceability is stable. The burst rate is close to
a historical low. DG2 pressure events continue
to reduce at what is now a relatively low level.
A slight rise in DG3 event is attributable to
a single unrepresentative event in one
company. One company (South Staffordshire)
displays a trend in serviceability which is
less than stable. We will discuss the current
situation with the company and seek an
assurance that it will put in place action to
restore stable trends in serviceability to
customers by 2003-04.
At the industry level, sewerage infrastructure
serviceability is stable. Sewer collapse rates
show a marginal improvement over the last ten
years. Flooding from overloaded sewers might
have been expected to be higher, due to adverse
weather. In some companies there has been an
increase in flooding due to collapses. This trend
is not shown on the industry overview. Trends in
serviceability are marginal for four companies
(Anglian, Southern, Thames and Wessex) and
deteriorating for one (South West). We will
discuss the current situation with these
companies and seek assurances that they will
put in place action to restore stable trends in
serviceability to customers by 2003-04. In the
light of no improvement since last year we will
be inviting Southern Water to explain its plans
to achieve this goal.
HEADING
48
Table 26 Water & sewerage infrastructure serviceability assessments for 2000-01
Water Water Sewerage Sewerage
infrastructure non-infrastructure infrastructure non-infrastructure
Water & sewerage companies
Anglian Stable Stable Marginal Stable
D
^
wr Cymru Stable Stable Stable Marginal
Northumbrian Stable Stable/Marginal Stable Marginal
Severn Trent Stable Stable Stable Stable
South West Improving Stable Deteriorating Stable
Southern Stable Stable Marginal Deteriorating
Thames Stable Marginal Marginal Stable
United Utilities Improving Stable Stable Marginal
Wessex Stable Marginal Marginal Stable
Yorkshire Improving Stable/Improving Stable Stable
WaSC assessment Stable Stable Stable Stable
Water only companies
Bournemouth & W Hants Stable Stable
Bristol Stable Stable
Cambridge Stable Marginal
Dee Valley Stable Stable
Folkestone & Dover Stable Stable
Mid Kent Stable Marginal
Portsmouth Stable Deteriorating
South East Improving Stable
South Staffs Stable/Marginal Deteriorating
Sutton & East Surrey Stable Stable
Tendring Hundred Stable Improving
Three Valleys Improving Stable
WOC assessment Stable Stable
Industry assessment Stable Stable
At the industry level, Ofwat assesses water non-
infrastructure serviceability to be stable.
However, there is considerable variation
between individual companies. Trends in
serviceability are marginal for four companies
(Thames, Wessex, Cambridge and Mid Kent)
and deteriorating for two (Portsmouth and
South Staffordshire). As the serviceability
indicators of non-infrastructure assets can
reflect operational management and other
factors as well as capital maintenance needs, we
will be exploring the underlying causes with
those companies having less than stable
assessments. We will then consider if further
regulatory action is necessary. Ofwat is jointly
progressing an initiative with the DWI to
address any limitations of the existing suite of
serviceability indicators used. This should allow
future company-specific assessments to be
more indicative of capital maintenance needs
from next year onwards.
At the industry level Ofwat assesses sewerage
non-infrastructure serviceability to be stable
though as with sewerage infrastructure, the
overall picture masks wide variation between
companies. The trends in serviceability are
marginal for three companies (D
^
wr Cymru,
Northumbrian and United Utilities) and
deteriorating for one (Southern). As for water,
the serviceability indicators reflect operational
management and other factors, as well as
capital maintenance needs. Consequently we
will first explore with these companies the
underlying causes before contemplating further
regulatory action. Ofwat is also jointly
progressing with the EA an initiative to address
any limitations of the existing suite of
serviceability indicators used. This should allow
company-specific assessments to be more
indicative of capital maintenance needs.
Infrastructure renewals and accounting
charges
It is the accounting charges and not expenditure
that drive customers bills. Capital expenditure
for above ground assets (such as treatment
works) and below ground assets (such as
sewers and pipes) contribute to the accounting
charges in customers bills in different ways.
The new quality improvement programme
(when it consists of above-ground assets) is
paid for by customers in their bills over the
life of the investment through depreciation
charges rather than immediately the
investment is incurred.
Above ground capital maintenance is paid
for by customers over the life of the
investment through depreciation charges.
Underground network capital maintenance
expenditure is averaged over a suitable time
horizon. It is this average infrastructure
renewals charge (IRC), which is paid through
customers bills rather than conventional
depreciation.
Infrastructure renewals accounting was adopted
by the water companies prior to privatisation in
1989. It reflects the way infrastructure assets are
managed, operated and maintained in a better
way than conventional depreciation policies.
Table 27 shows the infrastructure renewals
expenditure and charge by service in 2000-01
and in the four previous years.
The infrastructure renewals charges for both
water and sewerage has been broadly constant
over the past five years. Infrastructure renewals
expenditure has, however, declined in 2000-01
compared to 1999-2000 (which itself was a
reduction compared with 1998-99). The
infrastructure renewals expenditure in 2000-01
of 416 million represents a 19% decrease
compared with 1998-99.
In their Business Plans, companies argued that
higher levels of infrastructure renewals
expenditure would be required in the longer
term because the performance of the networks
would otherwise deteriorate. Ofwats
assessment, as set out in the previous section, is
that serviceability to customers is stable and
indeed improving on the water network.
If expenditure is expected to rise in future, the
principles of infrastructure renewals accounting
would suggest that a higher level of
infrastructure renewals charges would be
charged against profits. This has not occurred.
It also seems inconsistent that expenditure
has declined at the same time as companies
are suggesting that more long term work
is needed.
HEADING
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HEADING
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Table 27 Infrastructure renewals
2000-01 prices 1996-97 1997-98 1998-99 1999-00 2000-01
m m m m m
Water service:
Infrastructure renewals expenditure 315 269 301 281 270
Infrastructure renewals charge 241 243 246 240 266
Difference 74 26 55 41 4
Sewerage service:
Total:
Difference as % of charge 25 19 28 17 1
Water companies have a statutory duty to trade
at arms length with other companies in the
group (Associate companies) and the parent
company. One of the main reasons for this is to
ensure that price limits are set on the basis of
the actual costs of providing water and
sewerage services and not costs inflated by
cross subsidy. Arms length trading will also
prevent transactions taking place on preferential
terms that are not warranted.
At the 1999 Periodic Review, the Director made
downward adjustments to the base costs of four
companies to ensure that this was the case. A
consistent approach will be taken at future
Periodic Reviews.
Ofwats transfer pricing guideline, Regulatory
Accounting Guideline 5.03 (RAG 5) helps
companies meet their statutory duty to trade at
arms length. It sets out procedures and industry
best practice for trading with associate
companies. It ensures that the Appointed
business pays a fair price for services and
products received from associates and that
common costs are allocated appropriately
between the Appointed business and
associates.
Table 28 provides, for each company, the
financial value of trade in 2000-01 with
associates for both operating and capital
expenditure items and the percentage of
turnover this represents. Overall, the level of
trade with associates in the industry as a whole
has decreased from 707.4 m in 1999-2000 to
607.5 m in 2000-01. In real terms, this is a
decrease of 16.6%.
Ofwat monitors the procedures in place within
the companies to ensure that compliance
with RAG 5 can be demonstrated. The
performance of each company in meeting the
requirements of RAG 5 in 1999-2000 is also
recorded in Table 28.
Compliance with RAG 5 in 1999-2000
As part of the annual monitoring process, Ofwat
reviewed the information submitted by the
companies and the accompanying long form
reports from their respective Auditors who in
some cases were assisted by the Reporters.
Following this analysis Ofwat visited a number
of companies with an independent team of
consultants.
These visits were wide ranging and focused on
key aspects of the Appointed business
transactions with associates and the procedures
and practices they have in place to enable them
to demonstrate that trade with associates is at
arms length.
Ofwat visited Southern Water Services Limited
and United Utilities Water Limited. At Southern
Water the level of trade with associates was
decreasing and an increasing amount of work
was competitively tendered.
There were, however, a number of areas where
Ofwat felt improvements were necessary. These
related to the procedures and processes for
managing contracts with associates. In some
instances the rights and responsibilities of each
party had not been finalised. There were
instances where the documentation relating to
the procurement process was not adequate. In
some instances, market testing used to
determine transfer prices was no longer robust
as it had been undertaken a number of years
previously. The company is now addressing
these issues.
At United Utilities Water, Ofwat reviewed the
internal reorganisation within the United
Utilities Group and the basis of allocating costs
charged to United Utilities Water by its facilities
management associate, Vertex Data Science. No
major issues arose from this review.
Ofwat has also met with companies visited in
previous years to ensure that they have taken
appropriate steps to address areas of non-
compliance. These were: Anglian Water
Services Ltd, Northumbrian Water Ltd, Severn
Trent Water Ltd, Thames Water Utilities Limited
and Yorkshire Water Services Ltd.
The work undertaken by these companies has
been sufficient to address Ofwats main
concerns. This should lead to greater
transparency. It should ensure that trading with
associates will in future be based on proper
documentation, which illustrates that services
from associates are received on competitive,
economically advantageous terms and are at
arms length.
Ofwat will continue to monitor companies
trading arrangements with associates. Follow-
up visits will take place with those companies
where action is required to improve the systems
and procedures to ensure transactions with
group companies take place at arms length.
We have given feedback to the Auditors on the
focus and content of their audit reports on
5. TRANSFER PRICING
51
RAG 5. The reporting requirements for Auditors
have been revised to reflect current needs. The
role of Reporters has increased. Ofwat
considers that the skills and experience that
Reporters have acquired will improve the
quality of reports in this area. The Reporters
skills complement those of Auditors and are
especially helpful in reviewing transactions
between water companies and engineering and
contracting associates.
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52
Table 28 Trade with other companies within the group
2000-2001 prices Total value of trade Trade as a % of Compliance Examples
with other Group Appointed business with of Industry
companies 2000-01 turnover RAG 5 Best
Practice
Company m 2000-01 1999-00 1999-00 1999-00
Anglian 45.0 7 6
D
^
wr Cymru
1
45.4 10 16
Northumbrian
2
62.0 15 13
Severn Trent 84.3 10 12
South West 22.2 9 8 G
Southern 21.5 5 5
Thames 123.4 12 13
United Utilities
1
113.3 12 13
Wessex 3.3 1 1 G
Yorkshire 23.7 4 2
Total/average 544.0 9 10
Bournemouth & W Hants 0.8 3 3 G
Bristol 6.3 10 17 G
Cambridge 0.3 2 0 G
Dee Valley 3.0 18 19
Folkestone & Dover 1.6 13 11 G
Mid Kent 2.7 8 8
Portsmouth 0.3 1 1 G
South East 17.7 20 23
South Staffs 10.4 18 12
Sutton & East Surrey 0.2 1 1
Tendring Hundred 2.6 24 6 G
Three Valleys
2
17.5 11 11
Total/average 63.4 12 11
Industry total/average 607.5 10 10
Key:
G Satisfactory compliance with RAG 5
Some areas to be improved
Significant improvement required
1
Multi-utility companies
2
Comparative data for 1999-00 refects combined totals for Northumbrian/Essex & Suffolk and
Three Valleys/North Surrey
Examples of Industry Best Practice
Information about the disposal of water
companies land holdings is provided to Ofwat
to ensure that water companies are complying
with Condition K of their licence. The purpose of
this condition is two-fold: to ensure that the land
to be disposed of is surplus to the carrying out
of their regulated activities and that the best
price is obtained for it.
Table 29 shows the total number of cases of
land disposal and the gross proceeds from
them. The information submitted by the
companies is currently considered commercial
in confidence. Figures are therefore stated in
aggregate by the Customer Service Committee
(CSC) region.
Revisions to Condition K came into effect on
1 April 1996. Companies are now required to
notify Ofwat of disposals over 500,000 to
associate companies and of sales to external
third parties of over 1 million.
In 2000-01, 8 cases totalling around 14 million
were formally considered by the Director and in
total 514 disposals were reported with an
aggregate value of 79.1 million.
6. PROPERTY DEVELOPMENT AND LAND DISPOSAL
53
Table 29 Number of, and gross proceeds from, disposals of land - by CSC region
Value m Number of cases
Central CSC 6.6 91
Eastern CSC 2.8 66
Northumbrian CSC 0.7 9
North West CSC 12.1 142
Southern CSC 12.2 28
South West CSC 2.2 14
Thames CSC 25.7 19
CSC for Wales 3.0 76
Wessex CSC 4.5 10
Yorkshire CSC 9.4 59
TOTALS 79.1 514
INFLATION INDICES USED
IN THIS REPORT
In this report, the following tables have been
indexed using the following indices:
Table Index
1, 1a, 3, 4, 5, 6,13, RPI financial year
14,15, 16,17, average
18a, 18b, 19, 20a,
20b, 21, 22,27, 28
and Appendix 3
7 and 8 RPI financial year end
10,11 and 12 Both bases used
An example of RPI indexation is set out below:
From Table 1 in the 1999-2000 Report on the
financial performance and capital investment of
the water companies in England and Wales, the
industry total turnover in 19992000 was 7,014
million in 19992000 prices.
This has been indexed to 200001 prices using
financial year average RPI and appears in Table
1 of the 200001 report as 7,221 m, calculated
as follows:
7,014 m x 171.3 = 7,221 m
166.4
APPENDIX 1:
54
Table 30 Retail price indices used in this report
1996-97 1997-98 1998-99 1999-00 2000-01
Retail price index
- Financial year average 153.7 158.8 163.8 166.4 171.3
Retail price index
- Financial year end 155.4 160.8 164.1 168.4 172.2
Construction output price index
- Financial year average 98.3 102 107.3 112.3 121.3
APPENDIX 2:
55
RECONCILIATION OF CURRENT COST AND HISTORIC COST OPERATING PROFITS
2000-01 prices Current cost adjustment
Historical cost Depreciation Current cost

operating profit and asset disposals Working capital operating profit

1999-00 2000-01 1999-00 2000-01 1999-00 2000-01 1999-00 2000-01
m m m m m m m m
Anglian 302.3 266.0 (48.2) (58.9) 1.0 2.0 255.1 209.1
D
^
wr Cymru 155.2 132.7 (34.1) (34.5) 0.5 2.1 121.6 100.3
Northumbrian 235.3 153.8 (33.6) (33.8) (2.1) 0.5 199.6 120.5
Severn Trent 367.8 324.7 (27.6) (45.2) 1.7 2.6 341.9 282.1
South West 148.1 104.0 (13.1) (10.1) 0.0 (0.1) 135.0 93.8
Southern 261.9 225.0 (68.1) (76.6) 4.2 2.8 198.0 151.2
Thames 495.0 394.7 (95.3) (93.3) 3.7 4.0 403.4 305.4
United Utilities 461.9 373.4 (103.2) (96.5) 2.7 (0.4) 361.4 276.5
Wessex 157.3 118.4 (18.7) (17.7) 1.6 1.4 140.2 102.1
Yorkshire 272.1 210.2 (21.0) (47.7) (0.1) 0.5 251.0 163.0
Bournemouth &
W Hants 8.9 7.8 (1.9) (1.6) 0.0 (0.1) 7.0 6.1
Bristol 20.0 17.3 (4.8) (4.5) 0.2 0.0 15.4 12.8
Cambridge 4.5 4.0 (0.7) (0.8) 0.0 0.0 3.8 3.2
Dee Valley 9.1 6.3 (1.6) (1.7) 0.0 0.0 7.5 4.6
Folkestone & Dover 4.8 4.9 (0.6) (1.0) 0.0 0.0 4.2 3.9
Mid Kent 18.7 9.5 (2.1) (2.0) 0.6 0.5 17.2 8.0
Portsmouth 10.7 9.8 (1.5) (1.0) 0.3 0.1 9.5 8.9
South East 48.4 44.0 (8.6) (14.2) 0.4 0.0 40.2 29.8
South Staffs 16.5 14.8 (3.5) (3.3) 0.1 0.2 13.1 11.7
Sutton & East Surrey 12.0 9.3 (1.6) (1.5) 0.1 0.1 10.5 7.9
Tendring Hundred 5.4 4.3 (0.5) (0.5) 0.1 0.1 5.0 3.9
Three Valleys 72.1 46.2 (8.2) (9.2) 0.9 0.6 64.8 37.6
Industry 3,072.9 2,481.0 (498.5) (555.6) 15.6 17.0 2,605.4 1,942.3
APPENDIX 3:
56
ACTIVITY BASED COST ANALYSIS FOR 2000-01
Service analysis Business analysis
Water supply Sewerage services Customer Scientific Regulatory
______________________________________
Resources Distribution Water Sewerage Sewage Sludge Sewerage services services services
and supply treatment treatment services
treatment total & disposal total
m m m m m m m m m m
Total direct costs 303.8 311.4 615.2 143.9 218.4 155.2 517.5
General and
support expenditure 126.8 165.2 292.0 53.9 108.8 63.7 226.3

Function costs 430.6 476.6 907.2 197.8 327.2 218.9 743.9 293.3 93.7 26.4
Business analysis 245.6 167.8
1,152.8 911.6
Operating expenditure
Rates 207.1 103.1
Doubtful debts 64.0 63.6
Exceptional items 22.6 13.1
Third party services 70.7 10.6
Total operating expenditure 1,517.2 1,101.9
Capital maintenance 896.6 985.7

Total operating costs 2,413.8 2,087.6
1
Numbers do not reconcile to Tables 1, 1a and 3 due to figures in the aforementioned tables being net of
operating income.
THE OFWAT FRAMEWORK FOR
ASSESSING WATER COMPANY
MAINTENANCE NEEDS
Over the last ten years Ofwat has developed a
staged framework to assist it in reaching an
overall judgement of likely capital maintenance
needs for the next price limit period.
Subdivision of the asset systems
The first step has been to divide the asset
systems into four categories that follow broadly
the different functions of the assets (treatment
and transportation) and accounting practices.
The four categories are summarised below.
Water service infrastructure assets. These
include; impounding reservoirs, raw and
treated water trunk mains, service
reservoirs, distribution mains etc.
Water service non-infrastructure assets.
These include; treatment works, pumping
stations, telemetry and computer systems,
meters, plant & vehicles, depots, offices etc.
Sewerage service infrastructure assets.
These include; sewers, combined sewer
overflows, associated storage tanks, rising
mains, outfalls etc.
Sewerage service non-infrastructure assets.
These include; sewage treatment facilities,
sludge treatment, pumping stations,
telemetry and computer systems, plants &
vehicles, depots, offices etc.
OFWATS ANALYTICAL FRAMEWORK
The framework is based on a structured series
of tests or questions. In each case Ofwat used
the best available data and expert/specialist
consultants to inform its judgements for each of
the four categories above on these
questions/tests.
Stage A - SERVICEABILITY ASSESSMENT:
Understanding past performance, serviceability
and company actions necessary to deliver these
outcomes. This entailed:
A review of the overall trends in performance
of the asset systems in delivering services to
customers using the available indicators and
measures to assess whether the flow of
services was: improving (), stable (),
deteriorating () or marginal (?).
Recording the levels of activity and
expenditure incurred by the company over
time and the reasons for annual variations to
establish the typical level of activity and
expenditure for the period of the
serviceability trend analysis.
Where the expert review identified improving
() or stable () trends this lead to a preliminary
judgement that the typical level of activity had
been sufficient. Where the trends were
deteriorating () or marginal (?) Ofwat sought
an expert assessment of the likely uplift in the
typical level of activity that would have
delivered stable serviceability.
Stage B IS THE FUTURE PERIOD DIFFERENT?
Understanding any underlying concerns in the
asset systems to be maintained, particularly
where these resulted in different challenges
than had been met in the past. Essentially what
would be different about the next period that
would necessitate changes in the typical levels
of activity that had been sufficient in the past.
This entailed:
A review of the results of the most recent
assessment of overall asset condition and
how this compared with previous
assessments to understand the reasons
behind changes.
A review of company submissions on the
changing requirements for capital
maintenance with a focus on implications of
any increase in the size of the asset systems.
The results from the asset inventory
assessments were inconclusive. Generally
companies attributed the reported small net
increases in proportions of assets in the poor
condition grades, to errors in the 1992-93
assessments rather than deterioration in their
systems. The company submissions tended to
focus on a wish to improve asset condition and
not on threats to continuing service
performance. Ofwat considered these needs
unlikely to surface in the next price period.
Stage C SCOPE FOR IMPROVEMENTS IN
EFFICIENCY?
Understanding the relative efficiency of each
company, both in terms of its approach to
capital maintenance and capital works, and the
potential for even the best performing company
to improve its efficiency over the next price limit
period.
APPENDIX 4:
57
This entailed:
A statistical assessment of the relative
performance of all the companies over the
serviceability period. Rolling investigations
were used to identify the key explanatory
factors to include in econometric
relationships and thus derive relative cost
rankings. These were developed into relative
efficiency rankings following reviews of
special factor submissions from the
companies.
Comparative capital works unit cost
assessments to look at the unit costs that
underpin each companys forecast forward
capital expenditure programme.
Reviews of the scope for continuing
improvements on capital productivity over
the next price limit period by comparing the
use of up-to-date technology and practices
in the UK water sector with those in other
sectors and elsewhere in the developed
world.
Companies found to be inefficient were
assumed to rectify this poor performance
through a catch-up factor applied to its capital
costs and all companies would be expected to
improve year by year by a continuing reduction
that represented a proportion of the identified
potential.
Stage D IMPACT OF THE QUALITY
IMPROVEMENT PROGRAMMES?
Understanding the implications of each
companys water quality and environmental
improvement programme for the normal capital
maintenance programme. This entailed:
A review of the potential scope for overlaps
and synergies due to the interaction of the
quality enhancement and capital
maintenance programmes where existing
assets were being replaced for quality
improvement reasons. The review included
looking closely at the implications of earlier
improvement programmes on the typical
levels of expenditure.
DEVELOPING THE OFWAT FRAMEWORK
FOR THE NEXT PRICE REVIEW
More information, greater consistency between
companies, and longer trend data on service
and serviceability measures/indicators together
with a further update on asset condition will all
lead to better understanding to inform the
Ofwat judgements in the next price review.
Notwithstanding this, Ofwat, the quality
regulators (DWI & EA) and the companies are all
working to develop various elements of the
framework. Ofwats involvement in these
developments is summarised below.
Stage A Developments Ofwat and the DWI are
working together to develop better water quality
related indicators to improve the robustness of
the serviceability assessments. A similar
initiative is in progress with the EA to develop
better measures for the sewerage service. The
outcomes of the initial consultancy studies will
be shared with the industry later this year.
Stage B Developments Ofwat has set down in
a letter to companies (MD161 April 2000) how
it believes they should develop assessments of
an economic level of capital maintenance that is
consistent with the outcomes of the
serviceability assessment and evolving needs of
their businesses. Ofwat is in dialogue with a
number of leading companies in this area with
the aim of establishing benchmark practices of
this type of analysis.
Ofwat is also looking to develop better
understanding of the condition of the industrys
asset stock with particular attention on
identifying deterioration rates and the risk to
service performance from any such
deterioration.
Stage C Developments Ofwat will be
developing and refining its methods and
analysis of relative efficiency in the light of
comments by the Competition Commission.
HEADING
58
GLOSSARY OF TERMS AND DEFINITIONS
Current cost profit and loss account
Turnover
All revenue derived from standard charges as
defined in Condition B of the licence for
inclusion in the tariff basket calculation,
together with revenue grants and other sources,
including non tariff basket charges,
rechargeable works, bulk supplies and other
appointed business revenue.
Operating costs
Total operating expenditure of the business net
of any operating income, primarily any profits
or losses on the disposal of fixed assets.
Operating expenditure comprises, for example,
power, rates, payroll costs and materials and
consumables but excludes capital-related costs
such as depreciation.
Current cost depreciation
The depreciation charge on tangible fixed assets
based upon the current values of those assets,
less amortisation of deferred credits relating to
grants and third party contributions.
Infrastructure renewals charge
The annual accounting provision for
expenditure on the renewal of infrastructure
assets charged to the profit and loss account.
Working capital adjustment
The adjustment for the impact of general
inflation on the real value of working capital to
the business.
Financing adjustment
The impact of general inflation on the real value
of net finance for the business.
Current cost operating profit
Operating profit of the business derived from
the above current cost figures.
Other income
Income from other sources including rental
income and income from investments but
excluding interest receivable and profit on
disposal of assets.
Net interest
Interest receivable less interest payable. Interest
payable includes finance lease interest.
Taxation
Taxation on ordinary activities for the charging
year including any change in provisions for
deferred taxation.
Extraordinary items
The definition of extraordinary items was
changed by Financial Report Standard 3 -
Reporting Financial Performance.
Extraordinary items arising in 1990-91 have not
been reclassified and remain as defined in
SSAP6 as material items which derive from
events or transactions that fall outside the
ordinary activities of the company and are not
expected to occur frequently or regularly.
Dividends
Dividends on ordinary and preference shares
declared during the year.
Financial indicators
Cash Interest cover
The ratio of cashflow generated from operations
to the amount of interest paid.
Debt payback period
Measures how quickly (in years) the cashflow
generated from operations (after paying interest
and taxation) could repay the net debt
outstanding.
Dividend cover
The number of times by which the years
dividend can be paid out of the years profit.
Cashflow to capital expenditure
Illustrates the amount of cashflow generated
from operations (after paying interest, taxation
and dividends) compared to amount of capital
expenditure in the year (Purchase, less disposal
of fixed assets and infrastructure renewals
expenditure).
Interest cover
The number of times by which the years net
interest payable can be paid out of the profit
before interest.
Gearing
The ratio of net debt to net debt plus equity,
expressed as a percentage.
APPENDIX 5:
59
Cash flow statement
Net cash flow from operating activities
The net increase or decrease in cash and cash
equivalents resulting from the operations
shown in the profit and loss account in arriving
at operating profit. The net cash flow from
operating activities is calculated by adjusting
the current cost operating profit for items which
are not direct cash flows such as depreciation
and also the change in the components of
working capital, ie stocks, debtors and short-
term creditors. It is also adjusted for
infrastructure renewals expenditure which is
shown as an investing activity.
Returns on investment and servicing of finance
Receipts and payments resulting from the
ownership of an investment excluding those
classified under operating, investing or
financing activities.
Net interest
The net cash flow relating to the payment or
receipt of interest.
Dividends
All cash flows relating to payment of dividends.
Figures will typically comprise final dividends
for the preceding financial year together with
the interim dividends reported during the
current financial year. However, in some
instances, the interim dividends for the
preceding financial year may also be included.
Taxation
All cash flows to or from taxation authorities in
respect of the companys revenue and capital
profits including payments of advance
corporation tax.
Purchase of fixed assets
All cash flows relating to the acquisition of any
asset held as a fixed asset. These outflows are
shown net of grants and third party
contributions and any other external sources of
finance.
Infrastructure renewals expenditure
The actual expenditure incurred in the financial
year in maintaining the operating capability of
infrastructure assets.
Proceeds from sales of assets
Receipts from the sale of fixed assets.
Net cash flow before financing
The aggregate of the net cash flow from
operating activities, returns on investment and
servicing of finance, taxation and investing
activities.
Net cash flow from financing
Financing cash flows comprise receipts from or
repayments to external providers of finance,
including receipts from the issue of shares,
debenture and borrowings, new finance leases
and the capital element of finance lease rentals.
Cash
Cash in hand and deposits repayable on
demand, including amounts in foreign
currencies.
Liquid resources
The revised Financial Reporting Standard 1
Cash flow statements (Revised 1996) introduced
the term liquid resources, which replaced the
term cash equivalents used in the earlier
standard. Liquid resources are investments
which are a readily disposable store of value, for
example term deposits, government securities
or equities.
Cash equivalents
Short-term, highly liquid investments which are
readily convertible into known amounts of cash
without notice and which are within three
months of maturity when acquired; less
advances from banks repayable within three
months from the date of the advance.
HEADING
60
Investment and return on capital
Fixed asset formation
Additions to fixed assets during the year arising
from capital expenditure (excluding
infrastructure renewals expenditure) analysed
by function, ie water, sewerage and sewage
treatment and disposal. This is stated before
grants and contributions.
Infrastructure renewals expenditure
Planned maintenance expenditure on the
infrastructure network. This is stated net of any
grants and contributions.
Gross MEA value
The gross cost of replacing an existing asset
with a technically up-to-date new asset with the
same service capability.
Net MEA value
The aggregate net book value of the fixed assets
valued on a Modern Equivalent Asset (MEA)
basis. This will be the cost of an asset of
equivalent productive capability to satisfy the
remaining service potential of the asset, less
accumulated current cost depreciation. The net
MEA value is stated gross of third party
contributions.
Capital value
The capital base used in setting price limits for
1995 to 2005. It represents the initial market
value (200 day average) including debt plus
subsequent net new capital expenditure as
assumed at the time of initial price setting and
including new obligations imposed since 1989.
The capital value has been calculated using
Ofwat methodology (ie after current cost
depreciation and infrastructure renewals
accrual).
Investment by service area
Capital investment reporting by purpose in the
1999-2000 and future Returns to Ofwat requires
a primary distinction to be made between the
investment to maintain existing levels of service
to customers and the investment to improve
service to customers, for example, through
expenditure on quality enhancements. This
distinction is made to enable the Director to
develop a better understanding of the
relationship between service to customers,
company activity and expenditure.
In previous Returns, detailed investment was
reported under a mixture of purposes for the
different asset groups. For example, in the past,
capital investment for the purpose of maintaining
sewers was collected in the same expenditure
figure as capital investment on sewers for
improving the supply/demand balance.
The consequence of the expenditure by purpose
reporting in this report is that the investment by
service area breakdown in Tables 21 and 22 is
compiled from company Returns in a different
but comparable manner to that in previous
years. The definitions below describe the assets
that are categorised under each heading in
Tables 21 and 22, for the 2000-01 year.
Water resources
Water resource facilities assets, including
reservoirs and raw water aqueducts associated
with potable water supply.
Water treatment
Water treatment works.
Water Distribution
Water distribution mains including
communication pipes, service reservoirs, water
towers and pumping stations.
Sewerage
Sewers, storm overflows and in line pumping
stations.
Sewage treatment
Sewage treatment works, terminal pumping
stations, sludge treatment works, sea outfalls
and sludge disposal.
Water and sewerage general
Computers, communications and telemetry
equipment, regional instrumentation, control
and automation systems, vehicles and plant,
land and buildings for example, capital grounds
improvements at office premises not included in
other service categories.
HEADING
61
Measuring investment by outputs
Look-up table
Table listing the maximum allowed numbers of
exceedences, per annum, of a 95% ie standard
for various total numbers of samples; the test
procedure in use in England and Wales since
1985 for assessing sewage effluent compliance.
Population equivalent
The capacity of a sewage treatment works is
measured in terms of the amount of organic
material, which can be treated. It is assumed
that one person is equivalent to a load of 60g of
biological oxygen demand. This also includes
industrial wastewater treated at works. Hence,
the capacity of a works can greatly exceed the
population served in the catchment, especially if
a large volume of industrial effluent is also
treated.
HEADING
62
Customer Service Committee (CSC) regions
Central CSC
Responsible for customers of: Severn Trent Water Ltd
South Staffordshire Water plc
Eastern CSC
Responsible for customers of: Anglian Water Services Ltd
Cambridge Water plc
Essex & Suffolk Water plc
Tendring Hundred Water Services Ltd
Northumbria CSC
Responsible for customers of: Northumbrian Water Ltd
Hartlepool Water plc
North West CSC
Responsible for customers of: United Utilities Water Ltd
(formerly North West Water Ltd)
Southern CSC
Responsible for customers of: Southern Water Services Ltd
Portsmouth Water plc
Mid Kent Water plc
Folkestone & Dover Water Services Ltd
South East Water Ltd
South West CSC
Responsible for customers of: South West Water Services Ltd
Thames CSC
Responsible for customers of: Thames Water Utilities Ltd
Three Valleys Water plc
Sutton & East Surrey Water plc
CSC for Wales
Responsible for customers of: D
^
wr Cymru Cyfyngedig
Dee Valley Water plc
Wessex CSC
Responsible for customers of: Wessex Water Services Ltd
Bournemouth & West Hampshire Water plc
Bristol Water plc
Cholderton & District Water Co Ltd
Thames Water Utilities Ltd at Tidworth
Yorkshire CSC
Responsible for customers of: Yorkshire Water Services Ltd
HEADING
63
NOTES
64

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RPT FPR 2000-2001

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Contents 1

List of tables and figures 2

Historical cost Depreciation Current cost

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