Finances
Finances policy
The financial strategy of the company is to ensure a stable financial profile by:
• maximising revenue;
• delivering operational efficiency; and
• securing low cost long term funds.
Finances action plan
• Maximising revenue
The key elements of maximising revenue for the business are setting appropriate customer tariffs, maximising cash collection from customers and taking advantage of commercial business opportunities.
Customer tariffs are set on an annual basis and must be approved by Ofwat and kept within the price limits set in the five-yearly regulatory review. After two years of the price review period, income is higher than the Final Determination (FD) target (see KPIs). In the three years 2007/08 to 2009/10 the company will not increase prices by the full amount allowed by Ofwat at the last price review. However, this decision has been taken on the basis of strong financial performance and the low cost funding secured over the past 18 months. These funds are sufficient to meet the remainder of the capital programme up to March 2010.
It is important that the company collects all of the income due and the business places a high priority on debt recovery. The company offers a number of different collection arrangements to suit customer circumstances but will take all possible steps, including legal enforcement action, to recover income from customers who do not pay.
Commercial business opportunities are covered in more detail under the 'commercial services' section of this CR model.
• Delivering operational efficiency
Business planning is central to delivery of the company’s long term objectives, identifying how the objectives will be achieved and establishing the targets and principal actions against which business units are measured. The management team set operational efficiency targets over a five-year time horizon and business unit managers identify how sustainable efficiency savings can be delivered within their business plans. On a monthly basis, management compares the actual and forecast performance with plan and budget and this is reported to the Board.
The most significant projects currently underway in the business relate to mobile workforce management and the sludge strategy. [These initiatives are described in more detail elsewhere within the CR model but each is expected to deliver both operational efficiencies and environmental benefits.]
• Securing low cost funds
The company cannot finance it’s capital investment obligations from internally generated funds alone and, therefore, must raise additional finance on a regular basis. The strategy of the company is to finance investment by raising medium to long term debt, providing a balance sheet match with long term assets, and to fix a minimum of 60% of borrowings at fixed rates of interest.
The company assesses future capital requirements up to 5 years ahead and raises funding on a timely basis, taking advantage of any favourable market opportunities. In order to secure funding at attractive rates it is important for the key financial ratios (see KPIs) to meet or exceed targeted levels and to maintain acceptable credit ratings.
As at 31 March 2007 the company has sufficient funds in place to meet its investment requirements to the end of the current regulatory period in 2010. However, it is anticipated that further funding will be required in the next regulatory period and the Board continues to monitor the financial ratios and market conditions. Any surplus funds are invested based upon forecast requirements.
Finances KPIs
| KPI | Target | Performance | Performance |
|---|---|---|---|
| 06/07 | 06/07 | 05/06 | |
| Appointed business only | |||
| Turnover versus FD | +£4.5m | +£9.5m | +£10.0m |
| Opex versus FD 1 | -£7.9m | -£7.2m | +£0.1m |
| Gearing to RCV | <65% | 57% | 58% |
| NWL Group | |||
| Gearing to RCV | <70% | 65% | 66% |
| Cash interest cover | >3.0x | 3.6x | 3.3x |
| Cash flow to net debt | >13% | 16% | 17% |
1 performance reflects significant increase in power prices in 06/07
The forecast performance against these KPIs for the current year is reported to the NWL Board on a monthly basis. However, as this data is price-sensitive it cannot be reported in the public domain.
Finances case study
Securing low cost funds
In June 2006, the company issued two £100m index linked Eurobonds through its financing subsidiary, Northumbrian Water Finance plc, with maturities of 2049 and 2053 respectively.
Borrowing index linked debt means that the cash interest repayments are lower than for conventional debt whilst the outstanding principal increases annually with inflation. Over the maturity period the increase in the principal is matched by index linked growth in revenues.
The terms of the borrowings, 43 and 47 years, reflect the strategy of matching long term borrowings to the long term assets owned by the company. It also reflects the confidence of lenders in the long term financial sustainability of the business and the regulatory regime in which it operates.
Securing these funds at an early stage has also enabled the company to maximise interest received in the short term from cash placed on deposit.