Dee Valley : Annual Results Announcement for the year to 31 March 2016

76d887e4-d932-404a-ad9f-5f421908290b.pdf Dee Valley Group Plc (the 'Group') Annual Results Announcement for the year to 31 March 2016 A positive start to AMP6 Key Financial and Operational Highlights

• Profit before tax broadly consistent with the prior year, with the impact of a reduction in revenue partially offset by lower operating expenses:

  • Profit from operations of £6.6m (2015: £7.5m). Revenue for the year impacted by the AMP6 Final Determination, which imposed a reduction in prices in this first year of AMP6, and lower consumption amongst certain large, non-household customers;

  • Profit before tax of £4.2m (2015: £4.5m), with the reduction in profit from operations offset by a lower non-cash loan indexation charge, due to the lower rate of RPI inflation during the year;

  • Profit after tax £4.7m is £1.2m higher than the prior year as a result of a non-cash deferred tax credit arising due to a reduction in the corporation tax rate applied in calculating the tax position;

  • Capital investment of £6.2m in the year (£5.6m cash spend net of capital accruals);

  • Net cashflow from operating activities £12.0m (2015: £13.0m), with the reduction primarily due to lower operating profit.

• Continued focus on the customer, and delivering high levels of customer satisfaction:

  • 4th lowest water bills in England and Wales;

  • Social tariff in place from April 2016;

  • Ranked 4th out of the 18 water companies in England and Wales on Ofwat's qualitative measure of customer service (SIM), up from 8th place in 14/15;

  • 13% reduction in customer complaints compared to the prior year;

  • Ranked 1st in the industry by CC Water research for value for money and quality of response to customer contacts.

• Operational performance continues to improve, with infrastructure and water quality improvements delivered:

  • Drinking water quality compliance index improved to 99.95%;

  • 27% reduction in discoloured water customer contacts year-on-year;

  • 31% reduction in the number of bursts year-on-year;

  • 50% reduction in customer interruptions to supply;

  • Leakage level remains below target and one of the lowest in the sector;

  • Cleaned one seventh of our network in the year, more than doubling to 290km - a key contributor to the significant reduction in discoloured water customer contacts.

• Well placed to deliver the AMP6 investment plan

  • Long-term funding secured to support this investment programme (£30m revolving credit facility with a 5 year term to 2020) at a lower cost and with a 2 year option to extend to 2022;

  • Delivery of the key project for this AMP, the replacement of the Legacy treatment works, is progressing and capital investment is forecast to increase in the year ended 31 March 2017 as work on this project continues.

• Dividend consistent with the prior year and previously announced policy:

  • Final dividend 42.0p per share, giving a total dividend of 62.5p per share, consistent with the prior year and the base dividend in our AMP6 dividend policy.

Comment from Ian Plenderleith, Chief Executive, Dee Valley Group Plc

It has been a very positive start to this regulatory period for Dee Valley Water. In 2015/16 we have continued to focus on the customer and customer service, and thanks to the efforts and hard work of all my colleagues across Dee Valley Water we have made huge progress.

Our bills remain the fourth lowest in the sector and our investments into new customer systems have reaped benefits, with a strong improvement in our ranking on the Ofwat qualitative SIM measure and customer complaints down 13% year-on-year.

In previous years, customer satisfaction with water quality had been a particular challenge for us, however I am pleased to report that we have risen to this challenge with customer contacts for discoloured water reducing by 27% year-on-year. We are now well on track to outperform the target set for us by our regulators and meet the standards expected by our customers.

In 2015/16 we reviewed and improved our investment programme to drive further benefits for our customers and shareholders, and will continue to challenge ourselves to look for more efficient and effective ways to deliver a high quality service to our customers.

We have made significant progress during the first year of this AMP period with the foundations now in place to enable us to continue to improve and achieve the outcomes that our customers want over the next five years and beyond.

Summary Income Statement

2016 £'000	2015 £000
Revenue	23,149	24,599
Profit from operations	6,574	7,453
Profit before tax	4,244	4,458
Profit after tax	4,655	3,490
Basic and diluted earnings per ordinary share	100.5p	75.3p
Total dividend per ordinary share	62.5p	62.5p

10 June 2016

Enquiries

Dee Valley Group Plc

Ian Plenderleith Tel: 01978 846946

Chief Executive

Investec Bank Plc

Jeremy Ellis / Josh Levy Tel: 020 7597 4000

Chief Executive's Review

I have completed my first full year in Dee Valley Water and it has been a pleasure to work alongside our people and external stakeholders to bring significant improvements in service and operating performance for our customers.

We achieved a positive performance in the past year and can look forward to the next four years, and beyond, secure in the knowledge that we are laying strong foundations for long-term success.

When I joined Dee Valley Water in August 2014 it was clear we had high-quality people with extensive local knowledge. It was also clear that this local knowledge should be used to drive improvements in customer service and operating performance.

This coincided with the change in regulatory focus by Ofwat from capital expenditure (capex) based solutions to total expenditure (totex) and customer outcomes, which gave smaller companies such as ours the opportunity to be more flexible and agile in our means of delivering performance improvements. To fully take advantage of this regulatory shift we needed to create a culture that is forward looking with local customers at its heart. Achieving this would position us to deliver long-term value for our shareholders and external stakeholders.

The changes we have made during the past twelve months have laid the foundations. We have harnessed the knowledge and skills of our people and teams to develop a shared companywide vision. We have simplified and modernised our working practices to ensure our managers can easily access the best operational and customer information; we have made structural changes to ensure we are organised in a way that delivers a great service on behalf of our customers.

Everyone at Dee Valley Water now understands fully - and is completely aligned with - our vision to be the leading water service provider with our local customers at heart.

Ofwat KPI Performance

The key performance indicators set by Ofwat for the Group are summarised in two high-level areas which provide a broad overview of performance.

2015/16	2015/16	Measurement
Performance	Target
Customer Experience
Service Incentive Mechanism (SIM)	83.5	80	Score out of 100
Water supply Interruptions	0.087	0.2	Hours lost per property for three hours or longer
Discoloured water contacts	1.32*	2.8	Complaints per 1,000 population
Number of bursts	169	247	Mains bursts
Non-household Service Incentive Mechanism	82.0	80	Score out of 100
Reliability and stability
Leakage	78.6	90.8	Litres per property per day
Security of supply index	100%	100%	Index score
Per capita consumption and water efficiency	128**	131.44	Litres per person per day
Mean zonal compliance percentage	99.95%*	99.95%

(*) Calendar year measure

(**) The current year key performance indicators have yet to be audited.

Financial Review Overview

Following the agreement of a five year, £30 million revolving credit facility in May 2015, the Group is well placed to

deliver the investment plan agreed with Ofwat for the period to 2020. The facility provides cost effective funding to support the delivery of the largest capital investment plan in the Group's history.

Whilst capital delivery in the year ended 31 March 2016 was focused on preparation for the decommissioning of the Legacy treatment site, which has now commenced, and other key projects for AMP6, capital expenditure of £6.2 million was incurred in relation to the mains renewal programme and projects including investment at Oerog Springs.

The Group's financial performance was impacted by the PR14 final determination, which imposed a reduction in prices and therefore contributed to the downturn in revenue in the current year. However, this was mitigated by a reduction in operating expenses and financing costs.

Strong progress has been made against the Group's operational key performance indicators this year and this, alongside the financial certainty provided by the agreement of financing at favourable interest rates, ensures that the Group can progress confidently into the second year of AMP6. Capital investment in the year ended 31 March 2017 is forecast to exceed £10 million as work on the Legacy alternative scheme progresses.

Financial Results Profit from Operations

Profit from operations for the year ended 31 March 2016 was £6.6 million (2015: £7.5 million), with the impact of a reduction in revenue (£1.5 million) partially offset by a £0.7 million reduction in operating expenses.

Revenue for the year (£23.1 million; 2015: £24.6 million) was impacted by a 4% reduction in prices in this first year of AMP6, effective from 1 April 2015, and a reduction in consumption amongst certain large, non-household customers.

The reduction in operating expenses in comparison to the prior year was influenced by a reduction in the bad debt charge and an increase in the capitalisation of labour costs.

A review of the doubtful debt provisioning estimate in the prior year lead to a one-off increase in the provision to ensure that it covered all debts that were greater than two years old and to specifically provide for customers' debts based on historic default and non-payment. A consistent provisioning methodology has been applied in the current year, with the bad debt charge falling by £0.3 million year-on-year to a total of £0.5 million.

In the year ended 31 March 2016, the capitalisation of labour costs has increased due to the additional headcount required and recruited to enable the Group to deliver its largest ever capital investment programme.

The operating cost benefit arising from the above factors has been partially offset by investment to enhance the Group's Customer Service function. This investment will ensure that the Group continues to offer sector leading customer service, supported by an improved website and enhanced online payment options.

Taxation

A taxation credit of £0.4 million has arisen in the year (2015: £1.0 million charge), the variance primarily relating to a deferred tax credit which results from a reduction in the UK corporation rate from 20% to 19% (effective from 1 April 2017) and subsequently to 18% (effective from 1 April 2020).

Both of these amendments were substantively enacted on 18 November 2015 and the full impact of the reduction has been applied in calculating the tax position. The deferred tax liability at 31 March 2016 has been calculated based on the rate of 18% (2015: 20%).

Profit after Taxation

Profit after taxation of £4.7 million is £1.2 million higher than the prior year (2015: £3.5 million).

Whilst profit from operations fell by £0.9 million, this was offset by a reduction in the non-cash loan indexation charge, linked to the lower rate of RPI inflation during the year (£0.7 million), and the deferred tax credit referred to above (£1.3 million).