Profits and losses in complex NIW accounts
In the year to March 2013, Northern Ireland Water (NIW) had total current revenue of £426m and earned profits after tax of £110m. Compared with the previous year, total revenue was 3% higher. Post-tax profit decreased by 4%.
Since NIW is a statutory company (or go-co) and is also a regulated utility, the annual report is not easily directly compared with that of a normal trading organisation. The report for the year to March 2013 is presented to reflect these different interests.
The statutory accounts show a customer subsidy from Government of £282m. This is mainly a reflection of the continuing deferment of water charges for domestic customers. Only £69m of the total current revenue is from charges, mainly levied on business and farm users. A further £21m is paid by the roads service for the costs of road drainage.
A significant feature of the statutory accounting is that connection costs for (usually new) customers, valued at £48m, which are paid for by the developer and passed to NIW, are treated by NIW as added current revenue, more correctly described as 'transfers of assets from customers'. Instead of adding these installations directly as donated capital assets, they are treated as current revenue. This enhances the profitability of the go-co.
The 'bottom line' for the statutory presentation of the accounts is that the post-tax profit is used to pay a dividend of £27m to the main shareholder, the Government through the Department for Regional Development (DRD).
The remaining post-tax profit is earmarked partly to make a contribution to the actuarial deficit in the pension scheme for employees, estimated to cost £12m in 2012-13.
The remaining post-tax profit makes a major contribution to the programme of capital expenditure which, in 2012-13, cost £166m. However, the capital spending programme is also partly financed by greater borrowing, £75m, through the DRD and taken from the amount earmarked by the Treasury for the public sector investment programme.
NIW writes its annual report on the assumption that the organisation is temporarily integrated into the overall Stormont budget. Water charges are described as deferred.
The main items in the relationship to the Stormont budget are:
Subsidised customer charges £282m
Or nearly £400 per customer
Borrowing from capital budget £75m
And payments of:
Interest paid on borrowed funds £61m
Dividend paid to DRD £27m
The statutory trading results for NIW reflect a satisfactory outcome for this business. The board of the go-co reports that the organisation has successfully met most of its performance targets.
In a slightly contrasting part of the annual report, Northern Ireland Water presents regulatory accounts (not statutory accounts) which convey a less buoyant picture.
The definitions used for the regulated accounts, explained on pages 189-194, mean that:
Turnover was £371m (or £53m lower)
Operating profit was £121m (or £75m lower)
After-tax profit was £41m (or £69m lower)
Despite the differences, this is the same organisation, reported on using different presentation analyses.
The largest of many differences in the regulatory accounts stems from the exclusion of the income from assets acquired from new (and changed) connections amounting to £54m. Operating costs were deemed to be higher in the regulatory analysis. Significant differences in depreciation allowances and the treatment of PPP contracts also affect the total.
To add to what is unintended complexity, NIW offers a third version of the profit and loss account, and balance sheet, where the financial figures are restated in 'current costs'. In current costs the organisation has been trading at an annual post-tax loss of just under £30m.
The report of NIW gives a comprehensive account of a complex organisation required to use complicated accounting techniques in a hybrid delivery model which the chairman, Sean Hogan, describes as sub-optimal.
It has gone a long way to meet the efficiency challenges set by its shareholder (DRD) and the Regulator.