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Wales & West Utilities Limited 

REGULATORY ACCOUNTS 

FOR THE ELEVEN ENDED 31 MARCH 2006 

Registered No. 05046791 

Wales & West Utilities Ltd (Formerly Blackwater 2 Ltd)

CONTENTS: 

IMPORTANT INFORMATION 1 

THE OBLIGATION TO PRODUCE REGULATORY ACCOUNTING STATEMENTS 1 

DIRECTORS AND ADVISORS 2 

OPERATING AND FINANCIAL REVIEW 3 

REPORT OF THE DIRECTORS 8 

CORPORATE GOVERNANCE STATEMENT 13 

DIRECTORS’ RESPONSIBILITIES FOR PREPARING SEPARATE REGULATORY 

ACCOUNTING STATEMENTS 15 

INDEPENDANT AUDITORS REPORT TO THE GAS AND ELECTRICITY MARKETS 

AUTHORITY AND THE DIRECTORS OF WALES AND WEST UTILITIES LTD 16 

ACCOUNTS 

Profit & loss account 18 

Statement of total recognised gains and losses 19 

Balance sheet 20 

Cashflow statement 21 

Principal accounting policies 22 

Notes to the financial statements 26 

Wales & West Utilities Ltd (Formerly Blackwater 2 Ltd)

IMPORTANT INFORMATION 

Wales & West Utilities Ltd (“The Company”) is a regulated gas distribution business. 

At 31 March 2006 The Company operated the principal gas distribution business within Wales and the South West of England. 

THE OBLIGATION TO PRODUCE REGULATORY ACCOUNTING STATEMENTS 

The obligation to produce regulatory accounting statements is placed on The Company by Standard Special Condition A30 (“the Condition”) of the Gas Transporter Licence granted 

under the Gas Act 1986 (“The Gas Act”). The principal requirements of the Condition, in respect of the financial period ended 31 March 2006, are that the regulatory accounting 

statements must: 

• Fairly represent the revenues, costs, assets, liabilities, reserves and provisions of, or reasonably attributed to, that business. Taxation, capital liabilities and interest thereon are only 

attributed to individual businesses to the extent that they relate principally to those businesses, 

• Have the same content and format as the Statutory Accounts of The Company and conform to UK generally accepted accounting practice, in so far as is reasonably practicable, 

• Separately show, in appropriate detail, the amounts of revenues, costs, assets, liabilities, reserves or provisions which have been charged from or to any business in the MGN Gas 

Networks (UK) Limited group, or which have been determined by apportionment (“Charges and apportionments”), 

• Be subject to audit by The Company’s statutory auditors, and 

• Be published, except for the information on charges and apportionments. 

These accounts are therefore produced in compliance with, and solely for the purposes of, that Standard Special Condition and no reliance may be placed on them and no responsibility is 

assumed for them for any other purpose whatsoever. 

Wales & West Utilities Ltd (Formerly Blackwater 2 Ltd) 

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DIRECTORS AND ADVISORS 

Duncan Whyte (R, H) Chairman 

Graham Edwards Chief Executive Officer 

Stephen Box (A, H) 

James Dickson 

Philip Garling 

Howard Higgins (H) 

Christopher Koski 

Wayne Leamon (A, R) 

Martin Stanley (R) 

Steven Bickerton (Alternate Director to Philip Garling) 

Charles Hazelwood (Alternate Director to Graham Edwards) 

David Owens (Alternate Director to Martin Stanley, Wayne Leamon and Howard Higgins) 

(A) 

(R) 

(H) 

Member of the Audit Committee 

Member of the Remuneration Committee 

Member of the Health & Safety Committee 

COMPANY SECRETARY AND REGISTERED OFFICE 

Christopher Talbot 

Ferry Road, Cardiff, CF11 0XR 

AUDITORS 

PricewaterhouseCoopers LLP 

1 Kingsway, Cardiff CF10 3PW 

PRINCIPAL BANKERS 

Barclays Bank plc 

Subsequent to 21 June 2006, the date on which the statutory accounts were signed, the following changes in the above information occurred: 

• James Dickson resigned as a director of the Company with effect from 12 September 2006, 

• Anthony Clamp was appointed as a director of the Company with effect from 21 September 2006, 

• Duncan Whyte, Howard Higgins and Anthony Clamp were appointed to the Audit Committee, Wayne Leamon resigned from the Audit Committee, with effect from 21 

September 2006. 

• With effect from 26 June 2006 the Registered Office of the Company was changed to: Wales & West House, Spooner Close, Coedkernew, Newport, NP10 8FZ 


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OPERATING & FINANCIAL REVIEW IN RESPECT OF THE ELEVEN MONTHS ENDED 31 MARCH 2006 

Introduction 

Wales & West Utilities Ltd (“The Company”) is a regulated gas transportation business owning and operating the principal gas distribution network in Wales and the South West of 

England. The Company operates under a Gas Transporter’s licence granted by the Gas and Electricity Markets Authority. 

History & development of the business 

The Company (formerly known as Blackwater 2 Ltd) was a dormant company wholly owned by National Grid Gas plc (NGG) (then called Transco plc) up until 1 May 2005 at 

which time the Gas Distribution Business for the Wales and South West Local Distribution Zones was transferred into it. 

On 1 June 2005 NGG sold its entire shareholding in the Company to MGN Gas Networks (Senior Finance) Ltd. 

Regulatory environment 

The Company is a private company. Details of the immediate and ultimate parent companies are set out in note 27 to the statutory financial statements. 

The gas distribution business of the Company is regulated by the Office of Gas & Electricity Markets (Ofgem). Ofgem operates under the direction and governance of the Gas and 

Electricity Markets Authority, which makes all major decisions and sets policy priorities for Ofgem. 

Other performance measures 

The Company uses a number of measures of operational and financial performance to plan and monitor its business. The Company’s core business is as a regulated gas network 

infrastructure utility and therefore many of the targets are determined by Ofgem. Safety performance is reportable to the Health & Safety Executive and measurement is again 

based on important regulatory targets. Much of the Company’s performance depends on meeting and exceeding those regulatory targets and improving safety performance. 

Measures of operational performance include: 

• Lost Time Injuries (LTIs), 

• The management of controllable costs in relation to the regulated business 

• Reliability of the gas distribution network and other customerfacing quality of service measures 

The Directors believe that safety is paramount and, as a fundamental part of this, that all work related injuries and illnesses are preventable. Consequently the Company measures 

the level of LTIs as a key operational performance indicator. LTIs are injuries that arise from a person’s employment and cause that person to be unable to attend the workplace 

and perform his or her duties for one or more shifts or working days. All the Company’s operations are required to report LTIs suffered by their respective employees and 

contractors. 

The level of controllable costs is another key measure. The Company’s ability to make an operating profit depends largely on the ability to manage those of the Company’s costs 

that can be controlled. Controllable costs include employment costs and other costs incurred in operating and maintaining the distribution system. Ofgem monitors the Company’s 

performance in a number of areas and the ability to reduce controllable costs is important in this process. 

Reliability of the gas distribution network is monitored by Ofgem in a number of ways, including the number and duration of interruptions to customers’ gas supplies. The 

Company is required to meet a number of different customer service targets which are set out in a determination by Ofgem (“Overall Standards”); these include attendance at gas 

escapes, notifying customers in advance of planned interruptions and responding to complaints. Compensation payments for customers are detailed in the Gas (Standards of 

Performance) Regulations 2005, including for example, payments for customers whose gas supply has been interrupted by an unplanned incident, as well as payments for failing to 


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issue connection quotations on time and offering dates to commence and complete connections work. The Company’s licence also requires it to meet certain connection targets. 

Performance against the aforementioned standards is reportable to Ofgem on a quarterly basis and is reported to the Executive team every month. 

Certain costs, of course, cannot be controlled and hence are not included within the definition of controllable costs. Some are fixed or semi fixed and generally cannot be 

influenced by management actions. These costs included: 

• Depreciation charges, 

• Replacement expenditure in line with the HSE and Ofgem agreed 30 year programme, 

• Shrinkage gas purchase costs relating to changes in the commodity price, 

• Business rates 

• Ofgem licence fee 

• Certain pension and pension deficit related costs. 

Operational reliability is a core measure of the Company’s success, and it is fundamental to the Company’s relationships with Ofgem and the public. The Company also measures 

service quality to assess the performance of management and staff in serving customers; including a quarterly customer survey which is undertaken by an independent market 

research company, the results of which are published on the Company’s website and are reported to Ofgem. 

Operating review 

Background 

The Company comprises the majority of the gas distribution network within Wales and the South West of England Local Distribution Zones. This consists of some 32,000 

kilometres of pipelines. Gas is transported on behalf of 30 gas shippers through the Company’s distribution pipelines to around 2.4 million consumers. 

The Company is responsible for the safety, development, maintenance and daily operation of the gas distribution network which it operates. 

In September 2005, the Company brought the gas connections business in-house replacing the contract which was previously managed independently by Fulcrum Connections. 

This included the preparation and issue of quotations for connections, the planning of work for accepted quotations and the management of the internal and external relationships 

with the workforce providing the connection. 

Regulation 

In common with the other UK gas distribution businesses, the Company is regulated through the gas transporter licence under which it operates its gas distribution network. 

On 1 April 2002, the activities of the then NGG Distribution Gas Business became subject to a separate five year price control formula (“distribution price control formula”) to 31 

March 2007. This control included specific Ofgem allowances in respect of operating expenditure, capital expenditure, replacement expenditure and an allowed rate of return 

(which is currently set at a real pre-tax rate of 6.25% on the Company’s regulatory asset value). With effect from 1 April 2004, however, this single price control formula was 

disaggregated into eight separate price control formulae (“network price control formulae”) to cover the activities of the eight regional gas distribution networks. The Company 

operates under the network price control formula applicable to its geographic network. 

The network price control formula take the same form as the NGG Distribution Gas price control formula, with a maximum allowed revenue assigned to the network. The formula 

retains a 65% fixed and 35% variable revenue calculation associated with transportation volume changes, a mains replacement incentive mechanism and the pass-through of 

prescribed network rates and gas transporter licence fees payable to Ofgem. 


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The Company was allocated a regulatory asset value associated with its distribution assets using an estimate of NGG’s Gas Distribution business regulatory asset value as at 1 April 

2002. The allocation was aimed to minimise unnecessary regional differentials in transportation charges. The network price control formula also incorporated the same allowed 

rate of return assumptions at a real pre-tax rate of 6.25%. At 31 March 2006, the regulatory asset value is calculated to be approximately £1.1bn. 

The HSE and Ofgem agreed a replacement programme which was implemented in 2002 to replace metallic mains within 30 metres of buildings. In line with the other Gas 

Distribution businesses in the UK, the Company has a mains replacement incentive mechanism and retains 33% of any out performance against Ofgem’s annual cost targets as 

additional return or, alternatively, bears 50% of any overspend if it underperforms. 

To align its workload, Ofgem has proposed, and all the gas distribution companies have agreed, that the present price controls will be extended for one year, that is to 31 March 

2008, from which time a new five year price control will apply. The Company is currently dealing with a number of issues that it considers should apply to the one year extension, 

and is due to make its first submission to Ofgem with respect to the subsequent five year control, on 6 October 2006. Ofgem has already published two consultation papers on the 

review process and various issues associated with it, and more will be published over the next year or more. 

Ofgem is considering incentive schemes, and these may form part of the five year price control period starting 1 April 2008. 

Operating performance 

Gas demand in 2005/06 was 80,327 Gwh including shrinkage. 

The Company exceeded the safety-related standards of service targets with more than 97% of uncontrolled gas escapes (those leaks where the gas cannot be controlled by turning 

the gas supply off at the meter) attended within one hour, and more than 99% of controlled gas escapes (where the gas leak can be controlled at the meter) attended within two 

hours. 

Over the eleven months, the Company has seen an improvement in performance against the connections related standards of service, meeting all but two of the performance targets. 

Low levels of performance in the period immediately after bringing the connections business back in house adversely affected the results for the eleven months, although 

performance in the last few months of the period was substantially above target levels, and in some cases reached 100%. 

Financial performance 

The results of the Company for the eleven months ended 31 March 2006 are set out in the Profit and Loss account on page 18. 

Investment in the network 

Investment in the network is essential for ensuring the security of the gas supply and the safety of the public. Net capital expenditure in WWUL’s network was £66.2m and net 

replacement expenditure was £50.7m in the eleven months to 31 March 2006. 


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Health, Safety and Environment 

Safety 

The Company’s objective is to achieve zero work-related injuries, zero work-related ill health and zero injuries to the public. Over the last eleven months, there were 3 lost time 

injuries, giving a 12 month frequency rate of 0.09 LTI’s/100,000 hours worked. This represents in excess of a 50% reduction during the last 11 months compared with the twelve 

months ended 31 March 2005. 

The Company continues to make progress in the management of occupational illnesses with a comprehensive health surveillance programme for industrial employees monitoring 

such issues as Hand Arm Vibration Syndrome, noise exposure and muscular skeletal conditions. 

The safety challenge is significant. With a deployed work force (including contractors) of around 2000, a multi million pound replacement programme and the Company’s core role 

of managing the safe and secure delivery of gas, the Company meets this challenge by having a comprehensive management system designed and certified to standards such as ISO 

14001, with a structured risk management process at its core. 

The Company believes that its safety performance is a market leader in its sector and that valued position is targeted at being maintained through continued, vigilant implementation 

of its health, safety and environmental procedures. Nurturing a safety aware culture within the Company’s workforce that sees clear accountability resting with line management, 

employees and contract partners is a key element of the Company’s successful record. 

Accident Frequency Rate - LTI's/100,000 Hours 

1.5 

1.2 

0.9 

0.6 

0.3 

0.0 

Construction Extraction/Utilities Electricity 

WWU 

Environment 

Distribution 

The Company is also proud of its environmental achievements. In addition to receiving certification in its own right to ISO 14001, it retained the prestigious Green Dragon Award 

at the highest level – an award only achieved by a handful of companies. By utilising and developing industry-wide best practices, the Company has reduced its environmental 

impact. Key areas for focus have been climate change, the disposal of waste to land fill and the use of quarried stone. Protecting the environment is a key focus for the Company 

going forward, constantly looking for ways to minimise the environmental impact of its past, present and future activities. 

The Company continue to manage its portfolio of contaminated land to the benefit of both shareholders and the environment. These sites are principally former manufacturing gas 

plants and can sometimes have a complex mix of contamination dating back over 100 years. The Company’s remediation programme has a main focus on managing the 

environmental risk followed by the remediation and subsequent commercial development of the land. 


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Financial review 

Basis of accounting 

The accounts present the Company’s results for the period ended 31 March 2006 and the financial position as at 31 March 2006 and 2005. They have been prepared using the 

accounting policies shown on pages 22 to 25, in accordance with generally accepted accounting policies in the United Kingdom. 

As the Company acquired the assets, liabilities and activity of the Wales and South West Gas Distribution Network from NG on 1 May 2005, the profit and loss account shows the 

trading activity since that date. Accordingly it is not possible to compare the results of the business year on year. 

Changes in accounting policies adopted during the period resulting from the requirements of new accounting standards are set out in Principal Accounting Policies on page 22. 

Segmental reporting 

In addition to providing the overall results and financial position in the financial statements, the Company provides a breakdown of those results and balances into a number of 

different business segments as required by the License. 

Liquidity, resources and capital expenditure 

Net cash inflow from operations amounted to £478.8m, including intercompany creditors of £367.5m, and was augmented by new long term loans of £861.1m. These cash funds 

were used to repay the intercompany loan with NG of £1,195.4m which was acquired with the business. 

Capital purchases absorbed cash of £65.2m and net financing costs amounted to £50.1m. 

Cash flow forecasting 

Both short term and long term cashflow forecasts are produced frequently to assist in identifying the liquidity requirements of the Company. 

Debt 

Details of net debt are disclosed in note 9 and gross debt in note 12. Details of the Company’s approach to financial risk management are set out in the Report of the Directors on 

page 8. 

Shareholder funds 

Shareholder funds at 31 March 2006 amounted to a liability of £61.7m as a result of a retained loss of £93.5m in the period offset by issued and fully paid share capital if £30.7m. 


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PRINCIPAL ACTIVITIES AND BUSINESS REVIEW 

REPORT OF THE DIRECTORS 

The Company is principally engaged in the management of gas transportation assets. The Company provides gas distribution services throughout Wales and the South West of England 

Local Distribution Zones. 

On 1 May 2005 the issued share capital of the Company was increased to 30,675,000 ordinary shares of £1 each. 

With effect from 1 May 2005 the Company unconditionally acquired the gas distribution network which operates within Wales and the South West of England Local Distribution 

Zones from NGG in exchange for the issue of shares with a nominal value of £30.7m. Since that date, the Company has operated this distribution network. 

On 1 June 2005, the Company changed its name from Blackwater 2 Limited to Wales & West Utilities Limited. 

During September 2005, the Company terminated its agreement with Fulcrum Connections Ltd, a subsidiary of NGG, for the provision of meter connections and relocation services. 

The Fulcrum Connections Ltd staff who undertook that activity transferred to the Company and the Company now undertake this work directly. 

FUTURE DEVELOPMENTS 

The Company does not envisage any changes in activity for the foreseeable future. In the opinion of the Directors there were no other significant developments within the Company that 

occurred during the financial period under review. 

Details of the ownership of the Company are included in note 27. Details of movements in the authorised and issued share capital of the Company are included in Note 17. 

FINANCIAL RISK MANAGEMENT 

The Company’s operations expose it to a variety of financial risks that include the effects of changes in debt market prices, credit risk, liquidity risk and interest rate risk. The Company 

has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Company by monitoring levels of debt finance and related finance 

costs. The Company also uses derivative financial instruments to manage interest rate costs. 

Given the size of the Company, the Directors have not delegated the responsibility of monitoring financial risk management to a sub-committee of the Board. The policies set by the 

Board are implemented by the Company’s finance department. 

Price risk 

The Company is exposed to commodity price risk through the purchase of “shrinkage gas” as a result of its operations. Shrinkage gas is that gas which the Company consumes during its 

operational activity and comprises gas used by the gas distribution business, the gas which leaks from the distribution network and gas stolen from the network. This risk is managed 

through appropriate commodity purchase in the forward market. 

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FINANCIAL RISK MANAGEMENT (continued) 

Credit risk 

The Company has implemented policies that require appropriate credit checks on potential customers before sales are made. The amount of exposure to any individual counterparty is 

subject to a limit, which is reassessed on a regular basis. 

The amount of credit given to Gas Shippers is governed by Uniform Network Code (“UNC”) regulations and guidelines. This provides for defined levels of unsecured credit with Gas 

Shippers based on Investment Grade Ratings (“IGRs”) with any excess credit amounts being secured by Letters of Credit, Parent Company Guarantees or by way of Prepayment. 

The value at risk is monitored on a daily basis and is again regulated by UNC criteria allowing a maximum credit limit usage of 85% which, if exceeded, allows the Company to apply 

sanctions. 

The Company’s overall exposure is also monitored and approved having regard to the levels of exposure within each IGR category. 

The Company actively maintains long term debt finance that is designed to ensure the Company has sufficient available funds for operations and planned expansions. 

Interest rate cashflow risk 

The Company has both interest bearing assets and interest bearing liabilities. Interest bearing assets are cash, which bear interest at variable rates. The Company has a policy of hedging 

debt in order to fix interest rates and give greater certainty over future cashflows. 

RESULTS 

The loss on ordinary activities before taxation amounted to £93.5m (2005 £nil). The loss attributable to shareholders amounted to £93.5m (2005 £Nil). 

The Company did not trade until the acquisition of the business described above in May 2005. Accordingly, no comparatives for the profit and loss account or cashflow are presented in 

respect of the period to 31 March 2005. 

DIVIDEND ON ORDINARY SHARES 

The Directors do not recommend the payment of a dividend (2005 Nil) in respect of the period. 

FIXED ASSETS 

Following the acquisition of the Wales and South West gas distribution business, freehold land and buildings are carried in the accounts at fair value of £2.7m (2005 £Nil). 

In the opinion of the Directors there was no significant difference between the book values of property and market values at 31 March 2006. 


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DIRECTORS 

The names of the current directors of the Company are shown on page 2. 

Changes in directors during the period up to the date of signature of the statutory accounts on 21 June 2006 are shown below, subsequent changes in directors are set out on page 2, all 

other directors served throughout the period: 

Colin Buck Resigned 1 June 2005 

Ian Davis Resigned 1 June 2005 

Mark Fairbairn Resigned 1 June 2005 

Steven Holliday Resigned 1 June 2005 

James O’Sullivan Resigned 1 June 2005 

Alison Kay (Alternate Director) Appointed 20 May 2005 Resigned 1 June 2005 

Christopher Train (Alternate Director) Appointed 20 May 2005 Resigned 1 June 2005 

Ross Sayers Appointed 1 June 2005 Died 25 November 2005 

Graeme Bevans Appointed 1 June 2005 Resigned 10 March 2006 

Stephen Box Appointed 1 June 2005 

James Craig Appointed 1 June 2005 Resigned 16 February 2006 

Graham Edwards Appointed 1 June 2005 

Philip Garling Appointed 1 June 2005 

Richard Howes (Alternate Director) Appointed 1 June 2005 Resigned 19 September 2005 

Wayne Leamon Appointed 1 June 2005 

Duncan Whyte Appointed 1 June 2005 

Charles Hazelwood (Alternate Director) Appointed 1 June 2005 

Steven Bickerton (Alternate Director) Appointed 19 September 2005 

Christopher Koski Appointed 16 February 2006 

David Owens (Alternate Director) Appointed 16 February 2006 

Martin Stanley Appointed 16 February 2006 

Howard Higgins Appointed 16 February 2006 

(previously appointed alternate director from 1 June 2005) 

James Dickson Appointed 25 April 2006 

(previously appointed alternate director from 1 June 2005) 

DIRECTORS’ SERVICE CONTRACTS AND REMUNERATION 

Details of directors’ remuneration are set out in note 2(a). 


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DIRECTORS’ INTERESTS 

There were no significant contracts subsisting during or at the end of the period with the Company in which any director is or was materially interested (other than service contracts). 

None of the directors has or has had a beneficial interest in the shares of the Company. 

POLICY ON THE PAYMENT OF CREDITORS 

It is the Company’s policy to comply with terms of payment agreed with suppliers. Where payment terms are not negotiated the Company endeavours to adhere with the suppliers 

standard terms. 

EMPLOYMENT POLICIES 

The Company recognises that its employees are key to both the present and future success of the Company and supports the fundamental belief that to maximise the potential of every 

individual there must be:- 

• Investment in training and development. 

• A supportive working environment. 

• Employee participation and involvement in business matters. 

To this end the Company is evolving a framework of comprehensive policies and all employees have the opportunity to discuss their individual performance and development in a 

focused and proactive way. 

The Company seeks to maximise staff potential by encouraging employees to consider internal opportunities as part of their personal development. This can only be achieved with 

knowledge of the Company’s business aims and objectives, and keeping employees up to date with the Company’s news and views continues to be a high priority. The in-house 

newspaper supports this endeavour and provides a wide range of information. 

The Company continues to formally consult employees at all levels in the spirit of partnership and co-operation and the use of employee opinion and attitude surveys will provide the 

Company with valuable information upon which to base future policy decisions. 

The Company offers equality of opportunity and support for disabled employees and maintains good links with external organisations to encourage involvement in the workplace of 

disabled members of the wider community. 


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CONTRIBUTIONS FOR CHARITABLE AND POLITICAL PURPOSES 

During the period, there have been no political donations, and charitable donations amounted to £4,000 (2005 £Nil). Donations in excess of £200 were made to: 

Blackwood Alzheimer’s’ Society £500 

BBC Children in Need £500 

Flint & Holywell Rotary Club £300 

Sports Aid Wales £590 

Ty Hafan Children’s Hospice for Wales £300 

St David’s Hall & New Theatre Trust £1,175 

GOING CONCERN 

The Company’s accounts have been prepared on the basis that the Company is a going concern. In arriving at their decision to prepare the accounts on a going concern basis, the 

directors have reviewed the Company’s budget for 2006/07 and medium term business plans for 2007/08 to 2010/11 including capital expenditure plans. This included 

consideration of the cash flow implications of the plans and comparing these with the Company’s cash resources and committed borrowing facilities. 

REGULATORY ACCOUNTS 

The Gas Transporters Licence under which the Company operates requires specific accounting statements to be published. Copies of the regulatory accounts for the Company will be 

available from the Company Secretary after 30 November 2006. 

AUDITORS 

PricewaterhouseCoopers LLP were appointed as auditors on 20 January 2005. 

Pursuant to Section 386 of the Companies Act 1985, an elective resolution was passed on 8 June 2006 resolving that the Company dispense with the requirement to appoint auditors 

annually. 

In the case of each of the persons who are directors at the time when the report is approved under section 234A of the Companies Act 1984: 

• so far as the director is aware, there is no relevant audit information of which the company's auditors are unaware; and 

• the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's 

auditors are aware of that information. 

By Order of the Board 

C Talbot 

Company Secretary 

29 September 2006 


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CORPORATE GOVERNANCE STATEMENT 

STATEMENT OF COMPLIANCE 

The Company is a private company and is therefore not require to comply with the Combined Code on Corporate Governance issued by the Financial Reporting Council (“the 

Code”). However, the Company has resolved to adopt such parts of the Combined Code as are appropriate to its circumstances. 

BOARD OF DIRECTORS 

The Board is responsible to the shareholders for all aspects of the Company’s performance and meets on a bi-monthly basis to review the strategic direction of all business activities 

and monitors performance against approved business plans and budgets. 

Appointment to the Board is made in accordance with the terms of the agreement between the shareholders (“the shareholder agreement”). Not more than twelve, and not less than 

three, directors may be appointed to the Board at any time. Shareholders are obliged to ensure, so far as is reasonably possible, that up to two independent directors are appointed to 

the Board. 

The roles of Chairman (Duncan Whyte) and Chief Executive (Graham Edwards) are held separately. There is no standing Deputy Chairman. The Board of Directors currently 

comprises the Chairman, the Chief Executive, and seven non-executive directors. All directors have access to the advice and services of the Company Secretary who is responsible 

for ensuring that the Board procedures and applicable rules and regulations are observed. The non-executive directors are independent of management and free from any business 

or other relationship with the Company, other than as shareholder representatives. The non-executive directors have full access to both the internal and external auditors and to 

management. The non-executive directors have no financial interest in the Company other than by way of their fees and shareholdings as disclosed in the Report of the Directors 

and their service is not pensionable. The Chairman and one non-executive director (Stephen Box) are independent of shareholder interests. The Chairman has no other significant 

commitments. 

Since 1 June 2005, the date the Company became a member of the MGN Gas Networks (UK) Ltd Group, no directors, other than James Craig (5) and Graeme Bevans (3), have 

missed more than one Board meeting, and no director, or his alternate (other than Graeme Bevans) missed any Board Committee meeting. 

Evaluation of the performance of Board directors is conducted by virtue of their appointments being made and monitored by the investing shareholders. 

The Board reserves for its consideration or approval all Company matters which includes the Group’s strategy, major items of capital expenditure and certain material contracts, 

save for those which it explicitly delegates to management. The form of delegated authority is reviewed by the Board periodically. 

The Audit Committee, under the chairmanship of Stephen Box, comprises two of the non-executive directors, Duncan Whyte and Howard Higgins, and has written terms of 

reference. This Committee meets quarterly to monitor the adequacy of internal controls, accounting policies and financial reporting of the Company and the Group and receives 

reports from the internal and external auditors on a regular basis. The activities of the Audit Committee meetings are reported to and considered by the Board at least annually. 

The Remuneration Committee, under the chairmanship of the Chairman, comprises two other non-executive directors, Wayne Leamon and Martin Stanley, and has written terms 

of reference. This Committee meets as necessary to consider and determine the terms and conditions of employment of the executive directors, including salary, bonus, share 

option and pension entitlements. The activities of the Remuneration Committee meetings are reported to the Board at least annually. 


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The Health & Safety Committee, comprises the Chairman, and two non-executive directors, Howard Higgins and Stephen Box, has written terms of reference and meets 

quarterly. Having regard to the importance of safety to the Company, it reviews the Company’s safety and environmental record and activities. The activities of the Health & Safety 

Committee meetings are reported to and considered by the Board at least annually. 

GOING CONCERN 

The Company’s statement on going concern is included within the Report of the Directors on page 12. 

INTERNAL FINANCIAL CONTROL 

The Board of Directors has overall responsibility for the Group’s system of internal financial control. The Audit Committee, as a committee of the Board, reviews the effectiveness 

of the system of internal financial control of the Group and receives reports from the internal and external auditors on a regular basis. 

The Board has put in place an organisational structure with clearly defined lines of responsibility and delegation of authority. There are also established procedures for planning 

and capital expenditure, and information and reporting systems for monitoring the Group’s businesses and their performance. The Board has adopted a Code of Corporate Ethics 

applicable to all staff, setting out the standards which the Company expects of them. 

Management at Group and operating levels have a responsibility for identifying risks facing each of the Group’s businesses and for developing systems to mitigate and monitor 

risks. Clear parameters and guidelines continue to be codified for all major areas of risk and a Risk Management Forum oversees and monitors this process. 

The directors have delegated to executive management implementation of the system of internal financial control throughout the Group. This includes financial controls which 

enable the Board to meet its responsibilities for the integrity and accuracy of the Group’s accounting records and compliance with accepted accounting principles in order to show a 

true and fair view. 

The Group operates a comprehensive budgeting and financial reporting system which, as a matter of routine, compares actual out-turn to budgets, and approved business plans. 

Management accounts are prepared on a monthly basis and significant variances to plan are investigated with forecasts being revised on a regular basis. Business plans are 

prepared for a three year period, revised annually and are approved by the Board. Cashflow statements are prepared monthly and as part of the business plans to ensure that the 

Group has adequate funds and resources for the foreseeable future. 

The internal financial control system is monitored and supported by an internal audit function which reports to management and the Audit Committee on the Group’s operations. 

There is an annual programme of work for the Internal Auditors which is reviewed and approved by the Audit Committee. The priorities of the internal auditors and their work 

programme are developed to focus on the areas of greatest risk to the Group determined on the basis of a risk management approach to audit derived from the Company Risk 

Register. The Risk Register is maintained up to date by management and is reviewed by the Audit Committee. 

The external auditors are engaged to express an opinion on the financial statements. They review and test the system of internal financial control and the data contained in the 

financial statements to the extent necessary for expressing their opinion on the financial statements. 

The Board believes that the Group’s system of internal financial control can provide only reasonable and not absolute assurance that the assets are safeguarded, transactions 

authorised and recorded properly and that material errors and irregularities are either prevented or detected within a timely period. 


14

DIRECTORS' RESPONSIBILITIES FOR PREPARING SEPARATE REGULATORY ACCOUNTING STATEMENTS 

The Directors are required by the Condition, as amended by consents received from Ofgem, to prepare regulatory accounting statements for each financial period. These regulatory 

accounting statements must fairly present the revenues, costs, assets, liabilities, reserves, provisions and cash flows of, or reasonably attributed to the transportation business, the metering 

business and the other activities of the Company. 

The Directors consider that, in preparing the regulatory accounting statements, the business has used appropriate accounting policies, consistently applied and supported by reasonable 

and prudent judgements and estimates, all applicable accounting standards have been followed and that the financial statements have been prepared on a going concern basis. 

The Directors have a responsibility to ensure that the Company keeps accounting records in such a form that the revenues, costs, assets, liabilities, reserves and provisions of, or 

reasonably attributed to, each of the businesses are separately identifiable in the books of the Company. 

The Directors have responsibility for ensuring that the regulatory accounting statements fairly present the revenues, costs, assets, liabilities, reserves and provisions of, or reasonably 

attributed to, each business. 

The Directors have responsibility to ensure that, so far as is reasonably practicable, the regulatory accounting statements have the same content and format in respect of the businesses to 

which they relate as the annual accounts of the Company: that they confirm to best commercial accounting practices including all relevant accounting standards issued or adopted by the 

Accounting Standards Board currently in force and that the accounting policies used are stated. 

The Directors have responsibility to ensure that the regulatory accounting statements show separately and in appropriate detail the amounts of any revenues, costs, assets, liabilities, 

reserves or provisions that have been charged from or to any group company, or that have been determined by apportionment. 

The Directors, having prepared the regulatory accounting statements, have requested the Auditors take whatever steps and to undertake whatever inspections they consider to be 

appropriate for the purpose of enabling them to give their audit report. 

The Directors are responsible for ensuring that the regulatory accounting statements are published and where they are published on the internet, for the maintenance and integrity of the 

website. Uncertainty regarding legal requirements is compounded, as information published on the internet is accessible in many countries with different legal requirements relating to 

the preparation and dissemination of financial statements. 


15

INDEPENDENT AUDITORS’ REPORT TO THE GAS AND ELECTRICITY MARKETS AUTHORITY (“THE REGULATOR”) AND WALES AND WEST 

UTILITIES LIMITED 

We have audited the Regulatory financial statements of Wales and West Utilities Limited (“the Company”) on pages 18 to 52, which comprise the profit and loss account, the 

statement of total recognised gains and losses, the balance sheet, the cash flow statement and the related notes to the Regulatory financial statements. These Regulatory financial 

statements have been prepared under the accounting policies set out therein. For the avoidance of doubt, we have not audited the financial information for the trading in the month 

of April 2005, prior to the transfer of the business to the company. 

This report is made, on terms that have been agreed, solely to the Company and the Regulator in order to meet the requirements of the Regulatory Licence. Our audit work has been 

undertaken so that we might state to the Company and the Regulator those matters that we have agreed to state to them in our report, in order (a) to assist the Company to meet its 

obligation under the Regulatory Licence to procure such a report and (b) to facilitate the carrying out by the Regulator of its regulatory functions, and for no other purpose. To the 

fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Regulator, for our audit work, for this report or for the opinions 

we have formed. 

Basis of preparation 

The Regulatory financial statements have been prepared under the historical cost convention and in accordance with condition A30 of the Company’s Regulatory Licence and the 

accounting policies set out in the statement of accounting policies. 

The Regulatory financial statements are separate from the statutory financial statements of the Company and have not been prepared under the basis of Generally Accepted 

Accounting Principles in the United Kingdom (“UK GAAP”). Financial information other than that prepared on the basis of UK GAAP does not necessarily represent a true and 

fair view of the financial performance or financial position of a company as shown in financial statements prepared in accordance with the Companies Act 1985. 

Respective responsibilities of the Regulator, the Directors and the Auditors 

The nature, form and content of Regulatory financial statements are determined by the Regulator. It is not appropriate for us to assess whether the nature of the information being 

reported upon is suitable or appropriate for the Regulator’s purposes. Accordingly we make no such assessment. 

The directors’ responsibilities for preparing the Regulatory financial statements in accordance with condition A30 of the Regulatory Licence are set out in the statement of 

directors’ responsibilities on page 15. 

Our responsibility is to audit the Regulatory financial statements in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board, 

except as stated in the ‘Basis of audit opinion’, below and having regard to the guidance contained in Audit 05/03 ‘Reporting to Regulators of Regulated Entities’. 

We report our opinion as to whether the Regulatory financial statements present fairly, in accordance with condition A30 of the Company’s Regulatory Licence and the accounting 

policies set out on pages 22 to 25, the results and financial position of the Company. We also report to you if, in our opinion, the Company has not kept proper accounting records or 

if we have not received all the information and explanations we require for our audit. 

We read the other information contained within the Regulatory financial statements, including any supplementary schedules on which we do not express an audit opinion, and 

consider the implications for our report if we become aware of any apparent mis-statements or material inconsistencies with the Regulatory Accounts. Such information comprises 

the Operating and Financial review and the Corporate Governance statement. 


16

Basis of audit opinion 

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board except as noted below. An audit includes 

examination, on a test basis, of evidence relevant to the amounts and disclosures in the Regulatory financial statements. It also includes an assessment of the significant estimates 

and judgements made by the Directors in the preparation of the Regulatory financial statements, and of whether the accounting policies are consistently applied and adequately 

disclosed. 

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give 

reasonable assurance that the Regulatory financial statements are free from material mis-statement, whether caused by fraud or other irregularity or error. However, as the nature, 

form and content of Regulatory financial statements are determined by the Regulator, we did not evaluate the overall adequacy of the presentation of the information, which would 

have been required if we were to express an audit opinion under Auditing Standards. 

Our opinion on the Regulatory financial statements is separate from our opinion on the statutory accounts of the Company for the period ended 31 March 2006 on which we 

reported on 22 June 2006, which are prepared for a different purpose. Our audit report in relation to the statutory accounts of the Company (our “Statutory” audit) was made solely 

to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our Statutory audit work was undertaken so that we might state to the 

Company’s members those matters we are required to state to them in a Statutory audit report and for no other purpose. In these circumstances, to the fullest extent permitted by 

law, we do not accept or assume any responsibility to anyone other than the Company and the Company’s members as a body, for our Statutory audit work, for our Statutory audit 

report, or for the opinions we have formed in respect of that Statutory audit. 

Opinion 

In our opinion the Regulatory financial statements fairly present in accordance with condition A30 of the Company’s Regulatory Licence and the accounting policies set out on 

pages 18 to 52, the state of the Company’s affairs at 31 March 2006 and its profit and cash flows for the 11 months trading then ended, and have been properly prepared in 

accordance with condition A30 of the Regulatory licence and accounting policies. 

PricewaterhouseCoopers LLP 

Chartered Accountants and Registered Auditors, Cardiff 

29 September 2006 

1. The maintenance and integrity of the Wales and West Utilities Limited web site is the responsibility of the Directors and the maintenance and integrity of the Ofgem web site is 

the responsibility of the Regulator; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for 

any changes that may have occurred to the Regulatory financial statements since they were initially presented on the web sites. 

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and Regulatory financial statements may differ from legislation in other 

jurisdictions. 


17

PROFIT AND LOSS ACCOUNT 

FOR THE ELEVEN MONTHS ENDED 31 MARCH 2006 

For the eleven month trading period ended 31 March 2006 

2006 

Transportation De-minimis Metering Other 

business business activities activities Total 

Note £m £m £m £m £m 

Turnover: 

Acquisitions 214.3 0.2 9.6 0.2 224.3 

Total turnover 214.3 0.2 9.6 0.2 224.3 

Net operating costs - Acquisitions 1 210.7 0.1 10.7 - 221.5 

Operating profit: 

Acquisitions 3.6 0.1 (1.1) 0.2 2.8 

Total operating profit/(loss) 3.6 0.1 (1.1) 0.2 2.8 

Interest receivable 6.2 - - - 6.2 

Other finance income 26 2.8 - - - 2.8 

Interest payable and similar charges 3 (105.3) - - - (105.3) 

Profit/(loss) on ordinary activities before taxation (92.7) 0.1 (1.1) 0.2 (93.5) 

Taxation 4 - - - - - 

Profit/(loss) attributable to ordinary shareholders (92.7) 0.1 (1.1) 0.2 (93.5) 

Dividends on ordinary shares - - - - - 

Retained profit/(loss) for the period 18 (92.7) 0.1 (1.1) 0.2 (93.5) 

The Company did not trade until the acquisition of the trade and assets of the Wales and South West LDZ Gas Distribution business in May 2005. Accordingly no comparatives have been presented in 

respect of the period ended 31 March 2005. 


18

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 



Transportation 

business 

De-minimis 

business 

Metering 

activities Other activities Total 

£m £m £m £m £m 

Profit/(loss) for the financial period attributable to ordinary shareholders (92.7) 0.1 (1.1) 0.2 (93.5) 

Actuarial gain on pension scheme (note 26) 1.1 - - - 1.1 

Total recognised gains and losses relating to the period (91.6) 0.1 (1.1) 0.2 (92.4) 

There are no material differences between the profit on ordinary activities before taxation and the retained loss for the period stated above and their historical cost equivalents. 

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 




business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

Total recognised profit/(losses) for the period (91.6) 0.1 (1.1) 0.2 (92.4) 

New ordinary share capital issued 30.7 - - - 30.7 

Net increase/(decrease) in shareholders’ funds (60.9) 0.1 (1.1) 0.2 (61.7) 

At 1 April 2005 - - - - - 

At 31 March (60.9) 0.1 (1.1) 0.2 (61.7) 


19

BALANCE SHEET AT 31 MARCH 2006 

2006 2005 


business 

De-minimis 

business 

Metering 

activities 

Other 

activities Total 

Note £m £m £m £m £m £m 

Fixed assets 

Tangible assets 5 1,287.7 - 1.0 - 1,288.7 - 

Investments 6 0.1 - - - 0.1 - 

1,287.8 - 1.0 - 1,288.8 - 

Current assets 

Stocks and work in progress 7 2.8 - - - 2.8 - 

Debtors 8 35.6 - 1.0 - 36.6 - 

Inter-business unit activity balances 2.8 0.1 (3.1) 0.2 - - 

Cash at bank and in hand 29.9 - - - 29.9 - 

71.1 0.1 (2.1) 0.2 69.3 - 

Current liabilities 

Creditors: amounts falling due within one year 9(a) (446.4) - - - (446.4) - 

Net current (liabilities)/assets (375.3) 0.1 (2.1) 0.2 (377.1) - 

Total assets less current liabilities 912.5 0.1 (1.1) 0.2 911.7 - 

Creditors: amounts falling due after more than one year 9(b) (887.7) - - - (887.7) - 

Provisions for liabilities and charges 16 (70.4) - - - (70.4) - 

Net (liabilities)/assets before pension liability (45.6) 0.1 (1.1) 0.2 (46.4) - 

Pension liability 26 (15.3) - - - (15.3) - 

Net (liabilities)/assets including pension liability (60.9) 0.1 (1.1) 0.2 (61.7) - 

Capital and reserves 

Called up share capital 17 30.7 - - - 30.7 - 

Reserves 18 (91.6) 0.1 (1.1) 0.2 (92.4) - 

Equity shareholders’ funds (60.9) 0.1 (1.1) 0.2 (61.7) - 

Total shareholders’ funds (60.9) 0.1 (1.1) 0.2 (61.7) - 

The Regulatory Accounts on pages 18 to 52 inclusive, which are based on the Statutory Accounts of Wales & West Utilities Ltd as approved by the Board on 21 June 2006, were signed on 29 

September 2006. 

Graham Edwards 

Christopher Talbot 

Chief Executive Officer 

Company Secretary 


20

CASHFLOW STATEMENT 




business 

De-minimis 

business 

Metering 

activities 

Other 



Operating activities 

Net cash inflow from acquired operating activities 19 480.6 0.1 (2.1) 0.2 478.8 

Net cash inflow/(outflow) from operating activities 480.6 0.1 (2.1) 0.2 478.8 

Returns on investments and servicing of finance 

Interest received 6.2 - - - 6.2 

Interest paid (56.2) - - - (56.2) 

Interest element of finance leases (0.1) - - - (0.1) 

Net cash outflow from returns on investments and servicing of finance (50.1) - - - (50.1) 

Taxation 

UK corporation tax paid - - - - - 

Tax paid - - - - - 

Investing activities 

Purchase of tangible fixed assets (64.2) - (1.0) - (65.2) 

Grants and contributions received 0.8 - - - 0.8 

Long term loans repaid on acquisition of business 24 (1,195.4) - - - (1,195.4) 

Net cash outflow from investing activities (1,258.8) - (1.0) - (1,259.8) 

Net cash (outflow)/inflow before financing and treasury activities (828.3) 0.1 (3.1) 0.2 (831.1) 

Financing and treasury activities 

New long term loans 20 861.1 - - - 861.1 

Capital payments under finance leases 20 (0.1) - - - (0.1) 

Net cash inflow from financing and treasury activities 861.0 - - - 861.0 

Increase/(decrease) in cash and cash equivalents 21 32.7 0.1 (3.1) 0.2 29.9 

The Company did not trade until the acquisition of the trade and assets of the Wales and South West LDZ Gas Distribution business in May 2005. Accordingly no comparatives have been presented 

in respect of the period ended 31 March 2005. 


21

PRINCIPAL ACCOUNTING POLICIES 

The financial statements have been prepared in accordance with Accounting Standards applicable in the United Kingdom and comply with the Companies Act 1985. A summary of the principal 

Company accounting policies, which have been consistently applied, is shown below. 

CHANGES IN ACCOUNTING POLICY 

The Company has adopted FRS 17 ‘Retirement benefits’, FRS 21 ‘Events after the balance sheet date’, FRS 25 ‘Financial instruments disclosure and presentation’ and FRS 28 ‘Corresponding 

amounts’. The change in accounting policy to adopt the requirements of these standards has not had an impact on the financial statements for the prior year as the Company did not trade in the prior 

year and accordingly no adjustments are required. 

BASIS OF ACCOUNTING 

These regulatory accounting statements have been prepared in accordance with the historical cost convention as modified for the fair valuation exercise undertaken on the acquisition of the gas 

distribution business. 

The preparation of regulatory accounting statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported 

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the regulatory accounting statements and the reported amounts of revenues and expenses during the 

reporting period. Actual results could differ from these estimates. 

The Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason they adopt the going concern basis in the 

preparation of these financial statements. 

BASIS OF PREPARATION 

Regulatory accounting information is provided across the business segments in accordance with the License: 

• Transportation comprises the business of transporting gas through the Company’s pipes and related activities as specified in the licence, 

• Metering comprises the provision of meter installation and servicing activities, 

• Other activities comprises activities other than the transportation business carried out under the License or with the specific consent of Ofgem including emergency cover for Independent 

Gas Transporters within the Company’s geographic region, and 

• De-minimis comprises all other activities not falling within the categories above and includes software sales and consultancy. 

Meter reading activity undertaken by the Company is included within the Metering business segment and amounted to income of £0.3m and costs of £0.1m. 

ACQUISITIONS AND DISPOSALS 

The results of businesses acquired during the year are dealt with in the financial statements from the date of acquisition of those businesses. Where appropriate, adjustments are made to bring 

different accounting policies of newly acquired companies into line with the existing Company accounting policies. 

Goodwill arising from the purchase of businesses, representing the excess of the fair value of the purchase consideration (including costs of acquisition) over the fair value of net assets acquired, is 

amortised over its expected future economic life. 


22

TURNOVER 

Turnover represents the sales value derived from the distribution of gas together with the sales value derived from the provision of other services to customers during the period and excludes Value 

Added Tax. 

Turnover from the distribution of gas is partially derived from the value of units supplied during the period and includes an estimate of the value of units supplied between the date of the last meter 

reading and the year end. No liability is recognised when revenues received or receivable exceed the maximum amount permitted by regulatory agreement and reductions will be made to future 

prices to reflect this over-recovery. 

TANGIBLE FIXED ASSETS AND DEPRECIATION 

Tangible fixed assets are included in the balance sheet at their cost less accumulated depreciation. Cost includes payroll and finance costs incurred which are directly attributable to the construction 

of tangible fixed assets. 

Fixed assets acquired with the acquisition of the Wales & West gas distribution business are included at fair value. 

Tangible fixed assets include assets in which the Company’s interest comprises legally protected statutory or contractual rights of use. 

Additions represent the purchase or construction of new assets and extensions or significant increases in the capacity of existing tangible fixed assets. Contributions received towards the cost of 

tangible fixed assets are included in creditors as deferred income and credited on a straight line basis to the profit and loss account over the estimated economic lives of the assets. 

No depreciation is provided on freehold land and assets in the course of construction. Other tangible fixed assets are depreciated, principally on a straight line basis, at rates estimated to write off 

their book values over their estimated useful economic lives. In assessing estimated economic lives, which are reviewed on a regular basis, consideration is given to any contractual arrangements 

and operational requirements relating to particular assets. Unless otherwise determined by operational requirements, the depreciation periods for the principal categories of tangible fixed assets are, 

in general, shown below. 

Replacement expenditure represents the costs of planned maintenance of mains and services assets by replacing or lining sections of pipe. This expenditure is principally undertaken to repair and to 

maintain the safety of the network and is written off as incurred. Expenditure which enhances the performance of the mains and services assets is treated as an addition to tangible fixed assets. 

Principal depreciation periods are: 

Freehold buildings 

Leasehold properties 

Gas distribution network assets: 

Mains, services and regulating equipment 

Storage 

Meters 

Vehicles, mobile plant and equipment 

up to 50 years 

over the period of the lease 

30 to 65 years 

40 years 



Assets in the course of construction are not depreciated until commissioned. 

All assets are depreciated on a straight line basis over their estimated economic life. 


23

IMPAIRMENT OF FIXED ASSETS 

Impairments of fixed assets are calculated as the difference between the carrying values of the net assets of income generating units, including, where appropriate, investments and goodwill, and 

their recoverable amounts. Recoverable amount is defined as the higher of net realisable value or estimated value in use at the date the impairment review is undertaken. Net realisable value 

represents the net amount that can be generated through sale of the assets. Value in use represents the present value of expected future cashflows discounted on a pre-tax basis, using the estimated 

cost of capital of the income generating unit. 

Impairment reviews are carried out if there is some indication that an impairment may have occurred, or where otherwise required, to ensure that fixed assets are not carried above their estimated 

recoverable amounts. Impairments are recognised in the profit and loss account and, where material, are disclosed as exceptional. 

LEASED ASSETS 

Where assets are financed by leasing arrangements which transfer substantially all the risks and rewards of ownership of an asset to the lessee (finance leases), the assets are treated as if they had 

been purchased and the corresponding capital cost is shown as an obligation to the lessor. Leasing payments are treated as consisting of a capital element and finance costs, the capital element 

reducing the obligation to the lessor and the finance charges being written off to the profit and loss account over the period of the lease in reducing amounts in relation to the written down amount. 

The assets are depreciated over the shorter of their estimated useful life and the lease period. 

All other leases are regarded as operating leases. Rental costs arising under operating leases are charged to the profit and loss account in the year to which they relate. 

GRANTS, CUSTOMER CONTRIBUTIONS AND INFRASTRUCTURE CHARGES 

Grants, customer contributions and infrastructure charges relating to gas infrastructure assets and expenditure on other fixed assets are treated as deferred income and recognised in the profit and 

loss account over the expected useful economic lives of the related assets. 

Certain contributions noted above are wholly or partially refundable if an agreed volume of gas is distributed to them. Such contributions are included in provisions until there is no further liability 

to make refunds. 

INVESTMENTS 

Long term investments held as fixed assets are stated at cost less amounts written off or provided to reflect permanent diminutions in value. Those held as current assets are stated at the lower of 

cost and net realisable value. 

STOCKS AND WORK IN PROGRESS 

Stocks are stated at the lower of cost and net realisable value which takes account of any provision necessary to recognise damage and obsolescence. 

COSTS OF RAISING FINANCE 

Under the provisions of FRS4 “Capital Instruments”, costs associated with the raising of relevant finance are accounted for as a deduction from the amount of the consideration received. The costs 

are then amortised over the life of the instrument. 


24

DECOMMISSIONING AND ENVIRONMENTAL COSTS 

Decommissioning and environmental costs, based on discounted future estimated expenditures, are provided for in full and where appropriate a corresponding tangible fixed asset or regulatory asset 

is also recognised. The unwinding of the discount is included within the profit and loss account as a financing charge. 

FINANCIAL INSTRUMENTS 

Derivative financial instruments (“derivatives”) are used by the Company for the management of interest rate exposures and commodity price risks in respect of expected gas usage. The principal 

derivatives used include interest rate swaps and forward purchases relating to the purchase of gas. 

All transactions are undertaken, or maintained, with a view to providing a commercial hedge of the interest or commodity price risks associated with the Company’s underlying business activities 

and the financing of those activities. Amounts payable or receivable in respect of interest rate swaps are recognised in the profit and loss account over the economic lives of the agreements or 

underlying position being hedged, either within net interest or disclosed separately where deemed exceptional. 

Those derivatives relating to interest rates that are directly associated with a specific transaction and exactly match the underlying cashflows relating to the transaction are accounted for on the basis 

of the combined economic result of the transaction including the related derivative. 

PENSION COSTS 

The Company operates defined contribution and defined benefit pension schemes. 

The pension costs in respect of the defined contribution pension schemes comprise contributions payable in respect of the period. 

The assets of the defined benefit scheme are measured using closing market values. Pension scheme liabilities are measured using the projected unit method and discounted at the current rate of 

return on a high quality corporate bond of equivalent term and currency to the liability. 

The increase in the net present value of the liabilities of the defined benefit scheme expected to arise from employee service in the period is charged to operating profit. The net of the expected 

return on the scheme’s assets and the increase during the period in the present value of the schemes’ liabilities, arising from the passage of time, are included in net interest payable or other finance 

income, as appropriate. 

Actuarial gains and losses are recognised in the statement of total recognised gains and losses. 

DEFERRED TAXATION 

Provision is made for deferred taxation, using the liability method, on all material timing differences to the extent that it is probable that a liability or asset will crystallise. 

Deferred tax assets are only recognised to the extent that they are considered recoverable. 

Deferred tax balances are not discounted. 


25

NOTES TO THE REGULATORY ACCOUNTS 

FOR THE YEAR ENDED 31 MARCH 2006 

1 Net operating costs 

Net operating costs include: 

Acquisitions in the period: 

Staff costs 

Severance and redundancy costs 

Depreciation: 

Own assets 

Assets held under finance leases 

Replacement expenditure 

Rentals under operating leases: 

Hire of plant and equipment 

Other 

Fees paid to auditors: 

Audit services 

Taxation services 

Consultancy services 

Less: 

Own work capitalised 

Amortisation of customer contributions 



business 

De-minimis 

business 

Metering 

activities 

Other 



2(b) 37.7 

0.4 

49.9 

1.7 

50.7 

0.5 

0.1 

0.1 

- 

- 

(4.4) 

(0.2) 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

7.2 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

44.9 

0.4 

49.9 

1.7 

50.7 

0.5 

0.1 

0.1 

- 

- 

(4.4) 

(0.2) 


26



2 Directors and employees 

(a) Directors’ emoluments and interests 

Directors’ emoluments: 



business 

De-minimis 

business 

Metering 


£’000 £’000 £’000 £’000 £’000 

Fees 80.0 - - - 80.0 

Salary payments (including benefits in kind) 196.7 - - - 196.7 

Performance related bonus 92.0 - - - 92.0 

Contributions in lieu of pension 47.9 - - - 47.9 

416.6 - - - 416.6 

All Directors make their own pension arrangements; accordingly no retirement benefits are accruing to the directors. 

No director had any interest over shares in the Company. 

Highest paid director: 



business 

De-minimis 

business 

Metering 


£’000 £’000 £’000 £’000 £’000 

Salary payments (including benefits in kind) 196.7 - - - 196.7 

Performance related bonus 92.0 - - - 92.0 

Contributions in lieu of pension 47.9 - - - 47.9 

336.6 - - - 336.6 


27



2 Directors and employees (continued) 

(b) Staff costs 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

Wages and salaries 28.9 - 6.0 - 34.9 

Social security costs 2.6 - 0.5 - 3.1 

Pension costs 6.2 - 0.7 - 6.9 

37.7 - 7.2 - 44.9 

Of the above, £3.2m (2005 £Nil) has been charged to capital. 

(c) Average monthly number of employees during the period (including Directors) 



business 

De-minimis 

business 

Metering 


Number Number Number Number Number 

Regulated gas distribution activities 966 - 183 - 1,149 

Other activities - - 2 - 2 

966 - 185 - 1,151 

The staff numbers above are the weighted average staff numbers for Wales & West Utilities Limited for the eleven month period post Wales & West Utilities Ltd acquiring the Wales and South West 

gas distribution network business from Transco plc. The above allocations, to arrive at full time equivalents, represent an estimate of the time spent by employees on each activity and not the employees 

specifically employed within each activity. 

3 Interest payable and similar charges 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

On loans 105.2 - - - 105.2 

On finance leases 0.1 - - - 0.1 

105.3 - - - 105.3 


28



4 Taxation 

(a) Analysis of charge in the period 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

The charge for taxation is made up as follows: 

Current tax 

UK corporation tax on profits of the period - - - - - 

Adjustments in respect of previous periods - - - - - 

Total current tax (Note 4(b)) - - - - - 

Deferred tax 

Origination and reversal of timing differences - - - - - 

Total deferred tax (Note 16) - - - - - 

Total tax on profit on ordinary activities - - - - - 

(b) Factors affecting the current tax charge for the period 

The current tax assessed for the period is different to the standard rate of corporation tax in the UK of 30%. The differences are explained below: 


Metering 



business 

De-minimis 

business 

£m £m £m £m £m 

Profit/(loss) before tax (92.7) 0.1 (1.1) 0.2 (93.5) 

Loss multiplied by standard rate of corporation tax in the UK of 30% (27.8) - (0.3) - (28.1) 

Effects of: 

Temporary differences between taxable and accounting profit: 

Accelerated capital allowances 

Other timing differences 

Tax losses 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

Prior year charge/(credit) - - - - - 

Permanent differences 

18.5 

- 

0.3 

- 

Losses group relieved for no payment 

9.3 

- 

- 

- 

Current tax charge for period (Note 4(a)) - - - - - 

18.8 

9.3 


29



5 Tangible fixed assets 

Total 

Freehold land Gas distribution Vehicles, plant Assets under 

and buildings network assets and equipment construction 

Total 

£m £m £m £m £m 

Cost or valuation 

At 1 April 2005 - - - - - 

On transfer of business 2.7 1,257.8 13.6 - 1,274.1 

Transferred from group companies - - 11.4 - 11.4 

Additions - 10.3 - 44.5 54.8 

Transfers in period - 7.3 6.9 (14.2) - 

At 31 March 2006 2.7 1,275.4 31.9 30.3 1,340.3 

Accumulated depreciation 

At 1 April 2005 - - - - 

Charge for the period - 47.1 4.5 - 51.6 

At 31 March 2006 - 47.1 4.5 - 51.6 

Net book value 


At 31 March 2005 - - - - - 

Analysis of net book value at 31 March 2006 

Owned 2.7 1,228.3 25.7 30.3 1,287.0 

Held under finance lease - - 1.7 - 1.7 

2.7 1,228.3 27.4 30.3 1,288.7 


30



5. Tangible fixed assets (continued) 

Transportation business 



Total 

£m £m £m £m £m 


At 1 April 2005 - - - - - 

On transfer of business 2.7 1,257.8 13.6 - 1,274.1 

Transferred from group companies - - 11.4 - 11.4 

Additions - 10.3 - 43.5 53.8 

Transfers in period - 6.3 6.9 (13.2) - 



At 1 April 2005 - - - - 

Charge for the period - 47.1 4.5 - 51.6 

At 31 March 2006 - 47.1 4.5 - 51.6 





Owned 2.7 1,227.3 25.7 30.3 1,286.0 

Held under finance lease - - 1.7 - 1.7 

2.7 1,227.3 27.4 30.3 1,287.7 


31



5. Tangible fixed assets (continued) 

Metering activities 



Total 

£m £m £m £m £m 


At 1 April 2005 - - - - - 

On transfer of business - - - - - 

Transferred from group companies - - - - - 

Additions - - - 1.0 1.0 

Transfers in period - 1.0 - (1.0) - 

At 31 March 2006 - 1.0 - - 1.0 


At 1 April 2005 - - - - 

Charge for the period - - - - - 

At 31 March 2006 - - - - - 


At 31 March 2006 - 1.0 - - 1.0 



Owned - 1.0 - - 1.0 

Held under finance lease - - - - - 

- 1.0 - - 1.0 


32



6 Fixed asset investments 

Unlisted investments 


business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

Cost 

At 1 April 2005 - - - - - 

On acquisition of business 0.1 - - - 0.1 

At 31 March 2006 0.1 - - - 0.1 

Amounts written off 

At 1 April 2005 - - - - - 

On acquisition of business - - - - - 

At 31 March 2006 - - - - - 


At 31 March 2006 0.1 - - - 0.1 


The fixed asset investment represents the Company’s shareholding in xoserve Limited. The Company’s shareholding represents 10% of the issued share capital of xoserve Limited. 

In addition, the Company has a wholly owned subsidiary, Wales & West Utilities Pension Scheme Trustees Ltd which was incorporated on 21 March 2006. The Company owns all of the 

issued share capital of Wales & West Pension Scheme Trustees Ltd, which comprises 2 shares of £1 Each. 

7 Stocks and work in progress 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Raw materials and consumables 2.8 - - - 2.8 - 

The replacement cost of stocks is not materially different from their carrying value. 


33



8 Debtors 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Amounts falling due within one year: 

Trade debtors 3.4 - - - 3.4 - 

Prepayments and accrued income 32.2 - 1.0 - 33.2 - 

35.6 - 1.0 - 36.6 - 

9 Creditors 



business 

De-minimis 

business 

Metering 



(a) Amounts falling due within one year: 

Payments received on account 27.6 - - - 27.6 - 

Obligations under finance leases 11 1.4 - - - 1.4 - 

Trade creditors 13.8 - - - 13.8 - 

Amounts owed to group undertakings 367.5 - - - 367.5 - 

Other taxation and social security 10.5 - - - 10.5 - 

Other creditors 0.5 - - - 0.5 - 

Capital expenditure contributions 0.3 - - - 0.3 - 

Accruals and deferred income 24.0 - - - 24.0 - 

Grants received 0.8 - - - 0.8 - 

446.4 - - - 446.4 - 

(b) Amounts falling due after more than one year: 

Other loans 10 873.3 - - - 873.3 - 

Obligations under finance leases 11 0.7 - - - 0.7 - 

Capital expenditure contributions 13.7 - - - 13.7 - 

887.7 - - - 887.7 - 


34



10 Other loans 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Repayable as follows: 

Between two and five years 873.3 - - - 873.3 - 

Fixed interest rates on these loans range between 2.98% and 5.35% and variable interest rates varied between 0.4% to 1.0% above LIBOR. 

11 Finance leases 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Amounts due under finance leases are payable as follows: 

Within one year 1.4 - - - 1.4 - 

Between one and two years 0.7 - - - 0.7 - 

2.1 - - - 2.1 - 


35



12 Gross borrowings 



business 

De-minimis 

business 

Metering 

activity Other activities Total 

£m £m £m £m £m £m 

Finance leases 2.1 - - - 2.1 - 

Gross value of other loans 879.0 - - - 879.0 - 

881.1 - - - 881.1 - 

The maturity profile of the group’s gross borrowings, excluding bank overdrafts, but including finance leases, was as follows: 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

In one year or less, or on demand 1.4 - - - 1.4 - 

In more than one year but not more than two years 0.7 - - - 0.7 - 

In more than two years but not more than five years 879.0 - - - 879.0 - 

881.1 - - - 881.1 - 

The difference between gross borrowings as disclosed above and net borrowings as disclosed in notes 10 and 11 reflect the unamortised element of the loan commitment fees of £5.7m. 

13 Financial instruments and risk management 

(a) Interest rate swaps 

The Company has entered into interest rate swap arrangements in order to manage the interest rate exposure of the Company and not for trading or speculative purposes. 

The Company’s outstanding interest rate swap arrangement had a notional principal balance of £964m (2005 £Nil), with a termination date of 31 March 2013, with interest rates ranging between 2.98% 

to 5.35%. 


36



13 Financial instruments and risk management (continued) 

(b) Interest rate composition of gross borrowings 

After taking account of the interest rate swaps entered into by the Company, the fixed and floating interest rate profile of the Company’s gross borrowings, including intra-group indebtedness, was: 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

Fixed rate 964.0 - - - 964.0 

Floating rate 252.2 - - - 252.2 

Total 1,216.2 - - - 1,216.2 

(c) Interest rate profile of fixed rate borrowings 

After taking account of the interest rate swaps entered into by the Company, the weighted average interest rate profile of the Company’s gross borrowings, including intra-group indebtedness, together 

with the weighted average period for which the rate is fixed was: 

Weighted average interest rate 

Weighted average period for which rate is fixed 


business 

De-minimis 

business 

Metering 

activity 

Other 



business 

De-minimis 

business 

Metering 

activities 

Other 


2006 2006 

Currency % % % % % Years Years Years Years Years 

Sterling 10.13 - - - 10.13 4.2 - - - 4.2 

(d) Borrowing facilities 

Undrawn committed borrowing facilities were: 


Metering 



business 

De-minimis 

business 

£m £m £m £m £m 

Committed borrowing facilities available 1,152.0 - - - 1,152.0 

Drawn (879.0) - - - (879.0) 

Undrawn facilities as at 31 March 2006 expiring after 31 May 2010 

273.0 - - - 273.0 

At the Company’s option, £1,035m of the committed facilities are extendable to 31 May 2014. 


37




(e) Fair values of financial instruments 

In the table below, the fair value of short term borrowings, current asset investments, cash at bank and in hand and bank loans approximates to book values due to the short maturity of these 

instruments. 

The fair values of long term instruments have been determined by reference to prices available from the financial markets on which these borrowings are traded. The fair values fundamentally 

represent the change in anticipated future interest rates, to the dates of maturity of the borrowings, between the date on which those long term borrowings were raised and the year end. This 

increased liability will only materialise if the Company ceases trading and future anticipated interest rates remain at year end levels. 

Book value 

Fair value 


business 

De-minimis 

business 

Metering 

activities 

Other 



business 

De-minimis 

business 

Metering 

activities 

Other 


£m £m £m £m £m £m £m £m £m £m 

Primary financial 

instruments held or 

issued to finance the 

Company’s operations: 

Short term borrowings (2.1) - - - (2.1) (2.1) - - - (2.1) 

Long term borrowings (879.0) - - - (879.0) (879.0) - - - (879.0) 

Cash at bank and in hand 29.9 - - - 29.9 29.9 - - - 29.9 

(851.2) - - - (851.2) (851.2) - - - (851.2) 

Derivative financial 

instruments held to 

manage the interest rate 

profile and matched by 

primary financial 

instruments: 

Interest rate swaps (45.9) - - - (45.9) (50.3) - - - (50.3) 

(897.1) - - - (897.1) (901.5) - - - (901.5) 

The fair value of derivative financial instruments matched to primary financial instruments relates to long term borrowings with a book value of £1,041m which have been included within the 

primary financial instruments issued to finance the Company’s operations at a fair value of £879m, which is the redemption value of those borrowings. 


38




(f) Losses on derivative financial instruments 

The fair value of losses on derivative financial instruments since their acquisition is not recognised in the financial statements. These instruments are held to manage the Company’s interest rate 

exposures and the resultant fixed interest charges are made in the accounting periods to which they relate. The table below analyses the composition of the fair value losses (note 13(e)). Of these losses 

£50.3m would only materialise if the Company were to cease trading. 

Total losses 


business 

De-minimis 

business 

Metering 


£m £m £m £m £m 

At 1 April 2005 - - - - - 

Acquired in the period (50.4) - - - (50.4) 

Movement in fair value 0.1 - - - 0.1 

At 31 March 2006 (50.3) - - - (50.3) 

Of which: 

Losses expected to be included in 2006/07 (7.0) - - - (7.0) 

Losses expected to be included in 2007/08 or later years (43.3) - - - (43.3) 

Losses not expected to be included in 2007/08 or later years - - - - - 

(50.3) - - - (50.3) 

14 Capital commitments 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Contracted for but not provided in the financial statements 4.8 - - - 4.8 - 

In order to meet regulatory and service standards, the Company has longer term capital expenditure obligations within the regulated gas distribution business, which include investments to meet 

shortfalls in performance and condition, and to provide for new demands and growth. 

The current regulatory review period is due to end on 31 March 2007. Ofgem has opted to introduce a one year regulatory period followed by a five year regulatory period. Currently determinations of 

investment for these two regulatory periods have not been set. 


39



15 Leasing commitments 

Land and buildings 

Others 

2006 2005 2006 2005 


business 

De-minimis 

business 

Metering 

activities 

Other 

activities Total Total 


business 

De-minimis 

business 

Metering 

activities 

Other 

activities Total Total 

£m £m £m £m £m £m £m £m £m £m £m £m 

At 31 March 2006 there 

were revenue 

commitments, in the 

ordinary course of 

business in the next year 

to the payment of rentals 

on non cancellable 

operating leases expiring: 

Within one year 0.4 - - - 0.4 0.4 0.1 - - - 0.1 - 

Between two and five 0.4 - - - 0.4 0.4 0.7 - - - 0.7 - 

years 

After five years 0.7 - - - 0.7 0.7 - - - - - - 

1.5 - - - 1.5 1.5 0.8 - - - 0.8 - 

16 Provisions for liabilities and charges 


Transportation De-minimis Metering Other activities 

business business activities 

Total 

Total 


Insurance provision (a) 2.0 - - - 2.0 - 

Environmental and demolition provisions (b) 18.6 - - - 18.6 - 

Onerous contracts provision (c) 45.9 - - - 45.9 - 

Onerous leases provision (d) 0.6 - - - 0.6 - 

Wayleaves provision (e) 2.7 - - - 2.7 - 

Other provisions (f) 0.6 - - - 0.6 - 

Deferred taxation (g) - - - - - - 

70.4 - - - 70.4 - 


40



16 Provisions for liabilities and charges (continued) 

(a) Insurance provisions 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

On acquisition of business 2.0 - - - 2.0 - 

At 31 March 2.0 - - - 2.0 - 

The insurance provision is the estimate of liabilities in respect of past events incurred by the business. On the transfer of the business to the Company, these liabilities were established at a fair 

value of £2m. In accordance with insurance industry practice, these estimates were based on experience from previous years and there was, therefore, no identifiable payment date. 

(b) Environmental and demolition provisions 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 



The environmental provision represents the estimated environmental restoration and remediation costs relating to a number of sites owned and managed by the Company. The provision has been 

discounted to its estimated net present value. The anticipated timing of the cashflows for statutory decontamination cannot be predicted with certainty, but it is expected to be incurred over the 

period 2006 to 2057. 

(c) Onerous contracts provision 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Transferred from parent company in the period 50.4 - - - 50.4 - 

Utilised in the period (4.5) - - - (4.5) - 


On acquisition of the Gas Distribution business, the MGN Gas Networks (UK) Limited group acquired an interest rate swap contract from the National Grid group. The contract will be amortised 

on a straight line basis over the contract life, which ends in 2013. 


41




(d) Onerous lease provision 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 

Charge for the period 0.6 - - - 0.6 - 


The onerous lease provision represents the expected costs incurred in relation to vacant properties owned by the Company. The provision is expected to be utilised in the two years ended 31 

March 2008. 

(e) Wayleaves provisions 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 



The wayleaves provision is provided to cover the costs associated with rectifying gas distribution assets which are the subject of ineffective easements or wayleaves. The provision is expected to be 

utilised over the period until 2020. 

(f) Other provisions 



business 

De-minimis 

business 

Metering 


£m £m £m £m £m £m 



Other provisions provide for a potential liability in respect of contracts which have repayment clauses in the event that certain future thresholds are achieved. The provision is expected to be utilised 

over the period until 2016. 


42




(g) Deferred taxation 

The movement on deferred tax is as follows: 


Metering 



business 

De-minimis 

business 

£m £m £m £m £m 

At start of period - - - - - 

Profit and loss account - - - - - 

At end of period - - - - - 

Deferred tax provided is made up as follows: 

Accelerated capital allowances - - - - - 

Other timing differences - - - - - 

Tax losses carried forward - - - - - 

- - - - - 

A deferred tax asset has not been recognised in respect of total tax losses with a tax value of £10.5 million as there is insufficient evidence that the asset will be recoverable. 

17 Called up share capital 



business 

De-minimis 

business 

Metering 


£ £ £ £ £ £ 

Authorised: 

Ordinary shares of £1 each 30,675,000 - - - 30,675,000 30,675,000 

Allotted, called up and fully paid: 

Ordinary shares of £1 each 30,675,000 - - - 30,675,000 1 

The initial authorised share capital of the Company on incorporation was 100 ordinary shares of £1 each. 

The authorised share capital was increased from 100 ordinary shares of £1 each to 30,675,000 ordinary shares of £1 each on 30 August 2004. 

In total, 30,674,999 £1 ordinary shares, with an aggregate nominal value of £30,674,999 were issued at par on 1 May 2005 for an aggregate consideration of £30,674,999. The shares were issued 

to Transco plc in exchange for the transfer of the business, operational assets and liabilities of its gas distribution business relating to Wales and the South West of England LDZ’s on 1 May 2005 

(note 24). 


43



18 Reserves ~ Profit and loss account 

Transportation De-minimis Metering 

business business activities Other activities Total 

£m £m £m £m £m 

At 1 April 2005 - - - - - 

Loss retained for the period (92.7) 0.1 (1.1) 0.2 (93.5) 

Actuarial gain on pension scheme 1.1 - - 1.1 

Movement on deferred tax relating to pension scheme - - - - - 

At 31 March 2006 (91.6) 0.1 (1.1) 0.2 (92.4) 

Pension liability recorded in reserves (1.1) - - - (1.1) 

Profit and loss reserves excluding pension liability (92.7) 0.1 (1.1) 0.2 (93.5) 

19 Net Cash inflow from operating activities 



business 

De-minimis 

business 

Metering 

activities Other activities 

£m £m £m £m £m 

Acquisitions: 

Operating profit/(loss) 3.6 0.1 (1.1) 0.2 2.8 

Depreciation of tangible fixed assets 51.6 - - - 51.6 

Net increase in stocks (1.8) - - - (1.8) 

Net increase in debtors (18.1) - (1.0) - (19.1) 

Net increase in creditors 75.5 - - - 75.5 

Net increase in inter-company balances 367.5 - - - 367.5 

Pension provision 1.7 - - - 1.7 

Onerous lease provision 0.6 - - - 0.6 

Net cash inflow/(outflow) from operating activities 480.6 0.1 (2.1) 0.2 478.8 


44



20 Analysis of changes in financing in the period 

Long term loans & 

Share capital finance lease obligations 

2006 2005 2006 2005 

£m £m £m £m 

At 1 April - - - - 

Finance leases acquired with business - - 2.2 - 

Long term loans - - 861.1 - 

Long term loan issue costs written back - - 12.2 - 

Finance lease repayments - - (0.1) - 

Issue of ordinary shares 30.7 - - - 

At 31 March 30.7 - 875.4 - 

21 Analysis of changes in cash and cash equivalents in the period 


£m 

At 1 April - 

Net cash inflow 29.9 

At 31 March 29.9 

22 Analysis of cash and cash equivalents 

2006 2005 2006 

Change in 

period 

£m £m £m 

Cash at bank and in hand 29.9 - 29.9 


45



23 Reconciliation of net cash flow to increase in net cash 


£m 

Increase in cash as per cash flow statement 29.9 

Increase in loans and finance lease obligations (873.3) 

Increase in net debt resulting from cash flows (843.4) 

Finance leases acquired with business (2.2) 

Finance lease repayments 0.1 

Increase in net debt (845.5) 

At 1 April - 

At 31 March (845.5) 

24 Acquisition of trade and assets 

On 1 May 2005, Transco plc transferred into the Company the trade, operational assets and liabilities of its gas distribution business relating to Wales and the South West of England area of 

operation. On the transfer, Wales & West Utilities Limited applied fair values to the assets and liabilities which it acquired as set out below. 

Book 

values 

prior to Fixed asset Environmental Pension Other 

Provisional 

Fair value 

to the 

acquisition revaluation provisions provisions Revaluations Company 

£m £m £m £m £m £m 

Fixed assets: 

Tangible 839.7 434.4 - - - 1,274.1 

Investments 0.1 - - - - 0.1 

Stocks - - - - 1.0 1.0 

Debtors 1.2 - - - - 1.2 

Creditors due within one year (20.3) - - - (1.3) (21.6) 

Creditors due after more than one year (3.1) - - - - (3.1) 

Provisions for liabilities and charges - - (18.6) (17.5) (5.3) (41.4) 

Net operating assets acquired 817.6 434.4 (18.6) (17.5) (5.6) 1,210.3 

Inter-company loan acquired (1,179.6) - - - - (1,179.6) 

Net assets acquired (362.0) 434.4 (18.6) (17.5) (5.6) 30.7 


46



24 Acquisition of trade and assets (continued) 

Total 

£m 

Consideration: 

Shares issue (including costs of acquisition) 30.7 

Fair value of net assets acquired: 

Fair value of net assets acquired (as above) 30.7 

Goodwill - 

The fair values attributed to certain assets and liabilities are provisional and will be adjusted, if necessary, in the year ending 31 March 2007 with a consequential adjustment to goodwill. 

The purchase consideration for the transfer of the business, assets and liabilities from NGG amounted to £30.7m and was settled by the Company issuing shares with a nominal value equivalent 

to £30.7m and through the creation of an inter-company loan. 

Subsequent to deal completion, in September 2005, the Company cash settled the inter-company loan, which then amounted to £1,195.4m, with the National Grid group. 

25 Directors’ and officers’ loans and transactions 

No loans or credit transactions with any Directors, Officers or connected persons subsisted during the period or were outstanding at the end of the period. 

26 Pension schemes 

The Company operates one defined contribution and one defined benefit pension scheme. 

Defined benefit scheme 

The Company operates the Wales & West Utilities Pension Scheme (“the Scheme”). The Scheme funds are administered by trustees and are independent of the Company’s finances. The 

Scheme includes both a defined benefit section, providing benefits relating to final salary, and a defined contribution section. The Scheme was set up with effect from 1 st June 2005 and new 

employees were eligible to join the defined contribution section from this date. 

Former employees of NGG continued their membership of the Lattice Group Pension Scheme (National Grid Transco’s scheme) until December 2005. During this time the Company paid 

contributions to the Lattice Group Pension Scheme. 


47



26 Pension schemes Defined benefit scheme (continued) 

In December 2005 the past service benefits of 77 defined contribution members and 959 defined benefit members were transferred into the Wales & West Scheme from the Lattice Group 

Pension Scheme. These members are now contributing to the Wales & West Scheme. 

The balance sheet figures relate only to the defined benefit section of the Scheme and therefore exclude the assets and liabilities of the defined contribution section. This does not affect the 

reported deficit. 

The liabilities of the Scheme were calculated as at 1 May 2005 and 31 March 2006 based on calculations and data as at 31 May 2005 and 31 March 2006. These calculations were carried out 

by an independent qualified actuary in accordance with FRS17. The value of the defined benefit liabilities has been measured using the projected unit method. 

The key FRS17 assumptions used for the Scheme are set out below, along with the fair value of assets, a breakdown of the assets into the main asset classes, the present value of the FRS17 

liabilities and the deficit of assets below the FRS17 liabilities (which equals the gross pension liability). 

Assumptions 31 March 2006 1 May 2005 

Price inflation 2.9% pa 2.8% pa 

Discount rate 5.0% pa 5.4% pa 

Pension increases 

(LPI) 2.9% pa 2.8% pa 

Salary growth 3.9% pa 3.8% pa 


48




On the basis of the assumptions used for life expectancy, a male pensioner currently aged 60 would be expected to live for a further 24 years. Allowance is made for future improvements in life 

expectancy. 

Asset distribution and expected return 

31 March 2006 1 May 2005 

Expected 

return 

Fair value 

£m 

Expected 

return 

Fair value 

£m 

Equities 8.4% pa 133.8 8.5% pa 127.9 

Bonds/cash 4.2% pa 17.3 n/a - 

Property 6.3% pa 13.7 n/a - 

Total 164.8 127.9 

Balance sheet 31 st March 2006 

£m 

1 st May 2005 

£m 

Total fair value of assets 164.8 127.9 

FRS17 value of liabilities (180.1) (145.4) 

Gross pension liability (15.3) (17.5) 

The scheme is represented on the balance sheet at 31 March 2006 as a liability under FRS17 which amounts to £15.3m. 

Over the period to 31 March 2006, contributions by the Company of £4.7m were made in total to the Wales & West Scheme and the Lattice Group Pension Scheme in relation to members of 

the defined benefit section. A further £0.2m has been set aside outside of the Wales & West Scheme in order to meet the Scheme’s expenses. Including also member contributions of £0.7m 

gives a total of £5.6m. 

The employer paid a further £0.3m during the accounting period in respect of defined contribution members. 

A formal valuation as at 31 March 2006 is in progress. Until that valuation has been completed, it has been agreed that future employer contributions to the defined benefit section will be at a 

rate of 20.7% of pensionable salaries, plus an allowance for expenses. Future contributions are to be reviewed during 2006. 


49




The FRS17 deficit in the defined benefit section under FRS17 moved over the period as follows: 

2005/06 

£m 

Post retirement deficit on acquisition (17.5) 

Current service cost (employee and employer) (7.3) 

Contributions (employee and employer) 5.6 

Other net finance income 2.8 

Actuarial gain 1.1 

Post retirement deficit at end of period (15.3) 

The following amounts have been included within operating profit under FRS17 for the defined benefit section: 

2005/06 

£m 

Current service cost (employer’s part only) 6.6 

Past service cost - 

Total operating charge 6.6 

The following amounts have been included as net finance income under FRS17: 

2005/06 

£m 

Expected return on pension scheme assets 10.2 

Interest on post retirement liabilities (7.4) 

Net return to credit/(charge) to finance income 2.8 

The defined benefit section of the scheme is closed to new entrants and, under the method used to calculate pension costs in accordance with FRS17, the cost as a percentage of covered 

pensionable payroll will tend to increase as the average age of the membership increases. 

The following amounts have been recognised within the statement of total recognised gains and losses (“STRGL”) under FRS17: 

2005/06 

£m 

Actual return less expected return on scheme assets 21.9 

Experience gains and (losses) arising on scheme’s liabilities - 

Gain or (loss) due to changes in assumptions underlying the FRS17 value of scheme liabilities (20.8) 

Actuarial gain/(loss) recognised in the STRGL 1.1 


50




The history of experience gains and losses is: 

2005/06 

Actual return less expected return on scheme assets (£m) 21.9 

Percentage of scheme’s assets 13% 

Experience gains and (losses) arising on scheme’s liabilities (£m) - 

Percentage of the FRS17 value of the scheme’s liabilities - 

Total amount recognised in the STRGL (£m) 1.1 

Percentage of the FRS17 value of the scheme’s liabilities 1% 

Defined contribution scheme 

The Company also operates a defined contribution scheme for staff who have joined the Company since November 2005. 

The total pension cost for the period was £0.3m (2005 £Nil). 

27 Parent company 

The immediate parent company is MGN Gas Networks (Senior Finance) Ltd and the ultimate parent company is MGN Gas Networks (UK) Ltd. Copies on the annual accounts of MGN Gas 

Network (UK) Ltd may be obtained from the Company Secretary, MGN Gas Networks (UK) Ltd, Level 30, City Point, 1 Ropemaker Street, London EC2Y 9HD. 

28 Related party transactions 

(a) Gas purchases 

Under its license condition, the Company is required to purchase gas to cover certain “own use” activities including own consumption in operating the gas distribution network and shrinkage 

due to estimated losses from the network. 

The Company has contracted with Macquarie Bank Limited (“MBL”) to purchase the gas it requires to fulfil these commitments. The contract was awarded to MBL after it won a competitive 

tender process. These transactions are carried out on an arms length basis and the prices charged are compared to available quoted gas purchases prices to ensure they are competitive. The cost 

of purchasing this gas amounted to £11.0m in respect of the period. 


51



28 Related party transactions (continued) 

(b) xoserve Limited 

The Company owns 10% of the issued share capital of xoserve Limited (“xoserve”). Xoserve is owned jointly by the UK Gas Distribution companies and National Grid group as owner of the 

gas transmission business in the UK. 

Xoserve provides gas throughput (meter reading) and billing information to the Company which is used in the Company in setting its regulated gas distribution charges to the gas transporters. 

The cost to the Company of xoserve providing these services was £2.9m in respect of the period. 


52

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