Shareholder Executive

Scottish Water

Purpose

Scottish Water (SW) is responsible for providing water and waste water services to households and businesses across Scotland.

Legal Status and Ownership

SW is a statutory corporation established under the Water Industry (Scotland) Act 2002. SW's operations, including a large capital investment programme, are funded through customer charges and borrowing from Scottish Ministers.

SW is regulated by the Water Industry Commission for Scotland (WICS), the Scottish Environment Protection Agency and the Drinking Water Quality Regulator.

Scottish Executive's Objectives

Following the elections in May 2007, the SNP pledged to retain SW in public ownership and to invest in Scotland's public water and waste water services.

Key objectives for the water industry are to:

• achieve the maximum affordable improvement in public health and environmental protection standards
• support housing and their top priority of economic growth in communities across Scotland through investment in new water and sewerage capacity
• achieve these outcomes, and also improvements in operating performance, on the basis of charges that are affordable and stable across the period, and sustainable in the long-term.

Financial Performance

£m	20081	2007	2006
Turnover	-	1,017	1,019
Operating Profit	-	369	345
Profit/(Loss) for the year	-	158	135
Net Cash flow2	-	12	(7)
Net Operating Assets	-	3,319	3,104
RONA	-	11.1%	11.1%
Shareholders' Funds	-	2,950	2,732
Dividends	-	-	-

1 Figures for 2008 had not been published at the date of publication of this report.
2 Net cash flow includes net cash inflows from financing of £162.1m in 2006.

Commentary

This was the second year of the regulatory period 2006-10. In its November 2007 report the WICS praised SW's year-on-year progress in reducing operating costs as an achievement that was: 'unprecedented in the UK water industry'.

SW's out-performance (excluding subsidiaries) to 31 March 2007 was £27.4m, and the provisional value for outperformancein the year to 31 March 2008 is £16.3m, giving a cumulative total £43.7m.

SW is now half way through its £2.4bn capital investment programme – one of the largest investment programmes in the UK. In 2007-08 the company invested a total of £625m to improve assets.

In 2007-08 SW exceeded its customer service target (including drinking water quality, water pressure and sewer flooding), achieving a 6.9% increase over the previous year's score. Business efficiencies enabled customer charge increases to be kept below inflation. However, despite reducing reported leakage over the last two years, SW missed its target for reducing leakage. As a result SW has doubled the number of engineers and technicians working on leakage in a determined effort to make large and rapid reductions in leakage.

The year saw a number of changes at SW including the set up of two wholly owned but autonomous subsidiaries. The retail and wholesale divisions were separated on 1 April 2008. SW supported the opening of the business customer market to retail competition, a first in the UK, as the wholesale provider.

Going forward SW is preparing for the next Regulatory Period and developing its strategy. Key elements of this involve delivering a guaranteed level of service to all customers, focussing on first time resolution where problems occur, and providing rebates of charges should it fail to deliver to normal standards.

Jon Hargreaves, the Chief Executive, retired in November 2007. Douglas Millican became the acting Chief Executive until Richard Ackroyd took up the post in March 2008. Paul Jowitt left the board at the end of March 2008. Donald Emslie and Alistair Buchanan joined as non-executive Directors on 1 April 2008.