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As Chairman it gives me and my fellow Board members great pleasure to set
out the draft Strategic plan for growth in Scottish Water. This plan ‘Always
seizing opportunities to add value’ sets out our aspirations to evolve into a
dynamic organisation that supports Scotland’s communities and economy. This
plan is predicated on the continuing access to £700m of borrowing in the 2010-
15 regulatory period for the delivery of the regulated capital investment


Ronnie Mercer


           1.   Growing Scottish Water ..............................................................    3
           2.                                                                                            4
                Greener Scotland ..........................................................................
           3.                                                                                          10
                Wealthier Scotland .....................................................................
           4.                                                                                          13
                Smarter Scotland ........................................................................
           5.                                                                                          15
                International Aid..........................................................................
           6.                                                                                          16
                Financing our plan .....................................................................
           1.   Growing Scottish Water ..............................................................    3
           2.                                                                                          4
                Greener Scotland ..........................................................................
           3.                                                                                       10
                Wealthier Scotland .....................................................................
           4.                                                                                        13
                Smarter Scotland ........................................................................
           5.                                                Error! Bookmark not defined.15
                WaterAid ......................................
           6.                                                                                       16
                Financing our plan .....................................................................

                                                                                                          Growing Scottish Water
1. Growing Scottish Water

By 2015 Scottish Water will have made significant progress towards becoming
one of the best water companies in the UK. Our customer service levels will be
comparable to, or better than, the upper quartile companies in the industry and
our charges are expected to be in the lower quartile, reflecting the significant
efficiencies that have been made over that time.

The water industry, including Scottish Water, is already facing up to a new set of
challenges and opportunities, not least, climate change impacts and a need for
more innovation within the industry. To address these while keeping customers
prices stable in the longer term requires new thinking in delivery of our services
and growth of our commercial activities.

Our growth strategy is to continue to take opportunities to exploit our existing
asset base through both our own development and working in partnership with
other organisations and the private sector. We are also pursuing wider
opportunities to expand our business in areas that align with our proven skills
and maximise the return from Scotland’s natural resources.

To date our non-regulated growth activities have been constrained by access to
capital, but we have developed frameworks with the private sector to deliver
these through our non-regulated commercial subsidiary, Scottish Water

To this end our plan identifies both the opportunities that we are currently
pursuing and potential areas of growth that we are exploring to bring benefits to
Scotland and Scottish Water’s regulated business by March 2015.

                                             and Fairer

                                Attracting    Home serve
                               New water
                  Hydro        customers     Film industry                       Water
                  power                                       O&M              excellence
             Waste recycling            Fibre optics         contracts           centre
               & energy
 Greener                                                                         consultancy
           Sludge / biomass               Growing
            Wind power                  Scottish Water                            Stream
                                                Charitable                           R&D

                     Safer and Stronger                            Healthier

Figure 1: Alignment with Scottish Government strategic objectives

Greener Scotland
                   2. Greener Scotland

                   Scottish Water currently consumes around 450 GWh/ annum of electricity at a
                   cost of over £40m per annum. Our plans summarised in the table below set out
                   a programme to achieve a position whereby the exploitation of our land, hydro
                   potential and waste resources will result in provision of a net contribution of
                   renewable electricity to Scotland.
                   Investment Area                         Location         Status     2010/11         2011/12        2012/13        2013/14         2014/15        2015/16        2016/17          2017/18          2018 onward
                   Wind power
                   Existing land rental agreements
                                                                                                                                           Estimated 350GWh/annum
                                                         Whitelee      complete
                                                                                                       planning            construction                                  estimated 170 to 220 GWh/annum
                                                         Afton         development                     consent
                                                                                                     submit planning application     planning             construction                  estimated 150 to 230 GWh/annum
                                                         Daer          development                                                   consent
                                                                                       submit          Receive
                                                                                      planning         planning            construction                                  estimated 120 to 150 GWh/annum
                                                         Camps         development   application       consent
                   Large wind turbine development                                                                     Receive                                                                                        estimated 250
                                                                                      preferred      development
                   opportunities                                                                                      planning                                     construction                                          to 300
                                                                                       bidders          work
                                                         6 sites       feasibility                                    consent                                                                                         GWh/annum
                   Medium wind turbine development                                                                    Receive
                   opportunities                                                                                      planning             construction                               estimated 6 GWh/annum
                                                         various       feasibility                                    consent
                   Waste to energy
                   Anerobic digestion
                                                                                                                    estimated 8 GWh/annum                                                   estimated 14 GWh/annum
                                                         Deerdykes     complete

                                                                                                                           construction                                    estimated 6 to 8 GWh/annum
                                                         site 1        development
                                                                                                                                     planning             construction                    estimated 6 to 8 GWh/annum
                                                         site 2        feasibility                                                   consent
                                                                                                                                                                                                                     estimated 6 to
                                                                                                                                                                                                                     8 GWh/annum
                                                         site 3        feasibility
                                                                                                                                                                                                                 estimated 20 to
                                                         potential                                                                                                                 planning       construction
                                                                                                                                                                                                                 30 Gwh/annum
                                                         other sites   feasibility                                                                                                 consent
                   Biomass & sludge digestion                                                                         Receive
                                                                                          development work            planning     construction                          estimated 100 to 120 GWh/annum
                                                         Kinneil Kerse development                                    consent
                   Bio gas                                                                             Receive
                                                                                                       planning            construction                   estimated 4 GWh / annum and 200,000 litres of vehicle fuel
                                                         Dalderse      development                     consent
                                                                                                                                     estimated      estimated
                                                         3 potential                      development work          construction   200,000 litres 400,000 litres                  estimated 600,000 litres of fuel
                                                         sites         development                                                     of fuel        of fuel
                   Hydro energy
                   Existing Hydro
                                                                                                                                           estimated 18 GWh/annum
                                                         various       complete
                   Q&SIIIb Ministers' objectives                                                                     estimated      estimated
                                                                                                     construction     5 GWh /       15 GWh /                                  forecast 25 GWh / annum
                                                         various       development                                     annum          annum
                   Mini hydro                                                                                        estimated      estimated
                                                                                                     construction     3 GWh /        8 GWh /                                estimated 12 GWh / annum
                                                         various       feasibility                                     annum          annum
                   Hydro partnerships                                                                                               estimated       estimated
                                                                                          feasibility studies       construction     3 GWh /         4 GWh /                          estimated 7 GWh / annum
                                                         various       feasibility                                                    annum           annum
                   CEEF projects                                                      estimated
                                                                       largely         3 GWh /                                                     estimated 4 GWh / annum
                                                         3 sites       complete         annum
                   Photovoltaics                                                                                    estimated       estimated
                                                                                                     construction   0.1 GWh /       0.3 GWh /                             estimated      0.5 GWh / annum
                                                         various       development                                    annum           annum
                   Total expected generation                                         estimated        estimated     estimated       estimated      estimated       estimated       estimated                           estimated
                                                                                                                                                                                                estimated 992
                   capacity                                                          379 GWh /        380 GWh /     388 GWh /       406 GWh /      821 GWh /       830 GWh /       992 GWh /                          1268 GWh /
                                                                                                                                                                                                 GWh / annum
                                                                                       annum            annum         annum           annum          annum           annum           annum                              annum
                   Total potential generation capacity                               estimated        estimated     estimated       estimated      estimated       estimated       estimated       estimated           estimated
                                                                                     379 GWh /        380 GWh /     388 GWh /       406 GWh /      923 GWh /       932 GWh /      1176 GWh /      1176 GWh /          1514 GWh /
                                                                                       annum            annum         annum           annum          annum           annum           annum          annum               annum

                   Table 1: Forecast renewable electricity generation capacity

                   As can be seen from Table 1 the majority of these opportunities are at the
                   feasibility stage.

Existing wind generation from Scottish Water land

                                                                                        Greener Scotland
We have made significant progress working in partnership with major private
sector developers to realise projects to exploit wind generation from our land at
Afton, Daer and Camps, involving around £400m of private sector investment.
This will complement existing arrangements at Whitelee wind farm (some 60 of
the now operational 140 turbines are sited on Scottish Water land) established
through similar development agreements on a ‘silent landlord’ basis. This is a
low risk commercial activity for Scottish Water with the main commercial risk
being the up-front planning consents and subsequent predictability of the
renewable electricity output from the turbines.

Large Scale Wind Farms – SW Active Partner/Power Purchase Agreement

                                We are now at the stage of having selected two
                                experienced private sector wind farm developers
                                for six sites. We will facilitate “early access
                                arrangements” to allow the normal process for
                                wind farm development to progress.

                              We expect that it will take 3-5 years to see these
                              opportunities come to fruition but will be working
                              with the two organisations to conclude legal
documents for the land leases and/or Power Purchase Agreements to facilitate
the supply of discounted electricity at a known price over a 20-25 year period to
Scottish Water and potentially other parts of the public sector.

It is likely that not all of these sites will be successful, but if they are Scottish
Water could have access to substantial renewable generation at commercially
attractive rates. In this plan we have assumed that 4 of the 6 sites will be
commercially viable.

Medium Scale Wind

We have run a pilot project with an established wind developer which has
identified one site to potentially install a single wind turbine. The developer is
undertaking detailed site assessments and expects to submit a formal planning
application in mid 2011. In addition, we are about to initiate an OJEU
Procurement Process to identify a number of framework partners to work with on
single turbine opportunities and photovoltaics on all of our operational assets.
This will involve a selection of organisations who will then bid for packages of
sites at the second stage, then move on to the development phase.

There may be further opportunities to exploit Scottish Water land for wind
generation as the grid is extended. However the greater opportunity is for
Scottish Water to provide commercial and technical expertise to work with other
public sector agencies to exploit their asset potential in a similar manner.

                   Waste to Energy
Greener Scotland
                   We recently opened an anaerobic
                   digestion (AD) plant at Deerdykes which,
                   when up to full operational capacity, we
                   expect will generate around
                   8GWh/annum of renewable electricity. It
                   will also reduce the volume of food waste
                   going to landfill in Scotland by 30,000
                   tonnes and already composts 45,000
                   tonnes of green waste. This is a great
                   example of utilising redundant SW assets
                   and land for a sustainable benefit to
                   Scotland. The plant operates on a purely
                   commercial, merchanting basis.

                   Having a sustained supply of fuel stock raw materials is critical to the success of
                   this venture. At present, enough waste fuel stocks have now been secured to
                   operate at least one generator. Once fully operational, this scheme will
                   generate the equivalent of around 1.7% of SW’s annual electricity requirements.

                   We have planning consent for anaerobic digestion plants at two further sites.
                   We believe there is opportunity for the public sector to work together and create
                   up to 8 AD plants across Scotland that could generate over 50 GWh/annum of
                   renewable electricity assuming that we could secure all the councils’ food waste
                   as a fuel feedstock. Securing planning permission and SEPA consents for all
                   these plants will be a key stage in the delivery of the plan. It is important that we
                   secure planning permissions early regardless of the availability of finances to
                   construct plants, as this “first mover” advantage can easily be lost.

                   We would be interested to discuss with government how we can create a more
                   joined-up public sector that secures the best benefit overall for Scotland.
                   Securing feedstock through council engagement would reduce the investment
                   risk and increase the potential renewable electricity.

                   Developing a network of AD plants to treat food wastes and generate lower cost
                   electricity will contribute to Scotland’s renewable targets and reduce council
                   landfill costs and exposure. These projects could be effected rapidly as joint
                   public sector initiatives avoiding the necessity to go through traditional, lengthy
                   and expensive procurement routes or PFI structures.

                   In this plan we have assumed that we will build a further two AD plants subject
                   to gaining agreements for fuel waste stocks. We are also investigating options
                   to expand activities at Deerdykes to include dry digestion plant that can exploit
                   existing co-mingled waste streams at the site.

Kinneil Kerse – Biomass plant

                                                                                     Greener Scotland
We are in discussions with a private sector partner to develop a waste-wood
based waste-to-energy plant located on land adjacent to the existing Kinneil
Kerse WwTW. This plant has the potential for 100-120 GWh/annum net
electrical output, potentially contributing the equivalent of around one-third of
SW’s annual requirements. A by-product generated by this plant is heat, which
there is an opportunity to sell to a second project co-located on the same SW
site that has the potential to offer SW long term sludge treatment solutions for
Kinneil, Perth, and Dunfermline WwTW sludge. In addition this opportunity will
create 20-30 operational jobs which will assist Scottish Water through creating
opportunities for redeploying staff from its water utility activities as we become
more efficient.

Our main concern regarding the viability of these projects is the commitment of
private sector partners. Therefore the time phasing of the deliverables could
change significantly depending on the market appetite. We intend to take an
equity share in the projects in exchange for the land opportunity.


We secured funding from Scottish Enterprise and Carbon Trust for a feasibility
study to investigate the potential to generate bio-methane road fuel from the
Dalderse AD biogas. This study is now complete and the findings suggest there
will be insufficient biogas generated to justify investment in a plant for bio-
methane production.

However, the study at Dalderse revealed that there is sufficient capacity in the
plant to justify investment if there was a higher sludge throughput. We are
reviewing with our asset planners whether there are options to increase sludge
volumes at Dalderse that meet the required financial returns and whether the
project could sell capacity into external markets.

Biogas to Bio methane

An opportunity exists to convert biogas to bio
methane. This bio methane can be injected to
the gas grid or used as vehicle fuel. Market
conditions are not yet ready for injecting to the
grid and we are investigating the generation of
600,000 litres per annum of vehicle fuel for use
in SW's fleet.

In addition to delivering clean, renewable vehicle fuel, this would allow SW to
secure stable vehicle fuel prices for a proportion of its fleet.

                   Hydro – Q&SIIIb Ministers’ objectives
Greener Scotland
                   The Q&SIIIb programme for an additional 25GWh of self generation is running to
                   schedule, and at pre-feasibility stage consisting of early planning and

                   An initial tranche of 10GWh of hydro schemes were promoted into feasibility in
                   September 2010. All outputs are forecast to be delivered by March 2014 with a
                   full 25GWh/annum generated in 2014/15.

                   Mini Hydro

                   In addition to the works promoted under the Ministers objectives for Q&SIIIb, we
                   are looking for further opportunities across our asset base to install hydro
                   generation. We have so far assessed 190 sites with 39 of interest and a further
                   40 awaiting feedback from further investigation. Two redundant sites are being
                   actively progressed. Mains sampling and flow tests will allow us to correctly size
                   and install turbines.

                   These projects are in addition to three existing small hydro schemes which we
                   have implemented through the use of the Central Energy Efficiency Fund

                   Hydro partnerships

                   We are always looking for opportunities to work in partnership with other
                   agencies to exploit commercial opportunities for hydro generation. Currently, we
                   are exploring opportunities with British Waterways and three local authorities to
                   develop hydro generation.

                   In this plan we have assumed that opportunities for joint investment will come to
                   fruition at 4 sites.

                   Photovoltaics (PV)

                   Scottish Water is actively seeking to utilise its
                   building roof space for the installation of
                   photovoltaics, which will provide electricity to
                   the host site. Until very recently PV
                   technology had a long payback period,
                   however with the recent introduction of the
                   new renewable Feed-in-Tariff and advances
                   in technology, returns are now more

Pump storage

                                                                                                Greener Scotland
We have identified Scottish Water sites with potential to secure greater
availability of renewable electricity through developing pump storage within our
asset base. This would allow us to use surplus wind generated electricity to
pump water to storage, and then release this to create hydro electricity at times
of peak demand, making a commercial return. These are longer term large
investments that require detailed feasibility study to confirm the business case.

At this stage we have not included any costs in this plan for pump storage

Overall Generation forecast

The graph below shows the forecast potential generation capacity that we aspire
to achieve through this plan.

                      Renewable generation capacity (GWh/annum)

        SW consumption                                                                  Wind
         2011/12   2012/13   2013/14   2014/15   2015/16   2016/17   2017/18    2018

Figure 2: Expected renewable generation from SW assets

The graph above shows that through innovative use of our existing assets we
have the potential to be in a position, in 2019, where our assets are being used
to generate two to three times the electricity we consume. This would meet over
3% of Scotland’s electricity demand from renewable electricity.

The generation of this amount of renewable electricity provides significant
benefits to Scottish Water’s regulated business both in terms of price risk
mitigation against rising electricity costs and securing electricity supplies for our
water and wastewater against a backdrop of a potential national electricity

Wealthier Scotland
                     3. Wealthier Scotland

                     We believe we can play an important role in supporting Scotland to maximise
                     the opportunities that exist from our natural water resources. In addition to
                     exploiting the opportunities for hydro power generation there are a large number
                     of water bodies in Scotland that are currently untapped as sources of
                     sustainable water supply.

                     This presents two main opportunities;

                         to attract new water intensive businesses to Scotland thus enhancing
                          Scotland’s economy, or

                         to export resources to other parts of the world / UK where water is in
                          shorter supply.

                     Scottish Water Horizons have a small water export business in the form of water
                     supplied to shipping and for the off-shore industry. We intend to build on this
                     business and studies have been undertaken to examine opportunities to export
                     bulk water but these have been largely found to be uneconomical, particularly
                     given the reduction in costs of desalination over the past 10 years. However, we
                     will keep this under active consideration.

                     We will research the possibility that there may be opportunity to attract new
                     water intensive businesses to Scotland with the offering of a wholesale product
                     that meets their needs at a competitive price, and also where possible with a
                     renewable electricity source from embedded hydro in the supplies.

                     We propose in the next 3 years to undertake feasibility studies to identify any
                     possibilities and work with other agencies such as Scottish Enterprise and SDI
                     to encourage new demand.

                     In support of creating awareness of Scotland’s resource abundance we will
                     establish an international consultancy focussed on water related matters that will
                     increase Scottish Water’s and Scotland’s reputation for being a more attractive
                     place to live, work and invest and also support Scotland’s humanitarian and
                     altruistic activities.

                     There may be other opportunities where the technology does not yet exist on a
                     commercial scale that would support a hydro economy, such as hydrogen
                     powered vehicles, or biogas vehicle powered by sludge waste. Scottish Water
                     runs an innovation programme linked to commercial, scientific and educational
                     partners to identify and develop such opportunities.

We are currently exploring further renewable generation opportunities with the

                                                                                     Wealthier Scotland
potential of replacing pressure reducing valves on our water network with mini
hydro turbines as well as looking into opportunities for coal bed methane and
ground source heat pumps.

Going forward, we’re also looking to install district heating networks using
specialist water pipes to provide a sustainable source of heat to local homes and
businesses in Scotland.

Other commercial activities

In addition to these strategic growth opportunities we continue to seek
opportunities to gain a return from our assets, resources or technical skills.

We have already undertaken work in Dundee laying
25km of fibre optic cables in our sewers and have
included in this plan installation of a further 600km of
fibre optics over the next 4 years across Scotland.

We are exploring opportunities to erect billboards on our land to gain advertising

                  We currently undertake an operating and maintenance
                  contract for the Ministry of Defence managing the delivery of
                  essential water and wastewater services as part of the multi-
                  million pound Aquatrine contract on over 500 MoD sites across
                  the country.

We are supporting the film industry and promoting the use of
sites in Scotland and already we’ve supported films such as
“The 39 Steps” which was filmed on the banks of Loch
Katrine, as well as the global launch of the new Land Rover

                  We’re leasing our land and property assets to enable mobile
                  phone operators to extend their networks, particularly in rural
                  or harder to reach areas of Scotland.

We also provide services to developers that support the successful completion
of housing and commercial development sites supporting economic growth in
Scotland. We undertake feasibility work right through to construction,
challenging conventional thinking to ensure developers get the best possible
engineering solution and cost.

Scottish Water has teamed up with Homeserve to offer our customers protection
from a range of household emergencies, whether it is a burst water pipe, a

                     blocked toilet or even a dripping tap. This service is provided by Homeserve
Wealthier Scotland
                     with Scottish Water receiving a risk free return.

                     The benefits of all of these activities are that they create low risk returns that can
                     be reinvested to support our more aspirational commercial activities.

                     Business Stream

                     In addition to the above activities we are also looking to build on our expertise in
                     Business Stream to extend our activities in the emerging non-domestic retail
                     market in England & Wales. There is a window of opportunity in this market for
                     Business Stream to grow market share before the existing incumbent suppliers
                     get to grips with competition.

                     Until market opening Business Stream will selectively target customers in England.
                     They will seek to leverage existing relationships and secure large solutions
                     opportunities. As no aggregation is allowed within this threshold a single site
                     approach will be required.

                     The propositions for England will be identical to those offered in Scotland, however
                     Business Stream will offer them on a case by case basis, tailoring the solution to the
                     customer’s unique needs. They will lead with Solutions services, most likely water
                     and waste water management solutions and then pull through licensed services.
                     They are unlikely to supply solely licensed services without solutions’ services as
                     they would be unable to achieve their desired margins.

                                                                                     Smarter ScotlandSmarter Scotland
4. Smarter Scotland

A smarter Scotland is critical to delivering the Government's Purpose of
achieving sustainable economic growth. By making Scotland smarter, we will
lay the foundations for the future well being and achievement of our children and
young people, increase skill levels across the population and better channel the
outputs of our universities and colleges into sustainable wealth creation,
especially participation, productivity and economic growth in the water sector.

Within the water sector there is an opportunity to better co-ordinate the
approach to future development of water related business, education and
research in Scotland. This would improve capacity within the sector and
strengthen Scotland’s recognised ability to be a world-leading player.

Scottish Development International has been leading some thinking in this area
over the last two years. Scottish Water is fully supportive of moves to create a
focal point for Scottish expertise in the water sector, and would be happy to play
a major part in this to improve commercial and humanitarian innovation. We
believe that the creation of a centre of excellence for expertise in the water
sector can;

    bring together the competencies of institutions and industry across
     Scotland to secure benefits from synergies across all bodies and facilitate
     joint projects in Scotland and internationally,

    increase Scotland’s impact and visibility in the international development
     arena, influencing national and international policy in relation to water,

    secure funding, nationally and internationally to support research and
     development activity

We support the creation of a Centre of Water Science Innovation in Scotland
and see an opportunity for the Scottish Government to establish a Board that
oversees a centre of excellence which includes chemical, biological,
environmental, and social sciences, engineering, water management, and

We would support this as a Board member and through participation in research
activities where appropriate. Scottish Water could undertake the following roles
within this:

    provide overall co-ordination of R&D programme with appropriate focus
     on relevant issues.

    provide a key link to UK water industry and UKWIR

                               provide commercial management of research programme
Smarter ScotlandWaterAid
                               provide ‘test bed’ facilities

                               provide relevant technical support resources as appropriate

                           The level of funding that such an institute is likely to require could be beyond the
                           capacity of Scottish Water to fund although we could make a contribution, from
                           part of the surpluses generated through commercial activities, as and when they

                           The government have also asked that we support Scotland’s bid to host the
                           World Water Forum in 2015. While Scottish Water is willing to support the bid
                           and organising of such an event, we do not have the expertise to lead this and
                           we would expect the government along with a body such as Event Scotland to
                           lead this establishing a bid committee similar to the one that was successful in
                           attracting the Commonwealth Games to Glasgow.

                           We have included in this plan financial support and a commitment of resources
                           to work with the government to develop a bid for the event from the retained
                           profits from Business Stream activities once it has become clear that Scottish
                           Water’s regulated investment programme can be financed without recourse to
                           the profits generated by Scottish Water Business Stream.

                                                                                     International AidSmarter Scotland
5. International Aid

Whilst Scottish Water, as a public body, cannot donate money to charitable
organisations, we currently provide support to WaterAid which is an international
non governmental organisation focused exclusively on improving poor people’s
access to safe water, improved hygiene and sanitation in developing countries.

We provide office space for WaterAid’s two members of staff in Scotland. We
facilitate a give-as-you earn scheme and a WaterAid lottery through our payroll

Our staff are encouraged and supported, in terms of time, to organise fund
raising events. These events range from occasional cake sales in offices to
major fundraisers such as the annual Valentine Ball and the Munro Challenge.
Last year we raised around £300,000 in Scotland.

Many companies in our supply chain are also keen supporters of WaterAid and
we have a pivotal role in maintaining their engagement whilst also seeking to
involve new sponsors by raising awareness of WaterAid.

It is therefore very pleasing for us to set out in this plan the opportunity to
contribute a proportion of retained profits from our commercial activities through
the Scottish Government to the benefit of international aid activities.

Financing our plan
                     6. Financing our plan

                     Within the constraints of current legislation we will need to reorganise the
                     structure of companies within Scottish Water to fulfill this plan. We propose that
                     SWBS Holdings will become a wholly owned subsidiary of Scottish Water
                     Horizons Holdings (Horizons Holdings). This will enable the distributable profits
                     of SWBS Holdings and Business Stream to be passed as dividends to Horizons
                     Holdings, who will in turn invest these, as required, into the commercial
                     operating company of Scottish Water Horizons (Horizons).

                     In summary, Horizons Holdings will act as the financing vehicle for all
                     commercial activities (other than those carried out within Business Stream), and
                     Horizons will act as the operating company for all such commercial activities.
                     During the period of this plan, investment in new activities will be financed from
                     private sector partners or from the distributable profits of SWBS Holdings and
                     Business Stream.


                                                              Scottish Water      Scottish Water
                                   Scottish Water
                                                               Solutions Ltd.     Solutions 2 Ltd.
                                  Horizons Holdings
                                                             (51% SW owned)      (51% SW owned)

                       Scottish Water
                                                Scottish Water
                      Business Stream
                                                 Horizons Ltd.

                       Scottish Water
                      Business Stream

                     Figure 3: Scottish Water group structure -

                     Table 2 sets out the direct capital investment by Scottish Water proposed in new
                     activity areas. In preparing this plan, we have minimized the investment in the
                     new activities until 2012/13 because of current uncertainty surrounding
                     regulated business financing.

                                                                                                                           Financing our plan
                                                                                                                                       Comment [SW]: Explain
                                                                                                                                       assumptions about SWBS required
£m                                          11/12           12/13           13/14           14/15           Total                      profits
New Activities

Waste to energy                               0.0           10.9            11.2             11.2           33.2
Hydro energy                                  2.2             4.4             2.8             2.9           12.3
Photovoltaics                                 0.6             0.6             0.6             0.6            2.4
Wind energy                                   0.0             0.0             0.0             0.0            0.0
Sub total                                     2.8           15.9            14.6             14.7           47.9
Existing activities                           2.3             1.5             1.5             0.8            6.9
Total                                         5.1           17.4            16.1             15.4           54.8

Table 2 Investment forecast

The financial projections set out in Table 3 are for Scottish Water Horizons only.
In addition to the financial benefits set out below, Scottish Water will benefit from
innovation and lower cost and volatility in future electricity costs because of the
forecast power purchase agreements from the large scale wind projects set out
on page 5, and Business Stream will benefit from the returns from the new
commercial activities set out on page 12.

Years to 31 March                               10/11               11/12           12/13       13/14           14/15
£m                                           Forecast        Projected       Projected      Projected       Projected
Total Income                                        22.8            21.5             23.3           23.4            28.4
Total Costs                                         20.5            19.1             19.1           20.0            21.7
Profit Before Tax                                    2.3              2.4             4.2            3.4             6.7
Corporation tax                                      0.6              0.7             1.2            1.0             1.9
Profit after tax                                     1.7              1.7             3.0            2.4             4.8

Table 3 Summary financial projections

In determining the funds required for investment by Horizons Holdings, we have
assumed that SWBS Holdings will retain £3m p.a. of the distributable profits
from Business Stream to enable payment to be made to the Scottish
Government to support their broader water sector objectives. The financing
requirements are set out in Table 4.

Years to 31 March                                   10/11           11/12           12/13       13/14          14/15
£m                                            Forecast       Projected       Projected      Projected      Projected
Opening retained profits in Business                  4.9             4.9             2.0           2.0             3.1
Stream Holdings
Distribution of required retained profits             0.0             0.0           18.0        18.0            18.0
by Business Stream
Allocation to Scottish Government by                  0.0             0.0             3.0           3.0             3.0
repayment of SWBS Holdings debt
Available for distribution to                         4.9             4.9           17.0        17.0            18.1
Horizons Holdings
Horizons funding requirements                         0.0            -2.9           -15.0       -13.9           -9.3
Closing retained profits in Business                  4.9             2.0             2.0           3.1             8.8
Stream Holdings

Table 4 Financing requirements

As can be seen from Table 3 we forecast a distribution of around £9m to the
Scottish Government to support non-commercial activities such as the 2015
                     World Water Forum, a Centre of Water Expertise and international aid. This will
Financing our plan
                     be achieved by SWBS Holdings repaying £9m of loans from the Scottish

                     The primary financial risks to this plan are the ability to generate the forecast
                     level of distributable profits by Business Stream, and whether any of these funds
                     will be required to support delivery of Scottish Water’s regulated capital
                     investment programme. Business Stream is currently competing to retain their
                     service provision contracts for a variety of public sector customers.

                     Their may be opportunity to increase further the direct investment by Scottish
                     Water depending on the availability of investment funds and appropriate
                     attractive investment opportunities.


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