2013 financial statements

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Financial Statements East Thames Group Limited March 2013

Registered Charity: No.1084952 Registered under the Companies Act 2006: No.4091100 Registered with the Homes and Communities Agency: No.LH 4309 |1

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Contents

Board members, senior staff, auditors and bankers ............................................................... 3 Introduction ............................................................................................................................. 4 Operating and financial review and board report .................................................................... 6 Independent auditor’s report to the members of East Thames Group Limited ..................... 24 Consolidated income and expenditure account .................................................................... 26 Consolidated statement of total recognised surpluses and deficits ...................................... 27 Consolidated balance sheet .................................................................................................. 28 Consolidated cash flow statement ........................................................................................ 30 Parent balance sheet ............................................................................................................ 32 Notes to the financial statements .......................................................................................... 33

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Board members, senior staff, auditors and bankers Board Chairman

Tina Tietjen

Vice Chair

Marianne Skelcher

Treasurer

Andrew Newell

Other Members

Ashley West Shirley Watson Sheila Lewis Mehban Chowdery June Barnes

Senior staff Group Chief Executive

June Barnes

Director of Finance

Suzanne Forster (resigned 31 December 2012)

Director of Development and Property

Geoff Pearce

Director of Support Operations

Steve James (resigned 31 March 2013)

Director of Corporate Resources

Simon Bass (appointed 1 February 2013)

Director of Communities and Neighbourhoods

Pamela Gardner

Registered Office:

Auditors:

29-35 West Ham Lane

Grant Thornton UK LLP

Bankers:

Stratford

101 Cambridge Science Park

Barclays Bank plc

London E15 4PH

Milton Road Cambridge

Business Banking 1 Churchill Place London E14 5

Cambridgeshire CB4 0FY

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Introduction

By Tina Tietjen, Group Chair and June Barnes, Group Chief Executive The services which the Group provides across east London and Essex continue to play a vital role in supporting these communities, particularly at a time when the external economic, political and regulatory environment continues to create uncertainty. Increasing unemployment, particularly for young people, combined with rising food and energy prices is putting pressure on already stretched household budgets. House prices and private rents in London and Essex continue to increase, while April saw the implementation of the “bedroom tax”, the first stage in the government’s reform of welfare benefits. These challenges highlight the importance of our work to deliver social and economic regeneration, new homes and good quality services that represent value for money, making the best use of the resources available to us.

We have maintained our focus on improving the operational efficiency and value for money of our services. We have undertaken a number of significant changes to the business as part of the Group’s “Improving East Thames” programme. By the end of 2012/13, these changes had reduced the Group’s underlying cost base by £9.4m on an annualised basis, achieved through a combination of staff savings, outsourcing and improvements to process and technology. We have also identified an additional £2m of savings to come, which we expect to be improved upon further as a result of our value for money strategy.

As part of these changes our repairs and planned maintenance programmes have been brought together and from April 2013 have been delivered by our partner Interserve. This partnership will improve the service our customers receive, enable us to better plan the maintenance of our homes and further reduce our costs.

These changes have contributed to the Group achieving a pre-tax surplus of £2m compared with £1.6m in the previous year. Interest cover (measured before housing depreciation and joint ventures) was 135%, up from 124% in the previous year. Gearing marginally reduced to 54% from 56% in the previous year.

In addition to increased savings, our focus has been to radically improve the quality of service provided to our customers and to improve operational efficiency. At 31 March our Net Promoter Score, the indicator that measures customers’ willingness to recommend East Thames, has improved. This was largely because of the change to maintenance contracting arrangements. We are confident that the new contract will provide a good quality service to customers and further improve this score.

Many of our other performance measures have shown improvement. Although rent collection is lower than the previous year, rent arrears have out-performed our target of 4.6%, and this is particularly important given the future risks presented by welfare reform.

In June 2012 we raised £250m via a fixed rate 30 year secure bond achieving a coupon of 5.486%. The proceeds of this bond were used to repay and restructure some existing loan facilities. The restructure has enabled us to improve our interest rate risk exposure, release security and improve our financial position. We have other facilities in place to enable us to deliver our committed 1,500 home development programme.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

During the year we completed 653 new homes, including 576 under the GLA/ HCA programme in London. In February 2013 homes from one of our showcase developments, the Ocean Estate started to be handed over. This is a major regeneration programme that will deliver 591 homes, with 195 for private sale, over the next three years. There has been strong demand for these homes and private sales prices are exceeding our expectations.

More generally, demand for both the new affordable rent product and shared ownership remains strong across east London and Essex.

Triathlon Homes, joint venture between East Thames Group, Southern Housing Group and First Base to deliver the social and affordable housing at East Village (formerly the Olympic Athletes Village), is progressing to plan. We have started marketing intermediate rent and pre-allocating social rented homes in time for the first residents to move into their homes in summer 2013.

In April 2013, our principal regulator the Homes and Communities Agency issued their regulatory judgement on East Thames. The judgement maintains the current rating for viability (V2) but downgraded our rating for governance (G3). The principal reason for this downgrade was that some of our tenants are paying a higher rent than the calculated target rent. We have thoroughly investigated this and have now established that this applies to 146 tenants. The Board is taking this matter very seriously and we are working with the HCA to implement changes that will move our governance rating to G1. The cost of putting tenants back to where they were had rents been correctly levied in the first place amounts to £31,000, a sum included in the 2012/13 accounts.

The rating agency Moody’s has on two recent occasions downgraded the ratings for nearly the entire housing sector. The first downgrade in February 2013 followed on from the downgrade of UK Sovereign debt. The second downgrade in May 2013 was mainly due to concerns over the security of support provided to housing associations by the UK Government. As at 31 May 2013, the East Thames rating was A2 with a stable outlook. This is line with many other comparable associations.

This year has been a year of major change for Board members and staff alike; overall we have reduced headcount by 8%. The Board structure has been simplified and a number of Board colleagues have stood down. All Board members and staff have managed these changes with professionalism and enthusiasm, in the knowledge that we are making these changes to continue to deliver the Group’s mission – to make a positive and lasting contribution in the neighbourhoods in which we work. We are grateful for their support and commitment, as well as that of our partners and stakeholders.

Tina Tietjen

June Barnes

Group Chairman

Group Chief Executive

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Operating and financial review and board report The Board of East Thames Group Limited presents its report together with the audited financial statements of East Thames Group Limited (the Company) and East Thames Group (the Group) for the year ended 31 March 2013.

Legal status The Company is registered under the Companies Act 2006 and is a registered charity. The Company is also registered with the Homes and Communities Agency as a housing provider.

Governing document East Thames Group Limited is a Company limited by guarantee, and the governing document of the Company is its memorandum and articles of association.

Principal activities The Group comprises East Thames Group Ltd, a non asset holding Private Registered Provider, and the principal asset holding Registered Provider, East Homes Ltd. Other subsidiaries are as follows:Company

Principal activity

East Living Ltd

Industrial and Provident Society, providing care and supported housing services for people with a wide range of needs.

East Potential Ltd

Registered Charity, providing training, employment and healthy living programmes to help individuals lead better lives, and neighbourhood regeneration projects to sustain neighbourhoods and develop communities.

East Thames Partnerships Ltd

Development of housing for private sale

East Regen Ltd

Development consultancy and management.

East Place Ltd

Property management company. Holds a 33% interest in Triathlon Homes LLP, a joint venture with First Base Ltd and Southern Housing Group. Triathlon will own and manage 1,379 affordable homes in East Village (the former Athletes Village).

East Treasury Ltd

Secures and provides funding for East Thames Group.

East Finance plc

Issuer of bond used to finance activities of the Group.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

The group’s principal activities are development and management of affordable housing, development of homes for sale and market rent, social and economic regeneration provision of supported housing including provision of foyer services for young people.

At the end of year, the Group owned or managed 12,278 homes and 2,972 other property assets. The development pipeline is over 2,000 homes with 1,500 having been committed by 31 March 2013. Of the pipeline 75% of the homes are for affordable tenures with the remainder being either outright/ market sales or market rent.

The Group has a pro-active social and economic regeneration programme principally directed towards helping residents and those in our communities to access employment. The majority of the Group’s activities are defined as social housing activities. The activities undertaken through East Thames Partnerships Limited are not defined as social housing activity but are engaged in to support or are intrinsic to the social housing activities of the Group.

Objectives and strategy The strategic plan supports the delivery of the Group’s mission to make a positive and lasting contribution to the neighbourhoods in which we work. The current strategic plan is being revised to take account of the new operating environment and will run from 2013 to 2016.

The strategic objectives for the year under review were: 1. Good housing services - work with our residents to establish and then to meet agreed standards on housing service delivery and as a result improve the services we provide to them.

2. A strong and valued organisation – ensure that we remain an independent organisation valued by our stakeholders and with activities focused on making a real difference in east London and Essex.

3. Improving lives - deliver a range of services to our residents and other local people which will improve their life chances by providing care and support and by providing access to training, employment and a range of community development opportunities.

4. Quality developments - contribute to the physical regeneration of the neighbourhoods in which we work and provide well designed and cost effective new homes to local people on low and modest incomes.

5. Olympic opportunities - contribute to the creation of a new and successful community at the Athletes' Village and help to ensure that the 2012 Olympics and its legacy has provided real benefits to local people.

We have made significant progress towards delivering the mission and achieving the aims set out in the strategic objectives. Many of the objectives have already been achieved.

The following are the most notable achievements in 2012/13:

Entering into a long-term strategic maintenance partnership with Interserve who, since April 2013, have been delivering the repairs and maintenance service to our homes at a lower cost.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013



Helping our residents to deal with the impacts of welfare reform. We have offered free welfare benefits advice; directly contacted more than 500 residents at risk of being affected by the benefit cap and the ‘bedroom tax’; and provided free employment and training programmes.



Reducing underlying operational spend by £9.4m per annum from the start of 2013/14. This was achieved as part of an 18-month transformation project working with PwC. Following end to end analysis of processes, systems and technology, five key projects were created to deliver business improvements.



Achieving Best Companies’ ‘Ones to Watch’ accreditation.



Helping 223 people to find jobs and 130 people to take part in further education or training. This success was achieved through our employment and training programmes which provide a range of support for people wanting to find work.



Completing 653 new homes, including the 576 we committed to with the Greater London Authority. These homes span a range of tenures including social rent, shared ownership, intermediate market rent and private sale.



Successfully managing the regeneration of the Ocean Estate in Stepney Green together with Tower Hamlets Council. The £220m regeneration completes in 2013/14. During 2012/13 we completed the refurbishment of existing council homes, started work on landscaping the estate and handed over the first phase of homes for sale.



Obtaining planning permission and progressing the regeneration of the New Union Wharf estate on the Isle of Dogs. This is an East Thames estate and the investment will improve homes for existing residents and offer new homes and a wider range of tenure options in the future.



With our partners in the Triathlon Homes consortium we are on track to deliver 1,379 affordable homes on the East Village (the former Olympic Athletes’ Village). This includes 675 homes at social rent. The first residents are due to move in from late summer 2013.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Business and financial review Financial review The Group delivered an improved financial result, with the underlying performance of the core housing business above that set out in the business plan and budget but largely offset by restructuring costs and an increase in impairment provision on certain historic development sites. The post tax Group surplus was £1.7m (2011/12: £1.6m) on a turnover of £115m (2011/12: £98.9m).

The following table is a summary of the results for the last five years:Group highlights- five year summary for the year ended 31 March

2013

2012

2011 restated

2010 restated

2009

Income and expenditure

£’000

£’000

£’000

£’000

£’000

Group turnover – excluding joint ventures

109,746

93,842

96,292

107,434

114,693

Cost of sales

(10,748)

(1,365)

(5,033)

-

-

(6,297)

(5,962)

(5,682)

(5,449)

(1,433)

(71,814)

(69,966)

(69,402)

(83,793)

(106,897)

20,887

16,549

16,175

18,192

6,363

3,277

4,024

653

(17)

-

(21,745)

(18,159)

(19,781)

(18,995)

(16,529)

(3,356)

(3,214)

(650)

-

-

Surplus on sale of assets

2,932

2,441

4,820

3,976

7,308

Tax

(342)

(38)

(56)

(171)

(292)

Surplus/(deficit) for the year

1,653

1,603

1,161

2,985

(3,150)

Group highlights- five year summary for the year ended 31 March

2013

2012

2011

2010

2009

Balance sheet

£’000

£’000

£’000

£’000

£’000

915,313

809,725

767,430

744,865

696,158

Housing depreciation Operating costs Operating surplus Share of operating surplus/(deficit) in joint venture Net interest payable excl joint venture Share of joint venture interest

Housing properties at

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Group highlights- five year summary for the year ended 31 March

2013

2012

2011 restated

2010 restated

2009

Other tangible fixed assets

28,219

36,768

38,223

40,348

47,833

Investments

25,495

18,799

14,837

16,342

12,311

Net current (liabilities)/assets

61,676

21,853

(24,963)

5,582

20,937

1,030,703

887,145

795,527

807,137

777,239

578,162

515,205

440,937

473,451

473,240

1,041

648

576

633

1,431

451,500

371,292

354,014

333,053

302,568

1,030,703

887,145

795,527

807,137

777,239

15,250

15,065

15,148

14,995

14,842

Operating margin - all activities

19%

18%

17%

17%

6%

Interest cover - excluding asset sales

96%

91%

82%

96%

38%

Interest cover - including asset sales

110%

105%

106%

117%

83%

Cash interest cover including asset sales after adding back housing depreciation

138%

137%

135%

145%

91%

54%

56%

54%

56%

59%

£4,709

£4,644

£4,582

£5,588

£7,202

valuation

Total assets less current liabilities Long term creditors Provisions and other long term liabilities Reserves Total funding Accommodation figures: Total housing stock owned or managed at year end

Net gearing Total operating cost per property managed (excluding depreciation)

The following are the key measures that we use to manage the financial position:

operating margin, which measures overall profitability of our business



cash interest cover, which measures our ability to service our loans from operating cash flow

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013



gearing, which measures how much we have borrowed relative to the value of our assets.

The five year results show a generally improving trend of performance, with improving operating margin, operating surplus and interest cover alongside reduced gearing.

Income and expenditure account The post tax surplus for the year was £1.7m.The following are the key factors influencing the results for the year:1. Surplus of £1.4m generated from first tranche sales of shared ownership properties (2011/12: £0.1m).

2. Operating surplus from social housing lettings of £24.5m (2011/12: £21.4m).

Turnover from social housing lettings increased by £3.1m whilst operating costs slightly increased by £0.3m. This reflected some of the early benefits coming from our programme to improve operational efficiency. The majority of savings came from reduced management costs (£3.6m or 16% reduction in costs). Costs of £3.9m associated with implementing the efficiency programme have been included in the operating surplus.

3. Interest payable of £21.7m, an increase of £3.6m compared with the previous year.

Following the bond issue in June 2012 we repaid some debt and cancelled certain swaps. This has resulted in some increased interest costs but reduced the risk exposure. The remainder of the increase in interest is due to net increased borrowing of £70m.

4. Surplus on asset sales was £2.9m (2011/12 £2.4m), these surpluses largely came from shared ownership leaseholders acquiring further equity in their home.

5. Cash interest cover of 138% remains healthy (2011/12: 137%).

Balance sheet 

Total assets less current liabilities now exceed £1bn, up from the £0.89bn at the previous year.



Our assets are shown at valuation, and the revaluation effect was £77m reflecting the operational efficiencies that will come into effect on 1 April 2013 and the valuation uplift following the addition of 411 new affordable homes.



The total amount invested in new affordable homes was £84.2m, partly funded by SHG receipts of £25.6m and utilisation of the Recycled Capital Grant Fund of £0.7m, the balance being funded from existing loan facilities and the proceeds of the bond issue in June 2012.



Net current assets are £61.7m, an increase of £39.8m over the previous year. Stock held for sale is £44.6m, an increase of £21.4m over the previous year. This reflects our continuing investment in mixed tenure programmes, including shared ownership and homes for sale, to support our continued investment in affordable homes. A number of schemes, including the Ocean Estate on Stepney, are being handed over and are being actively marketed. Sales values have generally exceeded expectations.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013



Revenue reserves have increased from £41.3m to £44.3m reflecting the surplus achieved in the year.



At year end we transferred part of our investment in our offices at West Ham Lane from “other tangible assets” to “investment properties”. Our programme to improve operational efficiency has reduced headcount and therefore our office space requirements. This has released capacity and we are letting vacant space. This space is shown at open market value and has resulted in an impairment charge of £1.3m being recognised in the results for the year.



Gearing has reduced from 56% to 54% and is significantly below both our internal target of 65% and lower than the limit imposed by our lenders.

Value for money During 2012/13 we completed an 18 month transformation programme, improving the experience of the Group’s customers and enabling underlying and annualised savings of more than £9.4m to be achieved from 1 April 2013. We have identified further annualised savings of £2m which we expect to improve upon further as a result of our value for money strategy.

The following are the main actions that have or will deliver these savings:1. Implementation of effective vacancy management and voluntary redundancy packages supported by improved technology and shorter workflow processes that delivered annualised savings of £4.6m per annum.

2. Implementation of our strategic maintenance programme, delivering a holistic customer experience alongside responsive and planned maintenance services. This will deliver improved quality and savings of £4.2m per annum from 2013/14.

3. Delivery of change programmes with internal staff resources with capacity and skill building provided by a small team of consultant experts.

4. Implementation of a leadership and management development programme that will better equip staff to deliver in a more competitive environment.

5. Implementation of a new self service portal for residents which will complete later this year. This will give residents access to their own online records where they can update their details, check their rent account, report a repair and access a range of other services.

6. Improved governance and delivery of the 2013/14 corporate plan which now prioritises investment to those proposals that meet strict and more challenging business criteria.

A value for money assessment will be published on our website in September 2013, in line with the Homes and Communities Agency (HCA) requirements, evaluating our success in meeting the business strategy, delivering against our agreed value for money strategy and making the best use of our resources. This statement will be aligned with the 30 year business plan.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Business review – key performance measures We have a number of key performance measures that monitor the delivery of the mission and the strategic plan objectives. The following are the performance results as at 31 March 2013.

Measure

Actual

Target

Comments on performance

Number of homes

12,278

None

Net promoter score1 – housing

15.8

15.0

The target was exceeded in this area.

Net promoter score1 – care and support

36.8

20.0

The target was well exceeded in this area, reflecting the ongoing positive work carried out within our care and support services.

Rent arrears (%)

3.58%

4.6%

Rent arrears continued to be managed well, with the target being exceeded

Repairs completed on time (%)

91.1%

95%

Satisfaction with repairs service

62.53%

75%

The target was not met in this area.

This was due to the restructuring of the repairs service and disengagement from the previous contracts.

Number of homes with valid gas certificates

99.99%

100%

The target was missed in this area by a very slim margin. This was due to one home being without a valid certificate at year end as the contractors were unable to gain access to the property.

Development – homes handover

653

576

The target was exceeded in this area.

1

Net promoter score measures the customer experience by identifying the most satisfied and most dissatisfied customers. A score of 1 or above is a good result and a score of 50 would be defined as excellent.

The following key performance measures are in the form being published by each of the G15 – the group that represents the 15 largest associations in London.

Performance measure

2013

2012

Number of social housing homes

12,278

11,716

Operating cost (excluding housing depreciation) per social housing home

£4,304

£4,404

Management cost per social housing home

£742

£724

Maintenance cost per social housing home

£1,386

£1,268

Service costs per social housing home

£572

£548

Overheads per social housing home

£742

£726 | 13

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Performance measure Current rent arrears Cash collection % Bad debts per social housing home Spend per unit on new supply Debt per property owned Capital commitment as proportion of fixed assets

2013

2012

3.58%

3.30%

98.84%

99.56%

£41

£44

£8,908

£2,942

£43,195

£39,590

19%

21%

Capital structure, treasury policy and compliance with lenders covenants Capital structure As at 31 March total group borrowings were £572.1m against total facilities of £689.6m (83% of all facilities drawn). The undrawn facilities of £117.5m were fully secured and available for drawdown. At 31 March there was cash of £29.8m giving total available liquidity of £147.3m.

We operate a conservative cash investment policy, and cash is generally invested with the Group’s clearing bank.

Of the total drawn facility of £572.1m, 44% or £251.4m (2012: <1%) is funded through bonds with the remainder through bank debt. In June 2012, East Finance plc issued a secured 30 year £250m sterling bond at a coupon of 5.486%. The proceeds of the bond were immediately on-lent to East Homes Limited. This financing provides East Homes Limited and the Group with a much stronger and diversified funding position, allowing it to meet its near term funding requirements. Of the £250m proceeds, £106.5m was used to prepay existing bank loans. There was no penalty or cost incurred in prepaying the £106.5m of bank loans, other than an accelerated write off of £0.5m of costs that were previously capitalised when the bank loans were originally established.

Of the £572.1m of borrowings:1. East Treasury Ltd has borrowed £314.9m and directly on-lent it to East Homes Limited. Of the £314.9m, £244.9m are term loans, £20m are revolving loans and £50m are term loans with Lender’s Option Borrower’s Option (‘LOBO’) which are subject to periodic re-pricing by the lender.

2. East Finance plc has borrowed £250m through the bond issue and directly on-lent it to East Homes Limited.

3. East Homes has borrowed £7.2m of debt directly in addition to the loans borrowed from East Treasury Ltd and from East Finance (which are borrowed by East Homes Limited on the same terms as lent to East Treasury Ltd).

The weighted average maturity of the £572.1m drawn debt is 25 years, or 21 years if the LOBO loans are cancelled at the first re-pricing dates.

All loan facilities are secured using properties owned by East Homes Limited. The three bank loan facilities and the Sterling bond are secured through the Prudential Trustee | 14

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Company Limited. The remaining two loans arranged by East Homes Limited are directly secured in favour of the lenders. In addition East Homes Limited has provided property security in favour of hedge counterparties as collateral for mark-to-market valuations on interest rate swaps.

The main objectives of the treasury policy are to ensure that the Group has sufficient cash to fund its operational activities and new investments; compliance is maintained with lenders’ covenants, risks to the Group’s financial resources are mitigated, the Group is protected from adverse interest rate volatility and that those financial resources are applied prudently.

Interest Rate Risk Management The treasury policy on interest rate management seeks to protect the Group from adverse interest rate volatility and to provide an appropriate level of certainty to the interest costs.

The target is for 70% of the group’s debt to be at fixed interest rates whilst recognising that it may be necessary to operate at either above or below that level on a shorter term basis. The policy allows the prudent use of approved financing and investment instruments within the portfolio.

The policy allows for a significant proportion of debt to be hedged by way of a combination of embedded fixes and stand-alone interest rate swaps including such swaps that can be cancelled at the counterparties’ option (cancellable swaps or swaptions). This strategy recognises that, as interest rates start to increase over time, a portion of cancellable swaps will be called and cancelled by the counterparty banks. This will drive the underlying borrowings onto a variable LIBOR based interest rate. Financial modelling takes account of the effect of cancellation of swaps.

At 31 March 2013, 83% of the drawn loan portfolio of £572.1m was hedged by way of embedded fixes or interest rate swaps (including cancellable swaps or swaptions). These hedges give rise to a mark-to-market value that recognises the change in market interest rates since inception of the hedge as well as the value of the option component of the cancellable swaps.

At 31 March 2013 the mark-to-market exposure on the £150m net notional of fixed interest rate swaps amounted to £93.4m which is substantially secured by charging East Homes Ltd properties together with £8.4m cash collateral in favour of the counterparty banks. A further £65m of interest rate fixes are embedded in bank loans. These embedded fixes carried a mark-to-market liability of £13.8m. As interest rates increase it is anticipated that this mark-to-market value will reduce.

Lender’s Option Borrower’s Option (“LOBO”) loans amounted to £50m. No property security is required for the mark-to-market values of the fixed rate obligations embedded in these transactions.

As a result of the £250m bond issue, £110m of cancellable interest rate swaps were restructured. The effect of the restructuring was to reduce fixed rate obligations at 31 March 2013 from £482m to £472m. Following the bond issue and at 31 March 2013 the weighted average cost of debt, inclusive of margins and hedging activities was 4.7% (2012: 4.05%).

Loan covenant compliance Loan covenants under the Group’s bank loans and the Sterling bond are all based on the results of East Homes Limited. These covenants generally relate to interest cover, gearing and asset cover. These are monitored monthly and reported to lenders annually. The Group

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

was in compliance with all covenants throughout the year ended 31 March 2013. The results below are based on the most stringent of the individual bank covenant tests.

Covenant (East Homes only)

Actual

Covenant

Gearing: % of borrowings to total assets

57%

≤70%

Interest cover (annual): total interest as % net surplus

136%

≥95%

Interest cover (3 year rolling): total interest as % net surplus

139%

≥105%

Risks and uncertainties Key risks

Nature of risk

Mitigation and management

Welfare reform

Under-occupation penalty (“bedroom tax”), universal credit and benefit cap are likely to affect rent collection, arrears and operating cash flow. The social effect of the reforms will impact on social and economic activities regeneration and housing management.

Detailed review of impact on customers, training staff, modifying rent collection procedures and information technology. Programme of communication and training for customers, staff and Board members. Re-assessed social and economic programmes. Business plan includes provision for risk of additional loss.

Further reductions of public spending

Additional cuts in revenue and capital funding will restrict the ability to build and grow the business and to build new homes. Adverse effect of any change to rent policy will impact on business plan and valuations.

Developing new initiatives to reduce the reliance on capital funding. The Improving East Thames programme was designed to improve operational efficiency and create the financial capacity to develop more homes.

Impact of FRS 102

FRS 102 will have a major impact on the presentation of the accounts of all Registered Providers.

We have made an initial assessment of the impact of FRS 102 on the business plan and on financial capacity. This will be an on-going action as the SORP is being finalised.

Housing market

New properties for shared ownership and outright sales are exposed to adverse change in the property market. The Group’s business plan could be adversely affected by a material and sustained downturn in the property market.

Prudent values are included in scheme appraisals and are supported by independent professional advice. Close monitoring of actual and planned sale programmes is undertaken. We will develop alternative use plans in the event that expected values fail to materialise and / or sales are delayed and include alternative scenarios as

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Key risks

Nature of risk

Mitigation and management part of our work on the 30 year plan.

Economic conditions

Increase in RPI or CPI would normally have a favourable impact on the business plan. The cap on the annual increase in welfare benefits rents would result in a sub-RPI increase in rents combined with a RPI increase in costs.

Reduction in LIBOR would increase mark-to-market exposure whilst an increase in LIBOR could increase interest costs and lead to cancellable swaps being called.

Regulatory changes – limiting investment

Ring-fencing of social housing assets, combined with further reductions in grants and / or restrictions on affordable/ social rents would restrict capacity to invest in new homes.

Business plan subject to extensive scenario modelling for a wide range of economic conditions. Of the total debt portfolio, 83% is hedged against adverse movements in interest rates. The section of this report on capital and treasury policy describes more fully how interest rate risk is managed.

The Board has considered mechanisms to ring-fence and protect social housing assets whilst maintaining a programme of regeneration and development. All scheme appraisals consider and model the risk of ring fencing and changes to the rent regime.

The year ahead – meeting the challenges and responding to the risks The Board has approved a new strategic and financial plan for 2013 to 2016. The plan is built on the success of the previous strategic plan with the objective of making people’s lives and local neighbourhoods better, through providing quality landlord services, building new homes, providing care or employment support. The mission of East Thames has not changed.

The new plan reflects the impact of welfare reform on our communities, the condition of the UK economy and the coalition government’s policies to stimulate investment in new homes.

The plan maintains our focus on the regeneration of east London and Essex and recognises that we are a social enterprise, a business and a charity. This means that our plans are designed to deliver the mission in a businesslike way, making best use of our resources, focussing on value for money and efficiency and paying close attention to risk.

The strategic plan has three principal aims:Aim 1 – Helping our residents cope with a challenging external environment.

Aim 2 – Working with our partners to regenerate east London and Essex neighbourhoods.

Aim 3 – Continuing to improve our business, creating the capacity for growth.

The business (financial) plans supporting the strategic plan have benefited from the efficiency savings that have been achieved and we envisage achieving further value for money savings. The plan continues to emphasise the need for further investment in new homes, whilst also recognising the need to ensure that social housing remains protected. | 17

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

The business plan has been modelled under a number of alternative economic scenarios and takes into account the strategic risks and uncertainties faced by the business, including being prepared for the impact of FRS 102.

In the forthcoming year the business will build on the success of earlier years, by embedding the new maintenance contract, consolidating changes to the customer service delivery model, further improving the system of internal controls and governance and continuing the delivery of the successful development programme.

Statement of compliance In preparing this Operating and Financial Review and Board report, the Board has followed the principles set out in the Statement of Recommended Practice: Accounting for registered social housing providers (Update 2010).

Board members and executive directors The Board members and Executive Directors are shown on page 2.

The Executive Directors are the Group Chief Executive and other members of the Groupâ&#x20AC;&#x2122;s Senior Management Team. They act as Executives with authority delegated by the Board.

Suzanne Forster, Director of Finance left on 31 December 2012. Following a restructure of the Senior Team that provides corporate resources and finance, Simon Bass was appointed as Director of Corporate Resources on 1 February 2013. The other Executive Directors served throughout the year.

To effect the planned change to the business, the Senior Management Team was supplemented with two Interim Directors who supported the transformation programme. Both of these Directors had left the group by 31 March 2013.

The Group Chief Executive and other Executive Directors (other than the Interim Directors) are employed on permanent contracts of employment with notice period of 6 months. The Executive Directors participate in either the Social Housing Pension Scheme or other available schemes on the same terms as all other eligible staff. The remuneration package of all Executive Directors is included in note 10a to the accounts.

Insurance policies indemnify Board members and officers against liability when acting for the group.

Employees We are committed to valuing equality and diversity in all aspects of our work, from providing affordable housing and support services, to delivering social regeneration programmes.

Equally, we recognise that as an employer, our practices must create an inclusive environment for all our staff, contractors, and Board members.

We aim to eliminate unfair treatment and discrimination in the services we provide and to promote and value respect in everything we do. We expect everyone who works for us to share these values and support us in our aims.

The Board has responsibility for health and safety. The group has prepared detailed health and safety policies and has in place education/ training programmes and systems to monitor the implementation and management of those policies.

| 18

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Donations The Group made no charitable or political donations in the year (2012: £nil).

Going concern The Group’s business activities, financial position and factors likely to affect its future are set out in the Operating and Financial Review. The Group has committed and drawn long term debt facilities, undrawn long term loan facilities (at 31 March 2013: £117.5m) and cash (at 31 March 2013 £29.8m) which provide resources to support the development programmes.

Operating cash flow is positive and we maintain sufficient liquidity to manage short term working capital requirements. The Group’s business plan, sensitised for key risk factors outlined in the Operating and Financial Review, shows that debt facilities can be repaid whilst also continuing to comply with lenders’ covenants.

The Board has a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future, being twelve months after the date on which the report and accounts are signed. For this reason, the Board continues to adopt the going concern basis for the financial statements.

Internal controls assurance The Board has overall responsibility for ensuring that there is a robust system of internal control across the Group and for reviewing its effectiveness.

The system of internal control is designed to manage risk and to provide: 

Reasonable assurance that strategic objectives will be achieved



Reasonable assurance that there will be no material misstatement or loss.

The system is risk-based and is embedded into standard management and governance processes.

The key elements of the system of internal controls include:(a) A comprehensive and regularly updated 30 year business plan covering all activities which is subject to periodic independent review. The Group prepares an annual budget and publishes regular management accounts and financial forecasts which are considered by the Group Executive Team and Board. (b) A comprehensive system and set of processes to identify, manage and mitigate strategic and operational risks. This system has been embedded into the operational culture of the business. The effectiveness of the system is reviewed by the Group Risk Management and Audit Committee (GRMAC). The Board is involved in both the identification and management of strategic risks and receives reports on both strategic and summarised operational risks. The Group Executive Team leads on the system and has oversight of operational risks which have been identified, reviewed and managed throughout the business. (c) Appraisal and consideration of investment in new property or regeneration schemes by the Group Executive Team, Development and Asset Management Committee and, where required, the Board.

| 19

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

(d) Oversight of the investment in strategic change programmes, including the Improving East Thames programme. This has been undertaken by a task and finish committee of the Board. (e) Compliance with the main provisions of the NHF Code of Governance. (f) A comprehensive system to manage health and safety and statutory compliance risk.

The Board receives at a minimum, an annual report on health and safety and at each board meeting receives “comply or explain” key performance indicators. (g) A comprehensive set of regularly reviewed and updated policies, procedures and delegated authorities covering all major policy/operational areas. (h) An anti-fraud policy covering the prevention, detection and reporting of fraud. All suspected frauds are recorded in the fraud register and are investigated in line with the anti-fraud policy. The Group has an anti-money laundering policy and has appointed a Money Laundering Reporting Officer. (i) A comprehensive system of performance reporting which is considered by the Board, Customer Experience Committee and Housing Services Panel on a “comply or explain” basis.

The Board obtains assurance on the systems of internal control through receiving reports and a comprehensive system of audit and assurance that includes: (a) Scrutiny by GRMAC, which meets at least four times each year and on behalf of the Board: a. Reviews the systems of risk management and internal control, b. Plans the work of internal audit c. Receives internal audit reports d. Reviews incidents of fraud, reporting annually on these to the board e. Plans the work of external audit and considers the Key Issues Memorandum published by the external auditor f.

Considers the annual reports on internal controls provided by the Group Chief Executive and Head of Internal Audit, and reports its findings to the Board

(b) A combined programme of risk-based and core internal audit activity. The programme is considered and approved by GRMAC for the Group. The Head of Internal Audit meets regularly with the Chair of GRMAC. Internal audits are undertaken by the internal team together with external expertise for specialist audit areas. (c) Commissioning specialised assurance during the year either as part of planned system improvements or where a particular control risk has been identified. (d) The Group’s external auditors providing some further limited assurance on the system of controls. The Key Issues Memorandum published by Grant Thornton is considered by GRMAC.

| 20

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

(e) The Board of East Treasury Ltd (and East Finance plc in relation to the public bond) considering Treasury strategy, policies and procedures annually. (f) Procedures for the recruitment, development, retention and training of suitably qualified staff.

The Board has considered the system of internal control and the annual report from the Group Risk Management and Audit Committee.

Following an enquiry made by the Homes and Communities Agency we have identified that 146 tenants were paying rent higher than the target rent at the date when rent convergence should have been completed (31 March 2012 for general needs dwellings and 31 March 2013 for supported housing dwellings). Following internal investigations, reviewed by an external firm of auditors, we have concluded that improvements were needed in the rent setting system and that the total amount that should be refunded to tenants was no more than ÂŁ31k. We have implemented the improvements and refunded tenants.

The Board has concluded that that there are no weaknesses in internal controls sufficient to lead to material misstatement or loss.

Code of governance The Group continues to comply with the main provisions of the National Housing Federation Code of Governance. As part of our annual compliance review some elements of best practice have been identified which will enhance our compliance and we are taking these forward. These are however not fundamental and do not affect our overall assessment.

Board meetings of the Group are conducted jointly with those of East Homes, East Living and East Potential. At 31 March 2013, each of the Boards of these subsidiaries had two independent Board members with the Board of East Homes having an additional three resident Board members. This structure enables Board members to make decisions about the future direction of the Group as a whole, whilst also exercising their governance responsibility for each entity.

In April 2013, the Homes and Communities Agency rated governance as G3, largely as a result of non-compliance with the rent standard within the Regulatory Framework. In light of this rating, the Board has commissioned a review of the Groupâ&#x20AC;&#x2122;s compliance with the Regulatory Framework and this has highlighted some limited areas for further improvement.

Separately, the Board is in the process of further streamlining its governance systems, membership and processes to ensure that they remain compliant with best practice and support the delivery of the business plan objectives.

Statement of the responsibilities of the Board for the report and financial statements The Board is responsible for preparing the report and financial statements in accordance with applicable law and regulations.

Company Law requires the Board to prepare financial statements for each financial year.

Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company Law, the Directors must not approve the | 21

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

financial statements unless they are satisfied that they give a true and fair view of the state of affairs and the surplus or deficit of the Group for that period.

In preparing these financial statements, the Board is required to: 

Select suitable accounting policies and then apply them consistently;



Make judgements and accounting estimates that are reasonable and prudent;



State whether applicable UK Accounting Standards and the Statement of Recommended Practice (SORP) Accounting by Registered Housing Providers Update 2010, have been followed, subject to any material departures disclosed and explained in the financial statements; and



Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Board is responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and Group and enable them to ensure that the financial statements comply with the Companies Act 2006.

They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as each of the directors is aware: 

There is no relevant audit information of which the company’s auditors are unaware; and



The Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

The Board is responsible for the maintenance and integrity of the corporate and financial information on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

External auditors Grant Thornton UK LLP have expressed their willingness to continue in office and will be deemed reappointed for the next financial year in accordance with section 487(2) of the companies act 2006 unless the company receives notice under section 488(I) of the companies act 2006.

Public benefit statement The Board confirm that they have referred to the guidance contained in the Charity Commission’s general guidance on public benefit when reviewing the Group’s aims and objectives and in planning future activities and setting the grant making policy for the year.

| 22

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

The report of the Board was approved by the Board on 12 August 2013 and signed on its behalf by:

Tina Tietjen Group Chairman

| 23

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Independent auditor’s report to the members of East Thames Group Limited (Registered No. 4091100) We have audited the financial statements of East Thames Group Limited for the year ended 31 March 2013 which comprise the consolidated income and expenditure account, the consolidated statement of total recognised surpluses and deficits, the note of historical cost surpluses and deficits, the reconciliation of movement in group's funds, the consolidated balance sheet, the consolidated cash flow statement, the parent income and expenditure account, the parent balance sheet, the parent cash flow statement and the related notes.

The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report 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 company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor As explained more fully in the Statement of the Responsibilities of the Board (set out on pages 20 & 21) the board is responsible for the preparation of financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements In our opinion the financial statements: 

Give a true and fair view of the state of the group’s and the parent company's affairs as at 31 March 2013 and of the group's and of the parent company's surplus or deficit for the year then ended;



Have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, the Housing and Regeneration Act 2008 and the Accounting Direction for Private Registered Providers of social housing 2012; and



Have been prepared in accordance with the requirements of the Companies Act 2006.

| 24

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Operating and Financial Review and Board Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: 

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or



the parent company's financial statements are not in agreement with the accounting records and returns; or



certain disclosures of directors' remuneration specified by law are not made; or



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

| 25

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Consolidated income and expenditure account For the year ended 31 March 2013 Note

Turnover: continuing activities (including share of joint venture) Less: share of joint venture turnover

2013

2012

£’000

£’000

114,991

98,874

(5,245)

(5,032)

Group turnover

3

109,746

93,842

Cost of sales

3

(10,748)

(1,365)

Operating costs

3

(78,111)

(75,928)

Operating surplus: continuing activities

20,887

16,549

Share of operating surplus in joint venture

3,277

4,024

24,164

20,573

Operating surplus including share of joint venture Surplus on sale of fixed assets – housing properties

5

2,932

2,441

Net interest payable and similar charges (excl joint venture)

8

(21,745)

(18,159)

(3,356)

(3,214)

1,995

1,641

(342)

(38)

1,653

1,603

Share of interest payable by joint venture Surplus on ordinary activities before taxation Tax on surplus on ordinary activities

19

Surplus for the financial year

The notes on pages 31 to 75 form part of these financial statements.

| 26

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Consolidated statement of total recognised surpluses and deficits For the year ended 31 March 2013 Note

Surplus for the financial year (Group)

2013

2012

£’000

£’000

1,732

793

Surplus for the financial year (share of joint venture)

13

(79)

810

Unrealised surplus on revaluation of housing properties

26

78,522

16,950

Unrealised surplus / (deficit) on revaluation of investment properties

26

33

(1,275)

80,208

17,278

Total recognised surpluses for the year

Note of historical cost surpluses and deficits for the year ended 31 March 2013 2013

2012

£’000

£’000

Reported surplus on ordinary activities

1,653

1,603

Excess of actual depreciation over historical cost depreciation

1,155

1,017

346

(319)

Historical costs surplus on ordinary activities before taxation

3,154

2,301

Tax on surplus on ordinary activities

(342)

(38)

Historical cost surplus for the year after taxation

2,812

2,263

Realisation of property revaluation surpluses/(deficits)

Reconciliation of movements in Group’s funds for the year ended 31 March 2013

Opening total funds Total recognised surpluses relating to the year Closing total funds

2013

2012

£’000

£’000

371,292

354,014

80,208

17,278

451,500

371,292

| 27

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Consolidated balance sheet At 31 March 2013 Note

2013

2012

£’000

£’000

Fixed assets Tangible assets Housing properties at valuation

11

915,313

809,725

Other tangible fixed assets

12

28,219

36,768

943,532

846,493

Investments Investment in joint venture: Share of gross assets

13a

57,429

54,963

Share of gross liabilities

13a

(54,395)

(52,049)

3,034

2,914

Investment properties

13b

22,289

15,675

Investments shared equity

13c

172

210

Cost of HomeBuy and Starter Home Initiative

13d

20,018

21,388

Less: Social Housing Grant

13d

(20,018)

(21,388)

-

-

25,495

18,799

969,027

865,292

Investment in Homebuy and Starter Home Initiative:

Total fixed assets Current assets Properties for sale

14

44,632

23,227

Debtors

15

29,289

17,221

Cash at bank and in hand

16

29,767

30,178

103,688

70,626

| 28

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Creditors: amounts falling due within one year

17

Net current assets Total assets less current liabilities

(42,012)

(48,773)

61,676

21,853

1,030,703

887,145

Creditors: amounts falling due after more than one year

18

578,162

515,205

Provision for liabilities

24

1,041

648

579,203

515,853

Capital and reserves Share capital

25

-

-

Revenue reserve

26

44,257

41,301

Restricted reserve

26

212

109

Designated reserve

26

95

-

Revaluation reserve

26

406,936

329,882

451,500

371,292

1,030,703

887,145

Group funds

The notes on pages 31 to 75 form part of these financial statements.

The financial statements were approved by the Board on 12 August 2013 and signed on its behalf by:

Tina Tietjen

Andrew Newell

Henry Potter

Chair

Treasurer

Company Secretary

| 29

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Consolidated cash flow statement For the year ended 31 March 2013 Note

2013

2012

£’000

£’000

5,553

40,513

534

457

(25,484)

(19,829)

(2,085)

(44)

(27,035)

(19,416)

(37)

(46)

(1,896)

(1,000)

(84,692)

(87,864)

(887)

(480)

-

(3)

27,752

10,825

(10)

(10)

Other capital grants

2,751

380

Sales of housing properties

7,129

6,347

116

417

1,405

929

(48,332)

(70,459)

(120)

(343)

Net cash flow from operating activities

30

Returns on investments and servicing of finance Interest received Interest paid Loan issue costs paid Net cash outflow from returns on investments

Corporation tax

Capital expenditure and financial investments Purchase of investment properties Purchase and construction of housing properties Purchase of other tangible fixed assets Purchase of shared equity investment Social Housing Grant received Social Housing Grant repaid

Sales of HomeBuy Sales of Starter Homes Initiatives Cash outflow from capital expenditure and financial investments

Cash outflow from investment in Joint Venture –

| 30

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Triathlon Homes LLP

Cash outflow before financing

(69,971)

(49,751)

250,000

-

-

72,000

(180,126)

(61)

Financing Sterling bond received Housing loans received Housing loans repaid Cash inflow from financing

32

69,874

71,939

(Decrease)/increase in cash in the year

32

(97)

22,188

2013

2012

Note

£’000

£’000

Turnover: continuing activities

3

17,141

16,722

Operating costs

3

(19,134)

(16,722)

(1,993)

-

-

-

(1,993)

-

Parent Income and Expenditure account as at 31 March 2013

Operating deficit: continuing activities Interest payable Deficit for the financial year

The notes on pages 31 to 75 form part of these financial statements.

The financial statements were approved by the Board on 12 August 2013 and signed on its behalf by:

Tina Tietjen

Andrew Newell

Henry Potter

Chair

Treasurer

Group Company Secretary | 31

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Parent balance sheet As at 31 March 2013 Note

2013

2012

£’000

£’000

Investment in subsidiaries

13e

13

-

Fixed assets

12

1,481

1,571

15

8,035

13,398

-

-

8,035

13,398

(9,529)

(12,976)

(1,494)

422

-

1,993

-

-

-

1,993

-

1,993

Current assets Debtors Cash at bank and in hand

Creditors: amounts falling due within one year

17

Net current (liabilities)/assets Total assets less current liabilities

Capital and reserves Share capital Revenue reserve

26

The notes on pages 31 to 75 form part of these financial statements.

The financial statements were approved by the Board on 12th August 2013 and signed on its behalf by:

Tina Tietjen

Andrew Newell

Henry Potter

Chairman

Treasurer

Group Company Secretary | 32

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Notes to the financial statements 1

LEGAL STATUS

The company is registered under the Companies Act 2006 and is a registered charity. The company is also registered with the Homes and Communities Agency.

2

ACCOUNTING POLICIES

Basis of accounting The financial statements of the Group and company are prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) and the Statement of Recommended Practice: Accounting by Registered Social Housing Providers Update 2010) and comply with the Accounting Direction for Private Registered Providers of Social Housing 2012.

The Group has taken true and fair overrides to the requirements of the Companies Act 2006 with regards to Social Housing Grant and Investment and Commercial Property. Further details are given in the relevant accounting policy.

The Group has taken advantage of the exemption to prepare a cash flow statement for the parent company.

Joint Ventures The Group’s interests in joint ventures comprise ventures where there is shared control. The investments in joint ventures are accounted for under gross equity method and are carried in the consolidated balance sheet at the Group’s share of their net assets at the date of acquisition and of their post acquisition retained profits and losses together with any goodwill arising on the acquisition, net of amortisation. The Group’s share of the results of joint ventures is included in the consolidated Income and Expenditure Account. Goodwill comprises the internal recharges of staff directly involved in the purchase of the affordable homes in East Village (the former Athletes Village for the 2012 Olympics and Paralympics.

Goodwill is not amortised until the joint venture’s housing properties are complete and available for letting.

Going Concern The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve months after the date on which the report and financial statements are signed. For this reason, it continues to adopt the going concern basis in the financial statements. Further details are given in the Operating and Financial Review and Board Report on page 17.

Basis of Consolidation The Group accounts consolidate the accounts of the parent Company and all its subsidiaries at 31 March using acquisition accounting and gross equity accounting for the Joint Venture.

| 33

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Turnover Turnover comprises rental income receivable in the year, management fees, income from shared ownership first tranche sales, sales of properties built for sale, and other services included at the invoiced value (excluding VAT) of services supplied in the year, and revenue grants receivable in the year.

Revenue Recognition Rental income is recognised from the point when properties under development reach practical completion or otherwise become available for letting. Rental income is recognised net of rent and service charge losses from voids.

Fee income is receivable when the conditions for receipt of the fees under the relevant contractual agreements have been met.

Income from first tranche sales and sales of properties built for sale is recognised at the point of legal completion of the sale.

Revenue grants are receivable when the conditions for receipt of agreed grant funding have been met.

Supporting People Funding Regime Charges for support services funded under Supporting People are recognised as they fall due under the contractual arrangements with Administering Authorities.

Value Added Tax The Group charges value added tax (VAT) on some of its income and is able to recover part of the VAT it incurs on expenditure. The income and expenditure account includes VAT to the extent that it is suffered by the Group and not recoverable from HM Revenue & Customs.

The balance of VAT payable or recoverable at the year- end is included as a current liability or asset.

Interest Payable Interest is capitalised on borrowings to finance developments to the extent that it accrues in respect of the period of development if it represents either: (a) interest on borrowings specifically financing the development programme after deduction of social housing grant (SHG) in advance; or (b) interest on borrowing of the Group as a whole after deduction of interest on SHG received in advance to the extent that they can be deemed to be financing the development programme.

Other interest payable is charged to the income and expenditure account in the year.

Derivatives The Group uses interest rates swaps to reduce its exposure to future increases in the interest rates on floating rate loans. The notional principal is not reflected in the Groupâ&#x20AC;&#x2122;s balance sheet. Payments made under interest rate swaps are recognised in the payment period and adjusted against interest payable on the loans.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Pensions The Group participates in a funded multi-employer defined benefit scheme, the Social Housing Pension Scheme (SHPS). It has not been possible to identify the share of underlying assets and liabilities belonging to individual participating employers. The income and expenditure charge represents the employer contribution payable to the scheme for the accounting period.

From the 1 April 2008 defined benefit schemes have been closed to new employees and existing employees not already in the scheme; these employees are eligible to contribute to a defined contribution scheme run by the Pension Trust. Employer contributions to the pension scheme are charged to the income and expenditure account as incurred.

Housing Properties Housing properties are principally properties available for rent, shared ownership, rent-now-buy-later and intermediate/market rent.

Completed housing properties in all tenure types are stated at Existing Use Value for Social Housing (EUV-SH). Full revaluations of the properties are undertaken every three years and interim valuations are carried out where there are indications of a significant change in value.

Housing properties under construction are stated at cost less related social housing grant and other capital grants. Cost includes the cost of acquiring land and buildings, development costs, interest charges incurred during the development period and expenditure incurred in respect of improvements.

Works to existing properties which replace a component that has been treated separately for depreciation purposes, along with those works that result in enhancing the economic benefits of the assets, are capitalised as improvements.

Economic benefits are enhanced if works result in an increase in rental income, a reduction in future maintenance costs or a significant extension to the useful economic life of a property.

Shared ownership properties under development are split proportionally between current and fixed assets based on the element relating to expected first tranche sales. The first tranche proportion is classed as a current asset and related sales proceeds included in turnover. The remaining element is classed as fixed asset and included in housing properties at cost, less any provisions needed for depreciation or impairment.

Donated Land Land donated by local authorities and others is added to cost at the market value of the land at the time of the donation. Where the land is not related to a specific development and is donated by a public body, an amount equivalent to the increase in value between market value and cost is added to other grants. Where the donation is from a non public source, the value of the donation is included as income.

Social Housing Grant Social Housing Grant (SHG) is receivable from the Homes & Communities Agency (the HCA) and is utilised to reduce the capital costs of housing properties including land costs. It is allocated to the land and structure components of the associated asset in proportion to their cost. Grant receivable in respect of identifiable components is allocated to those components. | 35

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

SHG due from the HCA or received in advance is included as a current asset or liability.

SHG received in respect of revenue expenditure is credited to the income and expenditure account in the same period as the expenditure to which it relates.

SHG released on sale of a property may be repayable but is normally available to be recycled and is credited to a Recycled Capital Grants Fund or Disposal Proceeds Fund and included in the balance sheet in creditors. SHG repayable in certain circumstances is included as a current liability until it is repaid. The repayment of SHG is generally subordinated to the repayment of housing loans by agreement with the HCA. Where individual components are disposed of and this does not create a relevant event for recycling purposes, any grant which has been allocated to the component is released to the income and expenditure account. Upon disposal of the associated property, the group is required to recycle these proceeds; as such a contingent liability is disclosed to reflect this.

Other Grants Other grants include grants from local authorities and other organisations. Capital grants are utilised to reduce the capital costs of housing properties including land costs. These include amounts attributable to land donated by public authorities. Grants in respect of revenue expenditure are included in the income and expenditure account in the same period as the expenditure to which they relate.

True and Fair Override Under the requirements of the SORP Update 2010, capital grants are shown as a deduction from the cost of housing properties on the balance sheet (see note 11). This is a departure from the rules of the Companies Act 2006 which does not permit income to be set off against assets. In the opinion of the Board it is a relevant accounting policy reflecting the subsidised costs of the assets and is comparable to that adopted by other registered social landlords. It has been adopted in order to present a true and fair view.

Depreciation is not provided on investment properties. This accounting treatment is a departure from the requirements of the Companies Act concerning depreciation of fixed assets. However, since investment properties are not held for consumption, the Board consider that systematic annual depreciation of these properties would be inappropriate and not give a true and fair view on their values as reflected in the financial statements.

Depreciation is only one of the many factors reflected in the annual valuation and the amount which might otherwise have been shown cannot be separately identified or quantified.

Depreciation of Housing Properties Freehold land, shared ownership properties and assets held in the course of completion are not depreciated.

Properties held on leases are amortised over the life of the lease or their estimated useful economic life, if shorter.

The Group separately identifies the major components which comprise its housing properties, and charges depreciation so as to write-down the cost of each component to its estimated residual value, on a straight line basis, over its estimated useful economic life.

Where SHG has been allocated to a component, the depreciable amount is arrived at on the basis of original cost, less the proportion of SHG and other grants attributable to the | 36

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

component, less residual value. Excess grant attributable to structure costs, is allocated to components.

Depreciation is calculated using the valued amount of the property and its components.

Depreciation is charged to the income and expenditure account and the excess of actual depreciation over historic cost is included in the statement of historic cost surpluses and deficits, credited to the revenue reserve and debited against the revaluation reserve.

The Group depreciates the major components of its housing properties over the following years; Component

Years

Kitchens

20

Bathrooms

30

Boilers

15

Other heating systems

30

External doors and windows

30

Roofs

60

Electrical installations

30

Structure

60-150

These useful economic lives apply equally to the Groupâ&#x20AC;&#x2122;s rented and supported housing and care stock of housing properties.

Properties held on leases are amortised over the life of the lease or their estimated useful economic life if shorter.

Impairment Housing properties which are depreciated over a period in excess of 50 years are subject to impairment reviews annually. Other assets are reviewed for impairment if there is an indication that impairment may have occurred.

Any impairment is recognised in the income and expenditure account to the extent of the excess of the assets carrying amount exceeds the recoverable amount. Recoverable amount is the greater of its net realisable value (being the sales value less costs) and value in use. Value in use is after taking into account any planned internal subsidy.

Any impairment arising from a reduction in prior year valuation uplifts is recognised as a reduction in unrealised surplus on the revaluation of housing properties and accounted for within the statement of total recognised surpluses and deficits.

Other Tangible Fixed Assets Other fixed assets include commercial property, investment property, offices, plant and machinery and motor vehicles. All other classes of other tangible fixed assets are stated at cost less depreciation. | 37

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Depreciation is provided evenly on the cost of service charge assets and other tangible fixed assets to write them down to their estimated residual values over their expected useful lives on a straight line basis over the following years: Assets

Years

Freehold offices other than head office

25

Head office

50

Lifts

25

Equipment and furniture

7

Service equipment

5

Motor vehicles

4

IT equipment

3

IT development

5-7

Capitalised works are depreciated in accordance with the Groupâ&#x20AC;&#x2122;s depreciation policy.

Leased Assets Rentals payable under operating leases are charged to the income and expenditure account on a straight-line basis over the lease term.

Properties for Sale (including Shared Ownership Properties) Completed properties for outright sale and properties under construction are valued at the lower of cost and net realisable value. Cost comprises materials, direct labour and direct development overheads. Net realisable value is based on estimated sales price after allowing for all further costs of completion and disposal.

First tranche shared ownership sales are included in turnover. First tranche elements of shared ownership housing properties are disclosed as properties for sale within current assets and are stated at the lower of cost and net realisable value.

Subsequent tranches are dealt with in the same way as fixed asset property sales and shown as a separate item after operating surplus in the Income and Expenditure Account.

Properties for sale within current assets also include other development for sale such as properties for outright sale.

Starter Homes Initiative Where properties built for sale are disposed of during the year, the disposal proceeds are included in turnover, and the attributable costs are included in cost of sales. The Group receives grant via the Homes and Communities Agency to enable key workers to purchase their own homes. The loan is included in Fixed Asset Investments at cost together with the associated grant.

| 38

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Investment and Commercial Property Properties held for their investment potential are accounted for as investment properties under SSAP 19 â&#x20AC;&#x153;accounting for investment propertiesâ&#x20AC;?. These properties are recorded at their current market value and because value is of prime importance, these are not depreciated. Commercial property under construction is recorded at the lower of cost and net realisable value, and on completion will be treated as investment properties. Changes in current market value are taken to the revaluation reserve.

Current asset investments Current assets are stated at the lower of cost and net realisable value. Liquid resources are readily disposable current asset investments. They include some money market deposits, held for more than 24 hours that can only be withdrawn without penalty on maturity or by giving notice of more than one working day.

Taxation The parent company is a registered charity and is registered under the Companies Act 2006 and is not generally subject to Corporation Tax. The majority of the Groupâ&#x20AC;&#x2122;s activities are not subject to Corporation Tax. Any change for taxation is based upon any taxable profit for the year and takes into account deferred tax where applicable.

The subsidiaries East Place Limited, East Regen Limited and East Thames Partnership Limited are subject to Corporation Tax, and other subsidiaries, including East Homes Limited may be liable to Corporation Tax on those activities that are not exempted either through charitable/public benefit objectives or being a registered charity.

Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be estimated reliably.

Finance costs Costs relating to providing sundry services including loan and bond issue costs are deferred and written off over the expected life of the loan and bond.

Reserves The Group establishes restricted reserves for specific purposes where their use is subject to external restrictions in accordance with the wishes of the funder or donor, and designated reserves where reserves are earmarked for a particular purpose.

Revaluation reserves The difference between the market value of investment properties and the historical cost carrying value is credited to the revaluation reserve. When the properties are revalued, the difference between the valuation and carrying value of housing properties is also credited to the revaluation reserve.

| 39

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 3

PARTICULARS OF TURNOVER, COST OF SALES, OPERATING COSTS AND OPERATING SURPLUS 2013

GROUP

Turnover £’000

2012

Cost of Sale

Operating cost

£’000

£’000

Operating surplus/ (deficit)

Turnover £’000

Cost of Sale

Operating cost

£’000

£’000

£’000

Operating surplus/ (deficit) £’000

82,386

-

57,930

24,456

79,052

-

57,657

21,395

Regeneration and development services

5,049

-

3,302

1,747

3,502

-

3,386

116

Community involvement

1,081

-

2,281

(1,200)

2,320

-

3,212

(892)

Support charges- fixed contracts

4,379

-

4,379

-

5,316

-

5,316

-

First tranche shared ownership sales

8,585

7,230

-

1,355

1,259

1,150

-

109

Sales of properties developed for sale to other Registered Providers

-

-

-

-

113

113

-

-

Impairment on schemes in the course of development

-

-

1,700

(1,700)

-

-

747

(747)

-

-

2,355

(2,355)

Social housing lettings: Other social housing activities:

Litigation costs Service Optimisation Abortive costs

Total – social housing activities

830

-

4,746

(3,916)

990

-

2,406

(1,416)

-

-

140

(140)

-

-

24

(24)

19,924

7,230

16,548

(3,854)

13,500

1,263

17,446

(5,209)

102,310

7,230

74,478

20,602

92,552

1,263

75,103

16,186

| 40

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 2013 GROUP

Turnover £’000

2012

Cost of Sale

Operating cost

£’000

£’000

Operating surplus/ (deficit)

Turnover £’000

Cost of Sale

Operating cost

£’000

£’000

£’000

Operating surplus/ (deficit) £’000

Non-social housing activities Development for sale – outright sales

6,412

3,518

1,377

1,517

247

102

-

145

Donation

-

-

-

-

67

-

-

67

Impairment on investment properties

-

-

1,341

(1,341)

-

-

144

(144)

Impairment on investment in shared equity

-

-

67

(67)

-

-

-

-

Commercial rent

1,024

-

848

176

976

-

681

295

Total non-social housing activities

7,436

3,518

3,633

285

1,290

102

825

363

109,746

10,748

78,111

20,887

93,842

1,365

75,928

16,549

14,607

-

15,251

(644)

14,490

-

16,722

(2,232)

1,626

-

3,883

(2,257)

1,412

-

-

1,412

Gift aid

266

-

-

266

-

-

-

-

Commercial rent

315

-

-

315

280

-

-

280

Other

327

-

-

327

540

-

-

540

Total

17,141

-

19,134

(1,993)

16,722

-

16,722

-

Total

PARENT Other income and expenditure Group recharge Donation received from Group member

| 41

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

4

PARTICULARS OF INCOME AND EXPENDITURE FROM SOCIAL HOUSING LETTINGS

GROUP

Housing accommod ation

Foyers £’000

Supported housing £’000

£’000 Rent receivable net of identifiable service charges

Residential care homes

Temporary social housing

Shared ownership & RNBL

£’000

£’000

£’000

Affordable living

2013

2012

£’000

£’000

£’000

42,050

2,595

3,211

431

-

12,871

552

61,710

58,739

1,932

1,383

1,681

-

-

1,790

40

6,826

6,313

-

-

2,246

-

-

-

-

2,246

2,458

164

-

3,569

4,773

-

2

-

8,508

8,178

Nomination Fees

-

-

-

-

-

21

-

21

-

Sales & Marketing fees

-

-

-

-

-

-

-

-

435

1,830

-

761

2

-

480

2

3,075

2,929

45,976

3,978

11,468

5,206

-

15,164

594

82,386

79,052

1,860

1,243

1,913

4

-

1,808

40

6,868

6,422

11,619

831

3,825

443

-

4,135

178

21,031

22,040

Support

-

-

4,130

4,758

-

-

-

8,888

9,066

Rent payable to landlords

-

-

217

-

-

1,294

-

1,511

1,822

Routine maintenance

5,240

517

675

-

-

941

19

7,392

6,782

Planned maintenance

3,712

291

736

-

-

198

5

4,942

5,338

Revenue element of major repairs expenditure

294

59

152

-

-

2

-

507

(291)

Rent losses from bad debts

469

-

31

1

(28)

21

-

494

516

Service charge income Support charges – resident subsidy Revenue grants from local authorities and other agencies

Other income Turnover from social housing lettings Service charge costs Management

| 42

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 Housing properties depreciation

5,778

-

-

-

-

519

-

6,297

5,962

Operating costs on social housing lettings

28,972

2,941

11,679

5,206

(28)

8,918

242

57,930

57,657

Operating surplus/(deficit) on social housing lettings

17,004

1,037

(211)

-

28

6,246

352

24,456

21,395

480

272

398

-

-

651

34

1,835

1,416

Void losses

5

SALES OF FIXED ASSETS – HOUSING PROPERTIES

GROUP

Sales proceeds £’000

Carrying value of fixed assets

Social housing grant

Social housing grant repaid

£’000

Transfer to RCGF & DPF

£’000

2013

2012

Surplus £’000

Surplus £’000

£’000 Sales of older and shared ownership properties Homebuy Starter Homes Initiative – current year sales

7,129

2,436

1,979

-

2,714

2,171

116

9

82

-

25

138

1,405

-

1,202

10

193

132

8,650

2,445

3,263

10

2,932

2,441

| 43

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 6

UNITS OF ACCOMMODATION IN MANAGEMENT

2013

2012

7,645

7,515

132

34

Supported housing and housing for older people

1,786

1,638

Low cost home (shared) ownership

1,659

1,512

430

381

Social Homebuy

21

18

Intermediate rent

410

410

12,083

11,508

80

80

115

111

-

17

195

208

12,278

11,716

Offices and community centres

102

89

Market and commercial rent

101

115

Garages and parking bays

629

759

Long leased

110

-

7

22

Static Homebuy

50

52

Freehold services

39

20

Playgrounds

21

52

Social housing owned Social rents Affordable Housing

Rent now buy later

Total owned

Accommodation managed for others General housing Supported housing and housing for older people Temporary social housing Total accommodation managed for others Total social housing managed

Non social housing owned

Units unavailable for letting

| 44

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Open Spaces

47

41

-

13

1,106

1,163

5

5

Market & commercial rent

159

142

Long leased properties

742

770

-

4

Homebuy

290

294

Starter Home Initiatives

335

369

Fixed equity

38

38

Management duties only

72

346

216

217

9

1

Total accommodation managed for others

1,866

2,186

Total non social housing managed

2,972

3,349

Total social and non social housing

15,250

15,065

Other Total owned

Accommodation managed for others Offices and community centres

Open Spaces

Support services only Other

7

OPERATING SURPLUS

The operating surplus is arrived at after charging:

Group 2013

Group 2012

Parent 2013

Parent 2012

£’000

£’000

£’000

£’000

Depreciation of housing properties

6,297

5,962

-

-

Depreciation of other fixed assets

1,661

1,934

708

996

Impairment on schemes in the course of development

1,700

747

-

-

Impairment on investment properties

1,341

144

-

-

67

-

-

-

Impairment on shared equity

| 45

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Operating leases on land and buildings

1,421

1,421

-

-

Fees payable to the Company’s auditor for the audit of the financial statements

14

15

14

15

Audit of the financial statements of the Company’s subsidiaries pursuant to legislation

63

61

-

-

Fees payable to the Company’s auditor for other audit related assurance services

30

70

-

-

8

NET INTEREST PAYABLE AND SIMILAR CHARGES

2013

2012

£’000

£’000

534

418

(25,484)

(20,092)

(24,950)

(19,674)

Interest payable capitalised on housing properties under construction

2,494

1,510

Interest payable capitalised on commercial properties under construction

1,332

131

(49)

(34)

(572)

(92)

(21,745)

(18,159)

5%

5%

Interest receivable Interest payable on loans and leases: - repayable in more than five years

Interest receivable transferred to the RCGF/DPF Amortisation of loan issue costs

Capitalisation rate used to determine the finance costs during the period

| 46

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 9

EMPLOYEES

Group 2013

Group 2012

Parent 2013

Parent 2012

Administration

436

477

134

125

Care staff

378

400

-

-

814

877

134

125

Group

Group 2012

Parent

Parent 2012

Number of employees expressed in full-time equivalents at end of year

2013 £’000

2013

£’000

£’000

£’000

Staff costs Wages and salaries

21,576

23,040

5,036

4,675

Social Security costs

2,170

2,272

536

483

Other pension costs

1,673

1,677

706

621

25,419

26,989

6,278

5,779

Staff remuneration by bands – Includes directors Pay Band

Number of staff

Number of staff

2013

2012

150,001 to 160,000

1

-

140,001 to 150,000

-

1

130,001 to 140,000

1

-

120,001 to 130,000

3

4

110,001 to 120,000

-

-

100,001 to 110,000

-

-

90,001 to 100,000

4

3

80,001 to 90,000

7

4

70,001 to 80,000

1

6

£

| 47

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Pay Band

Number of staff

Number of staff

2013

2012

16

17

33

35

2013

2012

£’000

£’000

Gross salary highest earner

151

150

Gross salary lowest earner

14

14

1:11

1:11

£ 60,000 to 70,000 Total

Ratio of highest to lowest earners

Ratio NHS Pension Scheme

East Thames Group Limited employs 11 staff who are members of the NHS Pension Scheme. Employees pay contributions averaging 6.31% and East Thames Group Limited pay contributions of 14%.

The estimated contribution for 2013/14 is £36k.

The NHS Pension Scheme is a statutory scheme, with benefits fully guaranteed by the Government. Contributions from both members and employers are paid to the Exchequer, which meets the cost of the scheme benefits. The Exchequer also pays for the costs of increasing benefits each year by the rate of inflation. This extra cost is not met by contributions from scheme members or employers.

Social Housing Pension Scheme (SHPS) East Thames Group Limited participates in SHPS (the Scheme). The Scheme is funded and is contracted out of the State Pension Scheme.

SHPS is a multi-employer defined benefit scheme. Employer participation in the Scheme is subject to adherence with the employer responsibilities and obligations as set out in the ‘SHPS House Policies and Rules Employer Guide’.

The Scheme operated a single benefit structure, final salary with a 1/60th accrual rate until 31 March 2007. From April 2007 there are three benefit structures available, namely: Final salary with a 1/60th accrual rate.

Final salary with a 1/70th accrual rate.

Career average revalued earnings (CARE) with a 1/60th accrual rate. | 48

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

From April 2010 there are a further two benefit structures available, namely: Final salary with a 1/80th accrual rate.

Career average revalued earnings (CARE) with a 1/80th accrual rate.

A defined contribution benefit structure was made available from 1 October 2010.

An employer can elect to operate different benefit structures for their active members and their new entrants. An employer can only operate one open defined benefit structure at any one time. An open benefit structure is one which new entrants are able to join.

East Thames Group Limited has operated the final salary with a 1/60th accrual rate for active members as at 31 March 2008.

The Trustee commissions an actuarial valuation of the Scheme every three years. The main purpose of the valuation is to determine the financial position of the Scheme in order to determine the level of future contributions required, in respect of each benefit structure, so that the Scheme can meet its pension obligations as they fall due. From April 2007 the split of the total contribution rate between member and employer is set at individual employer level, subject to the employer paying no less than 50% of the total contribution rate. From 1 April 2010 the requirement for employers to pay at least 50% of the total contribution rate no longer applies.

The actuarial valuation assesses whether the Scheme’s assets at the valuation date are likely to be sufficient to pay the pension benefits accrued by members as at the valuation date. Asset values are calculated by reference to market levels. Accrued pension benefits are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns.

During the accounting period East Thames Group Limited paid contributions at the rate of 8.2%. Member contributions varied between 8% and 10%.

As at the balance sheet date there were 186 active members of the Scheme employed by East Thames Group Limited. The annual pensionable payroll in respect of these members was £7.45 million.

It is not possible in the normal course of events to identify on a consistent and reasonable basis the share of underlying assets and liabilities belonging to individual participating employers. This is because the Scheme is a multi-employer Scheme where the Scheme assets are co-mingled for investment purposes, and benefits are paid from total Scheme assets. Accordingly, due to the nature of the Scheme, the accounting charge for the period under FRS17 represents the employer contribution payable.

The last formal valuation of the Scheme was performed as at 30 September 2011 by a professionally qualified Actuary using the Projected Unit Method. The market value of the Scheme’s assets at the valuation date was £2,062 million. The valuation revealed a shortfall of assets compared with the value of liabilities of £1,035 million, equivalent to a past service funding level of 67.0%.

The Scheme Actuary has prepared an Actuarial Report that provides an approximate update of the funding position of the Scheme as at 30 September 2012. Such a report is required by legislation for years in which a full actuarial valuation is not carried out. The market value of the Scheme’s assets at the date of the Actuarial report was £2,327 million. The Actuarial

| 49

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Report revealed a shortfall of assets compared with the value of liabilities of £1,241 million, equivalent to a past service funding level of 65%.

The financial assumptions underlying the valuation as at 30 September 2011 were as follows: Valuation Discount Rates:

% p.a.

Pre-Retirement

7.0

Non Pensioner Post Retirement

4.2

Pensioner Post Retirement

4.2

Pensionable Earnings Growth Price Inflation

2.5 per annum for 3 years, then 4.4 2.9

Pension Increases: Pre 88 GMP

0.0

Post 88 GMP

2.0

Excess Over GMP

2.4

Expenses for death-in-service insurance, administration and Pension Protection Fund (PPF) levy are included in the contribution rate.

The valuation was carried out using the following demographic assumptions: Mortality pre-retirement – 41% SAPS S1 Male / Female All Pensioners (amounts), Year of Birth, CMI_2009 projections with long term improvement rates of 1.5% p.a. for Males and 1.25% p.a. for Females Mortality post retirement – 97% SAPS S1 Male / Female All Pensioners (amounts), Year of Birth, CMI_2009 projections with long term improvement rates of 1.5% p.a. for Males and 1.25% p.a. for Females

| 50

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

The long-term joint contribution rates required from April 2013 from employers and members to meet the cost of future benefit accrual were assessed at: Benefit Structure

Long-term Joint Contribution Rate (% of pensionable salaries)

Final salary with a 1/60th accrual rate

19.4

Final salary with a 1/70th accrual rate

16.9

Career average revalued earnings (CARE) with a 1/60th accrual rate

18.1

Final salary with a 1/80th accrual rate

14.0

Career average revalued earnings (CARE) with a 1/80th accrual rate

9.7

If an actuarial valuation reveals a shortfall of assets compared to liabilities the Trustee must prepare a Recovery Plan setting out the steps to be taken to make up the shortfall.

Following consideration of the results of the actuarial valuation it was agreed that the shortfall of £1,035 million would be dealt with by the payment of deficit contributions as shown in the table below: From 1 April 2013 to 30 September 2020

A cash amount (*) equivalent to 7.5% of Members’ Earnings per annum (payable monthly and increasing by 4.7% per annum each 1 April)

From 1 October 2020 to 30 September 2023

A cash amount (*) equivalent to 3.1% of Members’ Earnings per annum (payable monthly and increasing by 4.7% per annum each 1 April)

From 1 April 2013 to 30 September 2026

£30,640,000 per annum (payable monthly and increasing by 3% per annum each 1 April; first increase on 1 April 2014)

(*) The contributions of 7.5% will be expressed in nominal pound terms (for each Employer), increasing each year in line with the Earnings growth assumption used in the 30 September 2008 valuation (i.e. 4.7% per annum). The contributions of 3.1% will be calculated by proportioning the nominal pound payment at the time of the change. Earnings at 30 September 2008 (for each Employer) will be used as the reference point for calculating these contributions.

These deficit contributions are in addition to the long-term joint contributions rates as set out in the table on page 47.

The Scheme Actuary will provide an approximate update on the funding position of the Scheme as at 30 September 2013. Such a report is required by legislation for years in which a full actuarial valuation is not carried out. The results of this approximate update will be available in spring 2014 and will be included in next year’s Disclosure Note.

Employers that participate in the Scheme on a non-contributory basis pay a joint contribution rate (i.e. a combined employer and employee rate). | 51

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Employers that have closed the defined benefit section of the Scheme to new entrants are required to pay an additional employer contribution loading of 2.5% to reflect the higher costs of a closed arrangement.

A small number of employers are required to contribute at a different rate to reflect the amortisation of a surplus or deficit on the transfer of assets and past service liabilities from another pension scheme into SHPS. New employers that do not transfer any past service liabilities to the Scheme pay contributions at the ongoing future service contribution rate. This rate is reviewed at each valuation and new employers joining the Scheme between valuations up until 1 April 2010 do not contribute towards the deficit until two valuations have been completed after their date of joining. New employers joining the Scheme after 1 April 2010 will be liable for past service deficit contributions from the valuation following joining. Contribution rates are changed on the 1 April that falls 18 months after the valuation date.

A copy of the Recovery Plan, setting out the level of deficit contributions payable and the period for which they will be payable, must be sent to The Pensions Regulator. The Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/or Recovery Plan are inappropriate. For example, the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Scheme liabilities and hence impact on the Recovery Plan) or impose a schedule of contributions on the Scheme (which would effectively amend the terms of the Recovery Plan). A response regarding the 30 September 2011 valuation is awaited.

As a result of pension scheme legislation there is a potential debt on the employer that could be levied by the Trustee of the Scheme. The debt is due in the event of the employer ceasing to participate in the Scheme or the Scheme winding up.

The debt for the Scheme as a whole is calculated by comparing the liabilities for the Scheme (calculated on a buy-out basis, i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Scheme. If the liabilities exceed assets there is a buy-out debt.

The leaving employer’s share of the buy-out debt is the proportion of the Scheme’s liability attributable to employment with the leaving employer compared to the total amount of the Scheme’s liabilities (relating to employment with all the currently participating employers).

The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Scheme liabilities, Scheme investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buy-out market. The amounts of debt can therefore be volatile over time.

East Thames Group Limited has been notified by The Pensions Trust of the estimated employer debt on withdrawal from SHPS based on the financial position of the Scheme as at 30th September 2012. As of this date the estimated employer debt for East Thames Group Limited was £66.5 million.

The estimated contributions for the 2013/14 year are £1.5m to the final defined benefit scheme and £0.2m to the defined contribution scheme.

| 52

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Growth Plan East Thames Group Ltd participates in The Pensions Trust’s Growth Plan (the Plan). The Plan is funded and is not contracted-out of the State scheme. The Plan is a multi-employer pension plan.

Contributions paid into the Plan up to and including September 2001 were converted to defined amounts of pension payable from Normal Retirement Date. From October 2001 contributions were invested in personal funds which have a capital guarantee and which are converted to pension on retirement, either within the Plan or by the purchase of an annuity.

The rules of the Plan allow for the declaration of bonuses and/or investment credits if this is within the financial capacity of the Plan assessed on a prudent basis. Bonuses/investment credits are not guaranteed and are declared at the discretion of the Plan’s Trustee.

The Trustee commissions an actuarial valuation of the Plan every three years. The purpose of the actuarial valuation is to determine the funding position of the Plan by comparing the assets with the past service liabilities as at the valuation date. Asset values are calculated by reference to market levels. Accrued past service liabilities are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns.

The rules of the Plan give the Trustee the power to require employers to pay additional contributions in order to ensure that the statutory funding objective under the Pensions Act 2004 is met. The statutory funding objective is that a pension scheme should have sufficient assets to meet its past service liabilities, known as Technical Provisions.

If the actuarial valuation reveals a deficit, the Trustee will agree a recovery plan to eliminate the deficit over a specified period of time either by way of additional contributions from employers, investment returns or a combination of these.

The rules of the Plan state that the proportion of obligatory contributions to be borne by the member and the member’s employer shall be determined by agreement between them.

Such agreement shall require the employer to pay part of such contributions and may provide that the employer shall pay the whole of them.

East Thames Group Ltd does not pay contributions to the Growth Plan. Members paid contributions at the rate of their choice.

It is not possible in the normal course of events to identify on a reasonable and consistent basis the share of underlying assets and liabilities belonging to individual participating employers. The Plan is a multi-employer scheme where the Plan assets are co-mingled for investment purposes, and benefits are paid from the total Plan assets. Accordingly, due to the nature of the Plan, the accounting charge for the period under FRS17 represents the employer contribution payable.

The valuation results at 30 September 2011 were completed in 2012 and have been formalised. The valuation of the Plan was performed by a professionally qualified Actuary using the Projected Unit Method. The market value of the Plan’s assets at the valuation date was £780 million and the Plan’s Technical Provisions (i.e. past service liabilities) were £928 million. The valuation therefore revealed a shortfall of assets compared with the value of liabilities of £148 million, equivalent to a funding level of 84%.

The financial assumptions underlying the valuation as at 30 September 2011 were as follows:

| 53

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 % Per annum

Investment return pre-retirement

4.9

Investment return post-retirement Actives / deferreds

4.2

Pensioners

4.2

Bonuses on accrued benefits

0.0

Inflation: Retail Prices Index (RPI)

2.9

Inflation: Consumer Price Index (CPI)

2.4

In determining the investment return assumptions the Trustee considered advice from the Scheme Actuary relating to the probability of achieving particular levels of investment return.

The Trustee has incorporated an element of prudence into the pre and post retirement investment return assumptions; such that there is a 60% expectation that the return will be in excess of that assumed and a 40% chance that the return will be lower than that assumed over the next 10 years.

The Scheme Actuary has prepared a funding position update as at 30th September 2012.

The market value of the Plan’s assets at that date was £790 million and the Plan’s Technical Provisions (i.e. past service liabilities) was £984 million. The update, therefore, revealed a shortfall of assets compared with the value of liabilities of £194 million, equivalent to a funding level of 80%.

If an actuarial valuation reveals a shortfall of assets compared to liabilities, the Trustee must prepare a recovery plan setting out the steps to be taken to make up the shortfall.

The Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/or recovery plan are inappropriate. For example the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Plan liabilities and hence impact on the recovery plan) or impose a schedule of contributions on the Plan (which would effectively amend the terms of the recovery plan). A copy of the recovery plan in respect of the September 2011 valuation was forwarded to The Pensions Regulator on 2 October 2012, as is required by legislation.

Following a change in legislation in September 2005 there is a potential debt on the employer that could be levied by the Trustee of the Plan and The Pensions Act 2011 has more recently altered the definition of Series 3 of the Growth Plan so that a liability arises to employers from membership of any Series except Series 4. The debt is due in the event of the employer ceasing to participate in the Plan or the Plan winding up.

The debt for the Plan as a whole is calculated by comparing the liabilities for the Plan (calculated on a buy-out basis i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Plan. If the liabilities exceed assets there is a buy-out debt.

The leaving employer’s share of the buy-out debt is the proportion of the Plan’s liability attributable to employment with the leaving employer compared to the total amount of the Plan’s liabilities (relating to employment with all the currently participating employers). The | 54

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Plan liabilities, Plan investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buy-out market. The amounts of debt can therefore be volatile over time.

When an employer withdraws from a multi-employer defined benefit pension scheme which is in deficit, the employer is required by law to pay its share of the deficit, calculated on a statutory basis (known as the buy-out basis). The calculation basis that applies to the Growth Plan was amended due to a change in the definition of money purchase contained in the Pensions Act 2011 but the regulations that will determine exactly how the change will apply in practice are still awaited. As the law stands, it is not yet clear whether the statutory calculation should include or exclude Series 3 liabilities. However, based upon current advice, the most likely interpretation is that Series 3 liabilities will have to be included in the calculation of an employer’s debt on withdrawal.

Owing to this situation, we have included 2 figures/calculations, namely: 

The cost of withdrawal if we include Series 3 liabilities in the calculation



The cost of withdrawal if we exclude Series 3 liabilities from the calculation

If an employer withdraws from the Growth Plan prior to the implementation of the regulations, the debt will be calculated on both bases and The Pensions Trust would request payment of the higher amount with any adjustment being made when the regulations are implemented.

East Thames Group Ltd has been notified by The Pensions Trust of the estimated employer debt on withdrawal from the Plan based on the financial position of the Plan as at 30 September 2012. As of this date the estimated employer debt for East Thames Group Ltd was £147,129.

The estimated contribution for the 2013/14 year is £380k.

| 55

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 10

DIRECTORS EMOLUMENTS

The Directors are defined as the members of the Group Board, including the Chief Executive and any member of the Group Executive team (Executive Directors).

Group Board & Committee members Fees payable to the 7 Group Board members totalled £42k (2012: £61k). In addition, expenses reimbursed to members totalled £13k (2012: £14k).

Remuneration payable to the 4 committee members for the year amounted to £13k (2012: £11k).

Executive Directors Remuneration payable to executive directors for management services totalled £758k.

(2012: £700k). The sum includes compensation for loss of office totalling £109k.

The emolument of the highest paid director, the Chief Executive, excluding pension contributions but including benefits in kind was £152k (2012: £151k).

The Chief Executive is an ordinary member of the SHPS pension scheme and has a contractual arrangement with East Thames Group Limited covering additional voluntary contributions (AVCs).

There are no other enhanced pension arrangements to which East Thames Group or any of its subsidiaries make a contribution.

Chief Executive and Chairperson’s remuneration on a £ per social housing unit basis Gross salary

No of units

£’000

Chief Executive Chairperson

10a

Cost per unit

Cost per unit

2013

2012

£

£

152

12,278

12.38

12.89

16

12,278

1.30

1.37

EXECUTIVE DIRECTORS AND THEIR EMOLUMENTS

Total 2013

Total 2012

£’000

£’000

Chief Executive

152

151

Other Executive Directors

474

432

Pensions contributions

132

117

Total

758

700

Aggregate emoluments payable to executive directors

| 56

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 11

TANGIBLE FIXED ASSETS – HOUSING PROPERTIES

Housing properties held for letting

Housing properties under construction

£’000

£’000

Shared ownership and rent to buy properties held for letting

Shared ownership and rent to buy properties under construction

£’000

£’000

Total £ ’000

Valuation/Costs At 1 April 2012

616,459

111,562

144,079

25,103

897,203

Additions

4,232

53,714

859

16,863

75,668

Tenure change transfers

(116)

(7,709)

116

9,427

1,718

Transfer to properties for sale

(213)

(2,880)

(9,049)

(3,249)

(15,391)

Works to existing properties

3,777

-

18

-

3,795

-

1,403

-

1,091

2,494

Schemes completed

79,915

(79,915)

36,160

(36,160)

-

Disposals

(376)

-

(3,917)

-

(4,293)

Redevelopment Transfer

(223)

132

-

47

(44)

Valuation adjustment

5,404

-

(6,196)

-

(792)

708,859

76,307

162,070

13,122

960,358

-

3,880

-

-

3,880

Depreciation charged in year

5,778

-

519

-

6,297

Tenure change transfer

(71)

-

71

-

-

-

1,700

-

-

1,700

Interest capitalised

As at March 2013 Depreciation and impairment As at 1 April 2012

Impairment provision in year

| 57

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Released on disposal

(43)

-

(2)

-

(45)

Redevelopment Transfer

(44)

-

-

-

(44)

(5,620)

-

(588)

-

(6,208)

-

5,580

-

-

5,580

-

74,668

-

8,930

83,598

11,883

13,474

4,256

1,588

31,201

(42)

(4,564)

42

4,564

-

-

(360)

-

-

(360)

Schemes completed

51,100

(51,100)

7,735

(7,735)

-

Disposals

(176)

-

(1,692)

-

(1,868)

(62,765)

-

(10,341)

-

(73,106)

-

32,118

-

7,347

39,465

At 31 March 2013

708,859

38,609

162,070

5,775

915,313

At 31 March 2012

616,459

33,014

144,079

16,173

809,725

Valuation adjustment At 31 March 2013 Social housing and other grants At 1 April 2012 Additions Tenure change transfers Transfer to properties for sale

Valuation adjustment At 31 March 2013 Net book value

2013

2012

£’000

£’000

939

623

2,856

2,434

507

(291)

4,302

2,766

Expenditure on works to existing properties Amount capitalised Components capitalised Amounts (credited) / charged to income and expenditure account

| 58

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

2013

2012

£’000

£’000

616,508

588,105

175

160

616,683

588,265

2013

2012

£’000

£’000

914,958

809,370

355

355

915,313

809,725

Total accumulated capital and revenue social grant receivable Capital grants Revenue grants

Housing properties comprise: Freehold land and buildings Long leasehold land and buildings

Valuation Completed housing properties held for letting are stated at Existing Use Value for Social Housing (EUV-SH) and shared ownership properties and Rent Now Buy Later (RNBL) are stated at EUV-SH less the Net Present Liability to repay Social Housing Grant. Housing properties have been valued by professional valuers, FPD Savills, Chartered Surveyors.

The last valuation of completed housing properties was prepared as at 31 March 2013 in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. The analysis of the carrying value of housing properties, split between valuation and cost is as follows: £’000 Completed properties at valuation East Homes Limited

870,929

Housing properties under construction at cost East Homes Limited

44,384 915,313

In the valuing of housing properties, discounted cash flow methodology was adopted and key assumptions included. | 59

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Discount rate (real)

5.5%

Long term (real) annual inflation rate

2.5%

Level of annual rent increase

0.5%

The carrying value of the housing properties that would have been in the financial statements had the assets been carried forward at historical costs less SHG, depreciation and impairment is as follows: 2013

2012

£’000

£’000

Historical cost

1,225,555

1,161,262

Social housing grant

(616,508)

(588,105)

Other capital grants

(41,482)

(40,912)

Depreciation and impairment

(58,211)

(51,458)

509,354

480,787

Impairment The Group considers individual boroughs to be separate Income Generating Units (IGUs) when assessing for impairment, in accordance with the requirements of Financial Reporting Standard (“FRS”) 11- Impairment of Fixed Assets and Goodwill.

During the year the Group recognised impairment of £1,700k (2012: £747k) on properties held at valuation using the value in use methodology at a discount rate of 5.5% on development schemes. The most significant impairment of £1,100k relates to a development scheme at Chobham Farm, London E10, where the acquisition cost was increased as a result of settling planning and profit overages with the vendor. A further development scheme at Bromley-by-Bow, London E3, which is jointly owned with another Registered Provider, has been impaired by £600k as a result of an anticipated negative return on the Group’s share of the affordable homes on this site.

| 60

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 12

TANGIBLE FIXED ASSETS – OTHER

GROUP

Freehold office £’000

Furniture & equipment

IT equipment £’000

£’000

IT software developm ent

Motor vehicles

Total £’000

£’000

£’000 Cost At 1 April 2012 Additions Transfers in the year Disposals At 31 March 2013

38,571

5,255

4,548

4,307

68

52,749

(7)

282

55

557

-

887

(7,673)

(102)

-

-

-

(7,775)

(72)

(289)

-

-

-

(361)

30,819

5,146

4,603

4,864

68

45,500

(3,705)

(3,892)

(4,527)

(3,789)

(68)

(15,981)

(952)

(369)

(26)

(314)

-

(1,661)

72

289

-

-

-

361

(4,585)

(3,972)

(4,553)

(4,103)

(68)

(17,281)

26,234

1,174

50

761

-

28,219

34,866

1,363

21

518

-

36,768

Depreciation At 1 April 2012 Charged in year Disposals At 31 March 2013 Net book value at 31 March 2013 At 31 March 2012

| 61

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

PARENT

Furniture & equipment

IT equipment £’000

£’000

IT software development

Total £’000

£’000

Cost At 1 April 2012

4,170

4,547

4,307

13,024

Additions

6

55

557

618

4,176

4,602

4,864

13,642

(3,139)

(4,525)

(3,789)

(11,453)

(368)

(26)

(314)

(708)

At 31 March 2013

(3,507)

(4,551)

(4,103)

(12,161)

Net book value at 31 March 2013

669

51

761

1,481

At 31 March 2012

1,031

22

518

1,571

At 31 March 2013 Depreciation At 1 April 2012 Charged in year

| 62

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 13

INVESTMENTS AND RELATED PARTY TRANSACTIONS

East Thames Group Ltd is a registered provider and registered charity registered under the Companies Act 2006. The parent and all subsidiaries are registered in England and Wales.

Main operational subsidiaries: East Homes Limited

Registered Provider and a charitable Industrial and Provident Society that provides social housing including lowcost home ownership.

Company limited by shares, 14 issued shares, one held

by East Thames Group Limited

East Living Limited

Charitable Industrial and Provident Society that provides care and supported housing.

Company limited by shares, 8 issued shares, one held by East Thames Group Limited

East Potential Limited

Registered charity that manages foyers and neighbourhood regeneration programmes on behalf of the Group.

Company limited by guarantee with eight members, one being East Thames Group Limited

East Thames Group Limited exercises control over the above subsidiaries and these subsidiaries are consolidated as though 100% owned. The remaining shares in these subsidiaries are held by the Board members and independent shareholders, which provide them with the right to vote at general meetings but do not provide them with any rights to dividends, redemption of share capital or distribution on winding up.

Other subsidiaries providing specialist and support services: East Regen Limited

Non-charitable company that provides management and development services.

Company limited by shares.

100% shares held by East Thames Group Limited

East Place Limited

Non-charitable company that undertakes commercial activities and a subsidiary of East Homes Limited.

Company limited by shares, single share held by East Homes Limited

East Treasury Limited

Non-charitable company that raises finance and provides treasury services.

Company limited by shares.

100% shares held by East Thames Group Limited

East Finance Plc

Non-charitable company that raises finance and provides treasury services.

Company limited by shares.

100% shares held by East Thames Group Limited

Non-charitable company that undertakes commercial activities and a subsidiary of East Homes Limited.

Company limited by shares.

100% shares held by East Homes Limited

Incorporated 09 March 2012 East Thames Partnership Limited Incorporated 18 March 2003

East Thames Group Limited exercises control through the power to appoint and remove Directors/Trustees to the Boards.

The Group has the following investments:

| 63

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

a) Joint venture - Triathlon Homes LLP East Place Ltd, a wholly owned subsidiary of East Homes Ltd, and which in turn is controlled

by East Thames Group, has a 33% interest in Triathlon Homes LLP, a joint venture company. Triathlon Homes LLP is considered to be a joint venture on the basis that neither the Group nor the other members can control that entity. Decisions essential to the financial and operating policy of the entity require each party’s consent.

The following represents the Group’s share of the joint venture’s assets and liabilities at 31 March 2013:

Fixed assets Current assets

Goodwill

Creditors: amounts falling due within one year Creditors: amounts falling due after more than one year

Members capital loan

2013

2012

£’000

£’000

45,913

43,618

9,700

9,727

55,613

53,345

1,816

1,618

57,429

54,963

(2,731)

(385)

(52,164)

(52,164)

(54,895)

(52,549)

500

500

-

-

(54,395)

(52,049)

Accrued interest

Details of the Group’s transactions during the year with Triathlon Homes LLP are included as follows: 2013

2012

£’000

£’000

198

343

5,245

4,024

1/3rd share of profit before taxation of Triathlon Homes LLP

(79)

810

1/3rd share of profit after taxation of Triathlon Homes LLP

(79)

810

Investment by East Thames Group Limited in Triathlon Homes LLP 1/3rd share of turnover of Triathlon Homes LLP

b) Investment Properties | 64

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Investment properties completed

Investment properties under construction

£’000

£’000

At 1 April 2012

11,899

3,776

15,675

Transfers in the year

7,673

-

7,673

Additions

889

1,108

1,997

Tenure change

-

(1,718)

(1,718)

Impairment

(1,341)

-

(1,341)

Valuation adjustment

3

-

3

At 31 March 2013

19,123

3,166

22,289

At 31 March 2012

11,898

3,776

15,674

GROUP

Total £’000

Cost / Valuation

Investments are carried in the Financial Statements at market value. The historical cost of these properties is £21.3m (2012: £14.7m).

Impairment A further impairment charge of £1.3m is recognised in respect of floors 4 and 5 of the Association’s head office at West Ham Lane. c) Investments Shared Equity To progress modernisation of the Ocean Estate several properties were decanted. In two cases an incentive payment in the form of a loan was made to the leasehold tenants to cover the shortfall in the purchase price of a new property. The full purchase price at the two properties was £717k; East Thames Group provided a shared equity loan of £203k plus expenses under the same principles as the HomeBuy scheme.

Cost

2013

2012

£’000

£’000

172

210

172

210

Impairment During the year an impairment charge of £67k has been recognised on one of the shared equity properties. The latest independent valuation for this property is £79k against a former book value of £147k. The difference of £67k, which is primarily due to weakness in the commercial property market, is considered to be an impairment and has been recognised as such.

| 65

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

d) Investment in HomeBuy and Starter Home Initiative 2013

2012

£’000

£’000

Long term investment in properties

21,388

22,552

Decrease in investment in properties

(1,370)

(1,164)

Cost of HomeBuy and Starter Home Initiative

20,018

21,388

(20,018)

(21,388)

-

-

Less: Social Housing Grant

e) Investments in subsidiaries

East Finance plc

Group

Parent

2013

2013

£’000

£’000

-

13

f) Related party transactions East Thames Group Ltd recharges a fair proportion of the Group’s overheads consisting of running costs of the Group’s head office at West Ham Lane, and shared services such as Finance, Human Resources, IT services, Internal Audit, Risk Management, Health and Safety, Marketing etc to each of the Group’s entities. Group overheads totalling £14.6m were charged based on a Board approved basis for sharing Group overheads of which the following were charged to non regulated entities of the Group: Parent 2013 £’000 East Living Ltd East Potential Ltd

3,801 713

East Place Ltd East Treasury Ltd East Regen Ltd

65 170 1,137

EastThames Group received a sum of £266k in the form of gift aid from its subsidiary, East Regen Ltd.

| 66

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 14

PROPERTIES FOR SALE

Group 2013 £’000

Group 2012 £’000

Shared ownership properties completed

4,534

710

Shared ownership properties under construction

7,883

2,171

Completed properties for sale to other Registered Providers

1,751

174

72

-

30,392

20,172

44,632

23,227

Properties for sale under construction to other Registered Providers Properties for sale under construction

Properties for sale under construction include £28.6m of costs on 174 private sales units on the Ocean Estate at Stepney Green in the London Borough of Tower Hamlets. The development is part of the wider regeneration programme to transform the Ocean Estate which commenced in 2010.

15

DEBTORS

Due within one year:

Rent and service charges receivable Less: Provision for bad and doubtful debts

Social Housing Grants receivable Other debtors Prepayments and accrued income Amounts due from group companies Other taxation

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

3,441

3,508

-

-

(1,050)

(1,142)

-

-

2,391

2,366

-

-

-

5,879

-

-

25,279

7,706

141

996

1,076

1,270

304

227

-

-

7,047

12,175

543

-

543

-

29,289

17,221

8,035

13,398

| 67

East Thames Group Limited Report and financial statements for the year ended 31 March 2013 16

CASH AT BANK AND IN HAND

Cash at bank and in hand includes restricted cash of £3.5m (2012: £3.5m). The restricted cash is deposited with Barclays Bank as a security for the Group’s obligation under the Athlete’s village project. As such this £3.5m cannot be accessed for general use in business unless an alternative form of security is provided. There is no restricted cash in the parent company.

17

CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

Loans (note 22)

6,126

69

-

-

Bank overdraft (note 21)

1,295

1,609

1,295

1,609

Rent and service charges received in advance

1,907

1,852

-

-

-

2,385

-

-

342

37

-

-

-

-

2,234

190

622

811

234

355

9,888

14,260

4,784

9,885

18,243

26,236

982

937

Recycled Capital Grant Fund (note 20)

2,259

380

-

-

Disposal Proceeds Fund (note 21)

1,330

1,134

-

-

42,012

48,773

9,529

12,976

Social Housing grants received in advance Corporation tax Amount due to group companies Other taxation and social security Other creditors Accruals and deferred income

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 18

CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

562,283

499,979

-

-

Accruals and deferred income

3,954

3,310

-

-

Recycled Capital Grant Fund (note 20)

5,980

5,440

-

-

345

1,485

-

-

5,600

4,991

-

-

578,162

515,205

-

-

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

351

38

-

-

Adjustments in respect of prior years

(9)

-

-

-

Tax on surplus on ordinary activities

342

38

-

-

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

1,663

1,641

-

-

399

427

-

-

Surplus in respect of charitable activities

74

(388)

-

-

Under/ (Over) provision in prior years

(9)

1

-

-

(599)

19

-

-

23

(21)

-

-

454

-

-

-

Loans (note 22)

Disposal Proceeds Fund (note 21) Other

19

TAXATION

United Kingdom Corporation Tax:

Current tax on income for the year

Current tax reconciliation:

Surplus on ordinary activities before taxation Theoretical tax at UK corporation tax rate 24% (2012:26%) Effects of:

Movement in tax losses Taxable income/(Non-deductible expenditure) Tax on share of profit from investment in

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Triathlon Current tax on surplus/(deficit) on ordinary activities

342

38

-

-

East Place Limited has a 33% share in Triathlon Homes LLP and is required to include its share of the partnership’s taxable profits. In 2012/13, Triathlon Homes LLP made an accounting loss but a taxable profit after adding back items disallowed for tax purposes.

Each member to the Joint venture has to recognise its share of the tax liability as Triathlon Homes LLP is not a taxable entity in its own right. Brought forward tax losses to offset these tax liabilities have been fully utilised.

20

RECYCLED CAPITAL GRANT FUND

Group

Group

2013

2012

£’000

£’000

At 1 April 2012

5,820

3,166

Grants recycled

3,081

2,872

Interest accrued

36

21

Purchase/development of properties

(698)

(239)

Balance at 31 March 2013

8,239

5,820

(2,259)

(380)

5,980

5,440

Due within one year Due in more than one year

£7,808k of the fund is due to the Housing and Communities Agency and £431k is due to the Greater London Authority.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 21

DISPOSAL PROCEEDS FUND

At 1 April 2012 Net sale proceeds recycled Interest accrued Major repairs and works to existing stock Balance at 31 March 2013 Due within one year Due in more than one year

Group

Group

2013

2012

£’000

£’000

2,619

2,526

182

160

13

13

(1,139)

(80)

1,675

2,619

(1,330)

(1,134)

345

1,485

The total fund is due to the Greater London Authority.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 22

DEBT ANALYSIS

Group 2013 £’000

Group 2012 Parent 2013 Parent 2012 £’000 £’000 £’000

Due within one year: Bank overdraft

1,295

1,609

1,295

1,609

Bank loans

6,050

-

-

-

Royal Bank of Scotland (Orchardbrook loans)

63

58

-

-

Other loans

13

11

-

-

7,421

1,678

1,295

1,609

Group 2013 £’000

Group 2012 Parent 2013 Parent 2012 £’000 £’000 £’000

Due after more than one year: Royal Bank of Scotland (Orchardbrook loans)

5,698

5,769

-

-

Barclays Bank

170,000

206,000

-

-

Nationwide Building Society

113,900

195,000

-

-

25,000

94,000

-

-

250,000

-

-

-

1,352

1,364

-

-

(3,667)

(2,154)

-

-

562,283

499,979

-

-

Lloyds Banking Group Sterling bond Other loans Capitalised costs

Loans are repayable as follows: (excluding capitalised costs) Group 2013 £’000 Repayable on maturity*

Group 2012 Parent 2013 Parent 2012 £’000 £’000 £’000

301,250

51,250

-

-

7,421

1,678

1,295

1,609

Repayable by instalments: - Within one year

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

- Between one and two years

6,134

69

-

-

- Between two and five years

18,460

10,004

-

-

240,106

440,810

-

-

573,371

503,811

1,295

1,609

- After more than five years

* £ 1.25m THFC maturity date 02/09/2019 * £ 50m Barclays LOBO’S maturity date 09/02/2068 *£250m Sterling bond maturity date 15/06/2042

As at 31 March 2013 the Group had total loan facilities of £689.6m, of which £572.1m were drawn:Lender

Borrower

Facility

Drawn

£m

£m

Sterling bond

East Finance plc

250.0

250.0

Barclays Bank

East Treasury Limited

207.5

169.9

Nationwide Building Society

East Treasury Limited

149.9

120.0

Lloyds Banking Group

East Treasury Limited

75.0

25.0

Orchardbrook

East Homes Limited

5.8

5.8

The Housing Finance Corporation

East Homes Limited

1.4

1.4

689.6

572.1

Total

On 15 June 2012, a 30 year £250m bond was issued by East Finance plc at a coupon of 5.486% with the entire proceeds being immediately-on-lent to East Homes Limited. During the year, £190m of loans were repaid from the proceeds of the bond with the balance allocated to fund our development activity.

As at 31 March 2013, the Group had £572m of debt of which £315m were bank loans borrowed by East Treasury Limited and directly on-lent to East Homes Limited. The outstanding bank loans consist of £20m of revolving loans and £295m of term loans, including £50m of Lender’s Option Borrower’s Option (LOBO) loans which are subject to periodic re-pricing by the Lender. A further £7.2m outstanding loans was borrowed directly

by East Homes Limited.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 23

ANNUAL OBLIGATIONS UNDER OPERATING LEASES

Group

Group

2013

2012

£’000

£’000

-

-

1,300

1,300

121

121

1,421

1,421

Operating leases on land and buildings which expire: Within one year In the second to fifth years inclusive Over five years

24

PROVISION FOR LIABILITIES

Group 2013 £’000

Group 2012 £’000

Parent 2013 £’000

Parent 2012 £’000

647

576

-

-

-

-

-

-

687

124

-

-

Utilised in the year

(293)

(52)

-

-

At 31 March

1,041

648

-

-

Dilapidation fund

771

648

-

-

Other

270

-

-

-

1,041

648

-

-

At 1 April Transfer (to)/from income and expenditure account - new and increased provisions

Comprising:

At 31 March 2013

The dilapidations provision represents the estimated costs of property improvements that the Group is required to perform under the terms of property leases; leases run until 2015.

Other represents provisions for expenses in various operating areas of the Group.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 25

SHARE CAPITAL

2013

2012

£

£ *Restated

Guarantees of £1 each issued and fully paid At 1 April 2012

49

97

6

19

Guarantees surrendered during the year

(7)

(67)

At 31 March 2013

48

49

Guarantees received during the year

The shares provide members with the right to vote at general meetings but do not provide any rights to dividends, redemption of share capital or distribution on winding up. *Shares are restated to include all Group subsidiaries. Only Group shares were stated in 2012, in error.

26

RESERVES

GROUP

Revaluation housing properties

Revaluation investment properties

£’000

£’000

Restricted £’000

Designated

Revenue Total

£’000

£’000

£ ’000

At 1 April 2012

328,938

944

109

-

41,301

371,292

Surplus for the year

-

-

-

-

1,732

1,732

78,522

33

-

-

-

78,555

346

-

Property revaluation adjustment Transfers property sales valuation realised Transfer in respect of depreciation on revalued properties Transfers between

(346)

(1,155)

-

-

-

1,155

-

-

-

103

95

(198)

-

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

reserves Group share of gain in joint venture At 31 March 2013

-

-

-

-

(79)

(79)

405,959

977

212

95

44,257

451,500

Revenue

Total

£’000

£ ’000

1,993

1,993

(1,993)

-

-

1,993

PARENT

At April 2012 Loss for the year At 31 March 2013

Group

Group

Parent

Parent

2013

2012

2013

2012

£’000

£’000

£’000

£’000

79

79

-

-

133

30

-

-

212

109

95

-

-

-

95

-

-

-

Restricted reserves comprise: Donations East Potential

Designated reserves comprise: East Potential

All restricted and designated reserves are for use in social and economic regeneration programmes.

The Group plans its financial affairs to ensure that each year revenue income exceeds revenue expenditure. This policy ensures that the Group has a margin of safety to manage unexpected expenditure. The annual surpluses ensure that East Thames Group Limited is able to meet its commitment to providers of private finance and continue to provide social housing. | 76

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Unlike commercial organisations the Group’s rules prevent the distribution of reserves.

Instead these are applied to furthering the Group’s aims and objectives. At 31 March 2013 the Group’s reserves were all used in financing investments in social housing.

27

FINANCIAL COMMITMENTS

Group 2013

Group 2012

£’000

£’000

Expenditure contracted for but not provided in the accounts

90,883

164,826

Expenditure authorised by the Board but not contracted for

98,293

9,918

189,176

174,744

Capital Commitments

The expenditure will be funded from loan facilities (£117.5m) which are in place at the date of signing the account, grants (£20.1m), and operating cash flows (£51.6m). The Group’s Treasury Management policy requires a minimum of funding facilities for twelve month’s trading activities and this is monitored through weekly cash flow forecasts. Some of these commitments extend over a longer period and the Group ensures that it has adequate resources to finance this expenditure by quarterly updates of its 30 year business plan.

28

CONTINGENT LIABILITIES

The Group has provided certain financial guarantees in connection with trading obligations of East Regen Limited, a subsidiary undertaking of East Thames Group Limited. At 31 March 2013, these guarantees amounted to £24.8m (2012: £15.8m).

The Group receives capital grant from the Homes and Communities Agency, which is used to fund the acquisition and development of housing properties and their components. In certain circumstances upon disposal of grant funded properties the Group is required to recycle this grant by crediting the Recycled Capital Grant Fund.

At 31 March 2013, the Group has disposed of components, which had received £9.03m (2012 cumulative (£8.7m) of grant funding. Although the disposal of these components has not given rise to a relevant event for the purposes of recycling the grant (as the Group retains the property asset) it does have a future obligation to recycle such grant once the property is disposed of.

As the timing of any future disposal is uncertain, in accordance with Financial Reporting Standard (“FRS”) 12 – Provisions, Contingent Liabilities and Contingent Assets, no provision has been recognised in these financial statements.

29

POST BALANCE SHEET EVENTS

The Group has no post balance sheet events to recognise.

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 30

RECONCILIATION OF OPERATING SURPLUS TO OPERATING CASH FLOWS

Group 2013 £’000

Group 2012 £’000

20,887

17,359

(79)

(810)

Depreciation of fixed assets

7,958

7,896

Impairment of fixed assets and investments

3,109

891

-

24

(54)

(63)

31,821

25,297

485

72

Decrease in properties for sale

(1,069)

1,228

Decrease/(increase) in debtors

(12,160)

4,631

Increase/(decrease) in creditors

(13,524)

9,285

5,553

40,513

Group 2013 £’000

Group 2012 £’000

(97)

22,188

(69,874)

(71,939)

2,085

44

(67,886)

(49,707)

(572)

(92)

Net debt at the start of the year

(471,479)

(421,680)

Net debt at the end of the year

(539,937)

(471,479)

Operating surplus/(deficit) Share of operating surplus from joint venture (net of interest)

Write off of abortive costs Sales allowances

Movement in working capital Decrease in provisions

Net cash inflow from operating activities

31

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

(Decrease)/increase in cash in the period Cash (inflow)/outflow from increase in debt and lease financing Cash outflow from loan issue costs Change in net debt resulting from cash flows Change in net debt resulting from non cash flows

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013 32

ANALYSIS OF NET DEBT

Group

2012

Cash flow

£’000

£’000

Other changes

2013 £’000

£’000 Cash at bank and in hand

30,178

(411)

-

29,767

Bank overdraft

(1,609)

314

-

(1,295)

28,569

(97)

-

28,472

(69)

69

(6,126)

(6,126)

(502,133)

(69,943)

6,126

(565,950)

2,154

2,085

(572)

3,667

(471,479)

(67,886)

(572)

(539,937)

Loans due within one year Loans due after more than one year Capitalised loan issue costs

33

FINANCIAL ASSETS AND LIABILITIES

The Board policy on derivatives and financial instruments is explained in the Operating and Financial Review and Board Report.

Financial assets Other than short-term debtors, financial assets held are cash deposits and cash at bank.

These are sterling denominated and the interest rate profile at 31 March was: 2013 £’000

2012 £’000

Floating rate

15,143

27,197

Financial assets on which no interest is earned

14,624

2,981

29,767

30,178

The financial assets on which no interest is earned comprise current bank accounts. The remaining financial assets are floating rate, attracting interest at rates that vary with bank rates.

| 79

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Financial liabilities excluding trade creditors – interest rate risk profile The Group’s financial liabilities are sterling denominated. After taking into account various interest rate swaps, the interest rate profile of the Group’s financial liabilities at 31 March was: 2013

2012

£’000

£’000

Floating rate

100,000

70,000

Fixed rate

473,371

433,811

Total loans (note 22)

573,371

503,811

The fixed rate financial liabilities have a weighted average interest rate of 4.7% (2012:4.6%).

The weighted average period for which the interest rates are fixed is 27 years (2012: 30 years), or 17 years (2012:13 years) if the hedge counterparties exercise their option to cancel the fixed rate hedge contracts (cancellable swaps or swaptions) at their earliest call dates. The weighted average interest rate of these swaptions is 4.3% (2012: 4.2%).

The floating rate financial liabilities comprise bank loans that bear interest at rates based on the one-month LIBOR plus a lender’s margin.

The debt maturity profile is shown in note 22.

Borrowing facilities The Group has undrawn committed borrowing facilities of £117.5m. The total facilities available at 31 March in respect of which all conditions precedent had been met were as follows: 2013

2012

£’000

£’000

Expiring in one year or less

7,421

1,678

Expiring after more than one year but not more than two years

6,134

69

561,111

502,064

573,371

503,811

Expiring after more than two years

| 80

East Thames Group Limited Report and financial statements for the year ended 31 March 2013

Fair values of financial assets and liabilities 2013

2012

Book

Fair

Book

Fair

value

value

value

value

£’000

£’000

£’000

£’000

29,767

29,767

17,342

17,342

(6,126)

(6,126)

(69)

(69)

(562,283)

(682,476)

(499,979)

(572,295)

-

(93,455)

-

(74,769)

(538,642)

(752,290)

(482,706)

(629,791)

Primary financial instruments held or issued to finance the Group’s operations Financial assets Short-term financial liabilities and current portion of long-term borrowings Long-term borrowings Derivative financial instruments held to manage the interest rate profile Total

The fair values have been calculated by discounting cash flows at prevailing interest rates.

Gains and losses on hedges As explained in the Report of the Board, the Group uses interest rate swaps to manage its interest rate profile. Changes in the fair values of these instruments, used as hedges, are not recognised in the financial statement until the hedged position matures. An analysis of these unrecognised gains and losses is as follows: Gains

Losses

£’000

£’000

Total net gains / (losses) £’000

Unrecognised gains and losses on hedges at 31 March 2012

-

(93,455)

(93,455)

-

-

-

-

(93,455)

(93,455)

Of which: Gains and losses expected to be recognised in 2012-13 Gains and losses expected to be recognised in 2013-14 or later

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East Thames Group Limited Report and financial statements for the year ended 31 March 2013

East Thames 29-35 West Ham Lane Stratford London E15 4PH Tel: 020 8522 2000 Email: info@east-thames.co.uk www.east-thames.co.uk

Registered in England & Wales (4091100) Registered Charity (1084952)

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