Stillwater Services (SS) is a listed water utility company providing water and sewage services to the public and businesses of a region of Teeland. The company was formed when the government-owned Public Water Company of Teeland was broken up into regional utility companies (one of which was SS) and sold into private ownership over four years ago.As a vital utility for the economy of Teeland, water services are a government-regulated industry. The regulator is principally concerned that SS does not abuse its monopoly position in the regional market to unjustifiably increase price. The majority of services (80 percent) are controlled by the regulator who sets an acceptable return on capital employed (ROCE) level and ensures that the pricing of SS within these areas does not breach this level. The remaining services, such as a bottled water operation and a contract repairs service, are unregulated and SS can charge a market rate for these. The regulator calculates its ROCEfigure based on its own valuation of the capital assets being used in regulated services and the operating profit from those regulated services.The target pre-tax ROCE set by the regulator is 6 percent. If SS were to breach this figure, then the regulator could fine the company. In the past, other such companies have seen fines amounting to millions of dollars.

The board of SS is trying to drive the performance for the benefit of the shareholders. This is a new experience for many at SS, having been in the public sector until four years ago. In order to try to better communicate the objective of maximizing shareholder wealth, the board have decided to introduce economic value added (EVA(?)) as the key performance indicator.The finance director has asked you to calculate EVA(?) for the company, based on the following financial information for the year ending 30 September 2018:Stillwater Services

Capital employed:

1. Total operating costs include

2. Economic depreciation is assessed to be $83m in 2018.Economic depreciation includes any appropriate amortization adjustment. In previous years, it can be assumed that economic and accounting depreciation were the same.3. Tax is the cash paid in the current year ($9m) and an adjustment of $0.5m for deferred tax provisions. There was no deferred tax balance prior to 2018.4. The provision for doubtful debts was $4.5m on the 2018 statement of financial position.5. Research and development is not capitalized in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2018 is the first year of this project.6. Cost of capital of SS

Equity .................16%Debt (pre-tax) .......5%

7. Gearing of SS...40% Equity..............................60% Debt

(a) Evaluate the performance of SS using EVA(?).(b) Assess whether SS meets its regulatory ROCE target and comment on the impact of such a constraint on performance management at SS.

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2018 Regulated $m Non-regulated $m Total $m 69.0 276.0 345.0 Revenue Operating costs Operating profit Finance charges 47.0 230.0 277.0 46.0 22.0 68.0 23.0 Profit before tax 45.0 Tax at 25% 9.5 Profit after tax 35.5 2018 2017 $m $m Measured from published accounts Measured by regulator (for regulated services only) 657.0 637.0 779.0 761.0