TIDM53HO
RNS Number : 0068L
South East Water Limited
14 July 2017
South East Water Limited
Preliminary results
for the year to 31 March 2017
Chairman's Statement
On behalf of the Directors of South East Water, I am pleased to
present our annual report and financial statements for the year
ended 31 March 2017 which is the second reporting year of the
current five year regulatory period. The business has continued to
make significant progress and in particular it has been encouraging
to see further external recognition for our continued improvements
in customer service.
This has been a busy year for the business as the team has
worked hard to deliver the stretching objectives set in the
business plan, while also preparing for retail competition and
completing the sale of one of our shareholders 50 per cent share of
the business to new owners.
We have now also started preparing the business plan for the
next regulatory period (2020-2025) which will be submitted to Ofwat
in 2018. In preparing the last plan we strove to put customers at
the heart of the business and we now intend to further build on the
relationships we have been developing with our customers to
encourage even more participation so that our customers are fully
integral to our business model. Only through the creation and
support of a co-delivery approach can we ensure the company and our
customers have alignment with value, satisfaction and resilience
for the future.
Customer engagement - together we know h(2) ow
During 2016/17 we have been developing our approach to
engagement, building on the work we did for the last business plan.
Our experience shows that two-way engagement can ensure we develop
plans that have the support of customers and other
stakeholders.
While our pure know h(2) ow branding is about demonstrating the
technical excellence behind top quality drinking water, we also
recognise that sharing our knowledge and listening to the opinions
and expertise of our own customers and stakeholders will help us to
keep improving.
With this shared knowledge in mind we are developing our
"together we know h(2) ow" customer engagement programme in
conjunction with our Customer Challenge Group (CCG) which has been
recently reformed ready to support and challenge us through the
business planning process. In December we welcomed Zoe McLeod as
the new chair of our CCG and I would like to take this opportunity
to thank Roger Darlington, who chaired the group for the last five
years, for building a collaborative group that challenged us to
ensure customer views were considered at every stage of our
plans.
In preparation for the price review process to begin, Zoe has
appointed three new members including independent research and
insight experts, Leslie Sopp and Mairi Budge. Mairi has a strong
focus on behaviour change and Leslie has an extensive background in
research. Rupika Madhura has further strengthened the team by
bringing significant experience with price controls and regulatory
expertise.
For us, engagement should be part of what we do day-in day-out.
That is why we developed our customer satisfaction measures at the
start of the current business plan to ensure we capture the views
of all our customers, including the silent majority who rarely
contact us. Each month we survey a sample of customers and ask how
satisfied they are with the service we provide, rating us a score
out of five - with five being very satisfied.
The "five-out-of-five" focus across the business continues to
grow with employees from teams in both the office and the field
adopting the measure to reward and recognise dedication to customer
satisfaction. This initiative has seen our customer satisfaction
measure scores increase to an average of 4.28 up from 4.15 in
2015/16.
We received 30 per cent less written complaints than in the
previous year, this is the fifth year in a row we have reduced the
level of complaints. Our efforts were recognised by the Consumer
Council for Water in their September 2016 report where they praised
the team for the mixture of innovation and initiatives that place
customer care and satisfaction at the centre of all our
activities.
Our service incentive mechanism (SIM) score for 2016/17 was 84.6
out of 100 - a 2.6 point increase on the previous year's score of
82.0. We were particularly pleased with our quarter four results
which placed us fifth in the industry and thank the teams who
engage day and night with customers for their continued focus on
delivering a five-out-of-five service.
We know that these are tough economic times and recognise that
some customers may need support and that we should be proactive in
providing appropriate assistance when needed. Our customer care
team has worked closely with partner organisations, such as
Citizens Advice and the Money Advice Service, throughout the year
to ensure people have signed up to the right service and tariff
provisions for them. Our aim is to provide a frictionless approach
to make it easy for people to access the services they need and
ensuring we treat our customers with empathy and care at all
times.
This partnership working approach, with those in our communities
who provide support and advice when people need it, has led to a
further 4,890 people benefiting from our social tariff. This tariff
caps the water bill at a fixed amount for the year and those on a
low income or who are in receipt of specific benefits may be
eligible and we encourage them to apply.
Science and engineering excellence to deliver quality water
During the year we invested GBP89.8 million in new and existing
assets as part of the GBP437 million investment planned for the
period from 2015 to 2020. The expenditure in the year includes the
installation of ultrafiltration at three key sites in response to
deteriorating raw water quality, installing 32km of new pipelines
and renewing a further 10km of old pipelines across the region.
Schemes such as these are supporting our efforts to improve
services for our customers and help safeguard the environment, and
we are committed to continue this level of investment.
Our state of the art laboratory in Farnborough, Hampshire, which
opened in 2016, operates 24 hours a day, 365 days a year. We, test
some 500,000 water samples each year for our supply area, ensuring
that the water that we provide to our customers continues to be top
quality and enabling us to take corrective action where needed.
During the year 99.95 per cent of samples tested met the Drinking
Water Inspectorate standards. The laboratory also provides services
to a number of other water companies and other organisations and we
were delighted to begin a new contract in the year with South
Staffordshire Water to provide sampling services, testing a further
200,000 samples a year on their behalf.
During the year we invested GBP2.4 million more than we set out
in our Water Resources Management Plan to surpass our target of
reducing leakage. This target is agreed with Ofwat. This is against
the backdrop of a year which saw a marked increase in the number of
burst water mains compared to the previous year (3,032 compared to
2,307), mainly due to a dry autumn and then fluctuating
temperatures during the winter leading to increased ground
movements. We have also continued our investment in new technology
to identify and locate more of those hard to find small leaks.
It has been a challenging year on reactive maintenance activity
as the significant increase in the number of burst mains has
stretched our operational teams who have worked hard to maintain
supplies to customers and minimise supply interruptions. .
Our overall interruption performance for unplanned work was
12.93 minutes per property. While our underlying performance was
good (5.4 minutes), especially given the increase in burst mains
resulting from the weather, we had two large bursts in the year
which were complicated to repair, one in Barcombe Cross and the
other in Haywards Heath occurring in August 2016 and March 2017
respectively. These two events contributed to over half of the
total interruption time. We are looking at how we can respond
better to these complex events including looking at how we can
further interconnect our network to enable us to reroute supplies
quicker to reduce the impact during repairs.
As well as responding to burst water mains and reactive issues
on the network, we also have to undertake planned works on our
mains either to maintain them or allow us to connect new pipes to
the network which can lead to temporary interruptions to supply. We
are pleased to say that by utilising new techniques we have reduced
the number of planned interruptions considerably, so that in the
year it averaged only 3 seconds per property.
We've also worked hard during the year to improve the way we
communicate with customers when their supply is interrupted.
We launched our new "in your area" portal on our website in
March and customers can now enter their postcode to get up-to-date
information on work in their region that may affect them and
receive text or email to keep customers informed. We have received
very positive feedback from customers about this new service.
Non-household retail competition
From April 2017 the biggest change to the water industry since
privatisation got underway as businesses and other non-household
customers can now choose their supplier of retail services. This
change does not currently apply to household customers.
Retail services include all the customer related services, such
as talking with customers, advising on water usage, reading water
meters, billing and collecting payments. The water supplied to such
customers will continue to be provided by South East Water's
wholesale business, which is responsible for the abstraction,
treatment and distribution of drinking water.
During the year we worked closely with Ofwat and Market Operator
Services Limited (MOSL) to prepare the business for the new market.
The business undertook a significant amount of work to ensure
employees were appropriately trained, our systems compliant and
that all milestones were met ready for the official opening on 1
April 2017.
I am pleased to report that our teams met all the requirements
in order to operate in the new market and we started offering
retail services on 1 April 2017. Our strategy is to offer our
current customers an enhanced service by providing wastewater
retail services as well as drinking water and we have successfully
obtained a sewerage licence to provide this option for our
customers.
Within the current South East Water supply area we are operating
as South East Water Choice. For customers outside our supply area a
separate business branded Water Choice will operate.
South East Water Choice, which entered the open market with
54,000 customers, has a great team in place with a new Managing
Director, Tanya Sephton leading them to further develop the
business both inside the South East Water region and beyond.
Non-household customers can now opt for the retail business to
provide them with both water and wastewater services. Multi-site
customers can also benefit from our consolidated billing
service.
There is more information available at www.openwater.org.uk
Financial results
The results published in this report summarise our performance
for the year and incorporate the performance of South East Water
Ltd and South East Water (Finance) Ltd.
This year we have had a strong financial performance having
generated an operating profit of GBP79.0m for the year to 31 March
2017, compared with GBP74.8m for the prior year. Our turnover was
GBP218.9m for the year compared to GBP214.4m in the prior year.
Net operational costs have increased to GBP147.3m compared to
GBP146.1m in the prior year, an increase of GBP1.2m. Included in
the increase in costs are additional employee costs incurred in
respect of the market opening programme and in respect of improving
our operational response to customers and an increase in the cost
of treating and purchasing water from neighbouring water
companies.
Profit before tax has fallen by GBP17.1m from GBP42.4m to
GBP25.3m. Whilst group operating profit has increased by GBP4.2m
from GBP74.8m to GBP79.0m, there has been an increase in finance
costs of GBP21.3m, offsetting the improved operating performance.
The additional finance costs include a GBP13.7m increase in the
fair value of our interest rate swap arising from higher forward
projections of RPI, compared with the previous year, and GBP6.0m of
additional interest costs on our indexed linked loans.
Profit after tax has reduced from GBP46.5m to GBP27.1m, a
reduction of GBP19.4m which is driven by the additional finance
costs noted above. In the year there was a tax credit of GBP1.7m
compared to GBP4.0m in the previous year. The tax credit has arisen
because of the reduction in corporation tax rates applicable to our
deferred tax liability.
Overall the Board is pleased with our strong financial
performance in the year.
Board and shareholder changes
We were pleased to welcome new shareholders in February 2017
when Hastings Funds Management completed the acquisition from La
Caisse de dépôt et placement du Québec (CDPQ) of its shareholding
in HDF (UK) Holdings Ltd, the holding company of South East Water
on behalf of its managed clients.
Three entities of the Desjardins cooperative financial group
(Régime de Rentes Du Mouvement Desjardins, Desjardins Financial
Security Life Assurance Company and Certas Home and Auto Insurance
Company) own a 25 per cent stake. With a further 25 per cent being
held by RBS Pension Trustee Ltd as trustee for the Royal Bank of
Scotland Group Pension Fund (Main Fund Section).
With Utilities Trust of Australia (UTA) maintaining ownership of
its 50 per cent stake which was already managed by Hastings,
Hastings is our sole investment manager.
This acquisition represents a strong vote of confidence in the
current performance of the business and our plans for the future.
We look forward to continuing to work with Hastings and our
shareholders further developing a long term and supportive
relationship.
During the year there have been a number of changes to the
Board. In December, Marissa Szczepaniak joined the board as
non-executive director to replace Valeria Rosati, who stepped down
from the company after nine years' service where she played a vital
role in the development of the business following the merger with
Mid Kent Water. She was instrumental in shaping the new business
and provided valued contribution in my first two years as Chairman.
Following the change in shareholders, Olivier Fortin, Jean Pierre
Ouellet and Peter Dixon resigned from the Board and Oliver Schubert
joined the Board and represents our new shareholders.
In addition, Paul Rich, a non-executive director, has resigned
from the Board to become Chairman of Invicta Water Limited, the
group's out of area non-household retail business. Paul's
background in marketing and communications means he brings valuable
skills to this new business.
I would like to thank all these board members for their hard
work and significant achievements over their time with the business
and to welcome Marissa and Oliver to the Company.
Our people, working together towards future success
For us the engagement of our employees is equally important as
engagement with customers, as we are keen to ensure we make South
East Water the water company people want to work for. We were
pleased to see good results in our employee survey at the start of
the year, for example 96 per cent of employees agreed they
understood our vision and 97 per cent agreed that we care about our
environment and community. Our focus on both customers and health
and safety also showed strong results with both areas receiving 95
per cent positive responses. There are however areas of employee
engagement we still need to improve, in particular employees would
like to see more opportunities for career development, more
feedback on performance and more reward and recognition. We've set
up employee focus groups across the business to review these areas
and develop action plans to help us keep improving.
We benefit from having a very dedicated workforce at South East
Water who continue to demonstrate great passion and ambition for
the business to ensure we deliver on our vision to be the water
company people want to be supplied by and want to work for. On
behalf of the Board I would like to thank the management team and
all our employees and business partners for their hard work and
dedication.
Nick Salmon
Chairman
14 July 2017
Group income statement
for the year ended 31 March 2017
2017 2016
Notes GBP000 GBP000
Revenue 3 218,905 214,430
---------- ----------
Group net operating costs (147,302) (146,125)
---------- ----------
Other income 3 7,407 6,467
Group operating profit 79,010 74,772
Finance costs (58,793) (37,458)
Finance income 5,119 5,122
Profit before taxation 25,336 42,436
Taxation 4 1,759 4,043
---------- ----------
Profit for the year 27,095 46,479
---------- ----------
Earnings per share
Basic and diluted from continuing operations 6 54.95p 94.25p
---------- ----------
Profit for the current and prior year is generated entirely from
continuing operations.
Group statement of comprehensive income
for the year ended 31 March 2017
2017 2016
GBP000 GBP000
Profit for the year 27,095 46,479
Items that will not be reclassified
subsequently to profit or loss:
Remeasurement of defined benefit asset/liability (3,933) 11,121
Deferred tax on defined benefit pension
schemes 4 708 (2,223)
Impact of deferred tax rate change in
respect of the pension schemes 4 (286) (509)
(3,511) 8,389
---------- ---------
Total comprehensive income for the year
attributable to owners of the Company 23,584 54,868
---------- ---------
Group statement of financial position
as at 31 March 2017
31 March 31 March
2017 2016
GBP000 GBP000
Non-current assets
Intangible assets 11,058 11,046
Property, plant and equipment 1,455,380 1,412,184
Amount due from parent undertaking 190,013 190,013
Defined benefit pension surplus 9,616 9,003
-------------- --------------
1,666,067 1,622,246
-------------- --------------
Current assets
Inventories 214 185
Trade and other receivables 72,113 66,650
Cash and cash equivalents 11,371 16,947
-------------- --------------
83,698 83,782
-------------- --------------
Total assets 1,749,765 1,706,028
-------------- --------------
Current liabilities
Trade and other payables (96,130) (85,257)
Deferred income (6,573) (6,803)
Provisions (2,472) (3,834)
-------------- --------------
(105,175) (95,894)
-------------- --------------
Non-current liabilities
Loans and borrowings (882,024) (869,880)
Trade and other payables (4,261) (2,589)
Derivative financial instruments (100,916) (87,226)
Net deferred tax liabilities (132,895) (140,566)
Defined benefit pension liability (1,851) (1,466)
Deferred income (69,938) (65,633)
(1,191,885) (1,167,360)
-------------- --------------
Total liabilities (1,297,060) (1,263,254)
-------------- --------------
Net assets 452,705 442,774
-------------- --------------
Equity
Ordinary share capital 49,312 49,312
Revaluation reserve 261,549 264,134
Retained earnings 141,844 129,328
-------------- --------------
Total equity 452,705 442,774
-------------- --------------
The accompanying notes are an integral part of this statement of
financial position.
Group statement of changes in equity
for the year ended 31 March 2017
Issued
share capital Revaluation Retained Total equity
GBP000 reserve earnings GBP000
GBP000 GBP000
Balance at 1 April 2015 49,312 264,155 78,508 391,975
--------------- -------------- ----------- ---------------
Profit for the year - - 46,479 46,479
--------------- -------------- ----------- ---------------
Other comprehensive income:
Remeasurement of defined benefit
asset/liability - - 11,121 11,121
Deferred tax on defined benefit
pension schemes - - (2,223) (2,223)
Impact of deferred tax rate change
in respect of the pension schemes - - (509) (509)
--------------- -------------- ----------- ---------------
Total other comprehensive income - - 8,389 8,389
Total comprehensive income - - 54,868 54,868
Dividends (see note 5) - - (9,000) (9,000)
Amortise revaluation reserve - (6,130) 6,130 -
Release revaluation on disposals - (57) 57 -
Deferred tax on reserve releases - 1,235 (1,235) -
Impact of deferred tax rate change - 4,931 - 4,931
--------------- -------------- ----------- ---------------
Balance at 31 March 2016 49,312 264,134 129,328 442,774
--------------- -------------- ----------- ---------------
Profit for the year - - 27,095 27,095
--------------- -------------- ----------- ---------------
Other comprehensive income:
Remeasurement of defined benefit
asset/liability - - (3,933) (3,933)
Deferred tax on defined benefit
pension schemes - - 708 708
Impact of deferred tax rate change
in respect of the pension schemes - - (286) (286)
--------------- -------------- ----------- ---------------
Total other comprehensive income - - (3,511) (3,511)
Total comprehensive income - - 23,584 23,584
Dividends (see note 5) - - (16,000) (16,000)
Release of revaluation reserve - (6,130) 6,130 -
Release of revaluation reserve
on disposals - (28) 28 -
Deferred tax on revaluation and
retained earnings transfer - 1,226 (1,226) -
Impact of deferred tax rate change - 2,347 - 2,347
--------------- -------------- ----------- ---------------
Balance at 31 March 2017 49,312 261,549 141,844 452,705
--------------- -------------- ----------- ---------------
All transactions relate to the equity holders of the
Company.
Group statement of cash flows
for the year ended 31 March 2017
Notes 2017 2016
GBP000 GBP000
Operating activities
Net cash flow from operating activities 7 127,462 120,182
Interest received 4,827 5,094
Interest paid (35,169) (34,947)
Group tax relief paid (2,000) (2,530)
--------- -----------
Net cash flow before investing and financing
activities 95,120 87,799
--------- -----------
Investing activities
Proceeds from sale of property, plant
and equipment 212 142
Purchase of property, plant and equipment (83,423) (88,214)
Purchase of intangible assets (3,197) (3,368)
Fixed asset contributions received 1,712 878
Net cash flow used in investing activities (84,696) (90,562)
--------- -----------
Financing activities
Repayments of borrowings - (9)
Dividends paid to shareholder 5 (16,000) (9,000)
Net cash flow used in financing activities (16,000) (9,009)
--------- -----------
Decrease in cash and cash equivalents (5,576) (11,772)
Cash and cash equivalents at the beginning
of the year 16,947 28,719
--------- -----------
Cash and cash equivalents at the year
end 11,371 16,947
--------- -----------
Notes
1 Basis of preparation
(i) The financial information included within this statement has
been prepared on the basis of accounting policies consistent with
those set out in the Annual Report and Financial Statements for the
year ended 31 March 2017.
(ii) The information shown for the years ended 31 March 2017 and
31 March 2016 does not constitute statutory accounts within the
meaning of section 435 of the Companies Act 2006 and has been
extracted from the full accounts for the year ended 31 March 2017.
The reports of the auditors on those accounts were unqualified and
did not contain a statement under either Section 498(2) or Section
498(3) of the Companies Act 2006. The accounts for the year ended
31 March 2017 will be delivered to the Registrar of Companies in
due course.
(iii) The financial information included in this statement was
approved by the Board on 14 July 2017.
2 Going concern
The Group finances its working capital requirements through cash
generated from operations and committed facilities that can be
called upon as required. Its facilities were undrawn during the
year and at the date of signing these financial statements. The
Group's annual budget and forecasts together with its five year
plan and longer-term resources planning all indicate that the Group
should be able to continue in operation utilising its current
financial resources and the proceeds of future borrowing
opportunities expected to become available.
The directors believe that the Company and Group are well placed
to manage its business risks successfully. After making enquiries,
the directors have a reasonable expectation that the Company and
the Group have adequate resources to continue in operational
existence for the foreseeable future. Accordingly, they continue to
adopt the going concern basis in preparing the annual report and
financial statements.
3 Total income
2017 2016
GBP000 GBP000
Revenue
Unmetered water income 46,115 56,850
Metered water income 166,513 151,935
Other sales 6,277 5,645
---------- ----------
Total Revenue 218,905 214,430
---------- ----------
Other income
Rental income 1,245 1,138
Sundry income 6,162 5,329
---------- ----------
Total other income 7,407 6,467
---------- ----------
Total income 226,312 220,897
---------- ----------
4 Corporation tax
Major components of the tax expense for the years ended 31 March
2017 and 2016 are:
2017 2016
GBP000 GBP000
Group income statement
Current tax:
Current UK tax charge 3,168 3,391
Amounts (over)/under provided in previous
years (25) 96
3,143 3,487
Deferred tax:
Relating to origination and reversal of temporary
differences 1,300 4,398
Impact of deferred tax rate change (6,202) (11,928)
(4,902) (7,530)
---------- ----------
Tax credit reported in the group income statement (1,759) (4,043)
---------- ----------
Tax charge to equity
Deferred tax on defined benefit pension schemes (708) 2,223
Impact of deferred tax rate change in respect
of the pension schemes 286 509
---------- ----------
Tax reported in comprehensive income statement (422) 2,732
---------- ----------
5 Dividends
2017 2016
GBP000 GBP000
Equity dividends paid during the year:
First interim dividend of 8.11p per
ordinary share (2016: 4.56p per ordinary
share) 4,000 2,250
Second interim dividend of 8.11p per
ordinary share (2016: 4.56p per ordinary
share) 4,000 2,250
Third interim dividend of 8.11p per
ordinary share (2016: 4.56p per ordinary
share) 4,000 2,250
Final dividend of 8.11p per ordinary
share (2016: 4.56p per ordinary share) 4,000 2,250
--------- --------
16,000 9,000
--------- --------
There were no dividends proposed for approval as at 31 March
2017 and 31 March 2016.
6 Earnings per ordinary share - basic and diluted
The following reflects the income and shares data used in the
basic and diluted earnings per share computations:
2017 2016
GBP000 GBP000
Profit for the year 27,095 46,479
----------- -----------
Number Number
Basic and diluted weighted average number
of shares 49,312,354 49,312,354
----------- -----------
Basic and diluted earnings per share 54.95p 94.25p
----------- -----------
There have been no other transactions involving ordinary shares
or potential ordinary shares between the reporting date and the
date of completion of these financial statements.
7 Group Cash flow from operating activities
2017 2016
GBP000 GBP000
Profit for the year 27,095 46,479
Adjustments for:
Income tax expense (1,759) (4,043)
Finance income (5,119) (5,122)
Finance costs 58,793 37,458
Depreciation and impairment of property, plant
and equipment 43,313 42,776
Amortisation and impairment of intangibles 3,183 2,973
Profit on disposal of fixed assets (94) (70)
Difference between pension contributions paid
and amounts recognised in the income statement (3,839) (3,626)
Changes in working capital:
Increase in trade and other receivables (5,492) (1,002)
Decrease/(increase) in inventory (29) 60
Increase in trade and other payables 11,410 4,299
---------- ----------
Net cash flow from operating activities 127,462 120,182
---------- ----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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