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South East Water Limited Annual Financial Report (4141F)

15/07/2019 7:00am

UK Regulatory


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RNS Number : 4141F

South East Water Limited

15 July 2019

South East Water Limited

Preliminary results

for the year to 31 March 2019

Chairman's Statement

On behalf of the Directors of South East Water, I am pleased to present our preliminary results announcement for the year ended 31 March 2019. This was the fourth year of the current five year regulatory period. It has been a pivotal year in building our long-term plans placing people (customers, the community we serve and our employees) and our environmental impact at the centre of our strategy to responsibly deliver exemplary customer satisfaction.

Our team has worked hard throughout the year to achieve the stretching objectives set in the 2015 to 2020 business plan, providing great service to all our household customers and to water retailers who rely on our wholesale water services. In addition, we have been developing our plans for the future in the form of the 60 year water resources management plan and publishing a very ambitious business plan for the next five year regulatory period.

Customer satisfaction responsibly delivered - our ambitious business plan

On 3 September 2018 we published our business plan for the five year period commencing April 2020, as did all of the other water and wastewater companies in England and Wales, following which Ofwat published its Initial Assessment of Plan (IAP) for each company in January 2019.

We were very pleased that Ofwat recognised the ambition in our plan and how we had challenged ourselves to deliver significant improvements over current performance levels at efficient cost. In particular, Ofwat commended us for showing ambition and innovation in the areas of improving customer service, support for vulnerable customers and the environment. We were one of only three companies to meet Ofwat's stretching requirements with a high quality package of outcome delivery incentives (ODI's) based on customer views.

However, Ofwat's overall assessment was that in certain areas our plan required further evidence and/or justification for some of the decisions made. We have responded comprehensively to all of the issues and actions raised by Ofwat and published our full response to the IAP on our website on 1 April 2019. We have provided more evidence in those areas where Ofwat did not find our initial evidence compelling and made a limited number of changes. For example, we have:

-- given greater protection to customers with a re-design of how any outperformance payments should be

shared with   them 

-- provided additional evidence in critical areas, such as per capita consumption (PCC) and leakage, to

justify our     approach in a water stressed region 

The plan has been built through an extensive engagement process involving nearly 13,000 customers, other stakeholders and businesses through 120 separate elements of research.

This research used both traditional methods and more innovative approaches and has enabled us to build a business plan that goes further to deliver a more personalised service for customers.

The plan, if agreed, will see the investment of a further GBP472 million to improve water infrastructure over the five year period. We consider this to be the most ambitious five year plan we have ever proposed. With a 36-strong suite of performance commitments, and innovative incentives - the plan challenges us to deliver performance levels well beyond anything we have delivered before.

Our plan also recognises our wider responsibilities as the provider of an essential service. To reflect this responsibility we have created 10 specific responsible business measures for key areas that customers and stakeholders have identified that we should focus on. The business plan also includes six very stretching new performance commitments relating to vulnerable customers and six new environmental performance commitments.

We firmly believe our ambitious business plan will deliver the service customers rightly expect in a responsible way, while maintaining the average annual bill at GBP204 before inflation for the next five years.

Throughout the year we worked closely with our independent Customer Challenge Group, led by chair Zoe McLeod, who provided challenge throughout which helped us build a business plan truly driven by customer priorities. I would like to thank Zoe and her team for their contribution and look forward to continuing the relationship as we develop a new Customer Engagement Panel which will support our efforts to continue to embed customer engagement in the way we conduct our business.

Engaging for long-term water resilience and sustainability

During 2018 we held a 12 week public consultation on our draft water resources management plan which formed part of our business plan submission. This plan takes a long term view, over 60 years, of how we aim to ensure that there are adequate supplies of water both throughout normal conditions and during periods of drought, taking account of forecast population growth and the potential effects of climate change. We need to achieve this while balancing the needs of the natural environment on a sustainable basis. We engaged with hundreds of customers and stakeholders during this time and the web page for the consultation received more than 1,900 visits.

In August 2018 we published a revised water resources management plan which took on board the key challenges raised in the consultation, and in particular customer and stakeholder support for the reduction of customers' water use and overall leakage. In line with the guidelines we have made an estimate of the cost of our preferred plan. Over the 60 year planning period we estimate that the current cost of our plan will be GBP986.2 million in net present value (NPV) terms and will increase the supply of water by 266.5 Ml/d (52 per cent) to secure the long-term resilience of water resources in our area. The revised plan is with the Secretary of State for approval and we hope to publish a final plan later this year.

Our award winning catchment management partnership has continued as part of our large programme of environmental work under the Water Industry National Environment Programme (WINEP). The team has had some notable successes during the year, including picking up a Water Industry Achievement Award for water resilience and successfully removing more than a tonne of agricultural chemicals from 23 farms across three catchments as part of a pesticide amnesty.

We are particularly proud to be a part of Interreg, a four year programme which aims to address the impacts of climate change and enhance the availability of raw water in Europe. The cross-border project is called PROWATER, which stands for 'protecting and restoring raw water sources through actions at the landscape scale' and will contribute to climate adaptation by restoring water storage in the environment through catchment management. Examples of this are forest conservation, natural water retention and restoration of compacted soils. These are all examples of Ecosystem-based Adaptation (EbA) measures.

Targeting five-out-of-five customer service

We have continued with our "five-out-of-five" customer commitment across the business including:

-- increased digital communications such as 'My Account' with more than 60,000 customers signed up during 2018/19 taking total numbers to 162,000, and 138,000 customers using our 'in your area' map showing supply updates

-- improving our customer account management tool giving our advisors a clearer view of customer information and ability to offer better advice for customers on payment plans

-- training 20 innovation champions across the business to embed a culture that supports new ideas and continual improvement

-- engaging with more than 5,800 people via our community events, open days and school programme

This year we became the first water company to receive BSI (British Standards Institution) accreditation to BS 18477, the standard which demonstrates that an organisation provides a comprehensive service for identifying and responding to vulnerable customers.

This was the last year of Ofwat operating its service incentive mechanism (SIM) survey. This compares customer service and satisfaction across the industry. It will be replaced by a customer experience measure (C-Mex) which is currently in development. For this final year we were pleased to see our SIM score for 2018/19 end the year at 85.4 out of 100 (85.6 in 2017/18). This is commendable as achieved against a backdrop of embedding the significant change in our billing processes through the introduction of "One Bill".

"One Bill" is our project with Southern Water to simplify 465,000 customer bills, enabling one bill to be issued for water and wastewater services. This project was in response to customers' requests for simpler bills for water and wastewater. This has been an important improvement for customers as many have said they wanted to be able to manage their water and wastewater bill through one account, just as our customers who have Thames Water as their wastewater service provider have done for many years.

Science and engineering excellence to deliver quality water

An exciting development this year has been the commencement of a year-long innovation programme to trial a smart water network. Around 2,000 properties in our Hartley district have been provided with the latest technology that could enable a further step change in leakage detection and repair times. What makes this trial different is we are the first water company in the UK to be using the 5G network as a key component to collect higher volumes of data, and then analysing this data to provide a centralised view of the digital network.

This in turn will enable us to become far more proactive when discovering and prioritising leak repairs, alongside opening up our engagement with customers in a much more innovative and interactive way. We are expecting the trial to inform subsequent wider programmes of work across the company.

We are continually looking for the latest innovations to drive leakage levels down further. In Kent we are pioneering a new satellite technology to identify leaks that are difficult to find with traditional methods. This technology, which is used to identify water on other planets, creates images which cover approximately 5,700 square kms. An algorithm then detects treated water, by looking for a particular chemical signature present in drinking water. This data is presented in a leakage graphic report overlaid on a map with streets and water pipes.

Our technicians in the area have an app on their phones which shows the location of suspected leaks, which they can then check and verify. This trial is in its early stages but the initial results look promising both in terms of leaks found and productivity.

The leakage figures we report include leaks on customer's pipes as well as our own, and we have also been trialling customer-side leak identification and repair innovations. We are currently partnering with Centrica Hive (a smart home technology provider) in an industry first to test new devices to alert customers to issues on their own plumbing.

I am pleased to report that the leakage team has beaten our target of 89.1 million litres a day (Ml/d), achieving 86.9 Ml/d during the year - a good step towards our commitment of reducing leakage by a further 15 per cent by 2025. Beating the target was a significant achievement given that the team started the year with additional leaks resulting from the severe cold weather and sudden thaw caused by the Siberian 'Beast from the East' in March 2018, and having recovered from this position, then had to mitigate a similar impact from a prolonged summer heatwave. Through round the clock working, and the diversion of other technical resources to the leakage effort we managed to repair an additional 1,717 leaks, compared to an average year.

The long heatwave of summer 2018 required us to produce up to an additional 100 million litres of treated water a day, 19 per cent more than a normal day.

Despite the increased demand for water throughout the heatwave, we were able to maintain supplies to customers without the need for temporary water restrictions. This was helped by customers themselves responding responsibly to our communication campaigns to save water usage during the hot, dry, spell and we thank everyone for doing their bit to save water. Rainfall through the winter 2018/19 has enabled our reservoirs and groundwater sources to replenish and means, as we move into summer 2019, our water resources are in a good position.

We saw an increase in burst water mains during the year, 2,826 compared with 2,747 in 2017/18, as the hot weather of the summer led to ground movements and the increased demand for water put pressure on the network. The number of bursts were a challenge for our operational teams. We ended the year with overall interruption to supply performance at 14.2 minutes per property (against our target of 12 minutes for the year). We undertake a wide range of activities to minimise the number of burst mains including dynamic pressure management, calm network operations and a targeted mains replacement policy.

During the year we invested GBP104.7 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 saw us install 33km of new mains pipelines and renew a further 30km of old pipelines across the region, continue our customer metering programme and improve our water treatment works. Schemes such as these are supporting our efforts to improve services for our customers and help safeguard the environment. We are committed to continuing this level of investment in 2020 to 2025 business plan.

Our largest single investment commenced this year at the Keleher Water Treatment Works at Bray in Berkshire. The GBP21 million project is increasing the capacity of the treatment works, which celebrated its 25(th) anniversary this year, from the current 45 million litres per day to 68 million litres per day. The work got underway during the summer with a site clearance programme which was completed ahead of schedule. Work will continue throughout 2019 and is on track to complete in early 2020.

We strive to keep improving the quality of the water we supply. We have maintained high overall water quality with 99.98 per cent of samples passing standards set by the Drinking Water Inspectorate in the calendar year from January to December 2018. I am pleased to report we have also made progress on reducing the number of contacts received from customers about discoloured water. In 2018/19 we received 0.59 contacts (per 1,000 population) compared to 0.82 the previous year. This improvement was the result of our successful Seaquest dosing and mains flushing programme which removes the harmless naturally occurring deposits which build up over time within the mains which can cause the discoloration incidents.

A very important water demand management project over the last eight years has been the compulsory Customer Metering Programme, which aimed to have 90 per cent of properties metered by 2020. The project has achieved the 90 per cent target in March 2019. I would like to commend the team, including our partner Clancy Docwra, which has delivered this metering programme. The project, which was shortlisted this year for a Water Industry Achievement Award, has been a success with demand for water reducing by 18 per cent in the homes that we have compulsorily metered.

Non-household customers

During the earlier part of the financial year the decision was taken to exit the non-household retail market and focus solely on the provision of wholesale water services to retailers in this new market. I am pleased to report that the transfer of our non-household customers to the new retailers has been successful.

Brexit

The proposed exit of the UK from the European Economic Area has been included in our risk analysis. Throughout the year we have been making contingency plans for this evolving issue. We have been working with our suppliers and other partners in the industry to ensure the consequences of the various exit scenarios have minimal impact on our services. Further details are set out in the Managing Directors Report.

Financial results

The results published in this report describe our performance for the year and incorporate the performance of South East Water Limited and South East Water (Finance) Limited.

This year we have had a strong financial performance, having generated a group operating profit of GBP86.4 million for the year to 31 March 2019, compared with GBP75.0 million for the prior year. Our turnover was GBP238.3 million for the year compared to GBP221.5 million in the prior year. This additional revenue is primarily due to the allowed price increase in the year of GBP9.2 million and the additional turnover taken to the income statement following the adoption of IFRS 15 of GBP7.5 million.

Group net operational costs, including charges for doubtful debt, have increased in the year to GBP164.8 million compared to GBP155.3 million in the prior year, an increase of GBP9.5 million. Included in this increase are additional costs of GBP2.3 million reflecting the impact of the adoption of IFRS 15 (see note 2), GBP1.4 million additional depreciation on fixed assets and GBP1.5 million of additional energy and bulk water supply costs.

Profit before tax has increased by GBP12.6 million from GBP23.8 million to GBP36.4 million. Net finance costs have reduced in the year by GBP1.2 million to GBP50.0 million. This is due to an increase in finance income of GBP1.3 million being offset by an increase in finance costs of GBP0.1 million.

Profit for the year has increased from GBP16.2 million to GBP38.7 million, which is driven by the improved operational performance detailed above together with the profit on disposal of the company's non-household business of GBP9.2 million. The reduction in tax during the year is largely due to the treatment of deferred tax on the group's revaluation reserve being revised in the prior year.

We have developed a Sustainability Finance Framework, under which the company can issue Sustainability Bonds and Sustainability Loans. The framework will finance a range of activities, not only environmental projects but also ones which will benefit society such as improving drinking water quality. The framework was supported by ING, which acted as sole Green Structuring Advisor and independently reviewed by VigeoEiris.

This Sustainability Finance Framework highlights how our activities are supporting five of the United Nation Sustainable Development Goals, including climate action and sustainable cities and communities. It is an important step in our continuous development as a responsible business.

We have secured the funding to replace the GBP311m of our debt which matures on 30 September 2019. We have secured GBP120m of debt from banks, which matures in 2025, and GBP175m from US insurance companies and pension funds in the form of a Private Placement. The Private Placement is in two tranches with GBP75 million maturing in 2031 and GBP100 million maturing in 2042. In addition we have secured a GBP54m equity injection from our shareholders which allows our gearing to reduce and is consistent with the commitment they provided in our business plan. The funds for each tranche are committed and will be drawn down in September. We look forward to working with our new investors to continue to develop our sustainable business strategy.

Our people, working together towards future success

We know that great people, who see purpose in their work, are the key to the success of our business. That is why ensuring South East Water is "the water company people want to work for" is an integral part of our vision. We are delighted that this year we were shortlisted in the Utility Week Environment Award and that in May 2018 we won the Resilience Initiative of the Year at the Water Industry Achievement Awards. Our people should be rightly proud of the job they do and the important role they play in our society.

Our "Thrive 365!" health, safety and wellbeing strategy, consists of two strands, safe people and safe working, and is about more than just preventing accidents; it is about enhancing the overall wellbeing of our people.

This year we have been developing our mental health strategy to combat poor mental health and the first stage has been to recruit and train 16 mental health first aiders. The course, conducted by the charity Mind, was thought provoking and those who took part said they left with a determination to ensure that everyone has access to the support they need at the times they need it.

In March we published our gender pay gap report which shows an average hourly rate pay gap of 23 per cent, while a small drop from the previous year it is still above the national average. We ensure that on a like for like role there is no gender pay gap, but our gap is the result of having more men in higher paid roles. To continue to reduce the gap we therefore need to increase the number of women we appoint and develop into higher paid roles. Accordingly we have concentrated this year on a review of our recruitment processes, to ensure that we benefit from the widest possible talent pool, alongside a review of our job evaluation system, to ensure that there is a clearer progression path for all our colleagues. We are also continuing with the initiatives we put into place last year, such as our women at work group, to help women progress their careers in the company and STEM ambassadors, to encourage recruitment into technical roles.

Engaging with our employees is important so we can continue to improve as an employer of choice. We were pleased that our 2018 engagement survey achieved a response rate of 88 per cent, and that 90 per cent of the employees who responded are proud to work for South East Water. We also undertook to achieve reaccreditation of the Investors in People (IIP) award during the year. The IIP framework has recently been updated and therefore we are pleased to confirm we have achieved the silver award, a great result against much more stretching standards that is only achieved by six per cent of IIP accredited companies. Thank you to the 100 colleagues who participated in the interview and review process that focused on nine indicators and 27 themes developed to reflect the features of leading businesses and organisations which outperform industry norms.

To support continued development of our employees we introduced a new employee performance management framework called iReview in 2017 and developed it further this year. We are delighted that this second year saw 100 per cent completion putting employees in the driving seat of their personal development. Building on the ambitions of our employees is vital and we are pleased to confirm last year more than 19,000 hours of official training and development were recorded.

Building a sustainable future

During the year we have been building our environmental, social and governance (ESG) framework and we aim to be recognised as a leading responsible business. As highlighted earlier the business plan incorporated a responsible business strategy with 10 new responsible business commitments to reflect the actions and behaviours customers expect a responsible business to display.

Activities we've been developing include increasing our schools programme of engagement, developing more partnerships by working with charities and universities, ensuring fair reward and recognition for all employees and working with Water UK and the Refill organisation to encourage the use of tap water as a sustainable alternative to bottled water. Full details of our work and example case studies can be seen in our Performance, People and Planet report.

To ensure we are prepared to continue to lead in this area, embed the commitments within the business and never stand-still, we have set up a Responsible Business board committee. The main purpose of the committee is to assist the board in defining the company's strategy relating to ESG matters and in reviewing related practices and initiatives to ensure they remain effective and up to date.

On behalf of the Board I would like to thank all our employees, the management team and our business partners for all they achieved during 2018/19. Yet again this year the South East Water community has demonstrated dedication and passion for providing customers with a sustainable water supply today and into the future. Our plans prepared during 2018/19 are the most ambitious we have seen and will support a long-term vision and legacy for the region. I look forward to the year ahead as we work together to prepare for the start of a new five year period and complete the commitments we made through to 2020.

Nick Salmon

Chairman

15 July 2019

Group income statement

for the year ended 31 March 2019

 
                                                                  2019                2018 
                                               Notes            GBP000              GBP000 
 
 Continuing operations 
 Revenue                                        5              238,281             221,492 
                                                      ----------------  ------------------ 
 
 Bad debt                                                      (1,584)             (1,199) 
                                                      ----------------  ------------------ 
 
   Group net operating costs                                 (163,257)           (154,068) 
                                                      ----------------  ------------------ 
 
 Other income                                   5               12,997               8,816 
 
   Group operating profit                                       86,437              75,041 
 Finance costs                                                (56,110)            (56,017) 
 Finance income                                                  6,076               4,803 
 
   Profit before taxation                                       36,403              23,827 
 Taxation                                       6              (6,992)             (7,590) 
                                                      ----------------  ------------------ 
  Profit for the year from continuing 
   operations                                                   29,411              16,237 
 
 Discontinued operations 
 Profit/(Loss) on discontinued operations       8                9,253                (69) 
                                                      ----------------  ------------------ 
 
 Profit for the year                                            38,664              16,168 
                                                      ----------------  ------------------ 
 
 Earnings per share 
 Basic and diluted                              9               78.41p              32.79p 
                                                      ----------------  ------------------ 
 

Group statement of comprehensive income

for the year ended 31 March 2019

 
                                                                   Notes        2019       2018 
                                                                              GBP000     GBP000 
 
 Profit for the year                                                          38,664     16,168 
 Items that will not be reclassified 
  subsequently to profit or loss: 
 Remeasurement of defined benefit (deficit)/surplus                          (3,525)      9,355 
 Deferred tax on defined benefit pension 
  schemes                                                      6                 600    (1,590) 
 
                                                                             (2,925)      7,765 
                                                                          ----------  --------- 
 
   Total comprehensive income for the year 
   attributable to owners of the company                                      35,739     23,933 
                                                                          ----------  --------- 
 

Group statement of financial position

as at 31 March 2019

 
                                             31 March        31 March 
                                                 2019            2018 
                                               GBP000          GBP000 
 
 Non-current assets 
 Intangible assets                             10,501          10,758 
 Property, plant and equipment              1,555,123       1,501,707 
 Amount due from parent undertaking           189,911         190,013 
 Defined benefit pension surplus               25,564          24,510 
                                       --------------  -------------- 
 
                                            1,781,099       1,726,988 
                                       --------------  -------------- 
 
 Current assets 
 Inventories                                      592             236 
 Trade and other receivables                   86,190          78,255 
 Cash and cash equivalents                     12,804           6,528 
                                       --------------  -------------- 
 
                                               99,586          85,019 
                                       --------------  -------------- 
 
  Total assets                              1,880,685       1,812,007 
                                       --------------  -------------- 
 
 Current liabilities 
 Loans and borrowings                       (254,890)        (20,000) 
 Derivative financial instruments           (108,836)               - 
 Trade and other payables                    (92,263)        (94,379) 
 Deferred income                              (7,183)         (7,593) 
 Provisions                                   (3,972)         (2,515) 
                                       --------------  -------------- 
 
                                            (467,144)       (124,487) 
                                       --------------  -------------- 
 
 Non-current liabilities 
 Loans and borrowings                       (717,604)       (900,897) 
 Trade and other payables                     (5,379)         (5,979) 
 Derivative financial instruments                   -       (104,169) 
 Net deferred tax liabilities               (145,395)       (140,085) 
 Defined benefit pension liability            (3,154)         (3,281) 
 Deferred income                              (3,185)        (74,471) 
 
                                            (874,717)     (1,228,882) 
                                       --------------  -------------- 
 
   Total liabilities                      (1,341,861)     (1,353,369) 
                                       --------------  -------------- 
 
   Net assets                                 538,824         458,638 
                                       --------------  -------------- 
 
 Equity 
 Ordinary share capital                        49,312          49,312 
 Revaluation reserve                          251,259         256,396 
 Retained earnings                            238,253         152,930 
                                       --------------  -------------- 
 
   Total equity                               538,824         458,638 
                                       --------------  -------------- 
 

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 2019

 
                                               Issued 
                                        share capital     Revaluation     Retained     Total equity 
                                               GBP000         reserve     earnings           GBP000 
                                                               GBP000       GBP000 
 
 
 Balance at 1 April 2017                       49,312         261,549      141,845          452,706 
                                      ---------------  --------------  -----------  --------------- 
 
 Profit for the year                                -               -       16,168           16,168 
                                      ---------------  --------------  -----------  --------------- 
 Other comprehensive income: 
   Remeasurement of defined benefit 
    surplus/(deficit)                               -               -        9,355            9,355 
   Deferred tax on defined benefit 
    pension schemes                                 -               -      (1,590)          (1,590) 
 
   Total other comprehensive income                 -               -        7,765            7,765 
 Total comprehensive income                                                 23,933           23,933 
 Dividends (see note 5)                             -               -     (18,000)         (18,000) 
 Amortise revaluation reserve                       -         (6,129)        6,129                - 
 Release revaluation on disposals                   -            (70)           70                - 
 Deferred tax on revaluation and 
  retained earnings transfer                        -           1,046      (1,046)                - 
 
   Balance at 31 March 2018                    49,312         256,396      152,931          458,639 
 Change in accounting policy IFRS 
  15 (see note 2)                                   -               -       72,548           72,548 
                                      ---------------  --------------  -----------  --------------- 
 Change in accounting policy IFRS 
  9 (see note 3)                                                             (102)            (102) 
                                      ---------------  --------------  -----------  --------------- 
 
   At 1 April 2018                             49,312         256,396      225,377          531,085 
                                      ---------------  --------------  -----------  --------------- 
 
 Profit for the year                                -               -       38,664           38,664 
                                      ---------------  --------------  -----------  --------------- 
 Other comprehensive income: 
   Remeasurement of defined benefit 
    surplus/(deficit)                               -               -      (3,525)          (3,525) 
   Deferred tax on defined benefit 
    pension schemes                                 -               -          600              600 
 
   Total other comprehensive income                 -               -      (2,925)          (2,925) 
 
   Total comprehensive income                                               35,739           35,739 
 Dividends (see note 5)                             -               -     (28,000)         (28,000) 
 Amortise of revaluation reserve                    -         (6,127)        6,127                - 
 Release of revaluation reserve 
  on disposals                                      -            (51)           51                - 
 Deferred tax on revaluation and 
  retained earnings transfer                        -           1,041      (1,041)                - 
 
   Balance at 31 March 2019                    49,312         251,259      238,253          538,824 
                                      ---------------  --------------  -----------  --------------- 
 

All transactions relate to the equity holders of the Company.

Group statement of cash flows

for the year ended 31 March 2019

 
                                                               Notes       2019       2018 
                                                                         GBP000     GBP000 
 
 Operating activities 
 Net cash flow from operating activities                                125,023    123,172 
 Interest received                                                        5,437      4,554 
 Interest paid                                                         (36,940)   (35,617) 
 Group tax relief paid                                                  (1,314)    (4,036) 
                                                                      ---------  --------- 
 
   Net cash flow before investing and financing 
   activities                                                            92,206     88,073 
                                                                      ---------  --------- 
 
 Investing activities 
 Proceeds from the sale of property, plant 
  and equipment                                                             736        264 
 Purchase of property, plant and equipment                             (97,132)   (93,763) 
 Proceeds from the sale of non-household 
  customer base                                                           9,156       (69) 
 Purchase of intangible assets                                          (2,997)    (3,106) 
 Fixed asset contributions received                                           -      1,758 
 
   Net cash flow used in investing activities                          (90,237)   (94,916) 
                                                                      ---------  --------- 
 
 Financing activities 
 New bank loans received                                                 35,000     20,000 
 Issue cost of new debt                                                 (2,693)          - 
 Dividends paid to shareholder                             7           (28,000)   (18,000) 
 
   Net cash flow from financing activities                                4,307      2,000 
                                                                      ---------  --------- 
 
 Increase/(Decrease) in cash and cash 
  equivalents                                                             6,276    (4,843) 
 Cash and cash equivalents at the beginning 
  of the year                                                             6,528     11,371 
                                                                      ---------  --------- 
 
   Cash and cash equivalents at the year 
   end                                                                   12,804      6,528 
                                                                      ---------  --------- 
 

Net Cash flow from operating activities

 
                                                         2019        2018 
                                                       GBP000      GBP000 
 
   Profit for the year                                 38,664      16,168 
 Adjustments for: 
  Income tax charge                                     6,992       7,590 
  Finance income                                      (6,076)     (4,835) 
  Finance costs                                        56,110      56,049 
  Depreciation and impairment of property, plant 
   and equipment                                       48,046      46,253 
  Amortisation and impairment of intangibles            3,254       3,405 
  Profit on disposal of fixed assets                  (9,253)       (120) 
  Proceeds from the sale of non-household customer 
   base                                               (9,156)          69 
  Difference between pension contributions paid 
   and amounts recognised in the income statement     (4,086)     (3,861) 
 Changes in working capital: 
  Increase in trade and other receivables             (5,451)     (5,958) 
  Increase in inventory                                 (356)        (22) 
  Increase/(Decrease) in trade and other payables     (2,444)       8,434 
 
   Net cash flow from operating activities            125,023     123,172 
                                                     --------  ---------- 
 

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 2019.

(ii) The information shown for the years ended 31 March 2019 and 31 March 2018 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 2019. 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 2019 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 15 July 2019.

   2          Adoption of IFRS 15 

The group adopted IFRS 15 Revenue from Contracts with Customers ("IFRS15") on 1 April 2018 using the modified retrospective method. The group has a number of different income streams that need to be considered in the context of IFRS 15.

Income from the supply of water services is currently recognised as the service is supplied. Under IFRS 15 there is no significant judgment required in identifying the customer in these contracts with customers. The performance obligations are the supply of the water services and revenue is recognised as these obligations are satisfied over time. The adoption of the new standard has had no material impact on the timing and amount of revenue recognised in these services.

Other income, including billing and collections services and laboratory services, involve similarly readily identifiable contracts with customers with clearly defined performance obligations to which prices are allocated.

Income from transactions relating to the group's network assets in providing a network connection and on-going access to the network ("capital income") requires significantly more judgment in identifying contracts with customers and the related performance obligations.

Capital income can be categorised under the following headings:

   --      Infrastructure charges; 
   --      New connections income; and 
   --      Developer contributions to new mains and mains diversions. 

Infrastructure charges were previously recognised in the income statement when access to the mains supply is granted. This treatment is consistent with the principles of IFRS 15 and no change is required for this income stream.

New connections income, to the extent it relates to the cost of the new connection, and developer contributions were previously held as deferred income on the statement of financial position and released to the income statement over the life of the underlying assets.

These activities relate to the establishing a connection to the water network and are performed for developers. Each of these activities are performed as separate contracts with the developers as required and on request from developers. Not all developments require all of these activities to be performed. The overall result from these contracts is that properties are allowed access to the network prior to the properties being sold. These activities are part of the group's ordinary activities associated with the operation, maintenance and expansion of a water network and, because they are deemed to result in an exchange transaction, we have determined that they fall within the scope of IFRS 15 as transactions arising from contracts with customers, i.e. the developers who request the services.

The performance obligations in contracts for the different capital related income streams are recognised as:

   --      Infrastructure charges - the provision of access to the network. 

-- New connections income - the connection of individual properties via a communication pipe to the mains supplying the development.

-- Developer contributions to new mains and mains diversions - the completion of the laying of a new main or replacement main, as defined by the contract.

The prices attaching to these contracts and relating to these performance obligations are set in line with the guidance provided by Ofwat. In the case of infrastructure charges and new connections a number of properties are aggregated together in determining when performance obligations are completed and the price relating to the obligation.

Revenue is recognised on each of these capital income streams on completion of the performance as described above.

Applying IFRS 15 has resulted in a significant change to the accounting policy for new connections income and developer contributions to new and diverted mains.

At the date of adoption of IFRS 15, the group had GBP75.7 million of deferred income in respect of infrastructure charges, new connection charges and developer contributions to new and diverted mains. Of this amount, GBP71.9 million related to contracts that have been completed and where the assets are in current use. An adjustment has been made to deferred income upon adoption of IFRS 15 for the contributions on completed jobs and retained earnings has increased by GBP71.9 million accordingly.

In addition, non-current trade and other payables includes amounts received from developers for self-lay, discounted aggregate deficit and relevant deficit schemes of GBP5.4 million at 1 April 2018. Of this amount, GBP0.5 million related to projects that have been completed in prior years and are not refundable to the developers. An adjustment has been made to non-current trade and other payable for the amounts received in respect of completed jobs and retained earnings has increased by GBP0.5 million accordingly.

The remaining amounts received from developers at 1 April 2018, being GBP3.8 million in respect of contributions and GBP4.9 million in respect of self-lay and similar schemes, relate to contracts where the performance obligations have not yet been satisfied. These will be recognised in the income statement on completion of the respective performance obligation under each contract.

In summary, the adjustments relating to the opening balances of net assets and retained earnings are:

 
                                             GBP000 
 
   Non-current trade and other payables         543 
 Deferred Tax                                   107 
 Non-current deferred income                 71,898 
 
   Increase in net assets                    72,548 
                                          --------- 
 
   Increase in retained earnings             72,548 
                                          --------- 
 
   3          Adoption of IFRS 9 

On 1 April 2018, the group adopted IFRS 9 Financial Instruments ("IFRS 9"). IFRS 9 specifies how the group should classify and measure financial assets and liabilities.

IFRS 9 does not change the classifications of financial liabilities from the current IAS 39 requirements. IFRS 9 requires all financial liabilities to be measured at amortised costs, except for financial liabilities through profit or loss.

In adopting the Standard, the group has assessed the classification of its financial instruments and reclassified its financial assets as follows:

 
 Financial asset            IAS 39 classification     IFRS 9 classification 
 
   Amount due from parent 
   due in more than one       Loans and receivables     Measured at amortised 
   year                                                 cost 
                           ------------------------  ------------------------ 
 Trade receivables          Loans and receivables     Measured at amortised 
                                                       cost 
                           ------------------------  ------------------------ 
 Accrued income             Loans and receivables     Measured at amortised 
                                                       cost 
                           ------------------------  ------------------------ 
 Amounts due from parent 
  and fellow subsidiary 
  undertakings due within     Loans and receivables     Measured at amortised 
  one year                                              cost 
                           ------------------------  ------------------------ 
 

There were no changes to the classification of the company's financial liabilities.

The group has considered the credit risk of its financial assets and concluded that:

-- the policy for provision for doubtful trade debts should be updated to include allowance for future environmental and economic conditions. In making this change management has concluded that no adjustment is required or has been recorded to the provision previously calculated under their old accounting policy following the adoption of IFRS 9; and

-- the risk of non-recovery of the group's parent loan is considered very small. In accordance with the requirements of IFRS 9, management has assessed the risk and recognised an allowance on transition for credit loss of GBP102,000 in its opening retained earnings. A provision for this allowance has been created and offset against the carrying value of the relevant asset in the group statement of financial position.

   4          Going concern 

The group's business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report. The group finances its working capital requirements through cash generated from operations and committed facilities that can be called upon as required. The group's annual budget and forecasts, together with its five year plan and longer resources planning, all indicate that the group should be able to continue operating.

Therefore, the directors believe that the South East Water and the group are well placed to manage their business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.

   5          Total income 
 
 Group and company                 2019        2018 
                                 GBP000      GBP000 
 
   Revenue 
 Unmetered water income          24,966      34,868 
 Metered water income           199,278     180,363 
 Unmetered sewerage income            -           - 
 Metered sewerage income           (15)           - 
 Other sales                     14,052       6,261 
                             ----------  ---------- 
 
   Total Revenue                238,281     221,492 
                             ----------  ---------- 
 
 Other income 
 Rental income                    1,233       1,178 
 Sundry income                   11,764       7,638 
                             ----------  ---------- 
 
   Total other income            12,997       8,816 
                             ----------  ---------- 
 
   Total income                 251,278     230,308 
                             ----------  ---------- 
 
   6.         Corporation tax 

Major components of the tax expense for the years ended 31 March 2019 and 2018 are:

 
                                                          2019      2018 
                                                        GBP000    GBP000 
 Group income statement 
 Current tax: 
 Current UK tax charge                                     878      1975 
  Amounts (over) provided in previous years                  -       (1) 
                                                      --------  -------- 
 
                                                           878     1,974 
                                                      --------  -------- 
 Deferred tax: 
  Relating to origination and reversal of temporary 
   differences                                           6,017     5,600 
  Tax charge reported in the group income statement      6,895     7,574 
                                                      --------  -------- 
 
 Tax charge/(credit) to equity                               -         - 
 Deferred tax on defined benefit pension schemes         (600)     1,590 
 
   Tax reported in comprehensive income statement        (600)     1,590 
                                                      --------  -------- 
 

Factors affecting the tax charge for the year

The tax for the year is lower than the standard rate of corporation tax in the UK. The differences are explained below:

 
                                                       2019      2018 
                                                     GBP000    GBP000 
 
 Profit for the year on Continued operation          36,403    23,827 
                                                   --------  -------- 
 
 Profit multiplied by the rate of corporation 
  tax in the UK of 19% (2018: 19%)                    6,917     4,527 
 Effects of: 
 Adjustments to current tax charge in respect 
  of previous years                                       -       (1) 
 Adjustments to deferred tax charge in respect 
  of previous years                                   (451)     2,523 
 Expenses not deductible for tax purposes               594       541 
 Tax effect of income not taxable in determining       (68)         - 
  taxable profit 
  Total tax charge reported in the group income 
   statement                                          6,992     7,590 
                                                   --------  -------- 
 

The adjustments to deferred tax in respect of previous years represents the changes between the year end and submitted computations and, in respect of the prior year, a revision of the tax treatment of the amortisation of the revaluation reserve. The expenses not deductible for tax purposes are made up of the movement on general provisions, entertainment expenses and depreciation on non-qualifying capital expenditure.

   7          Dividends 
 
                                                        2019       2018 
                                                      GBP000     GBP000 
 
 Equity dividends paid during the year: 
  First interim dividend of 14.20p per ordinary 
   share (2017: 9.13p per ordinary share)              7,000      4,500 
  Second interim dividend of 14.20p per ordinary 
   share (2017: 9.13p per ordinary share)              7,000      4,500 
  Third interim dividend of 14.20p per ordinary 
   share (2017: 9.13p per ordinary share)              7,000      4,500 
  Final dividend of 14.20p per ordinary share 
   (2017: 9.13p per ordinary share)                    7,000      4,500 
                                                   ---------  --------- 
 
                                                      28,000     18,000 
                                                   ---------  --------- 
 

There were no dividends proposed for approval as at 31 March 2019 and 31 March 2018.

   8          Profit on discontinued operations 

On 1 May 2018, the group sold its rights to the non-household customer base to its fellow wholly owned subsidiary, Invicta Water Limited, for a consideration of GBP10.0 million which has resulted in a profit on disposal of GBP9.2 million. The rights to the non-household customer base are an internally generated intangible asset and, as per IAS 38, these were not recognised on the group's statement of financial position.

 
                                                    2019      2018 
                                                  GBP000    GBP000 
 
 Revenue                                             354     3,363 
 Operating expenses                                (361)   (3,446) 
 Finance costs                                         -       (2) 
                                                --------  -------- 
 
   Profit before tax                                 (7)      (85) 
 Proceeds from disposal of intangible asset       10,000         - 
 Legal fee                                         (244)         - 
 Consultancy                                        (91)         - 
 Bad debt provision                                (502)         - 
 Taxation                                             97        16 
 
   Profit/(loss) attributable to discontinued 
   operation                                       9,253      (69) 
                                                --------  -------- 
 
   9          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:

 
                                                         2019         2018 
                                                       GBP000       GBP000 
 
 Profit for the year from continuing operation         29,411       16,237 
                                                  -----------  ----------- 
 
   Profit/(loss) for the year from discontinued 
   operation                                            9,253         (69) 
 
                                                       Number       Number 
 
 Basic and diluted weighted average number 
  of shares                                        49,312,354   49,312,354 
                                                  -----------  ----------- 
 Basic and diluted earnings per share from 
  continuing operation                                 59.64p       32.93p 
                                                  -----------  ----------- 
 Basic and diluted earnings per share from 
  discontinued operation                               18.77p      (0.14)p 
                                                  -----------  ----------- 
 

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.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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