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53HO Sth.e.wtr.5%db

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South East Water Limited Half-year Report (3037I)

11/12/2020 7:00am

UK Regulatory


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TIDM53HO

RNS Number : 3037I

South East Water Limited

11 December 2020

South East Water Limited

Condensed group financial statements

for the six months ended 30 September 2020

Chairman's introduction

I am pleased to present our interim report for the six months ended 30 September 2020.

Our priority over the last six months has been to continue to provide the essential water service our community needs while rapidly adapting to the impacts of the Covid-19 pandemic. We have continued to supply drinking water for more than 900,000 households in the south east and carry out essential repairs, while ensuring we keep our colleagues safe and well. As lockdown arrived we had to switch most of our office based staff to be able to work from home, including the customer call centre. For field staff new safe working procedures had to be implemented including the provision of additional PPE and additional vehicles so that social distancing could be respected. We made a clear commitment from the outset to support customers who struggle to pay their bills, with 40,000 benefiting from our financial assistance schemes including WaterSure and our social tariff. We have also increased the number of vulnerable customers supported through our Priority Services Register (PSR), with an additional 10,000 added during the first half of year bringing the total number on the PSR to 24,000.

Our purpose is "to provide today's public water service and create tomorrow's water supply solutions, fairly and responsibly, working with others to help society and the environment to thrive". The response of the company, employees and partner organisations to Covid-19 has clearly demonstrated how the organisation's stated purpose really is at the heart of everything we do.

This purpose, which we are inserting into our Articles of Association, is centred on our core function as a provider of a public water service, both for now and the future. It reflects our wider societal and environmental goals delivered through performing our core service, recognising key challenges we face - such as climate change and sustainability.

With our 2020 to 2025 investment period now underway we are focused on delivering our purpose-led plan which will see the expenditure of GBP433 million (2017/18 prices) in improvements across the network. We will track our progress against more than 40 challenging performance and responsible business commitments. Examples include:

   --      reducing leakage by 15 per cent by 2025 maintaining our upper quartile industry position 
   --      protecting wildlife and increasing biodiversity - 1,460 hectares 
   --      engaging and working with landowners - catchment management - 14,000 hectares 
   --      reducing per capita consumption by seven per cent 
   --      greenhouse gas emissions reduced by 68 per cent by 2025 
   --      engaging and working with 20 other abstractors to improve catchment resilience to low flows 

-- increasing the number of household customers receiving financial support by 100 per cent and those receiving non-financial support through our Priority Services Register by over 700 per cent

Today's public water service during challenging times

The first six months of the financial year have undoubtedly been challenging as the impacts of Covid-19 coupled with heatwaves in May and August put the company under great operational pressures. Household water use has increased significantly since March 2020 when the nationwide lockdown was first introduced. There has been a reduction in the number of workers commuting into London and more people staying at home and using more water than normal. Also the majority of residents remained in the region for their summer holidays when in normal years we see a significant holiday exodus. Non household, business and industrial consumption did reduce slightly but not by enough to offset the rise in household consumption. Hence there was a significant increase in the volumes of water we had to put into supply across all areas throughout the summer.

In readiness for the anticipated high demand we ensured our level of outage (sites out for maintenance) was very low across the business. Performance year-to-date against the outage target has been very good at 1.5 per cent versus a 4.0 per cent target so we were in a good position before the hot weather arrived.

As we were operating at almost maximum production capacity a key activity to maintain supplies was customer communication on using water efficiently and responsibly. Water efficiency advice and messaging is something we do all year round, but from early spring we significantly increased our activity. This was intensified during the summer and ahead of the extreme hot weather.

During July and August average day demand was 579 Ml/d compared to a pre-Covid July and August average day demand of 545 Ml/d in 2019. We saw demand reach a peak of 695 Ml/d on Friday 7 August - one of the highest levels on record for South East Water. Demand was consistently above 650 Ml/d for a total of six days

during the heatwave period of 6 - 13 August, which saw record maximum temperatures of 33 - 35degC sustained over the six days. Although across the organisation as a whole this level of demand was within our planned headroom, there were pockets where this consistently high demand exceeded our planned headroom.

Employees from across the business and our contractors responded superbly, working to keep water flowing for most of our customers, and striving to restore supplies for those impacted. Clearly at a time of pandemic the seriousness of the situation was increased and the welfare of our customers, particularly the vulnerable, was always our priority.

While we were able to manage and maintain water supplies for more than 99 per cent of our customers during this period, there were unfortunately some, particularly in parts of Mid Sussex, who were without water or experienced low pressure as the volumes of water being used by customers outstripped the design capacity of our network.

The community impacted was reliant on bottled water while we worked to refill the water network and restore water supplies. During the event we worked with community organisations, support agencies, local councils and other water companies to provide alternative water for those who needed it. We are very grateful for the invaluable support that these organisations provided.

The team has since carried out a thorough review to learn lessons and the Board will monitor progress against the action plan that has been created which aims to reduce the impact or likelihood of a similar event in the future. A report has been published detailing the event, lessons learned, key actions and some wider policy implications. This can be found at southeastwater.co.uk/midsussex

In September a different challenge was faced when a series of large sinkhole voids appeared on the site of two treated drinking water storage tanks that serve the Maidstone area. The voids appeared after heavy rain, with one being large enough to hold three buses and caused extensive damage to our tanks which between them hold 20 million litres of water and rendering the area unsafe. The team worked quickly to reconfigure the network to bypass the two tanks and were able to ensure customer water supplies were not impacted. We worked closely with the Local Resilience Forum and kept local residents informed. Working with specialist organisations we are now developing engineering solutions to stabilise the site and restore the storage capacity in the area ahead of summer 2021.

Covid-19 has challenged our ability to deliver some elements of our capital investment programme during this period. Work had to stop on a small number of schemes while safe working practices were developed and a reduction in the number of people able to work safely on site together impacted progress.

The GBP22 million project to increase the capacity of the Keleher water treatment works in Berkshire has reached a pivotal stage as we have now started treating water through the newly expanded works. The site treats water extracted from the River Thames to drinking water standards, increasing treatment capacity from 45 million litres per day to 68 million litres per day.

We have installed eight kilometres of new water mains in the first six-months of the year. This includes a GBP1.4 million project in Wokingham, Berkshire, where we laid more than three kilometres of pipe to replace an old pipeline which had become prone to bursting.

In Sevenoaks, Kent we are investing GBP7 million in upgrading the town's drinking water supply. A new treated drinking water storage tank is now installed which can hold five million litres, replacing the previous three million litre tank which had come to the end of its useful life after 96 years' service. The first phase of work to lay a new GBP2.8 million water main that will connect the upgraded storage tank to Solefields was completed in September. The second phase of work has had a delayed start due to Covid-19, but will now begin next year, as we install approximately three kilometres of new pipe through Knole Park. Once complete it will help supply residents and businesses in the town with top quality water for decades to come.

Water quality is of course of the upmost importance. Throughout this year we have worked closely with the Drinking Water Inspectorate (DWI) to ensure we are maintaining the highest standards for the water we provide. I am pleased to confirm for the first six months of the year we have achieved 99.98 per cent of our water quality samples meeting requirements and our performance in the DWI headline measure of water quality, Compliance Risk Index (CRI) is better than industry average.

We have continued to make improvements in our customer service capabilities. Using our cloud based platform, we have built a modern 'My Account' application with Artificial Intelligence capabilities. We have listened to customers through webchat and phone calls when they have asked for greater control of their account and their feedback on our online billing portal My Account has resulted in a complete redesign boasting an innovative supermarket-style self-service checkout system. Customers are now benefitting from a fully automated round the clock online system where they can submit their own meter readings, manage their payment plan, make payments and change their address as well as keeping track of their water use to help them see where they could save water and money. Of course customers can still have direct personal contact with our locally based Customer Service team whenever they need it.

This is just one example of the work underway to improve the customer experience. For the first half of the year the company has scored 80.5 out of 100 - and is 12th out of 17 in the industry in Ofwat's new C-Mex (customer experience measure).

Creating tomorrow's water supply solutions

Much of the focus of 2020 so far has understandably been on the here and now challenges, however we are always looking ahead to ensure we are ready to meet the water supply needs of tomorrow.

Aiming to protect future water quality, construction of a brand-new GBP5 million treatment station at our Woodgarston Water Treatment Works in Upper Wooton, Hampshire began this summer for completion by December 2021. The new equipment will futureproof the water supply against forecast increases in nitrate levels in the area, which will help to protect water supplies for future generations.

Alongside this vital investment, we continue to work with local farmers on their nutrient management practices and promoting cover crop usage. It will take time to see the benefits as improvements to groundwater quality can take several years to work through the water cycle. We are confident that our success in working with the farms in the Woodgarston catchment and others across our area will bring about a water quality improvement in future years.

The implementation of our latest water resources management plan (WRMP19) is underway. The plan manages the predicted future shortfall in available water for our region by reducing demand for water and developing new sources of water. Key water resource schemes for the next 25 years include upgrading existing treatment works alongside investment in two new reservoirs and a new treatment works at Aylesford, Kent. To reduce demand we have an ambitious water efficiency programme coupled with our commitment to reduce leakage by 15 per cent by 2025 and we aim to halve leakage levels by 2050. To achieve this level of reduction it is clear that we will need to innovate. We were therefore delighted to be recognised with three innovation awards for our Smart Network trial at this year's Water Industry Awards; Data Project of the Year, Most Innovative Project of the Year and Water Innovation Project of the Year. The trial involved bringing together 15 specialist companies to test cutting edge digital water meters, sensors, advanced analytics and telecommunications channels with 2,000 customers in north Kent. To combine all the elements into a smart network was an industry-first in England.

We are already well underway in developing our next water resources management plan (WRMP24), which will set out how we plan to secure water supplies for today's and tomorrow's customers, from 2025 to 2100.

As part of this plan, we are key partners in the regional Water Resources South East (WRSE) group which is looking at how water will be supplied across the whole of the South East region in the future, not just within our supply area. WRSE is an alliance between six water companies in the south east - ourselves, Southern Water, Thames Water, Affinity Water, SES Water and Portsmouth Water.

WRSE is currently creating its own draft regional water resources management plan which will be consulted on in January 2022, we will then use the results of that report to form the basis of our 2024 plan.

Early engagement is also underway on updating our drought plan which is being refreshed to ensure it not only provides clear guidance on how we would manage a severe drought, but also makes it easier for stakeholders and customers to understand the steps we are taking and the part they play. The draft drought plan will be published in March 2021 for public consultation.

Thriving together as a fair and responsible business

As an intrinsic part of our corporate plan, we have a responsible business strategy to further develop our environmental, social and governance (ESG) framework. We have also established a Responsible Business Board sub-committee to oversee progress. One way we are monitoring progress is through GRESB, a global benchmarking of ESG practice. This year we maintained the maximum five star rating and increased our score from 81 out of 100 in 2019 to 90 in the 2020 GRESB survey versus a peer group average of 77, making us the sector leader globally for water and wastewater companies.

Environmental

This year has seen the start of our 2020 to 2025 Environment Programme which doubles the amount we are spending compared with the previous five years to GBP37m. We are putting nature-based solutions into the heart of our long-term water quality and sufficiency management, building on our established catchment management approach.

Our catchment programme includes work at 44 groundwater sites to be delivered by 2022. This work will investigate increasing nitrate levels in raw groundwater, with the aim to reduce the need for more expensive water treatment solutions in the future by working with landowners to improve soil conditions and reduce pollution at source. Due to Covid-19 we have moved some of our engagement online and were pleased to host our first virtual workshop with more than 60 attendees discussing a range of topics from cover crops to beneficial insects for soil health.

We are proud to be a part of the 2 Seas Interreg programme which aims to address the impacts of climate change and enhance the availability of raw water. The multinational collaborative project we are working on is called PROWATER, which stands for 'protecting and restoring raw water sources through actions at the landscape scale'. The four-year project has a budget of more than EUR5.5 million. It is part funded by the European Regional Development Fund (EUR3.3 million) and part by project partners. This year has seen the commencement of pilot trials on our catchment land near Eastbourne to test which habitat types are best for allowing rainfall to reach the chalk groundwater sources. This work will help to develop understanding of which habitat type is likely to improve the resilience of the environment to drought in turn potentially helping the development of future nature-based solutions to complex environmental problems.

A company-wide trial is underway to reduce carbon and vehicular emissions with the investment in seven new electric vehicles and the installation of 10 charging points at South East Water sites across our supply area. This initiative is part of the company's commitment to reduce carbon emissions by 80 per cent by 2025 and joins a number of hybrid cars already in our fleet. Although the main driver for the trial is to reduce our carbon footprint, we are confident that the lower running costs and longer usable lifespan compared to diesel vans makes financial sense too.

Social

The health, safety and wellbeing of our people and those we work with has been our priority during the pandemic. Throughout the first half of the year we worked to develop Covid-19 safe practices, we were able to get 93 per cent of office-based staff working from home by the beginning of April, and have developed a wellbeing hub with information and a place to share advice. We are pleased to say our regular employee pulse surveys have shown an average of 93 per cent of our colleagues have a positive view of our health and safety commitment and 92 per cent feel positive about their wellbeing. For any employees who have been struggling during the pandemic we have put a range of support measures in place.

South East Water has signed the Social Mobility Pledge, this is one of our industry Public Interest Commitments and an important step to ensure diversity of our workforce and our commitment to social mobility. Taking steps to boost opportunities and social mobility is more important than ever as we face the challenges of a growing opportunity gap in the wake of Covid-19. The development of our workforce is key, we have continued with training through a combination of e-learning and in a bespoke Covid-19 secure training environment. We also continue to recruit apprentices despite the pandemic and have signed the EU Skills Apprentice Pledge to demonstrate our commitment to developing future workers.

In 2018 South East Water was the first water company to achieve the prestigious British Standards Institute (BSI) accreditation BS18477 for supporting vulnerable customers. This accreditation for inclusive service provision shines a spotlight on companies that excel in identifying and supporting vulnerable customers. This year we retained the accreditation for another year. The upgrade to our website, which is now AA accredited for accessibility, was noted as a key improvement.

We have also published our Resilient Customer Strategy. The strategy was launched at an online stakeholder event, attended by more than 60 representatives from support agencies, community leaders and the water industry. The event was held over three days and included interactive online sessions with case studies, networking sessions and presentations to talk about ways to collaborate and build resilient customers of the future.

Governance

In July, Managing Director Paul Butler retired after 18 years' service both at South East Water and previously Mid Kent Water. Paul's legacy is an organisation with a strong future which has customer satisfaction, responsibly delivered, at its heart. We thank Paul for his dedicated service to both the company and the water industry as a whole. David Hinton, promoted from the role of Asset and Regulation Director, replaced Paul as CEO and has been leading the corporate plan delivery and the company's response to the challenges faced in 2020.

The new purpose statement adopted by South East Water earlier this year recognised the greater importance placed on the purpose of companies and the public service purpose of water companies.

We have decided to enshrine our purpose into the company's articles of association and into the duties of its directors who must act in a way that fulfils the purpose. It is a strong foundation on which to build a culture of public service for the board and everyone working at South East Water and for the company to act as a responsible business.

Results and key financial performance indicators

The results published in this statement summarise our performance for the six months ended 30 September 2020. The financial statements are prepared under International Financial Reporting Standards ("IFRS") and incorporate the performance of South East Water Limited and our subsidiary, South East Water (Finance) Limited.

Revenue for the period was GBP133.7 million compared with GBP128.9 million for the same period in the previous year. The increase of GBP4.8 million is due to the following factors:

   --      the allowed average price increase of 4 per cent, increasing revenue by GBP4.9 million 

-- the effect of Covid-19 on demand coupled with the heatwave in the summer amounted to an increase in water revenue of GBP3.7 million, offset by lower contributions from developers of GBP3.3 million as a result of the Covid-19 restrictions

-- the effect of the lockdown on our non-appointed business including laboratory sampling income and third party work leading to a reduction of GBP0.5 million

Net operating costs for the period to 30 September 2020 were GBP84.7 million, GBP0.2 million less than 2019. After allowing for an exceptional credit of GBP7.8 million for one of our group pension schemes (see below), our operating cost base has increased by GBP7.6 million and this is due to:

-- the heatwave in August costing GBP1.8 million comprising additional production and pumping costs and

compensation paid to customers for supply interruptions

-- increased depreciation for the six months of GBP1.6 million in line with the continued investment in the group's fixed assets

-- the costs associated with overall higher demand of GBP0.7 million including power costs, bottled water provisions and additional chemical costs

-- the net impact of the Covid-19 pandemic quantified at GBP1.0 million comprising business interruption costs, protective equipment and reduced debt recoveries

-- the costs associated with responding to a number of unplanned incidents in the period of GBP0.5 millions

-- other general inflationary pressures have added in excess of GBP2.0 million across the cost base including contractor costs and power costs

Offsetting the cost increase above is a cost reduction of GBP7.8 million in respect of past service costs on one of the group's defined benefit pension schemes, which is a result of the change from RPI to CPI in measuring the liabilities of the scheme. This change has taken place in the Mid Kent Group Pension Scheme and was agreed with the Trustees following a review of the pension scheme rules.

Finance costs show significant savings at GBP20.1 million compared to GBP25.9 million for the prior year's comparative period. The reduction in costs is largely due to the lower finance costs of the new loans replacing the bonds that matured in September 2019 which amounts to GBP2.4 million. These is also a significant lower indexation charges in the year of GBP2.5 million and reduction in fees of GBP0.9 million. Finance income at GBP2.1 million for the period is GBP0.9 million less than the prior year, reflecting the repayment of GBP54.0 million of the variable rate loan by the group's parent company in September 2019.

Profit before tax was GBP29.8 million compared with GBP19.9 million for the same period last year. This represents 22.3 per cent of revenue, up from 15.4 per cent for the corresponding period last year.

The group has incurred a tax charge of GBP1.7 million in the period compared to GBP1.9 million for the period to 30 September 2019. The tax expense for the year comprises GBP0.8 million of current tax and GBP0.9 million of deferred tax.

Our profit after tax has increased from GBP18.1 million in the prior period to GBP28.1 million for the six months ended 30 September 2020.

The dividend for the six months ended 30 September 2020 of GBP5.5 million is the same as that paid in the same period last year and represents a nominal dividend yield of 2.2 per cent. The dividend is in line with our dividend policy and is lower than Ofwat's view of what is a reasonable nominal dividend yield, which is 4 per cent.

Net cash generated from operations was GBP63.9 million for the six months to 30 September 2020 compared to GBP77.8 million in the same period for the previous year. The significant reduction of in cash flow of GBP13.9 million has been largely caused by the impact of Covid-19 on trade and other receivables. The impact of Covid-19 has been particularly strong in the non-household sector and cash receipts from water retailers are GBP6.4 million lower than in previous year. Also, there has been a noticeable reduction in non-water activities, such as laboratory testing and new connections, which has also contributed GBP1.9 million to the reduction of cash received in the period. The combined effect has been a reduction in cash receipts of approximately GBP8.3 million.

Additionally, the increase in costs has resulted in a higher cash outflow to suppliers than in the previous year. We have also reduced the payment terms on a small number of key contracts to safeguard supplies during the current difficult trading conditions. The joint effect of the increased costs and faster payment of suppliers has resulted in an increased outflow of cash of approximately GBP5.6 million.

Principal risks and uncertainties

The principle risks and uncertainties facing the business are set out in the Strategic Report within the group's Annual Report for the financial year 2019/20, which can be found on the South East Water website.

Going concern

We continue to comply with the financial covenants set out in our securitisation structure and continue to hold ratings from Moody's and Standard & Poor's consistent with the requirements of both our securitisation and our instrument of appointment.

In preparing the financial statements the Directors considered the group's ability to meet its debts as they fall due for a period of one year from the date of this report, especially in light of the on-going Covid-19 pandemic.

The group's business activities, together with the factors likely to affect its future development, performance and position were set out in the strategic report included in the year end finance 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 has called GBP40 million from its committed facilities, which is currently being held in reserve, to ensure against any potential liquidity issues during the on-going Covid-19 pandemic.

The group prepared an annual budget in March, which has been reforecast as appropriate to take account of the changed circumstances brought on by Covid-19. The financial results for the six months to 30 September are consistent with our reforecast. The directors are therefore satisfied that the group has sufficient resources to continue in operation for a period of not less than 12 months from the date of this report.

In coming to this decision the Board has considered the implications of the on-going Covid-19 pandemic and the impact this may have on the business. The Board has considered a range of plausible scenarios and has stress tested the financial covenants against these scenarios. The Board have considered specifically the impact on cash flows in the first half of the financial year against expectation and hold some comfort that the financial performance exceeds the assessments made at the previous year end.

Looking ahead

The remainder of the year-ahead will be focussed on ending the first year of the 2020 to 2025 investment period in a good position, embedding our ongoing engagement activities and ensuring that no matter what we are protecting our employees and customers as Covid-19 continues to challenge us all. We look forward to working closely with our employees, partners and supply chain in these efforts through 2021.

Preparations had been made previously for the exit of the UK from the European Economic Area. We have continued with contingency planning, particularly as the timing now coincides with the increased risks that winter weather brings. We have been working with our suppliers and other partners in the industry and through local resilience forums to ensure any potential impact on our services is minimised.

In the short-term, we are watching the winter recharge of our water sources and rainfall over the next few months. Most of our water sources are in a good position, but some areas are lower than we would want at this time of year, although we expect normal winter rainfall will see these quickly recover. The team will continue to monitor our resources and are working to manage operations to move water around the network, increase supplies and reduce leakage. We will continue engaging widely on our water efficiency campaigns with customers as we expect lifestyle changes from Covid-19 to continue to influence demand during 2021 whatever the weather.

On behalf of the Board I would like to thank all the employees and business partners at South East Water for their dedication and hard work over the last six months - in Covid-19 times the importance of their roles and the purpose of our organisation to support our local communities has never been clearer.

Nick Salmon

Chairman

11 December 2020

Condensed group income statement

for the six months ended 30 September 2020

 
                                                   Six months      Six months 
                                                        ended           ended 
                                                 30 September    30 September 
                                                         2020            2019 
                                       Notes           GBP000          GBP000 
 
 Revenue                                 4            133,736         128,878 
 
 Bad debt                                5            (1,146)         (1,590) 
 Group net operating costs               5           (84,732)        (84,544) 
 
 Group operating profit                                47,858          42,744 
 
 Finance expense                         6           (20,130)        (25,859) 
 Finance income                          7              2,055           3,038 
 
 Profit before taxation                                29,783          19,923 
 
 Taxation                                8            (1,677)         (1,851) 
                                               --------------  -------------- 
 
 Profit for the six months                             28,106          18,072 
                                               --------------  -------------- 
 
 
 
 Other comprehensive income: 
 Items not reclassified subsequently to 
  profit or loss: 
  Remeasurement of defined benefit pension 
   schemes' surplus or (deficit)                     (19,446)          11,666 
  Deferred tax on defined benefit pension 
   schemes                                              1,663         (1,983) 
 
 Other comprehensive income for six months           (17,783)           9,683 
                                               --------------  -------------- 
 
   Total comprehensive income                          10,323          27,755 
                                               --------------  -------------- 
 
 
 
 Earnings per share 
 Basic and diluted earning per share     57p   37p 
                                        ----  ---- 
 

Condensed group statement of financial position

as at 30 September 2020

 
                                                                  31 
                                          30 September         March   30 September 
                                                  2020          2020           2019 
                                  Notes         GBP000        GBP000         GBP000 
 
   Assets 
 
   Non-current assets 
 Property, plant and equipment     12        1,624,466     1,608,845      1,580,566 
 Intangible assets                 11            8,925         9,568         10,703 
 Amount due from parent 
  undertaking                      17          135,941       135,941        135,941 
 Defined benefit pension 
  surplus                                       27,344        35,912         40,178 
 
                                             1,796,676     1,790,266      1,767,388 
                                         -------------  ------------  ------------- 
 
   Current assets 
 Inventories                                       690           689            640 
 Trade and other receivables       13           94,293        84,441         87,318 
 Cash and cash equivalents                      59,288        12,981         12,787 
 
                                               154,271        98,111        100,745 
                                         -------------  ------------  ------------- 
 
   Total assets                              1,950,947     1,888,377      1,868,133 
                                         -------------  ------------  ------------- 
 
 Liabilities 
 
 Non-current liabilities 
 Trade and other payables          15            5,207         4,997          5,312 
 Loans and borrowings             15,17      1,032,537     1,029,326      1,017,728 
 Corporation tax payable                            54             -              - 
 Defined benefit pension 
  liability                                      3,302         3,115          3,126 
 Deferred tax liabilities                      165,553       166,352        148,106 
 Deferred income                                 4,663         3,438          4,902 
                                         -------------  ------------  ------------- 
 
                                             1,211,316     1,207,228      1,179,174 
                                         -------------  ------------  ------------- 
 
 Current liabilities 
 Trade and other payables          14          102,633        97,627        103,900 
 Loans and borrowings              13           80,000        30,000         15,000 
 Deferred income                                 3,899         5,418          5,238 
 Provisions                                      4,629         4,457          3,742 
 
                                               191,161       137,502        127,880 
 
   Total liabilities                         1,402,477     1,344,730      1,307,054 
                                         -------------  ------------  ------------- 
 Net assets                                    548,470       543,647        561,079 
                                         -------------  ------------  ------------- 
 
 Equity 
 Ordinary share capital                         49,312        49,312         49,312 
 Revaluation reserve                           238,893       241,386        248,711 
 Retained earnings                             260,265       252,949        263,056 
                                         -------------  ------------  ------------- 
 
   Total equity                                548,470       543,647        561,079 
                                         -------------  ------------  ------------- 
 

The notes on pages below are an integral part of these condensed group financial statements.

Condensed group statement of changes in equity

for the six months ended 30 September 2020

 
 
                                                           Revaluation    Retained 
                                         Share capital         reserve    earnings   Total equity 
                                                GBP000          GBP000      GBP000         GBP000 
 
 
 At 1 April 2020                                49,312         241,386     252,949        543,647 
 Comprehensive income for 
  the six months 
 Profit for the six months                           -               -      28,106         28,106 
 Other comprehensive income                          -               -    (17,783)       (17,783) 
                                      ----------------  --------------  ----------  ------------- 
 
   Total comprehensive income 
   for the six months                                -               -      10,323         10,323 
                                      ----------------  --------------  ----------  ------------- 
 
 Contributions by and distributions 
  to owners 
 Dividends                                           -               -     (5,500)        (5,500) 
 Transfer to retained earnings                       -         (2,953)       2,953              - 
 Transfer between other reserves                     -            (11)          11              - 
 Deferred tax on release 
  from revaluation reserve                           -             471       (471)              - 
                                      ----------------  --------------  ----------  ------------- 
 
   Total contribution by and 
   distributions to owners                           -         (2,493)     (3,007)        (5,500) 
 
   At 30 September 2020                         49,312         238,893     260,265        548,470 
                                      ----------------  --------------  ----------  ------------- 
 
 
 At 1 April 2019                                49,312         251,259     238,253        538,824 
 Comprehensive income for 
  the six months 
 Profit for the year                                 -               -      18,072         18,072 
 Other comprehensive income                          -               -       9,683          9,683 
                                      ----------------  --------------  ----------  ------------- 
 
   Total comprehensive income 
   for the six months                                -               -      27,755         27,755 
                                      ----------------  --------------  ----------  ------------- 
 
 Contributions by and distributions 
  to owners 
 Dividends                                           -               -     (5,500)        (5,500) 
 Transfer to retained earnings                       -         (3,064)       3,064              - 
 Transfer between other reserves                     -             (5)           5              - 
 Deferred tax on release 
  from revaluation reserve                           -             521       (521)              - 
                                      ----------------  --------------  ----------  ------------- 
 
 Total contributions by and 
  distributions to owners                            -         (2,548)     (2,952)        (5,500) 
 
   At 30 September 2019                         49,312         248,711     263,056        561,079 
                                      ----------------  --------------  ----------  ------------- 
 

Condensed group statement of cash flows

for the six months ended 30 September 2020

 
                                                          Six months      Six months 
                                                               ended           ended 
                                                        30 September    30 September 
                                                                2020            2019 
                                               Notes          GBP000          GBP000 
 
 Cash flows from operating activities 
 Profit for six months                                        28,106          18,072 
 Adjustments for 
 Depreciation property, plant and 
  equipment                                                   26,582          25,408 
 Amortisation and impairment of intangibles                    1,855           1,431 
 Finance income                                              (2,055)         (3,038) 
 Finance expense                                              19,975          25,859 
 Loss/(gain)on sale of property, 
  plant and equipment                                             23            (51) 
 Difference between pension contributions 
  paid and amount recognised                                (10,309)         (2,647) 
 Tax (paid)/received                                           1,677           1,851 
                                                      --------------  -------------- 
 
   Operating cash flows before movement 
   in working capital                                         65,854          66,885 
                                                      --------------  -------------- 
 
   Movement in working capital: 
 Increase in trade and other receivables                    (10,045)         (1,442) 
 Increase in inventories                                         (1)            (48) 
 Increase in trade and other payables                          8,057          12,362 
                                                      --------------  -------------- 
 
   Cash generated from operations                             63,865          77,757 
 Interest paid                                              (13,113)        (22,043) 
 Interest received                                             1,679           2,656 
 Tax received                                                  (765)              56 
 
   Net cash from operating activities                         51,666          58,426 
                                                      --------------  -------------- 
 
 Cash flow from investing activities 
 Purchase of property, plant and 
  equipment                                                 (48,822)        (49,216) 
 Sale of property, plant and equipment                          (20)              79 
 Purchase of intangible assets                               (1,212)         (1,633) 
 Contributions to infrastructure 
  assets received                                                210             476 
 
   Net cash used in investing activities                    (49,844)        (50,294) 
                                                      --------------  -------------- 
 
 Cash flows from financing activities 
 Issue costs of listed debt                                     (15)         (2,813) 
 Proceeds from bank borrowings                                50,000         295,000 
 Repayment of borrowings                                           -       (294,836) 
 Dividends paid to the holders of 
  the parent                                     9           (5,500)         (5,500) 
 
   Net cash from/(used in) financing 
   activities                                                 44,485         (8,149) 
                                                      --------------  -------------- 
 
 Net cash increase/(Decrease) in 
  cash and cash equivalents                                   46,307            (17) 
 Cash and cash equivalents at the 
  beginning of six months                                     12,981          12,804 
                                                      --------------  -------------- 
 
   Cash and cash equivalents at the 
   end of six months                                          59,288          12,787 
                                                      --------------  -------------- 
 

Notes to the condensed group financial statements

for the six months ended 30 September 2020

   1.    Reporting entity 

South East Water Limited (the 'company') is a limited company incorporated in England. The company's registered office is at Rocfort Road, Snodland, Kent, ME6 5AH. These condensed consolidated financial statements comprise the company and its subsidiary (collectively the 'group'). The group is primarily involved in the supply of water to a population of 2.2 million in an area of 5,700 kms and the provision of certain ancillary services for customers, developers and other bodies within the limits of the relevant legislation.

   2.    Basis of preparation 

The condensed group financial statements for the six months ended 30 September 2020 are set out on pages 8 to 21, and have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting as endorsed by the European Union. The statements should be read in conjunction with the financial statements for the year ended 31 March 2020, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") endorsed by the European Union.

The condensed group financial statements are presented in sterling.

These interim financial results are not audited but reviewed by our auditor. The information herein for the year ended 31 March 2020 does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2020 were approved by the Board of Directors on 15 July 2020 and delivered to the Registrar of Companies. The report of the auditors on those accounts was not qualified, did not include any reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

   3.    Accounting policies 

The accounting policies applied in these condensed interim financial statements are the same as those applied in the last annual financial statements for the year ended 31 March 2020.

   4.    Total income 
 
                              Six months      Six months 
                                   ended           ended 
                            30 September    30 September 
                                    2020            2019 
                                  GBP000          GBP000 
 
 Revenue 
 Unmetered water income            9,986          10,379 
 Metered water income            114,222         105,291 
 Other sales                       3,898           7,148 
                          --------------  -------------- 
 
 Total revenue                   128,106         122,818 
                          --------------  -------------- 
 
 Other income 
 Rental income                       579             624 
 Sundry income                     5,051           5,436 
                          --------------  -------------- 
 
   Total other income              5,630           6,060 
                          --------------  -------------- 
 
   Total income                  133,736         128,878 
                          --------------  -------------- 
 
   5.   Segmental analysis 
 
                                    Wholesale        Retail         Other 
                                   activities    activities    activities      Total 
                                       GBP000        GBP000        GBP000     GBP000 
 
   Period to 30 September 2020 
 Total income                         117,494         8,835         7,407    133,736 
                                 ------------  ------------  ------------  --------- 
 
   Operating profit                    45,741           616         1,501     47,858 
                                 ------------  ------------  ------------ 
 Finance costs                                                              (20,130) 
 Finance income                                                                2,055 
                                                                           --------- 
 
   Profit before taxation                                                     29,783 
 Taxation                                                                    (1,677) 
                                                                           --------- 
 
   Profit for the period                                                      28,106 
 
   Period to 30 September 2019 
 Total income                         108,975        10,932         8,971    128,878 
                                 ------------  ------------  ------------  --------- 
 
   Operating profit                    38,675         1,871         2,198     42,744 
                                 ------------  ------------  ------------ 
 Finance costs                                                              (25,859) 
 Finance income                                                                3,038 
                                                                           --------- 
 
   Profit before taxation                                                     19,923 
 Taxation                                                                    (1,851) 
                                                                           --------- 
 
   Profit for the period                                                      18,072 
                                                                           --------- 
 
   6.   Net operating costs 
 
                                              Six months              Six months 
                                                   ended                   ended 
                                            30 September            30 September 
                                                    2020                    2019 
                                                  GBP000                  GBP000 
 
 Employee benefits expenses                        9,070                  15,550 
 Asset expenses                                   28,460                  26,788 
 Other operating expenses                         47,202                  42,206 
                                          --------------  ---------------------- 
 
                                                  84,732                  84,544 
 Impairment losses on trade receivables            1,146                   1,590 
 
                                                  85,878                  86,134 
                                          --------------  ---------------------- 
 
   7.   Finance income 
 
                                                   Six months      Six months 
                                                        ended           ended 
                                                 30 September    30 September 
                                                         2020            2019 
                                                       GBP000          GBP000 
 
 Interest receivable from group undertakings            1,620           2,599 
 Pension fund finance credit                              382             319 
 Interest receivable on bank balances and 
  short term deposits                                      53             120 
 
                                                        2,055           3,038 
                                               --------------  -------------- 
 
   8.   Finance costs 
 
                                                  Six months      Six months 
                                                       ended           ended 
                                                30 September    30 September 
                                                        2020            2019 
                                                      GBP000          GBP000 
 
 Effective interest on listed debt                     6,880          11,568 
 Fair value movements on interest rate swap            - 962           2,713 
 Indexation on listed debt                             6,348           2,481 
 Interest on index linked loans                        2,096           6,184 
 Indexation on index linked loans                      5,167           2,188 
 Other finance costs                                   6,880           2,197 
 
                                                      21,453          27,331 
 Less: interest capitalised                          (1,323)         (1,472) 
                                              --------------  -------------- 
                                                      20,130          25,859 
                                              --------------  -------------- 
 
   9.   Taxation 
 
                                 Six months                 Six months 
                                      ended                      ended 
                               30 September               30 September 
                                       2020                       2019 
                                     GBP000                     GBP000 
 
 Current taxation charge                813                      1,123 
  Deferred taxation charge              864                        728 
                                      1,677                      1,851 
                             --------------  ------------------------- 
 

The current tax charge is based on management's estimate of the weighted average annual corporation tax rate expected for the full financial year.

10. Dividends

 
                                                  Six months      Six months 
                                                       ended           ended 
                                                30 September    30 September 
                                                        2020            2019 
                                                      GBP000          GBP000 
 Interim dividend of 11.2 pence (2019: 11.2 
  pence) per share paid during the period              2,750           2,750 
 Interim dividend of 11.2 pence (2019: 11.2 
  pence) per share paid during the period              2,750           2,750 
                                              --------------  -------------- 
                                                       5,500           5,500 
                                              --------------  -------------- 
 

11. Intangible assets

 
                                      30 September   31 March   30 September 
                                              2020       2020           2019 
                                            GBP000     GBP000         GBP000 
  Net book amount 
 
   At 1 April                                9,568     10,501         10,501 
 Additions for the period                    1,212      2,985          1,633 
 Reclassification of assets in the               -      (869)              - 
  period 
 Amortisation for the period               (1,855)    (3,049)        (1,431) 
                                     -------------  ---------  ------------- 
 
   Closing balance as at                     8,925      9,568         10,703 
                                     -------------  ---------  ------------- 
 

12. Property, plant and equipment

 
                                      30 September      31 March   30 September 
                                              2020          2020           2019 
                                            GBP000        GBP000         GBP000 
 
   Net book amount 
 
   At 1 April                            1,608,845     1,558,221      1,558,221 
 Additions for the period                   42,242       101,485         47,775 
 Reclassification of assets in the               -           869              - 
  period 
 Depreciation for the period              (26,582)      (51,422)       (25,408) 
 Disposals for the period                     (39)         (115)           (22) 
 Impairment for the period                       -         (193)              - 
                                     -------------  ------------  ------------- 
 
   Closing balance as at                 1,624,466     1,608,845      1,580,566 
                                     -------------  ------------  ------------- 
 

13. Trade and other receivables

 
                                        30 September   31 March   30 September 
                                                2020       2020           2019 
                                              GBP000     GBP000         GBP000 
 
 Financial asset receivables 
 Trade receivables                            41,746     39,752         39,686 
 Accrued income                               47,839     39,018         41,520 
 Amounts due from group undertakings               -          -             35 
                                              89,585     78,770         81,241 
                                       -------------  ---------  ------------- 
 Non-financial asset receivables 
 Prepayments                                   3,380      3,872          4,778 
 Other receivables                             1,328      1,799          1,299 
                                       -------------  ---------  ------------- 
 
                                               4,708      5,671          6,077 
                                       -------------  ---------  ------------- 
                                              94,293     84,441         87,318 
                                       -------------  ---------  ------------- 
 

14. Trade and other payables

 
                                      30 September   31 March   30 September 
                                              2020       2020           2019 
                                            GBP000     GBP000         GBP000 
 
 Financial liabilities 
 Trade payables                              7,118     12,877         11,638 
 Amounts due to group undertakings          10,720     10,727         10,117 
 Other payables                             11,441      4,606         13,493 
 Accruals                                   37,539     33,546         34,419 
                                     -------------  ---------  ------------- 
 
                                            66,818     61,756         69,667 
                                     -------------  ---------  ------------- 
 
   Non-financial liabilities 
 Payments received in advance               34,729     34,856         33,232 
 Other taxes and social security             1,086      1,015          1,001 
                                     -------------  ---------  ------------- 
                                            35,815     35,871         34,233 
                                     -------------  ---------  ------------- 
                                           102,633     97,627        103,900 
                                     -------------  ---------  ------------- 
 

15. Non-current financial liabilities

 
                                  30 September    31 March   30 September 
                                          2020        2020           2019 
                                        GBP000      GBP000         GBP000 
 
 Irredeemable debenture stock              989         990            990 
 Fixed and Variable rate loans         292,474     292,332        292,312 
 Lease liabilities                       4,084       4,239          2,977 
 Listed bonds                          339,969     338,926        336,949 
 Index linked loans                    395,021     392,839           384, 
                                 -------------  ----------  ------------- 
 
   Loans and borrowings              1,032,537   1,029,326      1,017,728 
 Trade and other payables                5,207       4,997          5,312 
                                 -------------  ----------  ------------- 
                                     1,037,744   1,034,323      1,023,040 
                                 -------------  ----------  ------------- 
 

16. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and shares data used in the basic and diluted earnings per share computations:

 
                                                        2020           2019 
                                                      GBP000         GBP000 
 
   Profit for the year                                28,106         18,072 
                                               -------------  ------------- 
 
                                                      Number         Number 
 
   Basic and diluted weighted average number 
   of shares                                      49,312,354     49,312,354 
                                               -------------  ------------- 
 
   Basic and diluted earnings per share from 
   continuing operations                                 57p            37p 
                                               -------------  ------------- 
 

17. Financial instruments

Fair values of financial assets and financial liabilities

Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties. In the opinion of the directors, the fair values of the financial assets and liabilities of the group (apart from the specific items shown in the fair value table below) are not materially different from the book values.

 
                                        Book value               Fair value               Book value               Fair value               Book value               Fair value 
                                      30 September                       30                 31 March                 31 March             30 September             30 September 
                                              2020                September                     2020                     2020                     2019                     2019 
                                            GBP000                     2020                   GBP000                   GBP000                   GBP000                   GBP000 
                                                                     GBP000 
 
             Measured at 
             amortised 
             cost 
            Amounts due 
             from parent 
             undertaking                   135,941                  108,345                  135,941                  107,771                  135,941                  107,125 
                           -----------------------  -----------------------  -----------------------  -----------------------  -----------------------  ----------------------- 
 
             Current 
             liabilities 
            Bank loan                       80,000                   80,000                   30,000                   30,000                   15,000                   15,000 
                           -----------------------  -----------------------  -----------------------  -----------------------  -----------------------  ----------------------- 
 
             Non-current 
             liabilities 
            Irredeemable 
             debentures 
             Bank 
             loan                              989                      843                      990                      842                      990                      844 
            Bank loan                      292,474                  362,444                  292,332                  292,332                  292,312                  366,428 
            Listed bond                    339,969                  430,369                  338,926                  430,369                  336,949                  430,369 
            Index linked 
             loans                         395,021                  686,893                  392,839                  504,074                  384,500                  391,611 
            Lease 
             liabilities 
             capital 
             element                         4,084                    4,084                    4,239                    4,239                    2,977                    2,977 
                           -----------------------  -----------------------  -----------------------  -----------------------  -----------------------  ----------------------- 
 
                                         1,032,537                1,484,633                1,029,326                1,231,856                1,017,728                1,192,229 
                           -----------------------  -----------------------  -----------------------  -----------------------  -----------------------  ----------------------- 
 

18. Analysis of amounts recognised in other comprehensive income

 
                                                               Retained 
                                                               earnings 
                                                                 GBP000 
 Six Months to 30 September 2020 
 Actuarial gain/loss on defined benefit pension schemes        (19,446) 
 Deferred tax on defined benefit pension schemes                  1,663 
                                                          ------------- 
                                                               (17,783) 
                                                          ------------- 
                                                               Retained 
                                                               earnings 
                                                                 GBP000 
 Six Months to 30 September 2019 
 Actuarial gain/loss on defined benefit pension schemes          11,666 
 Deferred tax on defined benefit pension schemes                (1,983) 
                                                          ------------- 
                                                                  9,683 
                                                          ------------- 
 

19. Events after the reporting date

In December 2020, the company's parent company will repay GBP136 million variable rate loan to the company. This will be funded by an exceptional dividend payable to the parent company by South East Water Limited.

On 20 November 2020, the High Court issued a supplementary ruling in the Lloyds Bank GMP equalisation case with respect to members that have transferred out of their scheme prior to the ruling. The results of this mean that Trustees are obliged to make transfer payments that reflect equalised benefits and are required to make top up payments where this was not the case in the past.

The extent to which the judgement will increase the liabilities of the schemes is under consideration but is not expected to be material. Any adjustment necessary is expected to be recognised by the company in the second half of the period ending 31 March 2021.

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