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South East Water Limited Half-year Report (9732I)

07/12/2022 5:32pm

UK Regulatory


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TIDM53HO

RNS Number : 9732I

South East Water Limited

07 December 2022

South East Water Limited

Condensed group financial statements

for the six months ended 30 September 2022

Chair and CEO joint report

We are pleased to present our interim report for the six months ended 30 September 2022. Our interim report and our company's performance for this period is set against the backdrop of an unprecedented summer.

We saw record-breaking temperatures exceed 40degC (104degF) for the first time, the driest spell of weather in this country since 1975/76, and the driest July in Kent and Sussex since records began, with just eight per cent of the average monthly rainfall.

After one of the most challenging periods on record, we want to thank everyone involved in our business and supply chain who has gone above and beyond throughout the summer to keep taps flowing for our customers.

While we deeply regret the disruption to water supplies experienced by a small percentage of our customers in Kent and part of Sussex, the sterling efforts of our teams meant that, despite the exceptional conditions, only 0.7 per cent of our 2.3 million customers suffered any interruption to their mains water supply caused by the record levels of demand.

Our decision to implement a Temporary Use Ban (TUB) on 12 August was not one we took lightly but was absolutely necessary to protect water supplies and the environment. This was the first time we have implemented a temporary use ban since 2012, which underlines the seriousness of the situation we faced in the summer.

Our aim is always to ensure we will have enough water to supply our customers, whatever the weather, and that's why our planning for summer was critical.

We continually monitor the weather and prepared by making sure all our assets were ready for the challenge and postponed any planned activity that would reduce our capacity as well as ensuring our field teams were ready and fully focused on maintaining supplies.

From a very early stage, we emailed customers, posted water efficiency advice on our social media channels and signposted customers to our Water Latest webpage. Our large-scale communications campaign continued throughout the summer and into autumn.

Despite all our planning and preparation, the combination of factors we experienced in the summer were unprecedented, and even more severe than those experienced during the summer lockdowns of the Covid-19 pandemic.

At the start of the dry conditions in June, our raw water stocks were in a good position. Our challenge was to ensure we could treat raw water quickly enough to keep up with customer demand. Unfortunately as the summer developed and with very low levels of rainfall, we became concerned about the impact on the environment of abstracting more water.

Despite using multiple channels to ask initially for voluntary restraint, demand for water remained very high and we still received less than half of the average expected rainfall during August. We had to take action to make sure we had drinking water available for everyone, including for our vulnerable customers, protect the environment and for essential uses (eg. hospitals).

The temporary use ban helped us to maintain essential supplies for drinking and sanitation and gave us time to treat and pump more water through the network. At the height of the summer, we were pumping an extra 120 million litres of water a day around our region - the equivalent of supplying a further four towns the size of Maidstone or Eastbourne. The amount of water entering our network hit a high of 697 million litres per day, compared to the average daily amount of 530 million litres per day.

In the summer we saw more leaks and bursts reported to us than ever before. In Kent and Sussex alone, we had nearly 2,000 reported to us in just two months - an increase of 50 per cent. Leaks increased due to ground movement around pipes during the very hot weather and reports rose as the leaks became more visible in the drier weather. Our communications campaign also increased awareness among customers which prompted higher response levels.

It was a vast team effort, involving all our operational team and supply chain, to record, investigate, prioritise and fix these leaks as quickly as possible. Customer services advisers, technicians, scheduling teams and repair gangs worked around the clock to tackle the record number of reported leaks.

We have a proud track record of proactively tackling leaks and, before the summer period, the number of leaks across our network was at an all-time low. Since 2000/01, we have reduced leakage by 22 per cent, outperforming the target set by our regulator, Ofwat, and we remain committed to halving leakage levels by 2050. Although our downward trend has been impacted by the record-breaking number of leaks this summer, we remain determined to find and fix more leaks, using innovation and the latest satellite technology to do so.

We successfully applied for a drought permit at Ardingly Reservoir due to water resources being very low for the time of year. This has enabled us to pump water into the reservoir from a 500-metre stretch of the River Ouse in West Sussex, under licence from the Environment Agency.

However, due to the above average rainfall received from September onwards, we have been able to lift the TUB on Wednesday 30 November. This decision was enabled by a combination of our reservoirs refilling more quickly than expected and our aquifers starting to recharge earlier. Our two biggest reservoirs at Ardingly and Arlington in Sussex, which provide eight per cent of all the water we supply to our region were 82 per cent and 47 per cent full respectively by late November. At the same time the soil moisture deficit, which indicates whether rainfall is reaching underground aquifers was favourable - indicating an earlier than expected commencement of winter recharge.

As a result of these significant operational challenges, our ODI performance has been disappointing in the first half of the year. The summer drought created significant demand in Kent which resulted in supply interruptions. We expect to reach our penalty collar for this ODI in 2022/23 of GBP3.2 million. A combination of historical factors, including housing growth and investment policies have resulted in a situation where our service is not as resilient to this kind of drought as we believe it should be, and our customers expect it to be. We are engaged in discussions with DEFRA, Ofwat, the EA and DWI on how we can improve the resilience of our service, particularly through further future investment.

The drought has also had an effect on a number of other ODIs. Extended drought causes the ground to dry, crack and shrink. This is particularly true in parts of the country such as South East England that are rich in clay based soils. This movement damages pipes buried in the ground and causes an increase in both leakage and mains failures. The extended drought created a large backlog of repairs, which we are now working our way through. We expect the situation to be essentially recovered by the end of the year, in terms of the integrity of our network. However, in the meantime we have incurred more leakage and mains repairs than in a normal year, and we are not certain at this point in the year whether or not we will be able to recover our ODI scores to target by the end of the year.

Our Water Quality ODIs are all ahead of target at the end of September and we expect small levels of outperformance on 'taste and odour'; 'appearance of water'; 'low pressure'; 'Priority Services Register'; and household voids. We continue to work hard to lead the industry on environmental stewardship and we remain on target to deliver our WINEP (Water Industry National Environment Programme) programme in both the year and the five year period.

At the same time as managing the unprecedented summer situation, we have been developing our new water resources management plan which water companies are required to do every five years. This looks at how we'll keep your taps flowing over the longer term (2025 to 2075) while striking the delicate balance of protecting the environment and keeping bills affordable.

Due to the unique challenges we face here in the south east, we're looking 50 years into the future with our plan, rather than the standard 25 years. By doing this, we can make sure the work we do now lays the best foundation for future generations. Our plan outlines how we will invest GBP1.2 billion over the next 50 years to drive down leaks, help customers reduce water use and build large-scale infrastructure projects such as reservoirs, water recycling plants and desalination schemes.

It also demonstrates how we will reduce the amount of water we abstract from the environment by 158 million litres a day by 2050 to protect our precious natural environment, and how we will support our customers to reduce demand for water through, for example, smart metering and water efficiency initiatives.

We are grateful for all the support, feedback and collaboration we have received across the region, and through the Water Resources South East alliance, to complete our draft plan, which we will be consulting on over the coming months, before publishing our final plan in 2023.

We have seen this summer how water and the environment are intrinsically linked. In April we became the first water company in the UK to produce a draft 25-year Environment Plan, mapping out how we will help to create a more resilient environment across all parts of our operational area, now and into the long-term.

In April we also published the final version of our five-year Drought Plan. Both documents have been created with widespread community and stakeholder input from the outset.

A major focus area for us remains the way we can support our customers, especially those who may need extra help. Our Priority Services Register played a vital role in ensuring we were able to protect our most vulnerable customers during the summer water supply issues and registrations continue to rise.

We are proud of the collaborations we have formed with other organisations and stakeholders to make sure we identify and support customers who may be facing challenging circumstances.

This is critical work given the current cost of living crisis. We have continued to promote our affordability schemes and taken a sympathetic approach to arrears management in cases where customers have been struggling to pay their water bills.

Even with the extraordinary challenges we've faced over the summer, there have also been many positives during the first six months of this financial year. Some of the headlines for each of our company's four strategic pillars are summarised in this report. These four themes help us focus on how we run our business today and influence how we plan for the long-term future.

Results and key financial performance indicators

The results published in this statement summarise our performance for the six months ended 30 September 2022. The financial statements are prepared under International Financial Reporting Standards ("IFRS") and incorporate the performance of South East Water Limited and its subsidiary, South East Water (Finance) Limited.

Revenue for the period was GBP137.8 million compared with GBP130.8 million for the same period in the previous year. The additional GBP7.0 million of revenue is due to tariff increases of GBP4.6 million and the higher demand experienced during the summer heatwave of GBP3.4 million. This has been offset by a reduction in other sales of GBP1.0 million, with lower new connections income and infrastructure income as a result of the slowdown in the housing and construction industries in the current economic environment.

Net operating costs, including bad debt, for the period to 30 September 2022 were GBP110.2 million, which is GBP16.4 million more than the corresponding period last year. This increase has been caused by a combination of weather events and the significant increase in key elements of our cost base namely power and chemicals.

The combined impact of Storm Eunice, the summer heatwave and the application of TUBs has resulted in an additional cost of GBP4.9 million in the first half of the year. Additionally, recent high inflation has led to significant increases in the cost of power (GBP3.4 million) and chemicals and materials (GBP1.8 million). Contractor and consultant costs, including reactive maintenance, have increased by GBP2.7 million following last year's unusually low burst numbers. Other increases include personnel costs of GBP1.3 million, plus bulk supply and abstraction costs of GBP1.2 million.

Finance costs have increased from GBP23.2 million to GBP47.4 million. The increase of GBP24.2 million reflects higher indexation costs on the four indexed linked loans of GBP21.9 million due to sharp rise in inflation over the period. Additionally, cash interest on the index linked loans have increased by GBP0.8 million, interest on the variable rate bank loan has increased by GBP0.8 million due to the increase in SONIA and there is an additional charge of GBP0.5 million on the fixed rate loan notes issued in the second half of the last financial year. Other finance charges increased by GBP0.2 million.

Interest receivable for the six months to 30 September 2022, which comprises interest earned on bank deposits and returns on pension scheme assets, was GBP0.9 million compared to GBP0.3 million in the prior year.

Loss before tax in the six month period was GBP12.7 million. This compares to a profit before tax of GBP20.1 million in the same period last year.

The group tax credit of GBP4.5 million in the period compares to charge of GBP38.6 million for the same period last year. The current tax charge in the period is nil. The deferred tax credit is made up of deferred tax on the loss in the period and the deferral of capital allowances for future use.

The prior year included a charge of GBP35.9 million for the impact on deferred tax of the change in the tax rate from 19 per cent to 25 per cent, which is effective from 1 April 2023.

The group has recorded a loss after tax of GBP8.2 million for the six months to 30 September 2022. This compares to a loss after tax of GBP18.6 million for the same period in the prior year. The loss for the year is primarily due to the rise in finance costs as a result of the sharp increase in inflation throughout the reporting period.

The dividend paid for the six months ended 30 September 2022 of GBP4.5 million is same as that paid in the corresponding period last year and this represents a nominal dividend yield of 1.8 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.

The cash generated from operations was GBP69.2 million for the six months to 30 September 2022, down from GBP80.3 million for the corresponding period last year. This reflects the reduction in operating profit in the period.

The group has cash and cash equivalent balances of GBP21.3 million as at 30 September 2022. This compares to the balance of GBP22.7 million as at 30 September 2021. During the period there has been no movement on the revolving credit facility which remains undrawn.

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 current economic uncertainty associated with various factors including high inflation, pressures on household finances, supply chain constraints and high power prices caused by Russia's invasion of Ukraine.

The group's business activities together with the factors likely to affect its future development were set out in the strategic report included in the group's annual report for the financial year ended 31 March 2022.

The group finances its working capital requirements through cash generated from operations and committed facilities that can be called upon as required.

The directors have assessed the going concern review that has been completed for the group. That assessment considered the output of the viability assessment for the year ended 31 March 2022 and performance since that date compared with budget. The assessment also took into account the material uncertainties that could affect going concern, reported by the company's ultimate parent, HDF (UK) Holdings Limited for the year ended 31 March 2022. The material uncertainties in HDF have no effect on the going concern status of the group nor on the ability of the group to carry out normal operational activities.

In adopting the going concern basis of preparation for these financial statements, the directors have considered the liquidity position of the group, financial forecasts, stress testing of principal risks and uncertainties and the impact of these stress tests on committed funding facilities levels and applicable covenants.

The directors have a reasonable expectation that the company has sufficient resources to continue in operation for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial statements.

Trusted and reliable service

How we build trust in what we do and deliver a high-quality service to our customers

-- The vast majority of our customers had no issues with their water supply in the summer, despite record- breaking temperatures, minimal rainfall, exceptional demand levels and unprecedented reports of leaks caused by the very dry ground. In total, 0.7 per cent of our 2.3 million customers regretfully experienced water supply interruptions while 0.06 per cent of the one million properties we supply suffered an interruption beyond 48 hours.

-- Our dedicated teams worked 24/7 to treat and pump record amounts of water through our 9,000 milesof water mains and to investigate, prioritise and fix leaks. In August we fixed 50 per cent more leaks than planned.

-- We reallocated resources quickly from flushing operations to optimise the effectiveness and speed of our incident response. Regular meetings have helped us to tackle the backlog of work in Kent, which was most affected by the summer incident.

-- Collaboration and communication have been strengthened with neighbouring water companies who experienced similar challenges, including supply chain issues. Securing fuel supplies and chemicals to treat our raw water required a co-ordinated effort.

-- Away from the main summer incident, we continued our satellite surveying programme to identify ground water composition levels around 2,500km of our Kent pipe network. By overlaying our pipe network on to the surveys, we can pinpoint other emerging leaks to proactively tackle.

-- Our UKAS-accredited specialist laboratory at Farnborough in Hampshire conducted more than 100,000 water quality tests in the first half of the year, with 99.99 per cent passing the Drinking Water Inspectorate's (DWI) stringent quality standards.

-- We have carried out more network pressure monitoring and servicing than ever before, prior to reallocating teams to support the summer demand response. Pressure changes can severely damage pipes, causing leaks and breaks, so this work is necessary to drive down leakage and prevent bursts.

-- Our multimillion-pound refurbishment of the Arlington water treatment works safeguarded reliable water supplies for our Sussex customers, with no reported outages during the drought.

-- We have performed strongly against the target and industry average in the DWI's new Compliance Risk Index performance measure in the first half of the year. This considers water quality compliance failures at water treatment works and in domestic household water plumbing (cause, location and customer impact). Our Event Risk Index, based on the seriousness of an event, how it's managed and its impact, is currently above our corporate target, mainly due to the summer incident, but we continue to fare very well against the industry average.

-- Repairs to our drinking water storage tanks in mid-Kent are continuing following sinkhole damage in 2020. One reservoir cell has been back in operation for over a year, one has been safely demolished and the third, and largest, cell is being extensively repaired to strengthen the structure. When complete in 2023, the site will provide 14.6 million litres of drinking water a day.

-- The treatment process at Woodgarston is starting to benefit from new GBP5.5 million nitrate removal equipment installed at the treatment works to future-proof the water supply from forecasted nitrate level increases in the area. We have also completed the installation of ten new UV disinfection plants across our network to make our disinfection process more resilient to parasites.

Thriving people

How we help the people who work with us to thrive

-- We are proud of our colleagues from across the business who rose to every challenge during the difficult summer period, demonstrating dedication, commitment, resilience and agility.

-- Welfare vehicles visited our frontline teams dealing with incidents and handing out bottled water in affected communities. This was a first for our company, providing a welcome pitstop with refreshments, a toilet and rest facilities.

-- We held our first company wellbeing walks in June, aimed at encouraging colleagues to take time out, while around 40 of our more energetic colleagues have started a Couch to 5k running group.

-- We are in the third year of our five-year people plan. Plans are progressing for a new Foundation for Leadership programme for line managers and a Leading for Change senior leadership programme.

-- Our apprenticeship programme continues to thrive, offering opportunities for new joiners but also for existing employees to upskill. For the first time we are trialling apprenticeships in our customer services department and, with our new intake, we will have a 50/50 split between male and female apprentices. This new intake of 20 apprentices will bring our total up to 56 apprentices.

-- We have launched a Domestic Abuse policy and also a Menopause policy to provide support to colleagues and to encourage open and honest conversations.

-- We relaunched our Staff Council in June, giving our employee voice a higher profile and involving more people across the business. Members of the council meet regularly to discuss staff issues, including four times a year with our executive board.

-- Our safety committee has more representatives across more areas of the business following a relaunch and we have a new safety policy. Our executive board conducted a deep dive into health and safety in April and we have re-started our pre-pandemic visible leadership tours of operational and construction sites. In the first six months of the year, we have had one reportable (RIDDOR) incident and no other lost time injuries.

-- There has been a 225 per cent increase in the number of job applications we receive per vacancy between June and September. We are continuing to look at ways to attract top talent, and have used social media channels, including LinkedIn and Facebook, for the first time to promote our customer service vacancies.

-- Our wellbeing programme continues to go from strength to strength. April marked the second anniversary of the launch of our mental health first aiders (MHFA). We now have 42 MHFAs who have been contacted 800 times in two years (including repeat contacts). In addition, we have 37 wellbeing champions, and organise lunch and learn sessions on a range of wellbeing issues. Our company intranet now features a wellbeing hub too.

-- Our efforts to become a healthier place to work have resulted in us receiving a bronze wellbeing award from Kent and Medway's Healthy Workplace programme in recognition of the progress we are making to support health and wellbeing at work.

Community and society focussed

How we understand and respond to the needs of society

-- 13,505 additional households (1.5 per cent) joined our Priority Services Register (PSR) in the first half of the year. We contacted vulnerable customers during the heatwave and implementation of the temporary use ban (TUB) to proactively inform them if they were exempt from the TUB. Almost 8,000 bottled water drops were made to PSR customers who lost/risked losing supply. We worked with councils to reach other 'at risk' customers.

-- We have successfully recertified our BSI18477: Inclusive Service Provision standard and plan to join the first pilot group of water companies transitioning to the new BS ISO 22458 Customer Vulnerability standard. We were delighted to receive the Credit Awards 2022 Vulnerable Customer Strategy of the Year (Creditor) award in June.

-- To auto-enrol more customers onto support tariffs, we have followed up our industry-first council datashare to join an industry/Department for Work and Pensions project to help more eligible customers access our affordability tariffs, without having to apply. Our Trusted Partnership programme will support customers during the cost-of-living crisis.

-- We have developed our East Grinstead Town Council partnership to sponsor community events and promote our vulnerability, affordability and water efficiency schemes. We have worked with West Sussex County Council on environment-focussed water efficiency messaging.

-- Take-up of free water-saving devices has more than tripled since last year with nearly 209,000 devices given out in six months, compared to more than 59,000 in the same period last year. We are delivering water efficiency-focussed messaging and supporting low-income families in partnership with Kent County Council (KCC).

-- Issuing a million pieces of information about the summer challenges led to more customers contacting us. Consequently, our overall downward complaints trend suffered; complaints peaked at 400 in a month. Upfront communications, via email, social media and My Account on our website, limited complaints. Investing in a fully automated communications system in 2023 will enhance our incident interaction with customers. 42 per cent of our customers now have an online My Account, with registrations increasing by 108 per cent since 2020. More customers are using My Account to track water use and compare use to neighbours, download bills and manage payments.

-- With KCC we have helped to lead the distribution of a government hardship fund for those struggling with bills, with GBP500,000 given to customers in Kent.

-- To better understand our customers' needs, we have joined Centre for Sustainable Energy, Sustainability First, National Energy Action and SCOPE to implement a key horizon scanning project on vulnerability and affordability.

-- We published our annual performance report (2021/22) on a dedicated interactive microsite in July to aid transparency and accessibility.

-- To support the East Grinstead community impacted by Storm Eunice, when UK Power Networks failures meant we couldn't pump/move water into the area, we have distributed GBP100,000 to local charitable and community groups. We are also distributing GBP250,000 to parish councils affected by the summer demand challenges as a goodwill gesture. Councils will redistribute to local good causes. Furthermore, ten south east good causes received GBP2,000 from our company Community Chest fund in May.

Flourishing environment

How we contribute to an environment that flourishes today and tomorrow

-- In April we became the first UK water company to produce a draft 25-year Environment Plan. This involved our largest ever consultation exercise when we emailed 500,000+ customers and stakeholders. We await feedback on our draft water resources management plan (dWRMP24) and Water Industry National Environment Programme (WINEP24) to ensure our final Environmental Plan is reflective of our stakeholder and customer views.

-- We have prepared a Strategic Environmental Assessment (SEA), a key part of our dWRMP24, covering our long-term planning for 2025 to 2075. This ensures we consider the environment at all stages of the draft plan preparation.

-- In June we launched a water saving week campaign to support the annual Waterwise water efficiency initiative with website, social media and blog content.

-- We have continued to engage with farmers and landowners over land management improvements and capital grant scheme applications. We have agreed to fund a water harvesting/water efficiency pilot project in the River Teise catchment, with support funding from Catchment Sensitive Farming. Through our award-winning catchment work, we have partnered with the Ouse and Adur Rivers Trust to seed-fund the development of a catchment-wide strategy to tackle Invasive Non-Native Species eg, Himalayan balsam, which impacts on the River Ouse.

-- We successfully delivered more improvement schemes as part of the WINEP than ever before and held three stakeholder workshops across our regions to discuss environmental issues. This work will underpin our next WINEP 2025 to 2035. Through the WINEP, we have researched improvements to the habitat of numerous rivers and streams and worked with local environmental groups and elected stakeholders to discuss improvements to the River Darent in Kent and Maidenhead Ditch in Berkshire. We have also installed river habitat enhancements in a WINEP River Cuckmere pilot trial.

-- Our final five-year Drought Plan was published following widespread consultation and Defra approval in May. This outlines the actions we will take before, during and after periods of drought to conserve water and secure supplies, while balancing the needs of the environment.

-- A summer wart-biter bush cricket survey confirmed that the reintroduced population has expanded and spread out across the Deep Dean valley in East Sussex following a WINEP habitat restoration project. Two sand martin nesting banks and nesting islands for terns have been installed at the Wakehurst arm of Ardingly Reservoir and we part-funded the release of almost 100 water voles into the River Thames in Berkshire in a project led by Wild Cookham and the Berks, Bucks and Oxon Wildlife Trust to increase biodiversity and boost river health.

-- We have surveyed thousands of square kilometres of land near the River Ouse, Cuckmere and River Stour using ultra-high resolution aerial imagery to identify leaks on company-owned or private water pipes. Our leakage and engagement teams use this information to liaise directly with landowners about the leaks and to offer other support (eg, water efficiency audits, rainwater harvesting).

-- We continue to work with Sussex maize growers to trial different ways of preventing soil and valuable nutrients reaching rivers and groundwater. We plan to nearly double our funding for farmers who sow grass on their fields during the autumn too.

-- Shortlisting is under way after we invited community groups and businesses to express their interest in running new recreational activities at Arlington Reservoir in East Sussex.

-- An introductory report outlining our catchment restoration strategy and our flagship chalk stream project on the River Stour has been prepared and will be published shortly.

Condensed group income statement

for the six months ended 30 September 2022

 
                                                                  Six months                Six months 
                                                                    ended 30                  ended 30 
                                                                   September                 September 
                                                                        2022                      2021 
                                                Note                  GBP000                    GBP000 
==========================================  ========  ======================  ======================== 
Revenue                                            6                 137,839                   130,775 
Bad debt                                                             (2,378)                   (2,128) 
Net operating costs                                8               (107,857)                  (91,691) 
Other income                                       6                   6,198                     5,952 
==========================================  ========  ======================  ======================== 
Profit from operations                                                33,802                    42,908 
Finance income                                     9                     890                       345 
Finance expense                                    9                (47,394)                  (23,194) 
==========================================  ========  ======================  ======================== 
(Loss)/profit before taxation                                       (12,702)                    20,059 
Taxation                                          10                   4,494                  (38,631) 
==========================================  ========  ======================  ======================== 
Loss for the six months                                              (8,208)                  (18,572) 
====================================================  ======================  ======================== 
Other comprehensive income: 
 Items that will not be reclassified to the 
 income statement: 
Net actuarial (loss)/gain on 
 pension schemes                                                    (11,348)                     4,463 
Deferred tax credit/(charge) on the net actuarial 
 (loss)/gain                                                           1,959                   (1,375) 
====================================================  ======================  ======================== 
Other comprehensive (loss)/profit for the six 
 months                                                              (9,389)                     3,088 
====================================================  ======================  ======================== 
Total comprehensive loss                                            (17,597)                  (15,484) 
====================================================  ======================  ======================== 
 
 
 
                                                                  Six months                Six months 
                                                                    ended 30                  ended 30 
                                                                   September                 September 
                                                                        2022                      2021 
                                                                       Pence                     Pence 
==========================================  ========  ======================  ======================== 
Loss per share attributable to the ordinary 
 equity holders of the parent 
                                                      ======================  ======================== 
Basic and diluted                                 12            (16.64)                  (37.66) 
==========================================  ========  ======================  ======================== 
 

The notes form part of these financial statements.

Condensed group statement of financial position

as at 30 September 2022

 
                                                           Note  30 September   31 March  30 September 
                                                                         2022       2022          2021 
                                                                       GBP000     GBP000        GBP000 
Assets 
 Non-current assets 
Property, plant and equipment                                14     1,692,091  1,678,147     1,653,840 
Right of use assets                                          14        10,647     10,980        11,525 
Intangible assets                                            13         8,152      8,294         8,624 
Defined benefit pension surplus                                        49,001     57,346        41,653 
==================================  ===========================  ============  =========  ============ 
                                                                    1,759,891  1,754,767     1,715,642 
===============================================================  ============  =========  ============ 
Current assets 
Inventories                                                               832        851           668 
Trade and other receivables                                  15        94,104     84,037        88,821 
Cash and cash equivalents                                              21,261     14,539        22,749 
==================================  ===========================  ============  =========  ============ 
                                                                      116,197     99,427       112,238 
===============================================================  ============  =========  ============ 
Total assets                                                        1,876,088  1,854,194     1,827,880 
===============================================================  ============  =========  ============ 
Liabilities 
 Non-current liabilities 
Trade and other payables                                     16         4,284      4,154         4,062 
Loans and borrowings                                         17     1,148,687  1,120,478     1,044,540 
Defined benefit pension liability                                       2,365      2,869         3,221 
Deferred tax liability                                                222,416    228,790       220,122 
Deferred income                                                         3,974      4,315         3,235 
==================================  ===========================  ============  =========  ============ 
                                                                    1,381,726  1,360,606     1,275,180 
===============================================================  ============  =========  ============ 
Current liabilities 
Trade and other payables                                     16       122,993     99,851       102,997 
Loans and borrowings                                         17           409        339        50,324 
Deferred income                                                         6,224      5,740         6,712 
Provisions                                                              7,489      8,314        10,375 
==================================  ===========================  ============  =========  ============ 
                                                                      137,115    114,244       170,408 
===============================================================  ============  =========  ============ 
Total liabilities                                                   1,518,841  1,474,850     1,445,588 
===============================================================  ============  =========  ============ 
Net assets                                                            357,247    379,344       382,292 
===============================================================  ============  =========  ============ 
Issued capital and reserves attributable 
 to owners of the parent 
Share capital                                                          49,312     49,312        49,312 
Revaluation reserve                                                   215,608    217,906       219,922 
Retained earnings                                                      92,327    112,126       113,058 
==================================  ===========================  ============  =========  ============ 
Total equity                                                          357,247    379,344       382,292 
===============================================================  ============  =========  ============ 
 

The financial statements were approved and authorised for issue by the board of directors and were signed on its behalf by:

David Hinton Andrew Farmer

DIRECTOR

DIRECTOR

7 DECEMBER 2022.

7 DECEMBER 2022.

The notes form part of these financial statements.

Condensed group statement of changes in equity

for the six months ended 30 September 2022

 
                                                        Share      Revaluation     Retained         Total 
                                                         capital       reserve     earnings          equity 
                                             Note        GBP000         GBP000       GBP000          GBP000 
=========================================  ======  =============  ============  ===========  ============== 
At 1 April 2022                                           49,312       217,906    112,126      379,344 
=========================================  ======  =============  ============  ===========  ============== 
Comprehensive income for the six 
 months 
Loss for the six months                                        -             -      (8,208)         (8,208) 
Other comprehensive loss                                       -             -      (9,389)         (9,389) 
=========================================  ======  =============  ============  ===========  ============== 
Total comprehensive income for 
 the six months                                                -             -     (17,597)    (17,597) 
Dividends                                      11              -             -      (4,500)         (4,500) 
Amortisation of revaluation reserve                            -       (3,056)       3,056                - 
Release revaluation reserve on disposals                       -           (8)            8               - 
Deferred tax on revaluation and 
 retained earnings transfers 1                                 -           766        (766)               - 
=========================================  ======  =============  ============  ===========  ============== 
                                                               -       (2,298)      (2,202)         (4,500) 
=========================================  ======  =============  ============  ===========  ============== 
At 30 September 2022                                      49,312       215,608     92,327      357,247 
=========================================  ======  =============  ============  ===========  ============== 
 
 
At 1 April 2021                                        49,312     235,774   130,741   415,827 
=========================================  ====================  ========  ========  ======== 
Comprehensive income for the six 
 months 
Loss for the six months                                       -         -  (18,572)  (18,572) 
Other comprehensive loss                                      -         -     3,088     3,088 
=========================================  ========  ==========  ========  ========  ======== 
Total comprehensive loss for the 
 six months                                                   -         -  (15,484)  (15,484) 
=========================================  ========  ==========  ========  ========  ======== 
Dividends                                    11               -         -   (4,500)   (4,500) 
Amortisation of revaluation reserve                           -   (3,056)     3,056         - 
Release revaluation reserve on disposals                      -       (9)         9         - 
Deferred tax on revaluation and 
 retained earnings transfers 1                                -       764     (764)         - 
Impact of deferred tax rate change                            -  (13,551)         -  (13,551) 
=========================================  ========  ==========  ========  ========  ======== 
                                                              -  (15,852)   (2,199)  (18,051) 
=========================================  ========  ==========  ========  ========  ======== 
At 30 September 2021                                     49,312   219,922   113,058   382,292 
=========================================  ========  ==========  ========  ========  ======== 
 

All transactions relate to the equity holders of the group.

1 The movement between the revaluation reserve and retained earnings arises from the depreciation and associated deferred tax on the fair value uplift of assets at the time of transition to IFRS.

Condensed group statement of cash flows

for the six months ended 30 September 2022

 
                                                            Six months              Six months 
                                                              ended 30                ended 30 
                                                             September               September 
                                                                  2022                    2021 
                                                                GBP000                  GBP000 
================================================  ====================  ====================== 
Cash flows from operating activities 
Loss for the six months                                        (8,208)                (18,572) 
Adjustments for 
Depreciation and impairment of property, plant 
 and equipment                                                  28,994                  28,404 
Amortisation of intangible assets including 
 impairment                                                      1,487                   1,432 
Finance income                                                   (890)                   (345) 
Finance expense                                                 47,394                  23,194 
(Gain)/Loss on disposal of property, plant and 
 equipment                                                       (126)                      67 
Difference between pension contributions paid 
 and amounts recognised 
 in the income statement                                       (2,791)                 (2,773) 
Taxation on loss                                               (4,494)                  38,631 
================================================  ====================  ====================== 
 
  Movements in working capital:                                 61,366                  70,038 
Increase in trade and other receivables                       (10,248)                 (1,474) 
Decrease in inventories                                             19                       5 
Increase in trade and other payables                            18,095                  11,730 
================================================  ====================  ====================== 
Cash generated from operations                                  69,232                  80,299 
Interest paid                                                 (14,989)                (14,048) 
Interest received                                                  148                     345 
Income tax paid                                                  (522)                   (518) 
================================================  ====================  ====================== 
Net cash generated from operating activities                    53,869                  66,078 
================================================  ====================  ====================== 
Cash flows from investing activities 
Purchases of property, plant and equipment                    (41,320)                (48,587) 
Proceeds from disposal of property, plant and 
 equipment                                                         159                     143 
Purchase of intangibles                                        (1,345)                 (1,269) 
Contributions to infrastructure assets received                      -                   (562) 
================================================  ====================  ====================== 
Net cash outflow from investing activities                    (42,506)                (50,275) 
================================================  ====================  ====================== 
Cash flows from financing activities 
Issue costs of debt                                                (6)                    (66) 
Credit facility repayment of borrowings                              -                (80,000) 
Loan notes issued                                                    -                  50,000 
Debenture redemption                                               (1)                       - 
Dividends paid to shareholders                                 (4,500)                 (4,500) 
Payment of lease liabilities                                     (134)                   (105) 
================================================  ====================  ====================== 
Net cash used in financing activities                          (4,641)                (34,671) 
================================================  ====================  ====================== 
Net cash increase/(decrease) in cash and cash 
 equivalents                                                     6,722                (18,868) 
Cash and cash equivalents at the beginning of 
 six months                                                     14,539                  41,617 
================================================  ====================  ====================== 
Cash and cash equivalents at the end of the 
 six months                                                     21,261                  22,749 
================================================  ====================  ====================== 
 

The notes form part of these financial statements.

Notes to the condensed group financial statements

for the six months ended 30 September 2022

1. Reporting entity

South East Water Limited (the 'company') is a limited company incorporated in the United Kingdom. The company's registered office is at Rocfort Road, Snodland, Kent, ME6 5AH. These consolidated financial statements comprise the company and its subsidiary South East Water (Finance) Limited (collectively the 'group'). The group's principal activities are the supply of water to a population of 2.3 million in an area of 5,700 square 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 consolidated financial statements for the six months ended 30 September 2022, 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 UK endorsement board. The statements should be read in conjunction with the financial statements for the year ended 31 March 2022, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the UK endorsement board.

The condensed group financial statements are presented in sterling.

These interim financial results have not been audited or reviewed by our auditor. The information herein for the year ended 31 March 2022 does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2022 were approved by the Board of Directors on 14 July 2022 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. Key judgements and sources of estimation uncertainty

The preparation of interim financial statements requires the application of judgements and assumptions by management which affects the value of assets and liabilities at the balance sheet date and income and expenditure for the six months ended 30 September 2022. Actual results may differ from those arrived at based on management's judgements and assumptions. In preparing these condensed interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the Group Annual Report for the year ended 31 March 2022.

4. Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. The directors have considered the current economic uncertainty and the impact that this might have on the business. The directors have concluded that it is correct to continue to adopt the going concern basis of accounting in preparing the financial statements. Further details are provided in the Chair and Chief Executive's joint statement.

Notes to the condensed group financial statements

for the six months ended 30 September 2022

5. 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 2022.

6. Revenue and other income

 
                                   Six months              Six months 
                                     ended 30                ended 30 
                                    September               September 
                                         2022                    2021 
                                       GBP000                  GBP000 
=======================  ====================  ====================== 
Revenue 
Unmetered water income                 10,294                  10,233 
Metered water income                  122,561                 114,556 
Other sales                             4,984                   5,986 
=======================  ====================  ====================== 
Total revenue                         137,839                 130,775 
=======================  ====================  ====================== 
Other income 
Rental income                             625                     624 
Other income                            5,573                   5,328 
=======================  ====================  ====================== 
Total other income                      6,198                   5,952 
=======================  ====================  ====================== 
Total income                          144,037                 136,727 
=======================  ====================  ====================== 
 

Other sales comprise a number of income streams, including those associated with activities typically performed for property developers, which impact the group's infrastructure network assets, including diversions works to relocate water assets, and activities that facilitate the creation of an authorised connection through which properties can obtain water services. Other sales includes new connections income of GBP2.0 million (2021: GBP2.5 million), infrastructure income of GBP0.7 million (2021: GBP1.3 million) and capital contributions of GBP1.3 million (2021: GBP1.4 million).

Other income includes charges for billing and cash collection services amounting to GBP3.5 million (2021: GBP3.5 million) and laboratory income of GBP1.5 million (2021: GBP1.3 million).

Notes to the condensed group financial statements

for the six months ended 30 September 2022

7. Segmental analysis

Financial and other performance information is reported internally every month to the South East Water Executive Committee. The Executive Committee is responsible for the day to day running of the business, and accordingly the Executive Committee is considered to be the chief operating decision maker of the group for the purposes of segmental reporting under IFRS 8: Operating Segments. The Executive Committee considers that the Group's activities largely fall into one main business segment, namely Regulated Water, with all other activities included in "Other" below. Regulated Water is the supply of potable water on a wholesale and retail basis, both of which are governed by the Water Act 2014.

A segmental analysis of the management results are presented below together with a reconciliation to the statutory revenue and profit before tax.

 
                                      Regulated            Other activities 
                                          water             GBP000                      Total 
                                         GBP000                                         GBP000 
====================================  =========  ==========================  ================= 
Six months to 30 September 2022 
Water revenue                           132,855                           -            132,855 
Other income                              3,000          8,181                          11,181 
Net operating costs                    (77,965)                     (7,034)           (84,999) 
====================================  =========  ==========================  ================= 
EBITDA                                   57,890          1,147                          59,037 
Depreciation and profit on disposal    (30,331)                           -           (30,331) 
====================================  =========  ==========================  ================= 
Company operating profit                 27,559          1,147                          28,706 
====================================  =========  ==========================  ================= 
 
 
Six months to 30 September 
 2021 
Water revenue                        124,790             -   124,790 
Other income                           3,717         8,221    11,938 
Net operating costs                 (62,655)       (6,148)  (68,803) 
==================================  ========  ============  ======== 
EBITDA                                65,852         2,073    67,925 
Depreciation and loss on disposal   (29,870)             -  (29,870) 
==================================  ========  ============  ======== 
Company operating profit              35,982         2,073    38,055 
==================================  ========  ============  ======== 
 

Notes to the condensed group financial statements

for the six months ended 30 September 2022

   7.    Segmental analysis continued 

The water revenue on a management accounts basis above of GBP132.9 million (2021: GBP124.8 million) compares with total revenue on a statutory basis of GBP137.8 million (2021: GBP130.8 million). The difference is Other sales of GBP4.9 million (2021: GBP6.0 million) (see note 6).

The business segments' management accounts operating profit is reconciled to the group's statutory operating profit and profit before tax as follows:

 
                                                 30 September  30 September 
                                                         2022          2021 
                                                       GBP000        GBP000 
===============================================  ============  ============ 
Management operating profit                            28,706        38,055 
Results of South East Water (Finance) Limited 
 (1)                                                        -             1 
Pension costs adjustment (2)                            2,791         2,434 
Additional loss on disposal of property, plant 
 and equipment                                           (24)          (36) 
Capitalistion of new connections (3)                    2,329         2,456 
Other statutory adjustments                                 -           (2) 
===============================================  ============  ============ 
Statutory profit from operations                       33,802        42,908 
Finance income                                            890           345 
Finance expense                                      (47,394)      (23,194) 
===============================================  ============  ============ 
Statutory (loss)/profit before taxation              (12,702)        20,059 
===============================================  ============  ============ 
 

1) The losses of South East Water (Finance) Limited are consolidated into these financial statements but not included in the finance reports presented to the Executive Committee

2) The internal finance reports include pension costs on the basis of contributions paid whereas the financial statements include pension costs on the basis of IAS 19 Employee Benefits

3) The internal finance reports record the costs associated with new connections in operating costs but these costs are capitalised as Property, Plant and Equipment in the financial statements

Notes to the condensed group financial statements

for the six months ended 30 September 2022

8. Net operating costs

 
                                                                 Six months             Six months 
                                                                   ended 30               ended 30 
                                                                  September              September 
                                                                       2022                   2021 
                                                                     GBP000                 GBP000 
=====================================================  ====================  ===================== 
Employees benefits expenses                                          18,048                 16,126 
Asset expenses                                                       30,355                 29,903 
Operating lease rentals: 
  Vehicles and office equipment                                         206                    178 
  Land and buildings                                                      7                      8 
Fee payable to group's auditor                                          219                    239 
Energy costs                                                         13,800                  9,708 
Rates                                                                 9,233                  9,235 
Contractors                                                          19,430                 14,023 
Bulk water supplies and abstraction licences                          5,163                  3,962 
Chemicals                                                             2,855                  1,849 
Insurance and related costs                                           2,047                  1,600 
Other                                                                 8,663                  7,014 
Other operating expenses charged to capital projects                (2,169)                (2,154) 
=====================================================  ====================  ===================== 
                                                                    107,857                 91,691 
=====================================================  ====================  ===================== 
 
 
9. Finance income and expense                                   Six months              Six months 
                                                                  ended 30                ended 30 
                                                                 September               September 
                                                                      2022                    2021 
                                                                    GBP000                  GBP000 
====================================================  ====================  ====================== 
Finance income 
Interest receivable on bank balances and short-term 
 deposits                                                              140                       1 
Net interest income on defined benefit assets                          750                     344 
====================================================  ====================  ====================== 
Total finance income                                                   890                     345 
====================================================  ====================  ====================== 
Finance expense 
Effective interest on listed debt                                    7,231                   6,964 
Indexation on listed debt                                           12,559                   5,048 
Interest on index linked loans                                       6,958                   6,437 
Indexation on index linked loans                                    15,338                     982 
Other finance costs                                                  6,133                   5,039 
Interest capitalised                                                 (825)                 (1,276) 
====================================================  ====================  ====================== 
Total finance expense                                               47,394                  23,194 
====================================================  ====================  ====================== 
 

Interest is capitalised at the weighted average rate of interest on the group senior long-term debt of

3.9 per cent (2021: 3.7 per cent).

Notes to the condensed group financial statements

for the six months ended 30 September 2022

10. Taxation

 
                                              Six months              Six months 
                                                ended 30                ended 30 
                                               September               September 
                                                    2022                    2021 
                                                  GBP000                  GBP000 
==================================  ====================  ====================== 
Current taxation (credit)/charge                    (79)                     663 
Deferred taxation (credit)/charge                (4,415)                  37,968 
==================================  ====================  ====================== 
                                                 (4,494)                  38,631 
==================================  ====================  ====================== 
 
  The current tax charge is based on management's estimate of the 
  weighted average annual corporation tax rate expected for the 
  full financial year. 
  The total deferred tax is estimated to be a credit of GBP4.4 million. 
  This is due to the deferred tax on the loss for the period and 
  the deferral of capital allowances. 
  The rate of corporation tax used for the deferred tax calculated 
  at 25 per cent future corporation tax rate. 
 
  Factors that may affect future tax charges 
  From 1 April 2023, the corporation tax rate increases to 25 per 
  cent under the Finance (c.26) Act June 2021. 
 

11. Dividends

 
                                                            Six months              Six months 
                                                              ended 30                ended 30 
                                                             September               September 
                                                                  2022                    2021 
                                                                GBP000                  GBP000 
================================================  ====================  ====================== 
Interim dividend of 4.6 pence (2021: 4.6 pence) 
 per Ordinary share paid during the six months 
                                                  ====================  ====================== 
                                                             2,250                  2,250 
Interim dividend of 4.6 pence (2021: 4.6 pence) 
 per Ordinary share paid during the six months                2,250                  2,250 
================================================  ====================  ====================== 
                                                             4,500                  4,500 
================================================  ====================  ====================== 
 

Notes to the condensed group financial statements

for the six months ended 30 September 2022

12. Earnings per share

 
                                                               Six months              Six months 
                                                                 ended 30                ended 30 
                                                                September               September 
                                                                     2022                    2021 
                                                                   GBP000                  GBP000 
===================================================  ====================  ====================== 
Loss for the six months from continuing operations                (8,208)                (18,572) 
===================================================  ====================  ====================== 
                                                               Six months              Six months 
                                                                 ended 30                ended 30 
                                                                September               September 
                                                                     2022                    2021 
                                                                   Number                  Number 
===================================================  ====================  ====================== 
Basic and diluted weighted average number of 
 shares                                                  49,312,354                    49,312,354 
===================================================  ====================  ====================== 
Basic and diluted loss per share from continuing 
 operations                                                      (16.64p)                (37.66p) 
===================================================  ====================  ====================== 
 

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