Chairman's Half Year Statement 2021

30/11/21

Chairman's statement on SES Water's half year performance for the six months ended 30 September 2021

I am pleased to present the interim results for SES Water for the six months ended 30 September 2021. With the ongoing impact of COVID-19, it continues to be a challenging time for our customers, employees, suppliers and the water sector as a whole. However, the Company has continued to ensure the treatment and distribution of high-quality water to our customers through this difficult period.

With COP26 highlighting the urgent need for action on climate change, the Company is making good progress in bringing to life its environmental, social and governance strategy, not least in launching its Net Zero Carbon routemap back in June. The routemap clearly sets out how the Company plans to achieve net zero carbon emissions by 2030.

Unfortunately, it was necessary to issue a precautionary boil notice to our customers living in the Oxted area at the start of October, following a positive result for E-coli from one sample at our Westwood Water Treatment Works. The boil notice was lifted within 48 hours after urgent tests across that part of our supply network found no evidence of further contamination. We have investigated the event and sent our report to the Drinking Water Inspectorate (DWI), who will in turn review it in line with their usual procedure. While it was the right thing to do, as we had to make sure the drinking water was safe, I am very sorry for the inconvenience and concern this will have caused those of our customers impacted by the boil notice. It is however important all customers are confident their health is our priority when drinking the water we supply.

On a personal note I am delighted the transition plan for the new Chair of the Company is underway, following the announcement in July 2021 that Dave Shemmans, one of our current non-executive directors, will take on that role with effect from 1 April 2022. That will coincide with the end of my third and final term as Chair of the Company. I have been extremely privileged to serve SES Water and its customers over the last 9 years, and I have no doubt Dave will be an outstanding Chair and guide the Company successfully through the remainder of the current AMP and the next Price Review (PR24). As a reminder, the current AMP refers to the Asset Management Plan for the five-year period 2019-2024, as agreed with Ofwat.

As a water-only company that does not collect or treat wastewater/sewage, we have not been directly impacted by the recent sewage discharge investigation that has been initiated by Ofwat and remain strongly committed to protecting our environment, both now and in the future.

Over the last 6 months, some specific developments within key areas of focus for the Company are as follows:

Delivering what we’ve promised to our customers

• In September we launched our new customer billing system, Aptumo, which represents the largest change we have made to this area of our business in more than 20 years, and the largest technology investment in our history. The new system will enable us to provide our customers with a more timely and accurate service to better manage their bills online, as well as reducing the complexity in our systems to allow our teams to spend more time focused on engaging with our customers. It will also modernise and improve our billing and revenue processes, which are important to ensure the ongoing financial resilience for the Company. Initial feedback from employees using Aptumo has been extremely positive and we have been pleased with the smooth transition to the new system
• Throughout the pandemic our top priority has remained the health and wellbeing of our employees and customers and we have continued to provide support to both groups. We’ve increased the number of Mental Health First Aiders who have run virtual coffee and chat sessions as well as providing one-to-one support for our employees. Likewise, we know our customers have been impacted in many different ways, which is why we’re continuing to provide ‘Here For You’ – our financial support programme, which includes ‘Breathing Space’, a payment pause scheme, for people struggling financially
• In May we re-commenced activity to collect outstanding household debt, having paused this activity at the start of the pandemic. We are adopting a flexible and segmented approach to this work, using the interaction as an opportunity to understand more about our customers’ financial circumstances and offer affordable payment plans and other means of support where required. Customers on our Priority Services Scheme continues to be above target, currently at 4.7%
• We continue to make improvements to our overall customer service performance across a broad range of measures but we know there is much more work we need to do. In the Quarter 2 C-MeX report (Ofwat’s sector-wide indicator of customer satisfaction) we ranked 11^th, up from 16^th in the previous quarter, and are currently in 15^th position for the year to date. While this is not where we want to be, the improvement was driven by a stronger result in the reputational element of the survey, where we ranked 10^th, and an improvement in our ranking on satisfaction with water enquiries, while our billing performance remained unchanged. With the launch of Aptumo we are confident we will be able to improve our score for billing, while we also have a focused plan in place to improve our performance across the wider business
• For D-MeX (Ofwat’s Developer Services measure of experience) our Quarter 1 overall score was 77.16 and, while a quarterly table is not published by Ofwat, using Water UK dashboards our position is shown to be 14^th, improved from 16^th. As with C-MeX, we know there is much more work to be done in this area and we are taking action to respond more quickly to developer applications, keep them updated on progress and better tailor our service to meet their individual needs
• Around 85% of the water we supply comes from underground and we are unique in the industry in having a legal obligation to soften the vast majority of groundwater we treat and a performance commitment on the level of hardness in the water we distribute. We have recently completed the challenging project refurbishing much of our softening process at Elmer Treatment Works. This allows us to more resiliently meet softened water targets for the site, which supplies over 150,000 people daily
• The number of vacant properties (or ‘voids’) where customers are connected to our network but not charged for any water is currently 4.17% of the properties in our supply area, against a regulatory target cap of 2.7%. Unfortunately, we incurred a financial penalty for the number of voids we had last year but we have a plan in place to reduce this number across both household and non-household properties. This includes door-to-door visits to residential properties and work with Developer Services to ensure we are able to bill new homes more promptly
  
  Delivering for the environment and our community

• We operate in a region which is classified as being in serious ‘water stress’ due to the growing population and limited water resources, which is why we have a target to reduce the amount of water per person we need to take from the environment. To help achieve this we have made progress on our programme to install meters for 90% of our customers without one by 2025. Since September we have started the next phase of our universal metering programme with the installation of meters to the remaining 3,500 of our customers in the Ewell area. As part of this work, we are trialling the impact of messaging around the environmental impact of metering supplies, since water supplied in this area is abstracted from groundwater sources that also feed important local chalk streams. We plan to roll out the wider programme across our supply area next year using learnings from both the Ewell trial and previous work we have undertaken to achieve over 60% meter penetration across our customer base
• Ahead of COP26, we recently launched our Net Zero Carbon routemap, which outlines our ambition of achieving net zero carbon by 2030 in the most affordable and resilient way. When producing the routemap we consulted with both our customers and our Environmental Scrutiny Panel to provide an independent voice on our plans. We have also joined the UN-backed ‘Race to Zero’ campaign to further our commitment to reaching zero carbon by the end of the decade
• We have continued to add to our fleet of electric vehicles, which now stands at 30, and having already installed charging points at every one of our operational sites, we continue to install home charging kits for our employees to use our electric and plug-in hybrid vans and company cars. Our vehicle fleet will comprise around 25% electric vehicles by the end of the current year.
• In the last six months we have completed a preliminary ecological assessment and biodiversity site management plan at our Fetcham Springs site and are working towards achieving The Wildlife Trusts’ Biodiversity Benchmark, which we already have for our Elmer Treatment Works. We are also working towards achieving this at our Bough Beech site by 2025
• In September, for the first time, we partnered with Run Reigate as the event’s official water provider, helping to save 24,000 plastic bottles from being used at the event. Instead, we provided participants with our water directly from mains below the running route and in biodegradable cups at the various drinking stations and from our branded tanker in the runners’ village
• Our partnership with the Community Foundation for Surrey has continued and in July we provided a further £13,500 in funding towards two local charities. Delight, a group based in Caterham helps disadvantaged children in Surrey overcome the barriers of poverty by improving their wellbeing, and Patchworking Garden Project, which is a social horticultural project based in Dorking helping people with physical or mental health conditions learn about gardening and crafting
• Our education programme has been shortlisted in the ‘communication and education’ category of The Better Society Awards 2021, designed to recognise commercial organisations helping to create a better and more sustainable world for all. The decision will be made in early December
• With COVID-19 restrictions having eased in the last six months, we have been able to resume school visits to our new education centre at Bough Beech Reservoir. Since May more than 750 adults and children have been able to attend, which has included 24 school visits. We have also been able to deliver in-person water saving talks to 385 people
• In September we successfully prosecuted a company for nine offences for illegally taking water from fire hydrants through the use of unauthorised standpipes. The company received fines totalling £4,500 which we added to our grant fund with the Community Foundation for Surrey

Transforming our performance through being more digitally focused

• Data technologies, science and processes are re-writing the rules of business for many organisations and propelling them toward digital transformation. Global spending on digital transformation technologies is huge and is making us all radically re-think how we can embrace such technology to better meet customer expectations. At the foundation of this radical re-thinking is the intelligent management of the proliferation of data through the organisation. We see data as the key enabler for our digital transformation, and as result we are investing in improving our data skills and capabilities across the Company. We have now established a centralised data team, which is helping to build awareness around the value of data as well providing practical help in data management techniques and gaining insights from integrating data from multiple sources. Businesses like SES Water, intent on digital transformation, must first look at our data and how we can quickly cleanse, review and blend business-critical data from different systems across the Company
• Managing leakage is one of our customers’ top priorities and an ever-present focus for us too. We have one of the lowest levels in the industry. Our aim is to more than halve the water lost from our network and our customers’ pipes by 2045. At the half-year point during this current year, our reported leakage was slightly behind the target, however this still represents a very good achievement following a very challenging 18 months dealing with the impacts of COVID-19, which has resulted in us needing to effectively achieve two years’ worth of leakage savings in one year. We know we have a very stretching regulatory target to reach for the 2021/22 report year, which will require us to achieve a reduction in leakage significantly ahead of the cumulative reduction of the last five years. At the half year mark we are on track to achieve this
• Given this challenging target, we are investing in innovative technology and real-time data solutions with key partners such as Vodafone and Royal HaskoningDHV, and will soon be the first UK water company with a totally ‘smart’ network. This means the network will be able to recognise and highlight issues in real-time
• Using newly implemented software, data is sent from sensors on the pipes in our network directly to our operational teams and speeds up their response time to prevent leaks and bursts and reduce the amount of supply interruptions for our customers
• The ground-breaking technology is also better for the environment, with less risk of pollution incidents, less unnecessary site visits and lower carbon emissions by targeting where our field teams look for leaks

Targeted investment to ensure operational resilience

• In the past six months we have made significant investment (£1.9m) on several important mains replacement schemes across our supply area, including in Redhill where we have laid more than 1.5 kilometres of new water main to support the significant new building development in the town
• After a challenging first year in this five-year cycle, we are now making good headway towards completing a resilience programme we have been progressing since 2010, to enable the transfer of water from Bough Beech Treatment Works in Kent to the north of our area, which was previously completely reliant on groundwater supplies. Work commenced in late September to begin laying the last new strategic main to connect areas of our supply that were previously separate, alongside the commencement of the third and final phase of work to upgrade the capacity of our Bough Beech site and a number of strategic pumping stations. This means that by 2025 every property can be supplied by more than one treatment works if needed, such as during periods of low rainfall or operational outages. Subject to our ability to upsize a section of strategic main on a major A-road in south London, we hope to complete the programme nearly two years early in mid-2023
• During the first half of the year, we have invested £1.4m into upgrading our Treatment Works at Bough Beech Reservoir so we will be able to increase the amount of water we pump out to customers from 50 mega litres per day to 65 mega litres (1 mega litre is the equivalent of 1 million litres) and the laying of 2.4 kilometres of new water main in Langley Park, Sutton, which will allow us to carry a greater volume of water from Bough Beech to our customers in the north of our supply area

Financial performance and ensuring financial resilience

• The six months ended 30 September 2021 saw revenue increase by 3% (£1.0m) to £32.3m (2020: £31.2m). The increase in revenue was driven by the partial recovery post COVID-19 and associated lockdown restrictions increasing the volume of wholesale water, although this has not fully recovered to pre-COVID levels
• Operating costs increased by 4% (£1.1m) in the year to £26.8m (2020: £25.7m) mainly due to higher run rates of network maintenance spend and increased volumes of electricity consumption
• Other operating income remained broadly consistent with prior year at £2.0m (2020: £2.2m) due to monies received for insurance receipts relating to a chemical spill at Elmer water treatment works that occurred in 2017
• Operating profit has increased by 5.1% to £7.8m (2020: £7.7m) due to the partial recovery of revenue and the one-off insurance monies but offset by increased operating costs. There has been an improvement in latest cash collection rates seen within the region and as a result a £0.5m reduction to the bad debt provision has been made within the half year accounts
• Net financing costs have remained at a similar level of £5.5m (2020: £5.4m) however increasing inflation (RPI) costs will increase financing costs for the year ending 31 March 2022
• The tax charge increased by £12.5m to £12.9m (2020: £0.4m) due to the change in tax rate, effective from 2023/24, announced in the Spring budget increasing the provision for deferred tax. Due to this increased tax charge the Company reported a loss after tax of (£10.6m) (2020 Profit: £1.7m)
• Net cash from operating activities of £7.2m decreased from prior year (2020: £10.9m) due to increased operating and financing costs as noted above. Net cash from investing activities of £9.7m increased from prior year (2020: £8.6m) due increase spend on the capital programme mainly with the completion of the new billing system. Net cash from financing activities increased to £7.3m inflow of cash (2020: £3.0m outflow). In 2021 £6m drawdown on the Company’s revolving credit facility was made. The Board considered that a final interim dividend related to the year-ended 31 March 2021 could be declared and paid after its consideration of our performance across a number of factors including service to customers, compliance with statutory obligations, as well as financial performance against regulatory assumptions and internal targets.
• In the last 6 months we commenced a series of financing-related activities to both continue to enhance our financial resilience and address our funding requirements for the rest of this AMP. This has included removing certain pre-funding requirements associated with our long-dated bond ahead of required repayments commencing 2027, which has been economically beneficial for the company and also improved our ability to access further debt funding if required. In addition, we are in the process of raising the remaining AMP 7 debt to fund our capital programme activity through to 2025

Our People

• Our people will always be our greatest asset and their commitment and determination to deliver a consistently high level of service for our customers can always be counted on. Despite the challenges of the past 18 months there have been countless examples of our people going above and beyond to ensure our customers receive the service they expect and rely upon
• Throughout the pandemic, we have closely followed the Government’s guidance on COVID-19 safety restrictions. As these restrictions have been eased on a national level, we have also started to lift some measures to allow those of our workforce who have been able to work from home to gradually return to work, albeit in a hybrid capacity
• Our phased ‘Together Again’ programme will allow our employees to enjoy the benefits of working together in person for the majority of the working week, while also having the option of working remotely when needed. Precautions remain in place in our workplaces to reduce the risk of COVID-19 transmission and will be continually kept under review and adjusted as necessary in line with Government advice
• In October we received the results from this year’s Employee Engagement Survey, for which 77% of our workforce took the time to share their opinions. This is a higher percentage than in previous years and from a larger employee base. Our overall engagement score is also up from 61 points in 2019 to 64.9 points this year.
• The top scores from the survey indicate our employees feel the workplace is a safe, healthy and comfortable place to work, with a receptive management team and a caring culture. Meanwhile, areas flagged as in need of improvement included career progression, recognition, resources and collaboration across the business. The Board and the Executive leadership team are committed to learning more about these concerns and are already working to address these as part of an action plan in the coming months
• We continue to work on reducing our gender pay gap and our 2021 mean pay gap is 12.3% - down from 15.1% the previous year. Some of the actions we are taking to reduce this further include creating a Company Diversity and Inclusion group for the Company, giving managers recruitment training and making sure our job adverts attract a wide range of people with the help of specialist copy writers. These actions, together with new recruitment processes, form part of our plan to help increase representation of women and other under-represented groups, at all levels, within the Company
• The health and safety of our employees, contractors and members of the public remains a key priority for the Board. In total, 37 Potential Hazard Early Warnings (PHEW) have been reported since April, all of which are being fully investigated and the majority already resolved. The key findings from senior management inspections across our sites in the past six months relate to general site maintenance and a number of security improvement actions
• With COVID-19 changing our ways of working, we moved our health and safety training to an e-learning programme and virtual classrooms, enabling us to mitigate any health risk to our employees and also ensure we remained compliant in providing the mandatory training. Now restrictions have eased we have been able to resume to in-person delivery of the training programme
• Since April the Company has, for the first time, piloted an ‘Aspiring Managers’ training programme. The series of six workshops was delivered internally by the Learning and Development team to provide learning opportunities for those in the business preparing to take the next steps in leading and managing teams. The programme has been well received by all those who have completed it and the Company is already planning to roll out the training again to the next cohort of employees

Risks and uncertainties

• The global COVID-19 pandemic continues to impact the country on a number of levels, which we and the rest of the water industry have also been affected by. The health and safety of our employees and customers remains our number one priority and there are a number of mitigating actions that we have taken, and continue to take, to manage the impact while taking care to abide by the latest Government advice throughout
• Senior management continues to hold meetings each week to discuss and assess the latest situation, both on a national and local level. These regular meetings have ensured we have been able to plan effectively and remain flexible to mitigate any risk
•  The speed at which the global economy has restarted since the COVID-19 pandemic hit is certainly encouraging and to be welcomed on the one hand but it has created, and continues to create, significant disruption to global supply chains due to an imbalance in supply and demand. This is being felt in both the cost and availability of everything from construction materials to vehicles. We are working closely with our colleagues from across the sector via our trade body Water UK to understand and mitigate impacts, along with lobbying Government departments to ensure the importance of maintaining supplies to the water sector is appropriately prioritised, with varying degrees of success. Having already mitigated through early purchasing the impact of electricity cost increases, we are focusing on mitigation strategies to counter cost increases now being seen in chemicals and other materials. At present, the duration of this disruption, and the associated cost challenges, is unknown. However, we have alerted Ofwat to these issues early and committed to keeping them informed of their impact on the delivery of our Business Plan over the coming months. Ofwat has recently confirmed regulatory penalties of circa £1.1m in respect of performance for the year-ended 31 March 2021, which will be reflected in our allowed revenues in 2022/23. This is in line with our expectations and – in accordance with Ofwat’s guidance – excludes adjustments associated with per capita consumption performance

Our primary focus remains ensuring we perform as strongly as possible during the second year of this five-year regulatory period to make sure we meet the commitment we have made to our customers. We are also starting to gear up for the next price review (PR24) and I’m confident that with the dedication and commitment of our employees and supply chain partners, we can rise to the challenges before us and provide our customers with the best possible service.

Jeremy Pelczer, Chairman

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