Chairmans statement on our half year performance for 201920

Chairman's statement on our half year performance 2019/20

29/11/19

Summary:

Our promises to customers

  • Our long-term and targeted asset investment strategy is helping ensure we are able to achieve industry upper quartile performance in terms of low levels of leakage, burst mains and supply interruptions
  • We have continued to provide top quality water but will miss our annual target of overall drinking water quality following five sample failures measured at customers’ taps, rather than issues with the quality of water leaving our treatment works
  • For the first time in this five-year regulatory period we are on track to meet our challenging goal of minimising customer contacts about water quality and we continue to lead the industry on this metric in terms of our relatively low level of contacts
  • We are investigating a single pollution occurrence caused by a burst main which has been classed as a significant incident by the Environment Agency
  • There have been some notable improvements in our overall customer service performance across a broad range of measures, including our first C-MeX results (this is the first year that Ofwat has been measuring its new sector-wide indicator of customer satisfaction), but we are likely to miss some performance targets at the end of the year to March 2020
  • Over 11,000 eligible customers are now benefitting from our Water Support Scheme bill discount, which is more than double our target for 2020
  • We are trialling innovative new technology, such as intelligent sensors and smart meters, that will help improve our network and bring down leakage and consumption

Planning for the future

  • We responded to Ofwat’s draft determination on our Business Plan and whilst we accepted the majority of interventions, we maintained that certain aspects were not rational or reasonable and did not recognise the specific circumstances of our company and what our customers have told us is most important. We will receive our final determination from Ofwat on 16 December
  • Our capital investment programme has continued apace, including laying key strategic mains to help increase the resilience and connectivity of our network and finalising the upgrade work at our Woodmansterne Treatment Works

Being a responsible business

  • We have commenced a trial of ten electric vehicles, powered by 100% renewable electricity
  • Along with other water companies we have signed up to the Social Mobility Pledge
  • Our very successful education programme has continued to teach adults and children about the value of water with over 7,000 individuals participating
  • We have continued our focus on the health and safety of our people following two lost-time accidents (where an employee has to take some time off work), and further improved our wellbeing programme
  • We have improved how we enable, recognise and reward employee performance by implementing a new online appraisal system as well as new performance management workshops for every manager

Finance and governance

  • Profit after tax has increased this half year, primarily due to one-off costs in the prior year related to operational incidents that have not recurred
  • We have agreed the terms of our new £35 million revolving credit facility at competitive market rates, demonstrating our credit worthiness and financial stability, despite the general downgrade in the sector’s credit quality in recent years
  • Along with other water companies we have included Ofwat’s enhanced Board leadership, transparency and governance principles in our licence, as well as providing additional information in our Annual Report

Performance commitments

During the first six months of 2019/20 we have remained focused on delivering the commitments we made to our customers in our Business Plan for 2015 to 2020. I am pleased to say that we have delivered some strong results in the first half of this year and we are therefore on course for a successful conclusion to the final year of the current five-year regulatory period.

Our customers’ top priority is a reliable supply of water and we have delivered this with both supply interruptions and burst mains being well within maximum target limits with far fewer than during the first half of last year. This performance clearly demonstrates the resilience of our network which is the result of many years of sustained and targeted investment.

Managing leakage is one of our customers’ top priorities and a key focus for us as well - last year we had the lowest level of leakage per property in the country. This strong performance continues and we are on track to meet our leakage target for the 21st successive year. We also remain committed to doing even better in the future with the aim of halving leakage by 2045.

At the start of the current five-year regulatory period we set ourselves particularly challenging annual targets to minimise the number of customers contacting us about the taste, smell or appearance of their water. At the end of September, we were within our maximum target limit and are therefore forecasting to meet this stretching target for the first time in this current 2015-2020 Asset Management Plan (AMP). We continue to lead the industry in this area with regard to the low levels of contact relative to industry average.

However, there are two key areas where we have not met our performance commitment targets:

  • To date, we have achieved 99.94% compliance with the Drinking Water Inspectorate’s definitions for overall water quality, which is below our target of 99.95%. While disappointing, this result reflects only five sample failures measured at customers’ taps, rather than any issues with the quality of water leaving our treatment works. However, we will still incur a financial penalty from Ofwat of £140,000 based on our annual performance for the 2019 calendar year. Three failures were due to exceedance of the iron standard and two were due to exceedance of the lead standard (one of which was solely due to customer pipework so the Company replaced their communication pipe and advised the other customer to replace their pipework).
  • Three potential pollution incidents have been logged with the Environment Agency (EA) for further investigation during the first half of the year, two as a result of burst mains and one linked to the commissioning of a new main. One of these, reported in July, has been classed as significant due to the volume of burst water travelling through the surface water drainage system so we are currently investigating.

Customer service

Our vision is to be an outstanding water company delivering service excellence but meeting our targets for the consistently high level of service we expect to provide when customers need to contact us has been an ongoing challenge, but recently there have been some improvements. 

This is the first year that Ofwat has been measuring its new sector-wide indicator of customer satisfaction, C-MeX and our target is to be in the top half of the industry. For the first quarter we achieved 13th place (out of 18) which, while behind target, is higher than our historic Service Incentive Mechanism (SIM) rankings (the previous measure used by Ofwat).

We also measure customer satisfaction through our own quarterly customer surveys which continues to show that over 90% of respondents are either satisfied or very satisfied with the service we provide.

In September the Consumer Council for Water (CCWater) published its household water complaints report for 2018/19 and we were highlighted for the significant improvements we had made in this area during the year. Our complaint levels are now at a four-year low, and therefore heading in the right direction, but we will continue in our efforts to further improve performance in this area. The majority of complaints received so far this year have been related to a significant road closure to carry out essential mains repair works and we have since undertaken a lessons learnt exercise to improve how we manage such events in the future. The balance of complaints were largely due to issues with our online billing system which have now been resolved.

The Board continues to monitor the Company’s customer service performance closely, as well as the progress of the improvement plan which includes significant investment to utilise latest digital technology as well as a brand-new billing system.

Whilst only 5.5% of our customers feel that their water bill is not good value for money, it is always disappointing when any customer feels this way. We know that for some people, paying their water bill can be a struggle so our Water Support Scheme continues to enable us to help customers who are experiencing genuine financial hardship. Over 11,000 eligible customers are now on this tariff which is over double the target we set ourselves for this five-year period. We continue to increase our activity to raise awareness of the extra support we can offer.

Water resources and demand

Despite some very wet weather this autumn and flooding in some parts of the country, over the last two winters we’ve had less rain than normal in our supply area. This is significant as like all water companies, we depend on winter rainfall for the water we supply to our customers as underground aquifers (rocks which act like a giant sponge) usually only fill up between October and March when there is less plant growth and evaporation.

Over the summer (April to September) we actually had slightly above average rainfall but last summer’s heatwave really dried out the ground which delayed recharge last autumn and means that our groundwater levels remain below average despite the recent rainfall. Our underground aquifers provide 85% of our overall water source, with the River Eden providing the other 15%. So far this winter we have had above average rainfall and if we receive average winter rainfall between now and March 2020 this is expected to allow our groundwater stores to sufficiently replenish such that we can meet the demands of next spring and summer. We have an agreed action plan that we can implement when our groundwater levels go below certain levels.

So far, we have started up an additional treatment works and are moving water around our vast network of pipes to use more plentiful sources. We have also expanded our Home Water Efficiency Check programme and are finding and fixing leaks as quickly as we can, including on customers’ pipes. We continue to monitor the situation carefully and are liaising with other companies in the region to discuss any emerging risks.

Water efficiency and sustainability

On average, each person in our supply area uses around 160 litres of water a day at home which is 20 litres higher than the national average. Water is a precious resource whatever the weather and given, as noted above, that 85% of the water we supply to our customers comes from underground, our water efficiency activities and messages are relevant all year round.

A key focus this year has been our new campaign ‘Every Drop Counts’ piloted in Tandridge and intended to test emerging and innovative methods of bringing down consumption and leakage to meet the challenging targets we have set ourselves in our next Business Plan. As well as increased water efficiency activity, including home visits, collaborating with local businesses and free leak detection and repair activity, we are trialling some exciting new technology.

Working with expert partners, we continue to make our network more ‘intelligent’ over time so that we have much more accurate and timely information about the health of our pipes enabling more informed decisions about repair and replacement. We are also testing new smart devices that will help our customers understand much more about their water usage and how they can use less. Our employees have been speaking at a number of industry conferences about our plans and progress and feedback from attendees has been very positive, particularly on the extent of our ambitions in this area, especially given our relatively small company size.

Since 2015 we have fitted over 32,000 water meters so have met our target for this AMP. On average, switching to a meter reduces water use by 14% making them a key tool in bringing down consumption. Our focus now turns to switching as many customers as possible onto measured charges to bring us in line with other water companies in the south east.

Our twenty-year environmental education programme has continued its success this year, with an increased target to reach 10,000 adults and children by the end of the financial year. At the end of September, 7,760 individuals had participated in our activities (including visits to our education centre, classroom workshops, community talks and summer events with our mobile information vehicle), which is more than our half-year target of 5,600.

Building on our switch to 100% renewable electricity in 2018, we have now started a five-year trial of electric vehicles. In partnership with Drax Group, we have invested in 16 new charging points across four sites and have replaced ten of our 100-strong fleet of diesel vans, saving 43 tons of CO2 a year.

Health and safety

The health and safety of our employees, contractors and members of the public remains a key priority for the Board.  However, since April we have had two lost-time accidents. Any accident is one too many and so the Company is continuing its focus in this area, paying particular attention to the root cause of each incident. We have commissioned an independent external review to build on the progress we have made in recent years.

We have also continued our focus on the health and wellbeing of our employees with our Aqualibrium programme. Under this initiative we offer annual health checks to everybody and have been trialling some new ideas including a ‘Well Me’ booth at our Redhill head office and wellbeing health boxes at our treatment works. These devices measure a range of health indicators including body fat and blood pressure and in the first 20 days over half of our employees had taken the opportunity to assess their health.

Our people

The people who work at SES Water represent our greatest asset and an engaged and supported workforce will deliver great service. We have a ‘People Plan’ which summarises everything we are doing to ensure our employees are the best they can be and sets out how we will continue to create a working environment that everyone is proud to be part of. One of the key activities we have progressed during the first six months of the year is improving how we enable, recognise and reward great performance. This has included implementing a new online appraisal system as well as new performance management workshops for every line manager.

Together with other water companies, we have strengthened our commitment to acting in the public interest by working together towards five challenging goals by 2030. You can learn more about these on Water UK’s website: https://www.water.org.uk/publications/. One of these goals is to be the first sector to achieve 100% commitment to the Social Mobility Pledge. Intended to increase investment, opportunities and diversity in communities, we have signed up to this and are already making good progress, including being one of the first water companies to offer the Industrial Cadets work experience scheme through the Engineering Development Trust.

From April 2017 companies with more than 250 employees have been required by law to report their gender pay gap under the Equality Act 2010. The report shows the difference between the average earnings of men and women. We welcome this new reporting because we are confident that at SES Water men and women are paid equally for doing equivalent jobs, regardless of gender. However, we do currently have a gender pay gap of 17% based on our most recent 18/19 data, which is the result of having fewer women in senior roles in the Company. This is not uncommon in the utilities industry as the STEM (science, technology, engineering and maths) fields have been predominantly male occupations with historically low participation among women.

Nevertheless, the challenge for us, and all employers, is to eliminate any gap as much as possible. We believe in creating a diverse and gender-balanced workforce which ensures equal opportunities for all employees and reflects the customers we serve. Some of the actions we are taking to ensure we continually challenge ourselves to be more inclusive include reviewing our recruitment processes and evaluating our appraisal system to ensure that capable employees, regardless of gender, can progress.

To facilitate more direct Board engagement with employees we have appointed a designated independent non-executive director to lead on this through the Company’s Joint Negotiating and Consultative Committee (JNCC).

Financial performance

Revenue in the first half of the year increased by 3% (£1.0m) to £34.3m (2018: £33.3m) mainly due to the RPI-linked increase in customer bills. Operating costs in the period reduced by 3% (£0.7m) to £23.3m (2018: £23.9m) because some one-off costs in 2018 relating to burst mains and increased leakage reduction activity have not recurred. Other operating income remained at similar minimal levels year-on-year. The increase in revenue and reduction in costs has resulted in an 18% increase in operating profit (£1.7m) to £11.1m (2018: £9.4m)

Net financing costs have increased by 11% (£0.5m) to £5.3m (2018: £4.8m) primarily due to the impact of RPI on the indexation of our £100m bond and set-up costs of our renewed £35m revolving credit facility. This has been offset by a reduction in interest charges due to repaying a £30m bank loan as part of our de-gearing strategy.  

The tax charge increased by 50% to £1.3m (2018: £0.8m) mainly due to the increase in profit before tax noted above. The tax charge is equivalent to 20% of profit before tax. Profit after tax increased by 21% (£0.8m) to £4.5m (2018: £3.7m).

Net cash from operating activities of £18.9m increased from prior year (2018: £12.8m) due to increased revenues noted above and settlement of an intercompany trading balance. Net cash from investing activities of £14.0m for the current period (2018: £11.3m) was as a result of the strong progress on capital programme. Net cash from financing activities increased to £1.2m inflow of cash (2018: £2.3m outflow) due to use of the company’s revolving credit facility to fund the capital programme.

Following the Board’s 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, an interim dividend of £1.8m relating to 2019/20 has been declared and will be paid in December 2019 (2018: £1.9m).   

Read our interim financial statements for the six months ended 30 September 2019

Read 'Keeping it clear 2019' our customer-friendly guide to how we are owned, run and financed

Capital investment

In the first six months of this year we have invested £15.2m (2018: £11.5m) in our capital programme. This includes significant resilience investment to enable all of our customers to be served by more than one treatment works by 2025. A key part of this is new strategic mains and by September we had laid 2.6 kilometres of pipe (1.6 miles) between Blindley Heath and Outwood which will help us move more of our water around our supply area.

We have invested £5.2m (2018: £4.0m) in upgrading our treatment works and pumping stations. This includes completing the refurbishment of our Woodmansterne Treatment Works – our largest ever single investment - as well as continuing significant improvements at Elmer Treatment Works to improve reliability and resilience.

Regulatory developments

In September 2018 we submitted our Business Plan for 2020 to 2025 to Ofwat and in January 2019 Ofwat issued its ‘initial assessment’ on our plan. The next step in the process was to resubmit parts of our plan in April and then in July we received the ‘draft determination’ which is the regulator’s view on the service levels we must deliver, together with the funding we will receive and the associated level of customer bills over the five-year period. On 30 August we responded with the changes we would like Ofwat to make in their final determination on 16 December. As expected, our primary challenge is on the funding for delivering everything we have planned for our customers. Although we requested £9 million less income than in our original plan, there is still a substantial gap between the costs we propose to spend and Ofwat’s view of what is considered efficient. We also continue to be concerned about the wider effects of the declining cost of capital and strongly caution against a further fall at final determination, requesting that Ofwat takes a balanced assessment of the recent evidence available in reaching its view. However, we were pleased to have the opportunity to discuss our views at a meeting with Ofwat representatives in September and we will have until 16 February 2020 to decide if we accept the final determination.

Governance, financing and organisational changes

Earlier this year, Managing Director Anthony Ferrar informed the Board of his intention to retire this year after 11 years of service with the Company. I am pleased to say that following an extensive and rigorous selection process, Ian Cain has been appointed as Group Chief Executive Officer and will succeed Anthony from 3 February 2020. Ian is currently the Chief Executive Officer of iSupplyEnergy (part of the Vattenfall group), a role he has been in for the last 14 months. Prior to this he was the Managing Director for Retail and Group Customer Service at Thames Water between 2013 and 2017 and has held a number of senior customer service and transformation positions at British Gas (Centrica). I look forward to working with Ian and am also pleased to take this public opportunity to thank Anthony for his many years of leadership and commitment and to wish him a long and happy retirement.

There has also been a change in shareholder nominated non-executive directors on the Board with Kenji Oida from Osaka Gas replacing Ryuichi Nishida in May. He brings with him a wealth of experience in investment risk management and business leadership.

The increased scrutiny into companies’ governance and financial arrangements has continued and on 1 April 2019 Ofwat’s enhanced Board leadership, transparency and governance principles came into effect. Whilst as a Board we consider that we were already meeting the revised requirements and were one of the first companies to endorse accepting a resulting change to our licence conditions, we recognise that there is always room to improve the approach we take in explaining how we operate to our customers and stakeholders. This has included expanded disclosures in our Annual Report 2019, including a new statement from the Board on the Company’s direction, aspirations and performance.

Our credit agency outlook has been downgraded to negative by both Moody’s and S&P. While disappointing, this is generally consistent with others in the industry and was strongly influenced by Ofwat’s proposals for a lower cost of capital across the sector.

As well as the availability of an overdraft and loans, we have a ‘revolving credit facility’ with our bank. This is a line of credit with an agreed maximum amount which can be drawn on at any time when needed. In July we agreed the terms of a new £35m five-year facility at favourable market rates which demonstrates our credit worthiness and financial stability.

Risks and uncertainties

The country remains in a period of substantial economic and financial uncertainty as the Government seeks to negotiate arrangements for leaving the European Union. We continue to work with the rest of the industry in preparation for the potential impact of a no-deal Brexit with the potential impacts incorporated in our risk register.

SES Water, as for many companies, recognises that a cyber-attack continues to be a significant risk and ensuring strong mitigations are in place is a high priority.

The Board also acknowledges the continuing political debate over the re-nationalisation of the water industry.

Future challenges

Our primary challenge remains ensuring that we perform as strongly as possible during the final six months of this five-year regulatory period to ensure we meet the commitments that we made to our customers. Whilst we know that some areas are more achievable than others, we must not be complacent as we head into the winter months when extreme weather can have a significant operational impact. As explained earlier in this statement, we need consistent winter rainfall to achieve a full recharge of resources for next spring and a significant cold snap could definitely impact performance against our leakage, bursts and supply interruptions targets.

Along with the rest of the industry we await Ofwat’s final determination on our Business Plan. Earlier in this statement we noted that we had accepted the majority of Ofwat’s interventions on our Business Plan in the draft determination, which sets out a package of stretching performance commitments. However, we maintain that certain aspects did not recognise the specific circumstances of our company and what our customers have told us is most important. We made a number of key representations, supported by our Customer Scrutiny Panel, which we believe strike a better balance for our customers by providing more of what matters to them at a price they can afford.

Finally, as ever, I would like to thank all our hard-working employees for their continuing dedication. Their skills and commitment mean we are not only performing strongly for our customers today, but we are confident in our ability to continuously improve our performance in the future as well.

Jeremy Pelczer
Chairman

29 November 2019