SES Water Chair's half year statement and interim accounts 2022

30/11/22

Chair’s statement on SES Water’s half year performance for the six months ended 30 September 2022

I was delighted to take up the role as Chair of the Company from 24 March this year and am pleased to present the interim results for SES Water for the six months ended 30 September 2022.

With the rise in cost-of-living, higher operational costs and drought being declared in the South East it continues to be a challenging time for our customers, colleagues, suppliers and the water sector as a whole. However, the Company has continued to supply high-quality, wholesome water to our customers with no temporary usage restrictions during this difficult period.

We are acutely aware that supply chain issues and inflation, originating from disruption caused by COVID-19, have been exacerbated by the war in Ukraine and are causing a cost-of-living crisis for both customers and businesses.

Despite these hardships we are doing all we can to strike the right balance between providing financial support for our customers, while also taking the necessary measures to strengthen our own financial resilience. We are closely monitoring payment trends and customer circumstances for any signs of increased difficulty to pay. We continue to work on community outreach to raise awareness of available financial support schemes and put appropriate arrangements in place for customers who need them, including payment breaks, discounts of up to 50 per cent and the option of capping tariffs for eligible customers.

During the past six months the water industry has rightly been under scrutiny by Government and our regulator due to the ongoing sewage discharge investigation. While we are a water-only Company, the issue affects the reputation of the whole sector and we remain in full compliance with all our water abstraction and discharge licences and are strongly committed to protecting our environment, both now and in the future.

The summer’s record high temperatures and ensuing drought have also highlighted the urgent need for more action - on both climate change and delivering greater resilience across the water sector. We have recently published our draft Water Resources Management Plan for consultation, which looks 50 years ahead and allows us to plan how much water will be needed to supply the area’s growing population, while also being ready for climate change. Our plan is also co-ordinated with Water Resources South East’s (WRSE) draft plan, to provide a collaborative and regional approach to managing water resources.

We also continue to make good progress tackling leakage and have confidence our approaches to leakage reduction through our fully smart network, and improved processes, are driving the lower leakage levels we are reporting.

Unlike some of the neighbouring water companies we did not meet the trigger level in our Drought Plan to introduce a Temporary Use Ban in our area. However, we need average levels of rainfall in the coming winter to refill our groundwater resources and Bough Beech reservoir to avoid having to put restrictions in place next spring and summer.

I look forward to helping us develop our business targets for the next Price Review (PR24), the agenda for which has been set by our Long-Term Delivery Strategy. This strategy sets out our vision and ambition for the next 25 years and how we will adapt if things change, as detailed in our initial strategic consultation document published in October 2022.

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

Delivering what we’ve promised to our customers

• In the 2022 year to date, we have maintained our industry-leading water quality performance from 2021. We lead the way in the water sector for our Compliance Risk Index (CRI) score, with only one sample failure due to the presence of lead service pipework and one shown to be due to the condition of a householder tap. The CRI is a measure that assesses water quality compliance across water companies.
• We know our customers are being impacted by the rise in the cost of living, 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, as well as Water Support – a 50% reduction on some bills and WaterSure, a capped tariff for eligible customers
• We continue to make improvements to our overall customer service performance across a broad range of measures. In the Quarter 2 C-MeX report (Ofwat’s sector-wide indicator of customer satisfaction) we ranked 12^th. We are currently in 13^th position for the year to date, which is up two places from our full year performance last year. While this is still not yet where we are aiming to be, this was the third quarter in five where we finished in 12^th or above and we are determined to continue to improve our customers’ satisfaction with our service. We have recently improved our dedicated service for bereaved customers, provided our field teams with braille passes and offered Dementia Friends training to our whole workforce
• For D-MeX (Ofwat’s Developer Services measure of experience) our Quarter 1 overall score was 81.51% and, while a quarterly table is not published by Ofwat, we believe our overall position of 15^th is slightly improved on last year. 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
• This year we have made good progress in collecting outstanding household debt and are using the interaction as an opportunity to understand more about our customers’ financial circumstances. Currently 6.3% of customers are on our Priority Services Register, which continues to be above target. The register provides extra support to those who have health, access or communication needs. We have also recently provided our field teams with braille passes and offered Dementia Friends training to our whole workforce
• Around 85% of the water we supply comes from underground. We are unique in the industry in having a legal obligation to soften the majority of groundwater we treat and a performance commitment on the level of hardness in the water we distribute. Unfortunately, due to operational challenges, a number of our sites have fallen slightly short of meeting our softening Performance Commitment, for which we will receive a financial penalty
• The number of connected properties that aren’t charged for any water (or ‘voids’) is currently 2.4% of the properties in our supply area and we have made significant progress reducing this from 4.12% last year. This is an important part of our work to make sure customers are paying fairly for the water they use.

Transforming our performance through being more digitally focused

• In September we launched MyAccount, an online platform accessed via our website so customers can more easily pay their bills, manage Direct Debits, see how much water they’re using, order free water saving devices, and more – all at the click of a button. Since launch there have been more than 35,000 registrations to the platform
• 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. We are currently just above our target leakage level over the last six months, driven by the very dry weather conditions, but by the end of the regulatory year, hope to have reduced leakage by around 11% since March 2020.We continue to have confidence in our approach to leakage reduction, including through the use of our fully smart network to detect leaks 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 the response time to mitigate the impact of leaks and bursts by reducing the risk of supply interruptions to customers and volume of water lost
• We also continue to develop and provide the right data-led insights to our operational teams – everything from customer experience and debt management metrics to field-based job tracking and asset condition

Delivering for the environment and our community

• We received below average rainfall throughout the summer months, with July 2022 being the driest (and having the hottest day) on record, and this resulted in the Environment Agency officially declaring the region in drought. Throughout the summer we continued to support local chalk streams to make sure they continued to flow and managed our abstraction activities so as to mitigate our impact on the local environment. In triggering our Drought Plan, we worked closely with key stakeholders to make sure we balance our obligations to both our customers and the environment and remain ready to progress plans to take additional action if necessary, dependent on the levels of winter rainfall we receive across our region
• The South East region 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 in our universal metering programme, which aims to ensure 90% of our customers are connected to a metered supply by 2025. Currently we have installed meters for more than two thirds of our customers and are trialling smart meters within the next year to allow customers to better understand their water usage and help identify customer-side leaks far quicker
• In launching a consultation for our draft Long-Term Delivery Strategy in October we have set out our priorities in a new 25-year vision document entitled “Providing your water in a changing world – our long-term ambitions and priorities”. This document is our first step in sharing our thoughts with our customers and we have so far collected more than 170 responses
• We have continued to add to our fleet of electric vehicles and having already installed charging points at all 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 now comprises of just over 20% electric vehicles, with the aim to reach more than 30% by March 2023
• In May we partnered with Run Series to support Run Gatwick for the first time as the event’s official water provider, avoiding more than 2,000 single-use plastic water bottles from being given out 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. In September, we also partnered with Run Reigate for the second time, helping to avoid the same number of single-use plastic bottles from being distributed
• We have also supported several other community events in the past six months including Cowpie Country Show in Betchworth and the Carshalton EcoFair
• In May we held our largest cross departmental ‘Give A Day’ opportunity at The Orpheus Centre in Godstone, where 60 colleagues volunteered and helped to build a water efficient, sensory garden for the centre
• Our partnership with the Community Foundation for Surrey has continued into its fourth year and in July we provided a further £12,000 in funding towards two local charities. The Breck Foundation, which aims to protect young people from online grooming and exploitation, and The Leatherhead Youth Project, working to see positive social transformation among teenagers in deprived communities in Surrey
• Since August we have donated more than £10,000 in funding to support local water efficiency projects through our Every Drop Counts community fund. A total of 17 different groups have been supported, including: schools, scout groups, community gardens, sport clubs and allotments
• We have continued to see an increase in school visits to our Flow Zone education centre at Bough Beech Reservoir. Since April more than 1,200 adults and children have been able to attend the centre. We have also been able to deliver in-person water saving talks to 500 people

Targeted investment to ensure operational resilience

• In the past six months we have made significant progress and investment on several important mains replacement schemes across our supply area, including in Redhill where we have completed the laying of more than 1.5 kilometres of new water main to support the significant redevelopment and regeneration of the town centre
• We are currently above target for mains repairs on our network, due to an increase in bursts during the summer. The situation is recovering, however we will receive a financial penalty
• We are nearing completion of a 15-year resilience programme we have been progressing since 2010. This means by 2025 every property across our region can be supplied by more than one treatment works if, due to operational challenges, this is needed
• This work included the expansion of our treatment works at Bough Beech Reservoir and capacity increases at a number of strategic pumping stations. We are now nearing the end of the final phase of these projects, costing more than £11m. This will mean we are able to increase the amount of water we pump out to customers from 50 mega litres per day to 65 mega litres per day to the north of our region, which was previously completely reliant on groundwater supplies
• As part of this programme we are also laying the final sections of two new water mains, one in Langley Park, Sutton and the other planned for summer 2023 – along a major A-road – the A22 – in south London

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. During the challenges of the extreme weather throughout the summer months there have been countless examples of our people going above and beyond to make sure our customers receive the service they expect and rely upon
• We have launched a refreshed Company Purpose internally to not only do the right thing for our customers and our environment, but also for our colleagues as one team. The new purpose is: ‘Harnessing the potential of water to enhance nature and improve lives’, which will be at the forefront of every piece of work we do and every decision made
• The health and safety of our colleagues, contractors and members of the public remains a key priority for the Board. In total, 61 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 signage improvement actions. In the past six months we have had no lost time injuries
• We continue to recruit within our operational and customer facing teams, introducing new ways of reaching potential colleagues through our employee referral scheme, careers fairs and working with local job centres. We have also worked with local education providers to reach future talent about a career in the utilities sector
• We launched our Diversity and Inclusion Strategy by supporting National Inclusion Week with activities for our colleagues. Colleague data is now being gathered so more relevant communications, activities, support and facilities can be provided throughout the year, and hiring managers have been provided with information to better support colleagues and candidates with autism
• Our Mental Health First Aiders continue to provide support for any of our colleagues who want to discuss their mental health in a safe and confidential space. We have a team of 28 Mental Health First Aiders across the business, providing a ratio of one for every 12 colleagues
• We continue to run a series of internal training workshops to support the learning and development of our colleagues. These sessions include coaching for aspiring managers
• Our internal people management system has recently been upgraded to allow colleagues to more easily manage their own learning and development plans
• We are also in the process of upgrading the Company intranet, which will improve our colleagues’ ability to find and access the documents they need

Financial performance and ensuring financial resilience

• The six months ended 30 September 2022 saw revenue increase by 4% (£1.4m) to £33.7m (2021: £32.3m). The increase in revenue was driven by higher summer demand from household customers, and continued recovery of non-household revenue post pandemic restrictions lifting, although this has not fully recovered to pre-COVID levels.
• Operating costs increased by 7% (£1.8m) in the period to £28.6m (2021: £26.8m) mainly due to higher run rates of network maintenance spend, increased volumes of electricity consumption and increased chemical spend. In addition, an increase to the bad debt provision was included in 2022 to reflect the challenges faced from the cost-of-living crisis on customers’ ability to pay water bills.
• Other operating income fell by £2.0m (2021: £2.0m) due to one off monies received in 2021 for insurance receipts relating to a chemical spill at Elmer water treatment works that occurred in 2017
• Operating profit has reduced by 49% to £4.0m (2021: £7.8m) with the partial recovery of revenue offset by the one-off insurance monies received in 2021 and increased operating costs in the six months to 30 September 2022.
• Net financing costs have increased significantly to £14.3m (2021: £5.5m) due to unprecedented increases in inflation (RPI)
• The tax charge decreased by £15.5m to £2.5m (refund) (2021: £12.9m charge) due to the change in tax rate, effective from 2023/24, announced in the Spring budget increasing the provision for deferred tax that occurred in 2021.
• The Company reported a loss after tax of (£7.8m) (2021 loss: £10.6m)
• Net cash spent on operating activities of £1.5m increased from prior year (2021: £7.2m) due to increased operating and financing costs as noted above. Net cash spent on investing activities of £11.2m increased from prior period (2021: £9.7m) due to increase spend on the capital programme. Net cash from financing activities increased to £10.9m (inflow) of cash due to the increased borrowing on the Revolving Credit Facility to fund the capital programme (2021: £4.5m). In 2022 £10m drawdown on the Company’s revolving credit facility was made.
• We were pleased to note that Moody’s affirmed our credit rating and outlook (Baa2 stable) in October 2022
• The appointed dividend payable for the year-ending 31 March 2023 comprises of an interim dividend to be paid in December 2022 and a final dividend payable in May 2023. With respect to the former, an interim ordinary appointed dividend of £1.5m was declared for the period and will be paid in December 2022 and was considered appropriate and in line with the Company’s dividend policy, taking into account Ofwat’s allowed return in regulatory equity in the PR19 determination (3.77%) and the overall solid operational and customer performance of the Company in the first six months of 2022/23.

Risks and uncertainties

• With the region still officially classed as in drought by the Environment Agency, we continue to closely monitor our water resource levels. Despite this we have not met the trigger level required in our Drought Plan to introduce a hosepipe ban in our area. However, we need average levels of winter rainfall up to April to refill these resources and avoid having to put restrictions in place next spring and summer
• As the cost-of-living concerns continue we are closely monitoring our customers’ ability to pay their bills, especially those who are financially vulnerable. We believe we are taking the right steps to manage this through our financial support schemes
• There continues to be 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 kept Ofwat informed about these issues and their impact on the delivery of our Business Plan.
• We continue to work on the financing of the business over the short term to the end of AMP 7 (2025) and will continue to develop our plans as we work through our operational and financial forecasts as we develop our PR24 strategies.

Our primary focus remains ensuring we perform as strongly as possible during the third year of this five-year regulatory period to make sure we meet the commitments we have made to our customers. We have also made good progress in preparing 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.

Dave Shemmans, Chair

Read our six monthly financial accounts