Chairs Half Year Statement and interim accounts 2023

30/11/23

Chair’s statement on SES Water’s half year performance for the six months ended 30 September 2023

I am pleased to present the interim results for SES Water for the six months ended 30 September 2023.

With the ongoing impact from high cost-of-living, supply chain issues and inflation, it remains a challenging time for our customers, colleagues, suppliers and the water sector as a whole. Despite this, we’ve continued to provide high-quality water throughout and I’m proud of the way everyone in the Company has worked together to overcome these challenges.

We’ve continued to provide financial support for our customers struggling to pay their bills, which is even more important given the cost-of-living pressures we’re all continuing to experience. It’s important we keep up this support in the year ahead and make sure our customers know we are here to help them. We have some great schemes in place under our ‘Here For You’ programme, including payment breaks and discounts of up to 50 per cent, and we’ve heard directly from some of our customers that these have helped make a difference to them.

The current economic climate continues to be a challenge for our business. While inflation levels have slightly reduced since earlier in the year, economic pressure remains on our supply chain costs (such as the cost of chemicals used in our water treatment processes). It has also substantially increased the financing costs of our large index-linked bond. As a result, we remain focused on implementing resilient financing and making sure we’re as efficient as possible with our operational and capital expenditure, while still delivering our performance commitments for our customers. 

In September we submitted an ambitious business plan to our regulator for the first five years of a broader 25-year strategy, outlining long-term goals to deliver more for our customers, the environment and the local community. This is a significant and important piece of work for the business and sets out how we will continue to be among the best in the industry in areas that matter most to our customers, including water quality, leakage reduction, supply resilience and environmental sustainability.

Between 2025 and 2030 the Company plans to spend £413m, an increase of £13.3m per year compared to the 2020 to 2025 period. During this period some of the key schemes in our plan include beginning a 20-year programme of additional targeted water mains replacement to further reduce leaks, mains bursts and water supply interruptions, finishing our smart meter roll out by 2032 and continuing to replace lead pipes in premises such as community venues and sports clubs.

We continue to make good progress tackling leakage and the combination of the investment we have made in our intelligent network, our early alert systems and the skill of our operational teams to manage them, has been effective in driving lower leakage levels.

It has also been well documented that our shareholders have engaged financial advisors to undertake a strategic review of the Group business. External advisors have been appointed to look at the entire East Surrey Holdings portfolio, including SES Water. While the strategic review is ongoing, our focus remains on delivering for our customers, our communities, and our people.

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

Delivering what we’ve promised to our customers

• For 2023 year to date, we are reporting a provisional water quality compliance risk index score of 0.01, which places us as one of the top-ranking companies for water quality in the Drinking Water Inspectorate’s online performance tracker.
• In the Quarter 2 C-MeX report (Ofwat’s sector-wide indicator of customer satisfaction) we came fifth out of all water companies for the Customer Experience Survey and 14^th for the Customer Service Survey, putting us 11^th overall in Q2 and 13^th for the year to date. This continues our long-term trend of improvement in this important area. We’ve been having conversations with teams across the business to help them understand the importance of great customer service and have launched a review to improve our end-to-end customer journeys to improve these
• 7.8% of our customers are on our Priority Services Register, which helps us provide extra support to those who have health, access or communication needs. This is well ahead of our target of 6.2% for the year and puts us on track to deliver our target for next year too
• We’ve reduced the number of connected properties with no billing account to just 2% on average across the year, meaning more customers are paying for the water they are using. This is down from an average of 4.12% in the 2021/22 financial year
• For D-MeX (Ofwat’s Developer Services measure of experience) our Quarter 1 overall score was 85.67% and our overall position of 12^th for Quarter 1 is improved on last year. As with C-MeX, we know there is 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

Transforming our performance through being more digitally focused

• Almost 70,000 customers have now registered for MyAccount, our online customer portal, which is up from 56,000 in March 2023. The portal allows customers to: 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. To date 13,000 customers have set-up to pay by Direct Debit since the portal since went live
• We started the new reporting year in a strong position with leakage reducing for the first two months followed by a modest but expected rise in the summer. Reduced burst main outbreaks due to favourable weather conditions has helped us with this performance
• Our efforts are now on driving leakage down again ahead of winter to build headroom against our target, protecting us against the risks of a colder than average winter
• We continue to have confidence in our approaches to leakage reduction through our strategic projects and improved capabilities as our smart network is helping us find and fix leaks quicker than ever before

Delivering for the environment and our community

• Our business plan for 2025 to 2030 addresses the challenges we face from climate change and meet the needs of a growing population in what is already a seriously water-stressed region
• Alongside our business plan we also published our revised draft Water Resources Management Plan, which sets out how we’ll continue to supply high-quality drinking water to our customers between 2025 and 2075
• We have a target to reduce the amount of water per person we need to take from the environment. Our current target (based on a three-year rolling average) is 141.31 litres per person per day and we reported 150.8 litres per person per day at the end of 2022/23. To help us achieve this target we have made further progress in our universal metering programme, which aims to ensure 90% of our customers are served by a metered supply by 2025. Currently we have fitted meters for 75% of our customers and are trialling smart meters to allow customers to better understand their water use and help identify customer-side leaks far quicker
• We have added to our fleet of electric vehicles, with each electric car helping to save around 2-3 tonnes of CO₂e per year, as well as reducing the impact on local air quality. Our vehicle fleet now comprises just over 30% of electric and hybrid vehicles, with the aim to reach 100% by 2030
• In May we partnered with Run Series to support Run Gatwick for the second time as the event’s official water provider, avoiding more than 24,000 single-use plastic water bottles from being given out at the event. Instead, we provided participants with water from our branded tanker (the ‘Quenchinator’) in the runners’ village. In September, we also partnered with Run Reigate for the third time, helping to avoid the same number of single-use plastic bottles from being distributed
• We have also taken the Quenchinator to provide our water for people at the YMCA Fun Run and Feasty Fest – both local events in Surrey
• We have expanded our charity partnership programme by partnering with The Orpheus Centre in Godstone, The Lucy Rayner Foundation and The Wildlife Aid Foundation
• We have also supported several other community events in the past six months including: Orphest, Pride In Surrey, and the Carshalton EcoFair
• In August we held our first garden centre road show, taking our event trailer to four local centres to speak to customers about the importance of saving water and provide them with water saving devices
• We have continued to see an increase in school visits to our Flow Zone education centre at Bough Beech Reservoir. Since April more than 1,300 adults and children have been able to attend the centre. We have also been able to deliver in-person water saving talks to more than 300 people

Targeted investment to ensure operational resilience

• In the past six months we have progressed a number of key mains replacement schemes across our supply area to make sure we are able to continue to deliver a reliable supply that contributes to reducing leakage and minimises the risks of supply interruptions and the potential for resultant water quality incidents
• We are nearing completion of a £45m programme of investment over a 15-year period from 2010 to 2025. This means by 2025 every property across our region can be supplied by more than one treatment works if needed, such as during periods of low rainfall or operational outages.
• Once the investment programme is complete we will be the first UK water company to have achieved this interconnectivity across our network. As part of this programme, in the first half of this year, we have successfully finished laying two new strategic water mains, one in Langley Park, Sutton, and the other along a major A-road – the A22 in South London
• The A22 scheme was one of the most complex schemes the Company has worked on and was completed a week early and within budget. The scheme directly benefits 27,000 properties in Purley and the surrounding area and vastly improves the resilience of the water supply network in the area
• Some planned interruptions to supply are unavoidable as we work to improve the long-term resilience of our mains network; however, our performance in the past six months has been within our target to keep interruptions to a minimum

Our People

• Our team remains the cornerstone of our success, with their unwavering dedication and drive to consistently provide exceptional service to our customers
• In total 480 days of training were delivered and completed from April to October 2023
• We have increased our focus as a business on developing skills and capability of our management team with internal management development programmes such as: Aspiring Managers, team building workshops and recruitment and selection
• 85% of needs identified through training analysis have had a solution provided and are either to be completed or already completed
• Apprenticeships are currently offered for the roles of Systems Technician, Payroll and IT and all vacancies with other early career opportunities are under review
• Eight of our colleagues are completing professional development qualifications in fields such as Level 2 Diploma in Operations, CIMA qualification and coaching
• 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 also continue to look after the physical wellbeing of our colleagues, providing annual health checks for all, as well as flu vaccinations
• The health and safety of our colleagues, contractors and members of the public remains a key priority for the Board. In total, 45 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 housekeeping, trip and slip hazards
• The Company has also gone 12 months without a recorded lost time accident, which is a great achievement and demonstrates how all colleagues care about protecting themselves and others

Financial performance and ensuring financial resilience

Operating profit for the six months ended 30 September 2023 increased by £0.5m to £4.5m compared to £4.0m in the six months to 30 September 2022.  The movements in operating profit between the two periods are shown in the graph below:

• Revenue increased by £3.8m (c11%) to £37.5m (2022: £33.7m) mainly driven by the 23/24 tariff rise and higher levels of consumption by non-household customers
• Operating costs increased by 15% (£4.2m) in the period to £32.8m (2022: £28.6m) mainly increased power costs, increased contractor spend, increased debt collection costs and assurance and support costs incurred in the first half of 2023/24 that won’t be repeated in the second half on our price review (PR24) submission to Ofwat.
• In the first half of 22/23 a £1m increase to the bad debt provision was included due to the impact of the cost of living crisis meaning more customers were unable to pay their bills, given the focus on cash collection in 23/24 to customers who can pay their bills, the provision has remained at consistent levels.
• Net financing costs remained at similar levels to 2022 as inflation (RPI) remains very high increasing the value of our long-term index linked bond. Similar to 2022/2023, given the losses before tax (mainly driven by financing costs) a tax credit of £2.3m (2022: £2.5m) was recognised in the period.
• Overall, the Company reported a loss after tax of (£7.5m) (2022 loss: £7.8m)

Movements in cash are summarised in the graph below, resulting in a cash balance at 30 September 2023 of £17.3m.

• Funds from operations generated £8.3m in the period to 30 September 2023 an increase of £5.0m from Sept 2022 of £2.3m.
• We paid £4.9m on interest charges primarily relating to our long term index linked bond and interest on our revolving credit facility in the 6 months to September 2023.This was £1.9m higher than interest charges in the 6 months to September 2022 due to the higher floating rate interest.
• We spent £10.0m on capital expenditure in the first 6 months to September 23, a reduction of £1.5m (2022: £11.5m)
• £22m short term borrowings taken out at the end of the financial year were repaid in the first half of the 2023/24.
• Equity injections of £7m were received from shareholders in August 2023, with a further £15m expected to be received by 31 March 2024
• As no final dividend was declared for 2022/23, no dividend has been paid in the six months ended 30 September 2023, and no interim dividend for 2023/24 has been declared.
• In November 2023, the Company successfully completed a new private debt placement of £40m with maturities of nine and 10 years through a single UK institutional investor. The first tranche of £10m of the private placement offering was drawn down by SES Water on 28 November 2023 and the second tranche of £30m is expected to be drawn down on 28 March 2024. The weighted average coupon of the borrowing is 5.71%. The notes have been wrapped by Assured Guaranty and will carry a AA rating from Standard & Poor’s

We were pleased to note that in October Moody’s affirmed our credit rating and outlook (Baa2 stable) reflecting the new and expected future equity.

Risks and uncertainties

• While inflation levels have reduced since March 2023, economic pressure remains on the operational and supply chain costs of the business, financing costs and levels of bad debt as customers continue to be adversely impacted by the overall impact on the cost-of-living issues
• As we saw in the first half of 2023/24 although revenue increased (due to tariff increases) volumes of household consumption were lower than seen in 2022/23 mainly driven by the wetter conditions in 23/24 compared to the long hot summer in 22/23.Weather conditions  can cause variations in water demand from the long term average resulting in  fluctuations  in revenue.
• We may experience loss of data (including personal data), ransomware issues or interruptions to our key operational control systems as a result of a cyber-attack. Among a number of measures we have put in place to counter-act this risk, we carry out network penetration testing every six months where third party security professionals carry out controlled hacking attempts on our network. This identifies and tests any weaknesses that could be exploited by cyber criminals
• We may experience a shortage of human resources, leading to an inability to operate effectively, due to an event that is outside of Company control, such as the COVID-19 pandemic, to factors that result in high levels of employee turnover. We have measures in place to ensure the Company is monitoring any emerging concerns and adopting appropriate event management that may include enhanced communications with colleagues, access to mental health first aiders, ensuring employees are equipped for home working and provision of personal protective equipment
• With the reset of the global economy post COVID-19, and with the compounding impacts of Brexit and the conflict in Ukraine, demand is outstripping supply, causing issues with goods and materials availability and hence price. SES Procurement captures intelligence from across the sector on supply chain impacts on a fortnightly basis and work is also progressing to identify ways in which our demand for these goods can either be reduced or delayed through operational adjustments of planning of work to a later date (when supply/demand is back in balance)

Our primary focus remains ensuring the Company performs strongly during the fourth year of this five-year regulatory period to meet the commitments we have made to our customers. We have also prepared and submitted an ambitious business plan for the next price review (PR24). I would like to thank all of our colleagues for their continued hard work and dedication during this very demanding period. Despite the challenging landscape we are operating in I have full confidence we can deliver our commitments, empower our customers and work with our communities to enhance nature and improve lives.

Dave Shemmans, Chair

Read our six monthly financial accounts