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Wessex Water Services Ltd
Summary of financial and service performance

The past year | Last five years | Long-term plan | Customers | Investors | Assets

Despite the challenging economic conditions we have successfully delivered our AMP4 2005-2010 investment programme and out-performed the assumptions made in the 2004 price determination.

We continue to be recognised as one of the most efficient water and sewerage companies, with the highest returns to our shareholder.

The past year

Against a background of continuing recession in the UK, and ongoing instability in the world’s financial markets, Wessex Water has produced a solid set of financial results over the past year with profit before tax rising to £152.9m.

There was an increase in turnover helped by allowed price increases, although we experienced some negative effect from the current economic climate. Operating costs fell through a combination of further efficiencies and a one-off credit under FRS17 pension accounting.

Interest charges reduced significantly due to lower short-term interest rates on our floating rate borrowings and lower inflation on our index-linked bonds. Taxation rose in line with profits but also due to a reduction in group relief available.

The divided for the year was slightly higher than the previous year but the figures are distorted as a £26.9m dividend in respect of 2008-09 was actually declared in 2009-10.

In respect of cash management we achieved our internal target of no cash outflow for the year, which represented a tremendous result from all parts of the business. Accordingly net debt only rose by accruals on our bonds.

Gearing fell from 70.0% to 67.6%, a result of strong cash performance and a high inflation number in March 2010.

At the end of the year we refinanced our £150m of bank facilities maturing in June 2010 and we now have sufficient liquidity until 2012-13.

We have outperformed the assumptions for AMP4. Over the last five years operating costs were 9% lower than Ofwat assumed and the capital investment programme has been delivered for 15% less than was originally allowed for. These savings will benefit customers over the next five-year period.

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The last five years

In addition we have also delivered the highest levels of service to customers in the industry and have:

• achieved the highest ever overall performance score (OPA) in the industry by some margin
• outperformed the 2004 price determination by exceeding the total number of outputs required
• topped Ofwat’s customer satisfaction survey
• delivered customer demands without restriction for the 33rd year
• had no major or significant pollution incidents for the second year running – a first in the industry
• received a range of awards for our performance including the Queen’s Award for Enterprise, the Citizens Advice inaugural award for best customer service in the UK, the government standard Customer Service Excellence Award for our approach to customer services and the Utility Week award for customer care
• returned outperfomance to the customer resulting in bills 5% lower than they might have otherwise been
• kept leakage within our target level, despite the major increase in bursts caused by the very cold winters this year and last
• improved service levels so that 98% of customers who contacted us rated our service as either good or very good
• increased our renewable generation by 68% and achieved self sufficiency in energy at our largest works, serving an equivalent population of 750,000 people
• introduced internal trading within operational business units, including the creation of GENeco, to give a greater focus and understanding of costs and to deliver efficiencies.

¹ The number of properties flooded due to other causes is primarily (93%) as a result of blockages in the public sewer system. Of these blockages, 90% are a consequence of sewer misuse by third parties. The total number of properties internally flooded (due to both “inadequate capacity” and “other causes”) is below the 10-year average.

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Our long-term plan

We have successfully negotiated a price review that brings stability for the next five years and this coincides with an incoming government which, through its coalition agreement, has committed to evolution rather than revolution of the industry.

Customers indicated during the 2009 price control that they wanted an efficient, safe, reliable supply of water at reasonable cost now and in the future and everything else was of markedly less importance.

Our own research showed that they wanted better service rather than lower bills, but equally, they did not want to see bills go up above inflation either. The key areas for service improvement were reductions in leakage, improvements in security of supply and a lower carbon footprint.

Our draft business plan therefore proposed flat bills plus service improvements on the issues that customers said mattered to them. By the time of the final business plan the worsening economic climate and new obligations and taxes meant that we could no longer deliver these improvements while keeping bills flat. So we refined our plan to defer investment on items of low priority to customers, keeping annual bill rises below 1%.

Our final determination from Ofwat reinstated some of the items that we had proposed to defer and cut out some items that customers had said they wanted; in particular metering that would have reduced leakage. Overall, bills in the next five-year period will rise annually at around 0.6%.

Our plan for the next five years is: 

• to integrate our water supply assets to improve security of supply, deal with deteriorating raw water quality and improve river flows
• improvements to drinking water quality
• further reductions in the risk of flooding to properties
• improvements to comply with the Bathing Water, Urban Waste Water and Shellfish Directives
• a further reduction in our carbon footprint by increasing the use of sewage sludge to generate renewable energy
• an investment programme of £1bn
• a cumulative K factor of 6% over five years
• average bills in 2015 3.1% higher than at present.

We are now focused on delivering the required outputs and efficiencies of the next five years and continuing to provide the highest levels of customer service in the industry.

A sustainable future

It is our intention to become a genuinely sustainable water company.

Much has been achieved over the last 20 years in the water sector – customer service and impacts on the water environment have improved considerably, water companies’ efficiency has increased greatly and significant investment has been delivered in a timely manner.

But we believe change is needed if we are to successfully respond to the challenges we face nationally and globally. We believe there are some major reforms that are worth serious consideration:

• the right approach to long-term investment is critical to the services we provide. We are a long-term business with investment that should be directed by long-term priorities, including the main concerns of customers, which we know are consistent over time. Currently, the entire investment programme is reviewed from scratch every five years. Replacing this with a 10-20 year investment programme would bring greater continuity and provide the opportunity to test more sustainable approaches
• interest in competition has increased in recent years and we are interested in greater use of market mechanisms in specific areas such as bulk water trading. The creation of incentives for more exchanges between companies would avoid unnecessary duplication and deliver cheaper bills to customers and more sustainable outcomes for the environment
• we believe that relaxing the constraints on company mergers would provide reductions in operating costs and customers. With company performance levels converging, the need for comparators is much diminished compared to that at privatisation. More value would now be gained from efficiency savings through mergers, particularly between co-located water only and water and sewerage companies
• we believe CCWater’s committee structure could be augmented by customer panels, focus groups, both domestic and commercial, social providers and interest groups on a regular basis to obtain good coverage of issues and priorities.

Whatever changes are proposed, we envisage a spectrum of market and regulation-led approaches to service delivery. Some fresh thinking and major changes are required if we are to genuinely deliver a sustainable water sector. We need to make continual improvements and deal with emerging challenges successfully.

Risks

• There are, inevitably, some uncertainties ahead.
• The transfer of private sewers, probably in 2011-12, which is likely to result in an interim determination to cover the significant cost impacts.
• Tax reform of capital allowances which could result in further increases in tax.
• The impacts of the Traffic Management Act.
• Uncertainty over capital prices and the mismatch between the regulatory index and the real world.
• Continuing uncertainty over pension deficits.
• Continued economic uncertainty which is affecting customer debt.
• Regulatory reform.
• The principle of development being self financing needs to be backed by a legal framework which ensures developers cannot connect to sewers where capacity is not available and they contribute their fair share of the costs of any necessary improvements to infrastructure.

Our five-year commitments

We have put into place plans to deliver our commitments for the next five years while maintaining our industry leading performance.

These include:

• introducing new work and asset management systems
• the greater competitive challenge of our in-house service delivery
• changes to our terms and conditions to match our future needs
• bringing together partners to help in the delivery of the capital programme
• continued development of BWBSL, our billing joint venture with Bristol Water, to ensure we continue to have the lowest cost of service and are well prepared for retail competition
• continued growth of our waste to energy business, GENeco
• even tighter focus on risk management.

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Customers

Service delivery

We are pleased that all key regulatory measures of service delivery showed improvement last year. All service measures were better than our monitoring plan target set back in 2004.

Of the 2,000 customers surveyed in our own monthly satisfaction survey, 98% rated our overall service as good or very good and we remain at the top of Ofwat’s independent survey of customer satisfaction.

Our operational complaints fell by more than a third and total complaints were down by 3.7%. There was a slight increase in billing complaints of 2.9% but this does not reflect any deterioration in the billing service: our monthly satisfaction survey showed 99% of customers rated our billing service as good or very good for the year and on 6 occasions the rating was 100%.

Nonetheless, we are working hard to reduce complaints from metered customers and have, for example, during the last year introduced new literature, procedures and website pages to assist metered customers.

We have formed partnerships with local authorities and the Environment Agency to provide a forum for discussing and resolving any issues related to our services. These have proved particularly fruitful in the case of flooding where various bodies have responsibilities in this area, and working in partnership can deliver more optimal solutions than working in isolation.

Our education programme continues, both with organisations that come into contact with vulnerable customers and also on wider water and sewerage issues, for example through our schools’ engagement.

Affordability, tariffs and debt recovery

With the fragile economic climate and unemployment increasing markedly over the year we have continued to see growing affordability problems and a worsening bad debt position.

Our new credit management system enables us to respond more effectively to this situation. It allows improved segmentation of our customer base which brings more accurate targeting of customers and ultimately more productive and successful debt recovery.

We remain committed to our work on affordability and are delighted to have been awarded the Citizens Advice inaugural award for best customer service in the UK in recognition of our best-practice approach to dealing with customers in debt.

Around 6,000 customers have already benefited from our Assist tariff aimed at making it possible for those with the greatest difficulty in paying to make a modest contribution towards the costs of water and sewerage services.

By encouraging customers to adopt an affordable payment routine, we have increased cash collection by 30% despite cutting charges by around 50%.

Our Restart schemes, which are designed to get customers who are having difficulty paying back on track, are still working well and evidence continues to suggest that 14 out of 15 people on the schemes will not fall into arrears again.

During the year we continued our trial to test the effectiveness and customer response to three different sophisticated tariffs.

² Original monitoring plan target was 827. Ofwat has recognised the third party problems associated with the delivery of Piddletrenthide Flood Alleviation Scheme and reduced the target to 808.

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Investors

Turnover

Appointed turnover increased by £18m or 4.3% to £434.6m, largely as a result of the 2009-10 price increase of 6%, but offset to some extent by customers switching to meters and reductions in volumes. The reduction in volume is higher than the long-run average as a result of the recession in the region.

Operating costs

Regulated operating costs reduced from £123.6m to £120.1m. However, these figures were distorted by a one-off credit under FRS17 pension accounting of £3.3m and a reduction in third-party costs of £1.2m, without which there would have been a £1.0m increase in operating costs. The cost increases were in respect of the operational costs of new obligations and bad debts as a result of the recession and continued inability to disconnect domestic customers. There were, however, tough targets set to save both inflation and make real efficiency savings that reduced costs by £1.5m.

Capital investment

In 2009-10 we delivered net capital expenditure of £103.1m (£108.8m gross). Capital expenditure for the last five years is 85% of that assumed by Ofwat in 2004.

During the last five years we have delivered the total number of regulatory outputs required by Ofwat. Overall we exceeded the monitoring plan targets for the five years, this is as a result of our strategic investment programme implemented in 2007-08 and 2008-09 which aimed at reducing risk and improving service to customers.

Historical cost capital maintenance charges (depreciation and the infrastructure maintenance charge) increased from £92.0m to £100.1m. The increase is split between a £1.1m increase in the infrastructure maintenance charge and a £7.0m increase in depreciation resulting from the continuing capital investment programme.

Interest and tax

Interest charges reduced from £84.7m last year to £63.8m. There was a tight control on cash which saw cash outflow before financing of only £9.9m compared to £161.9m in the previous year when there had been a large capital programme. Interest costs also reduced because of lower interest rates on the index linked bonds. In all the cost of debt reduced from 5.6% to 3.9%.

The corporation tax charge in the year was £28.7m, an increase of £6.3m as a result of increased profits and lower group relief received. The increase was reduced by credits received in respect of prior years. Deferred tax increased from a charge of £3.0m last year to £11.9m this year.

Dividends

Wessex Water’s dividend policy is to declare dividends consistent with the company’s performance and prudent management of the economic risk of the business.

The board wished to ensure that gearing stayed at or below 70% in order to secure the current credit rating and ongoing access to the capital markets. As a consequence the final dividend for 2008-09 of £26.9m was deferred to 2009-10. Therefore, while dividends increased from £81.1m to £138.9m, adjusting for the £26.9m they rose from £108.0m last year to £112.0m this year.

Cashflow and finance

Net debt increased by £9.9m to £1,530.1m. The net cash outflow comprised:

• cash inflow from operating activities of £296.8m, less
• capital investment cash outlay of £116.3m, less
• interest payments of £61.7m, less
• tax payments of £20.4m, less
• dividend payments of £108.3m.

During the course of the year we issued a £50m index linked bond and refinanced £150m of bank facilities that had reached their maturity date. This provides enough capacity for our financial needs for the coming year.

The regulatory capital value increased by £91m and gearing at 31 March 2010 stood at 67.6%.

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Assets

Serviceability

We have used the serviceability toolkit to self-assess our serviceability for 2009-10. The overall assessment is based on the indicators applicable in AMP4. In AMP5 some additional serviceability indicators will also apply. We are actively monitoring these parameters and formulating internal action plans to target stable performance.

Assessments for each sub-service are set out in the table below.

Maintenance activities

At the 2004 price determination we realised that an increase in capital maintenance was required over the period 2005-2010 to renew a growing proportion of ageing assets and accordingly we have invested significant sums in maintaining stable assets.

The key elements of our strategy were set out in our monitoring plan, delivery of which is reported in the table below.

Demand for developer-driven activities such as new mains and communication pipes has been low because of the downturn in the economy.

Water supply programme

Nitrates

We have dealt with rising nitrates by, wherever possible, adopting a sustainable approach using catchment management. Our catchment management specialists work alongside the local farming community to identify potential pollutant pathways and find alternative land management practices that will protect and improve groundwater quality.

We have:

• constructed ion exchange nitrate removal plants at two sites
• blended or substituted from a neighbouring site at three sites
• implemented catchment management at four sites.

In AMP5 we will extend the catchment management work to a further eight at risk sites.

Pesticides

Two schemes were included in the AMP4 programme for pesticides. Again, we have worked with farmers to reduce the risk of contamination.

The three-year ban on spraying pesticides around our Friar Waddon source has been very successful. In 2009 there was an accidental pesticide pollution but measures were quickly put in place to safeguard supplies and public health was not compromised. We are working with the farm to eliminate the risk of this recurring. We are also negotiating to extend the no-spray agreement for a further three years.

We have experienced problems with pesticides, including metaldehyde, at two other sources that are now subject to improvement schemes in AMP5.

Discoloured water and iron compliance

Avoiding discoloured water problems continues to be a high customer priority. During the year we have relined and replaced distribution mains with the aim of improving water quality.

There is a major mains rehabilitation project in Bridgwater for completion in summer 2011. During the year we have invested £1.2m in design and enabling works to ensure that the work is completed on time and customers benefit as soon as possible.

Maundown water treatment works

The scheme to reconstruct Maundown water treatment works was successfully commissioned in 2008-09. Maundown is the company’s largest and most strategic water treatment works serving a population equivalent of 200,000 (approximately 15% of the company’s total supply volume). The five-year £25m project has been completed on time, on budget and delivers water of the required standard.

Sewerage and sewage treatment programme

Sewage flooding

We have successfully completed our sewer flooding programme and concluded the AMP period with fewer properties on the flooding registers than our targets. Our external flooding programme has also removed 791 properties or areas at risk of external flooding against a target of 746.

We continue to wait for intermittent discharge consents for two pumped overflows at Piddletrenthide.

We have started working with local councils on the development of surface water management plans and have signed data sharing agreements with four of the 12 upper-tier authorities in our licence area.

AMP4 included a major programme of environment investigations and improvements, all of which were completed on time.

Intermittent discharges

During AMP4 we improved 27 unsatisfactory storm discharges that discharge very dilute sewage to rivers following heavy rainfall.

Our investigation work during AMP4 in Bristol has identified a further 65 intermittent discharges that require investment in AMP5. We advanced work at one of these to replace an AMP4 unsatisfactory discharge (at Ashton Avenue) that was delayed due to land purchase negotiations. The project is now under construction.

First-time sewerage

We have successfully completed our programme to provide communities with a public sewerage system, exceeding our AMP4 target. During AMP4 we delivered 18 named schemes and accepted a duty under the Act to sewer six additional communities. These schemes have all been completed.

Phosphorus removal

During this year we have successfully completed projects to remove phosphorus at 14 sewage treatment works. At one of these sites we are trialling the use of an innovative media ‘Bauxsol’ for phosphorus removal.

Dry weather flow improvement

We have completed the remaining three dry weather flow improvement projects where, due to their flow exceedence, consents were tightened under the Environment Agency’s ‘No deterioration’ policy.

Bristol sewage sludge treatment

At Bristol we have completed our current investment to maximise renewable energy through the combustion of biogas and have delivered our output to provide a non-agricultural disposal route for sludge through the construction and commissioning of a sludge dryer.

Misconnections

We have continued our work programme to identify and reduce the number of misconnections to the sewerage system which give rise to stream pollution. Since the start of AMP4 this has ensured more than 900 properties are no longer causing pollution.

Meeting demands

We maintained supplies to customers throughout the year without restrictions. Our customers have now enjoyed 33 consecutive years without hosepipe or other restrictions. We are in a healthy resource position regarding reservoir and groundwater storage.

To ensure communities can be served by more than one source of water in future we will be developing a 112km regional water supply grid that will take eight years to complete at a cost of £289m. It will involve connecting a major part of the water supply network from the north of Bournemouth, through Salisbury and towards Bath.

The grid project will also include new service reservoirs and building new or refurbishing pumping stations. It will ensure that customers have at least two sources of supply and deal with deteriorating raw water quality.

Leakage

Although it remains within our monitoring plan target, leakage increased from 72.2ML/d last year to 73.9ML/d this year. The cold conditions at the start of 2010 caused an increase in bursts and leaks which we were unable to locate and repair quickly due to the extensive snow cover over most of our region. During this time vehicular access was limited and pin-pointing leaks and making repairs was very difficult.

Additional detection staff were recruited and external repair and maintenance resources were brought in to deal with the increase in leakage. Leakage detection staff doubled night work from one night a week to two and worked every Saturday from the start of the new year until the end of March, by which time the instantaneous leakage rate had finally been brought back down to pre-frost levels.

Carbon accounting

Our emissions for the financial year to 31 March 2010 are shown in the table below.

The principal movement in emissions, compared with recent years, are as follows:

• carbon dioxide: a reduction of 5,000t for gross emissions (Defra method). The biggest upward factors were the increase in natural gas used for sludge drying and the increase in the grid emissions factor; each contributed an increase of around 700t. The biggest downward factor was the increase in renewable energy from biogas CHP, which contributed a saving of 4,600t CO2 compared with the previous year. Self-generated renewable electricity now amounts to 38GWh – 15% of our total electricity use – of which we exported 5GWh.
• process emissions: an increase of 700t CO2 equivalent from methane and a decrease of 300t CO2e from nitrous oxide. There were many small upward and downward movements; the single biggest item was a 1,000t CO2e increase in methane from sludge treatment which was mainly attributable to an increase in conventional digestion.

Carbon management

In 2009-10 we continued to take action to reduce our emissions through avoidance measures, energy efficiency and increasing renewable energy generation.

Of the 200 live projects on our energy efficiency database, the majority concern sewage treatment. Ammonia control has been extended and is now operating at 10 sites. We are implementing a thorough review of the operation of our biological aerated filter plants and conducting an advanced process control project at Holdenhurst STW (our second largest sewage treatment works). Reviewing the efficiency of an entire treatment works’ process train has already delivered benefits at Kingston Seymour; recent work at this site on pumping, secondary and tertiary treatment has reduced power consumption to 2004 levels.