Summary of financial and service performance 2013
Key documents: Key performance indicators, Risk and compliance statement, Accounting separation methodology statement
Introduction | Highlights | Finances
The changing climate continues to provide new challenges for Wessex Water. We began 2012-13 with a drought, which was quickly followed by the wettest summer on record.
Despite the early dry weather, we maintained our record of unrestricted water supplies to all our customers – it is now 36 years since we had to impose any form of restriction on water use within the Wessex Water region.
The intense summer rainfall caused a number of flooding problems but our major investment in sewerage infrastructure over recent years helped to minimise the impact on customers. In 2011 the government transferred responsibility for private sewers to water companies, so Wessex Water took on around 11,000 miles of largely sub-standard sewers. This, together with the growing impact of climate change, will require major investment in future.
The very wet summer also affected bathing water compliance, which slipped from the 100% level of previous years to 94% compliance with mandatory standards. One of the bathing waters that failed was Uphill at Weston-super-Mare. While bathing waters are affected by factors outside Wessex Water's control, we will ensure that our sewerage and sewage treatment systems do not have an adverse impact. At Weston-super-Mare we have completed work on a £26m scheme to provide improved treatment and disinfection.
We maintain 100% compliance with sewage treatment discharge consents and our compliance with drinking water standards continues to exceed 99.9%. We generated one of our highest recorded amounts of renewable energy and continued our progress to becoming a truly sustainable water and sewerage company. Many staff also worked long hours to help ensure the Olympic sailing at Weymouth was a great success.
We have continued to become more efficient and have delivered savings against both our capital investment programme and our operating costs, while at the same time delivering all of the required regulatory outputs.
We are sharing our capital efficiency savings with customers through additional customer focused schemes, £50m in this price review period and £100m in the last decade.
Wessex Water is halfway through a £1bn, five-year investment programme. This programme includes the largest project we have ever undertaken: the construction of a water supply grid across the Wessex Water region that will enable us to reduce abstraction at environmentally sensitive sites and ensure much greater flexibility and greater resilience in the supply of water to customers. Our total capital investment in 2012-13 was £222m. This investment not only improved services, but helped to create local jobs within the Wessex Water region.
Regulatory league tables continue to identify Wessex Water as the best performing water and sewerage company in England and Wales, with the highest levels of service and efficiency. The Consumer Council for Water announced that we received fewer complaints than any water company, and during the year complaints to us fell by 9%.
Our water and sewerage bills represent only 1.5% of average household expenditure. This is marginally higher than the 1.4% at privatisation in 1989. We recognise that the economic climate means some customers find it difficult to pay their bills, so we have launched tap, our tailored assistance programme, to help these customers. This programme works closely with debt agencies and special advisers to offer a range of tariffs and assistance.
Operating costs for the year increased from £135.8m to £148.4m due principally to increased business rates, the full year cost of operating private sewers and increases in costs from new obligations.
Despite these cost increases and the difficult economic conditions, profit before tax at £138.5m was at a similar level to last year.
There has been a good deal of public interest in tax paid by companies. Wessex Water does not have complicated tax schemes, pays the appropriate level of tax and is classified by HMRC to be a low risk taxpayer.
Wessex Water is committed to high standards of corporate governance; it is at the heart of our business and underpins the relationships we have with our customers, shareholder and other stakeholders. This year's report includes an extended section on corporate governance that reflects the latest guidance and codes of practice.
Prices and investment programmes for water companies follow a five-year cycle and work is well under way for the next price review, which will come into force in 2015. We are consulting directly with more than 10,000 customers, engaging with a wide range of stakeholders and putting our proposals to an independent scrutiny group chaired by Charles Howeson, the regional chair of the Consumer Council for Water.
Our proposals will recognise the range of new obligations we have to meet but must also take account of the ability of customers to pay in today's difficult economic climate.
We recognise the importance of innovation to our business and have signed a joint venture deal with the University of Bath worth more than £3m to create around 20 new research posts, and trials to test novel ideas that fit with our work.
Wessex Water continues to have very high levels of customer satisfaction, not least because of our prompt personal telephone answering, our knowledgeable and dedicated staff and our commitment to keeping customers informed of what we are doing at all times. These attributes, together with our investment in the infrastructure of the region, will put us in a strong position to meet the next round of challenges.
Colin Skellett, Chairman
The year's highlights
- The Consumer Council for Water announced that we received the fewest number of complaints per 1,000 customers of any water company. Complaints have fallen again this year
- Launched tap – our tailored assistance programme now helping 12,000 households who are struggling financially
- Expanded Assist – our social tariff scheme – in partnership with Citizens Advice. We expect this to reduce the bills of a further 10,000 vulnerable households
- No hosepipe bans imposed for the 36th consecutive year
- Installed 15,466 household meters and replaced or repaired 3,822 customers' leaky pipes free of charge
- Beat Ofwat's leakage target again and committed ourselves to a target of stopping any leak reported by a customer within 24 hours
- Continued to become more efficient – meaning lower bills for customers in the long run
- Industry leaders according to the latest Environment Agency assessment on environmental performance
- Unparalleled performance in the industry with no major or serious pollution incidents or prosecutions in the year. Our second lowest number of minor pollution incidents despite the unprecedented rainfall
- Became the first water company to retain a Queen's Award for Enterprise – recognising the way we have embedded sustainability across our business
- Won a number of other awards for promoting water efficiency, safety in the workplace and for the way we engage with our customers
- Made excellent progress on our water supply grid construction project.
We take a prudent approach to the financial management of the company, and with the full support of our shareholder we have decided not to adopt a highly leveraged structure. Virtually all the debt raised from the financial markets sits within the company and is primarily for the use of funding the capital programme.
The UK group structure is simple and transparent with the company owned by a Wessex Water intermediate company which in turn is owned by a YTL UK holding company.
We recognise how important it is to maintain our existing credit ratings which enables us to access the financial markets at all times. When declaring dividends the board of directors pays great attention to the level of our financial ratios and hence our future credit ratings.
We have an open relationship with HMRC in respect of our tax affairs and we are consistently considered by them to be a low risk taxpayer.
We choose not to pursue anything that would seriously alter that position. We clearly recognise that we have a duty to pay an appropriate amount of tax on the profits we make and pay that in a timely manner.
Overall we operate our finances to reward our shareholder with an appropriate return on their investment. However, we do not lose sight of the fact that this return needs to be consistent with the needs of our customers, as well as our obligation to deliver a sizeable capital investment programme and to protect the environment in which we operate.
In the third year of the current price review period, against a background of a continuation of challenging economic conditions and extreme rainfall that suppressed demand for water, we have been able to show a solid performance with operating profit increasing from £219.0m to £224.0m.
There was an increase in the costs of financing the business and as a result profit before tax rose only marginally from £137.5m to £138.5m. While the corporation tax charge grew, there was a reduced deferred tax charge resulting in profit after taxation increasing overall from £93.2m last year to £107.9m this year.
Turnover increased by £24.6m or 5.3% from £467.5m to £492.1m.
The price increase allowed by Ofwat at 1 April 2012 was 7.1%, comprising November 2011 RPI of 5.2% and a K factor of 1.9%. There was also a small growth in turnover due to new customers in the housing market and new connections, although economic growth in the region was flat.
There were two offsetting reductions in turnover because of the weather conditions and customers switching to metered supply. Total rainfall for the year to March 2013 was 1,278 millimetres compared with 640 millimetres in the previous year. The increased rainfall over the summer months had the greatest impact by reducing domestic metered water supply.
Operating costs (excluding depreciation, amortisation and disposal of assets) increased from £135.8m to £148.4m due to a number of factors:
- business rates continued to increase through the central government valuation process
- there was a full year cost of operation of private sewers, for which we were given responsibility half way through the previous year
- the bad debt charge increased both in line with the increase in turnover and because of the challenging economic conditions
- the price of power and chemicals increased by more than the level of inflation
- there was an accounting credit in the prior year for pension accounting under FRS17 which was not repeated this year
- an increase from the cost of meeting new obligations and installing additional meters.
Alongside these increases we were able to manage employment costs through a pay award effective from April 2012 that was below the rate of inflation.
In 2012-13 we delivered gross capital expenditure of £222.0m (£216.8m net of capital income) which is a 40% increase compared to £158.3m last year.
After three years of the current five-year price review period our capital expenditure represents 83.2% of the Final Determination allowance up to the end of year three.
We have completed a £26m project to help safeguard the future of water quality at beaches in Weston-super-Mare two years ahead of the introduction of new bathing water standards. Our work at the town's sewage treatment works will significantly contribute to safeguarding water quality at beaches in Weston.
The first outputs associated with our water supply grid programme have been completed and planning permission has been granted for a major section of the project – the £100m, 64km, Corfe Mullen to Salisbury trunk main.
The sewer overflow improvement programme remains ahead of the required regulatory profile with 30 projects achieved by the end of year three compared with 23 required.
We have identified a solution which did not involve construction for the growth scheme at Ramsey service reservoir, resulting in significant savings. The network solution will be implemented on completion of the Operation Clean and Clear Taunton project in 2013-14.
We have been able to invest in more customer focused and innovative schemes such as:
- visible leak initiative – improving our response time for visible leaks, ensuring that we are seen to respond quickly and efficiently to any emergent problem on our network
- water supply real-time monitoring – to monitor our water network using smart technology to reduce leaks
- trials on ultraviolet disinfection, aerated reed beds, nitrogen and phosphorus removal techniques – innovative solutions with potential to lower capital expenditure in the next five-year price review period.
Historical cost capital maintenance charges (depreciation and the infrastructure maintenance charge) increased by £7.0m from £112.7m to £119.7m. There was a £2.9m increase in the infrastructure maintenance charge, while depreciation increased by £4.1m. Base depreciation increased by £3.4m from the continuing capital investment programme, and there was a £0.7m movement on the disposal of fixed assets.
Interest charges increased from £81.5m last year to £85.5m this year. The £4.0m increase was split between the base interest increase of £3.5m and a £0.5m increase in the interest costs associated with pension accounting under FRS 17, shown as other finance costs in the profit and loss account.
There was an increase in net debt during the year from £1,626.1m to £1,738.3m. The cost of debt in both years was around 5% which with the increase in net debt explains the increase in the interest charge.
There is a prudent mix of debt between fixed rate, index linked and floating rate instruments. At the year end the debt split was approximately 45% fixed, 35% index linked and 20% floating, with the index linked debt based on either November or March RPI. In August 2012, the company issued a £100m fixed rate bond through its subsidiary which will mature in 2021.
The maturity of debt is generally long term with £1,599m of debt maturing after 2020.
The corporation tax charge in the year was £29.4m, an increase of £9.8m from £19.6m last year. The increase was mainly due to a one-off credit in the previous year following an industry-wide agreement with HMRC over the tax treatment of certain infrastructure income. There was also a benefit to the corporation tax charge from a reduction in the statutory tax rate from 26% last year to 24% this year.
Corporation tax is paid to HMRC quarterly. The company has a statutory year end of 30 June and the tax computation is prepared for the 12 months to 30 June each year. The first two payments are made in January and April before the tax year has ended, and the last two in July and October after the end of the year.
We use an external water industry expert to analyse our capital expenditure and ensure the correct capital allowances are claimed. We take a prudent approach to tax affairs, ensuring that we claim the tax relief to which we are entitled, but not submitting complicated tax schemes that could endanger our relationship with HMRC.
Deferred tax has moved significantly, from a substantial charge of £24.7m last year to a charge of £1.2m this year. In the prior year there was a reduction in the discounting of deferred tax due to the movement in discount rates, which pushed up the charge.
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 has agreed to ensure that gearing stays at or below 70% in order to maintain its current credit ratings and give the company continued access to the capital markets.
Cashflow and gearing
Net debt increased by £112.2m to £1,738.3m. This comprised:
- cash inflow from operating activities of £334.6m, less
- capital investment cash outlay of £215.4m, less
- interest payments of £80.0m, less
- tax payments of £21.8m, less
- dividend payments of £129.6m.
Liquidity at year end was £206m comprising £181m cash bank deposits and £25m undrawn bank facilities.
The regulatory capital value increased by £190m, from £2,543m to £2,733m, of which £83m related to the impact of inflation and £126m to growth in assets, less a £19m outperformance adjustment. Gearing at 31 March 2013, calculated as net debt divided by regulatory capital value, was 63.6%, virtually unchanged from last year and well below the 70% ceiling.