Annual Financial Report

South East Water Limited

17 July 2023

 

South East Water Limited

Preliminary results

for the year to 31 March 2023

Chair and CEO joint report

Our joint Chair/CEO statement reflects on our performance during one of the most challenging years for our company, our colleagues, and our customers, as well as the communities we serve and our natural environment.

We know what our customers expect from us - a reliable supply of high-quality drinking water that represents good value for money - and we strive to deliver consistently high levels of service via a business that is safe, efficient and effective. Every year we are proud to provide top quality drinking water to 2.3 million customers across the south east of England. Over the last year we treated and pumped around 542 million litres of water a day into our network of nearly 15,000kms (9,000 miles) of pipes at a cost to each customer of around 60p a day.

We couldn't do this without the sterling support of everyone in our business and so we start this review with a huge 'thank you' to all those who played their part in responding to the unprecedented challenges we have faced over the past year. This includes our colleagues, our contractors and our partners.

Our core purpose is to provide today's public water service and create tomorrow's water supply solutions, fairly and responsibly, working with others to help society and the environment to thrive. Annual performance targets that stretch us year-on-year are important as they help to drive sustained improvements in performance, innovation and delivery of service outcomes.

Whilst we acknowledge that the climate is changing, we have seen an exceptional combination of extreme weather events this year that has significantly impacted on our business operations and financial performance. While we have done everything we can to meet the exacting performance targets and rigorous environmental commitments that go even beyond our statutory obligations, extreme weather events have had a significant impact on our performance in the past year.

Climate change fuelled three major weather-related events during our last financial year, and these were preceded by another serious event, Storm Eunice, within the calendar year. First, we experienced an unprecedented extreme heatwave, with record-breaking temperatures, the driest conditions in Kent since records began in 1836 and the lowest rainfall in Sussex since 1911. While reservoirs were running low, demand for water was at an all-time high, peaking close to 700 million litres per day, compared to the daily average of 542 million litres. That's even higher than demand during the 2020 summer lockdown heatwave. Then, in less than two months, we went from a 'hosepipe ban' and drought to incessant rainfall, flooding and power cuts, followed by a major freeze-thaw when temperatures rose dramatically by +20 degrees within a 24-hour period, from -70C to +130C. Flooding had a major impact across our water network, especially in Tonbridge in Kent, and this contributed to the impact of the freeze-thaw event in December.

During June 2023, which has now been acknowledged as the warmest June on record, soaring temperatures continued to impact our ability to supply drinking water to all customers. Following six weeks with almost no rainfall, demand for water consistently exceeded the capacity at which we can supply all our customers. Service outages in both Kent and Sussex have left us with no option but to implement a Temporary Use Ban (TUB) - also known as a 'hosepipe ban' from 26 June across both counties, to manage demand.

Financially, the cost of the exceptional weather events in 2022 to our company was around £17 million. Our immediate response to the incidents cost in the region of £6.6 million, through the provision of alternate water, increased utility costs and additional communications. Whilst in the aftermath, the impact that the events had on our pipe network incurred an additional £4.9 million of costs, repairing leaks and bursts. As extreme weather events, supply interruptions were not covered by our Guaranteed Standard of Service. Despite this, we felt that it was right to recognise the difficulty that had been caused to householders and communities. Through a combination of individual compensation to those directly affected and community compensation a further cost of £5.5 million was incurred.

We are seeing the true cost of these events, both in tangible and intangible terms. These events have impacted our performance on ODIs, including those for supply interruptions. We have seen this reflected in significant penalties which will reduce our revenues in future years. Intangibly, the impact on the wider business was also great, because normal business was interrupted on multiple occasions, when resources had to be redeployed to tackle the operational requirements of these exceptional weather events.

You can read more about all these exceptional events and their impact later in this report. Although these incidents and their impact have dominated our workload and headlines, we must not lose sight of all the other important work that has continued alongside the response to these major weather events.

We are therefore pleased to present our group annual report and the audited financial statements for the year ended 31 March 2023.

Our financial performance has also been impacted by the exceptional weather related events mentioned above and by other pressures on our cost base, including significant increases in the cost of power, chemicals and other energy intensive products. Operating profit for the year decreased by £42.5 million, while the group recorded a loss before tax of £74.2 million (2021/22: profit of £17.0 million).

Despite the extraordinary challenges we have faced, we have continued to make progress on delivering on the commitments and ambitious targets we set in our five-year plans. For instance, protecting and enhancing our local environment remains integral to what we do and this report outlines our industry-leading work in this field. We have also made great progress with some key engineering projects which will deliver improved resilience across our network, and we have extended our support for vulnerable customers and those who are facing financial hardship as the cost-of-living crisis continues to bite.

Until the exceptional weather events occurred, we had been well ahead of our target to reduce leakage too. For the first time in over a decade we have not been able to achieve our annual leakage targets but we have an ambitious recovery plan under way to make up the ground lost during the exceptional events of the past year.

Having said this, the total leaks (non-visible leaks detected by our teams and the visible ones reported by customers) and the water savings we achieved by fixing them were above target.

It was the long run time of the leaks, due to the volumes we were dealing with during incidents, that detrimentally affected our overall leakage performance. This was the case even though we maximised the resource on this activity, both internally and from the supply chain. We are pleased that we improved our detection of non- visible leaks by 12 per cent in the past year and we know that our leakage strategy remains sound.

It is one based on improving our understanding of the network, data, leakage monitoring systems and operational management, as well as finding and fixing leaks on our vast pipe network and replacing the oldest parts of our network. We continue to invest and innovate through satellite technology, intelligent pressure monitoring (calm network) and use of the latest digital reporting and data analysis system (Waternet).

We have committed to investing £489 million into our network between 2020 and 2025 and we have continued to deliver on this commitment in 2022/23.

At the time of writing, one of our most ambitious pipelaying projects in Hampshire was nearing completion. The £11 million, two-year project to protect the future of water supplies in Fleet involved laying 11 kilometres of new pipe. We used specially trained dogs to sniff out and protect great crested newts as part of an innovative trial during this project. The dogs were able to identify where the protected newts were living at key construction stages so they could be safely relocated. This approach also helped to reduce our environmental footprint as it avoided the use of kilometres of plastic exclusion fencing.

Among other projects completed during the year were the renewal of 1.2km of water main in Pluckley, the replacement of an ageing water pipe in Uckfield, 200m of new water pipe in Marden, the installation of 845m of new water pipe in Balcombe and the installation of a new generator at our Godmersham Water Treatment Works site, which will enable us to maintain supplies in the event of future power cuts.

We submitted designs for a £39million state-of-the-art water treatment works on the site of the old Aylesford Newsprint in Aylesford, Kent, to the local planning authority in February 2023. If approved, work on the new treatment works, which will enable us to produce an additional 18 million litres of water per day, should begin later in 2023 and become fully operational and pumping water to homes by March 2025.

It's vital we plan ahead over many years to ensure we can deliver a reliable supply of drinking water to our customers, at a fair price, so we can protect and enhance the environment for future generations.

Last year we became the first water company to co-create a 25 Year Environment Plan and launched this for consultation, setting out the actions we commit to taking to protect and enhance our environment in the short and long-term. These actions include ways to future-proof water for the environment and the next generation, building an environment that adapts to climate change and working with partners to keep rivers and underground water sources healthy. Work on finalising the plan has continued this year, following a public consultation in April and May 2022. The revised final plan, which will be reviewed at least every five years, will be launched in Autumn 2023 and will feed in to our business plan covering the period 2025 to 2030.

Our environmental achievements reflect our commitment to doing everything we can to protect and enhance the natural environment around us. Although climate change remains a huge challenge and poses a risk to our operations due to its uncertainty, we have not shied away from tackling the challenges head-on through investment, innovation, engagement and partnerships.

We own or manage 33 Sites of Special Scientific Interest, a National Nature Reserve, two local nature reserves and numerous Areas of Outstanding Natural Beauty. A healthy, vibrant environment where nature can flourish is essential to protecting our valuable water resources and our dedicated Environment team ensure all our day-to-day operations support the environment's protection and conservation.

As custodians of the environment, we pride ourselves on adopting a proactive partnership approach which continues to reap rewards. We have worked closely with farmers and landowners to improve the quality of our water at the source and to protect our rivers and chalk aquifers. In priority areas, we have part-funded rainwater harvesting systems for farmers so they can store up water during wet weather ready for when their crops and animals need it most. This also helps prevent soil, nutrients and other chemicals being washed into local rivers during heavy rainfall, and it eases pressure on our treatment works. During the year we have organised a series of free events and workshops as part of our ongoing efforts to work alongside farmers. For example, in March we held a sustainable maize management 'walk and talk' and ran farm funding workshops aimed at jointly increasing sustainability and resilience.

In September we recruited our very first Environmental Apprentice and look forward to building on the success of this scheme as we continue to make environmental considerations integral to our planning. We unveiled details of our catchment restoration strategy and our flagship chalk stream project on the River Stour in October. The River Stour is one of only 200 chalk rivers in the world. Chalk rivers are rare and precious and provide a unique habitat to support a wide and diverse range of wildlife due to their cool, crystal-clear waters. However, these important and irreplaceable features of our local landscape are under threat from land management practices, pollution, invasive species and climate change. Our project on the River Stour forms part of Defra's wider catchment restoration programme and will serve as a best practice model to improve the ecological and chemical status of our chalk streams. Our work in this area will continue to involve close collaboration with key stakeholders and community groups, including the Kentish Stour Catchment Partnership, to develop and deliver the most appropriate catchment-wide solutions for the River Stour. Our chalk stream strategy is closely linked to our longer-term Water Resources Management Plan (WRMP), Water Industry National Environment Programme (WINEP24) and our 25 Year Environment Plan which have all helped to shape our approach.

As well as protecting the environment that we work in and abstract water from, a key part of our biodiversity ethos concerns the protection of all species. In addition to protecting great crested newts, as mentioned above, we also part-funded a project last June to release 100 water voles back into the River Thames near Cookham in Berkshire. We worked closely with Wild Cookham, a registered charitable community group dedicated to supporting biodiversity and caring for local wildlife to boost numbers of the declining species.

We also remain proud of our industry-leading partnership approach to helping the most vulnerable members of our society. We are absolutely committed to helping customers who need additional support, especially during the current cost-of-living crisis. We continue to lead the industry with our work on data sharing with councils to automatically identify and enrol more eligible customers on to our social tariff. In January we were one of the first nine organisations to achieve the BSI's new Inclusive Service Kitemark in recognition of our commitment to supporting vulnerable customers. Even more of our customers will have received support when the income cap on our social tariff increased in December 2022.

Feedback from our customers through informal daily interactions and more formal focus groups and interviews gives us vital insight into their priorities and expectations. We are proud of the connections we have forged with stakeholders, partner organisations and local communities in 2022/23. These connections help us to develop our plans and align our business priorities with the priorities that matter most to our customers and the communities we serve. Partnerships are vital because some of the challenges facing us need us to work together with customers and communities. We want to support customers to play their part in water efficiency drives and show them how we can help to reduce their water bills. The take-up of our free water-saving devices rocketed by 115 per cent last year, particularly during the summer drought event, showing the appetite among customers for this kind of support.

In October 2022 we launched an exciting new interactive portal, AquaSmart, to encourage Key Stage One aged children to engage in water-saving missions and learn about the importance of protecting wildlife and our environment. By becoming Aquanauts, they have access to a number of fun-filled, downloadable activities.

We plan to develop this educational initiative and extend it to older age groups as we seek to engage children in important water-saving messages.

As a company, we endeavour to deliver a 10 out of 10 service every time customers interact with us, whether that is by phone, email, social media or other channel. We know we don't always get things right, but we will do everything we can to learn and improve from all the constructive feedback we receive.

Technology is helping us on this journey and the first phase of the implementation of a major new communications platform, Genesys, has gone well. In February our new fully automated communications system went live. We switched off our old phone system and switched on our new one seamlessly, with no downtime.

Our phone system is now fully integrated with our customer service agents' user screens so we can handle customer calls much more intelligently and, as a result, improve the customer journey and experience. We're starting to phase in the new functionality which will enable us to respond faster, resolve more customer queries at the first point of contact and provide a more consistent level of service, no matter how customers choose to interact with us. We'll know if customers have contacted us before so they won't need to listen to the same recorded message during a second call. We'll know which agent a customer spoke to previously and we'll be able to route them through to the same agent again if they're free.

This major five-year investment will also open up new customer communication channels which will allow us to improve the customer experience and enhance the service we can provide. For instance, in the future, customers will be able to easily WhatsApp photos and videos of leaks to us free of charge so we can send engineers out to fix them, rather than having to send someone out to investigate the leak first. We'll benefit from obtaining better information and customers will benefit from a faster response and resolution. All our agents have been trained on the Genesys system, which is easy-to-use and very intuitive, and the feedback to date has been very positive. We look forward to sharing more details of the exciting developments with this system over the next year.

People are at the heart of everything we do, and our colleagues' health, safety and wellbeing are of paramount importance to us. We were thrilled to be awarded the Kent and Medway Gold Workplace Wellbeing Award in recognition of all the work we are doing to keep our colleagues safe and well.

As a service industry, we want our people to thrive and grow so they can consistently provide our customers with excellent service and enjoy a rewarding career. They are our company's best ambassadors. We have produced a people plan which sets out our recruitment and retention plans and, as part of these, we are particularly pleased to be promoting apprenticeships to train or retrain the professionals of the future. Apprentices now account for 6.6 per cent of our headcount.

Building a more diverse and inclusive workplace and workforce remains a goal for our company and we have continued to work closely with the Leonard Cheshire Foundation this year to give talented graduates with disabilities access to internships with our company which we hope will lead them into full-time employment.

We operate in an area of water-stress with a growing population and so we must continue to adapt and innovate to create a business that is fit to meet tomorrow's challenges as well as those we face today. We do this by ensuring we keep abreast of the latest data, trends, research and best practice and use this in our long- term strategic planning and investment choices.

As a water company, we don't work in isolation. We collaborate closely with other water companies across the south east, through the Water Resources South East (WRSE) alliance, to develop a regional resilience plan that will help us to secure water resources for years to come, together. This work has fed directly into our own company Water Resources Management Plan. In November 2022 we launched a 14-week public consultation on our draft WRMP. The plan sets out how we'll provide a reliable and resilient supply of drinking water from 2025 to 2075 and outlines how we propose to invest £2.2 billion during the next 50 years in building new infrastructure, and a further £2.1 billion in leakage reduction and initiatives to help customers reduce their water use. During the consultation period, we hosted stakeholder meetings, joint webinars with neighbouring water companies and public exhibitions at locations where key infrastructure have been proposed.

We are acutely aware of the commitment required by us as a company to ensure we put all necessary operational measures in place to improve our readiness and response to extreme events like drought and to prioritise short-term investment as appropriate, in addition to the need for additional and longer-term investment.

In May 2022 we published our final drought plan 2022 to 2027 following widespread consultation and approval from Defra. The plan details the actions we will take to conserve water and secure customers' supplies in the event of a drought event, while balancing the needs of the environment. We collaborated closely with customers, stakeholders and our colleagues to ensure we developed the best plan possible. Climate change impacts are core factors in the development of our long-term plans for water resource management and also a reason why we plan for and test our drought plan against more severe drought events than have been previously experienced.

Climate change forecasts predict hotter summers and warmer, wetter winters. We expect droughts to become more frequent and more severe in the future and so we are planning for this and increasing the resilience of our systems as a result. 2022/23 served as a sharp reminder to us all of the growing climate change crisis and the need for everyone to work together to solve the environmental and societal challenges we are facing, particularly in the water-stressed south east region.

We regret that any customers suffered interruptions to their supplies in 2022/23 and would like to take this opportunity to apologise again to those customers and communities affected by any of the incidents outlined below. We have made every effort possible to compensate those affected, over and above our statutory obligations, and this has clearly had a severe impact on our company's financial performance this year. We spent a huge amount on fixing the core problems, such as leaks and bursts on the pipe network, caused by these exceptional events but also on supplying alternate water to customers who experienced supply issues and on payments to those affected, either in line with our Guaranteed Standards of Service (GSS) or as compensation when GSS do not apply, such as in extreme weather conditions. The costs associated with these three extreme weather events in 2022/23, including bottled water, compensation, community grants, standby tankering, chemicals, fuel, power and postage amounted to £17 million.

It is essential to place the summer of 2022, and the unprecedented combination of storms, flooding and sudden temperature changes, in the context of climate change to understand the exceptional nature of these events and the need for a change in approach and adaptation going forward. As the challenges caused by climate change continue to increase, they impact and reveal pressure points in our specific network and supply areas, as well as in the supply systems of other water companies.

Looking ahead

This year has again pulled into sharp focus the challenges that extreme weather and the economic climate present to us as a business and to our customers. We will learn as many lessons as we can from the exceptional weather events of 2022/23, but we can't act alone. By working together with regulators, stakeholders and our customers, we will be better placed to sustain the vital service we provide for years to come and, at the same time, protect and enhance our natural environment.

Work is already well under way to prepare for our business plan submission, Price Review 24 (PR24), which will be submitted in October 2023.

By gaining valuable insights from customers and stakeholders, we've identified seven key strategic priorities for the next 25 years. These priorities, which are outlined in our draft Strategic Direction Statement (SDS), are to:

■ Provide top quality drinking water and an efficient service, support our customers and deliver greater value to society.

■ Manage and steward our assets, invest and innovate to ensure our water supply system is resilient to future challenges.

■ Protect and enhance the environment and biodiversity.

■ Reduce our carbon footprint, adapt to the impact of climate change and be a truly sustainable business.

■ Secure the future of water by protecting freshwater resources and developing new sustainable sources.

■ Secure the future of water by halving leakage and helping reduce the demand for water.

■ Be ready for the future through technology, innovation and investing in people.

The business plan will take a regional approach this year, reflecting the differing challenges that occur in each of our three regions - Kent, Sussex and our western region (Hampshire, Berkshire and Surrey). These include operational, historic, meteorological and customer-related challenges and differences.

The SDS will also set out how we will deal with risks and uncertainties through adaptive planning to ensure our strategy evolves and to ensure we deliver the right solutions at the right time.

In March 2023 we invited feedback on our SDS from a wide range of customers and stakeholders and this will be used to develop the SDS.

Our investment in infrastructure will continue at pace in 2023/24, combining both reactive developments to help in the very short term, and longer term planned strategic investments. To boost resilience in our network in the short term, we are bringing forward pump replacements, optimising the amount of water we can extract from water sources and increasing our maintenance. Longer term investment includes a £12 million investment to improve the resilience of the water supply network in east Kent is now under way. This essential project will see 16 kilometres of new water main installed in the area in two phases over a two-year period.

Despite the pressures and challenges faced in the last year, together with the financial implications of these, we remain resolute in our determination to continue investing, innovating and improving in all the areas that matter most to our customers and to continue safeguarding water supplies and the environment for generations to come.

Group income statement

for the year ended 31 March 2023

	Note	2023 £000	2022 £000
Revenue	2	257,482	251,276
Bad debts		(4,770)	(5,010)
Net operating costs	3	(228,412)	(184,364)
Other income	2	16,999	21,928
Profit from operations		41,299	83,830
Finance income	5	1,925	705
Finance expense	5	(117,459)	(67,565)
(Loss)/profit before taxation		(74,235)	16,970
Taxation	6	18,798	(45,880)
Loss for the year		(55,437)	(28,910)
Loss per share attributable to the ordinary equity holders of the parent	Note	2023 Pence	2022 Pence
Basic and diluted	8	(112.42)	(58.63)

The group activities above are derived from continuing operations.

Group statement of other comprehensive income

for the year ended 31 March 2023

	Note	2023 £000	2022 £000
Loss for the year		(55,437)	(28,910)
Other comprehensive (loss)/income:
Items that will not be reclassified to the income statement:
Net actuarial (loss)/gain on pension schemes		(39,449)	17,408
Deferred tax credit/(charge) on net actuarial (loss)/gain	6	9,862	(4,352)
Impact of deferred tax rate change in respect of pension schemes	6	-	1,639
Other comprehensive (loss)/income for the year		(29,587)	14,695
Total comprehensive income		(85,024)	(14,215)

Group statement of financial position

Registered number: 02679874

as at 31 March 2023

	Note	2023 £000	2022 £000
Assets Non-current assets
Property, plant and equipment		1,718,604	1,678,147
Right of use assets		11,153	10,980
Intangible assets		7,768	8,294
Defined benefit pension surplus		23,842	57,346
		1,761,367	1,754,767
Current assets
Inventories		1,132	851
Trade and other receivables		92,375	84,037
Cash and cash equivalents		4,002	14,539
		97,509	99,427
Total assets		1,858,876	1,854,194
Liabilities Non-current liabilities
Trade and other payables		4,104	4,154
Loans and borrowings		1,198,501	1,120,478
Deferred income		4,876	4,315
Defined benefit pension liabilities		2,482	2,869
Deferred tax liability	6	200,205	228,790
		1,410,168	1,360,606
Current liabilities
Trade and other payables		120,271	99,851
Loans and borrowings		30,520	339
Deferred income		5,312	5,740
Provisions		7,285	8,314
		163,388	114,244
Total liabilities		1,573,556	1,474,850
Net assets		285,320	379,344
Issued capital and reserves attributable to owners of the parent
Share capital		49,312	49,312
Revaluation reserve		213,254	217,906
Retained earnings		22,754	112,126
Total equity		285,320	379,344

The financial statements were approved and authorised for issue by the board of directors and were signed on its behalf by:

David Hinton                                                                                   Andrew Farmer

CHIEF EXECUTIVE OFFICER                                                                                    CHIEF FINANCIAL OFFICER

14 JULY 2023                                                                                                                14 JULY 2023

Group statement of changes in equity

for the year ended 31 March 2023

Note		Issued share capital £000	Revaluation reserve £000	Retained earnings £000	Total equity £000
At 1 April 2021 Comprehensive loss for the year		49,312	235,774	130,741	415,827
Loss for the year		-	-	(28,910)	(28,910)
Other comprehensive income		-	-	14,695	14,695
Total comprehensive income for the year		-	-	(14,215)	(14,215)
Dividends	7	-	-	(9,000)	(9,000)
Amortisation of revaluation reserve		-	(6,112)	6,112	-
Revaluation of infrastructure assets		-	283	-	283
Release revaluation reserve on disposals		-	(21)	21	-
Deferred tax on revaluation and retained earnings transfer1		-	1,533	(1,533)	-
Impact of deferred tax rate change	6	-	(13,551)	-	(13,551)
		-	(17,868)	(4,400)	(22,268)
At 31 March 2022		49,312	217,906	112,126	379,344
At 1 April 2022 Comprehensive loss for the year		49,312	217,906	112,126	379,344
Loss for the year		-	-	(55,437)	(55,437)
Other comprehensive income		-	-	(29,587)	(29,587)
Total comprehensive income for the year		-	-	(85,024)	(85,024)
Dividends	7	-	-	(9,000)	(9,000)
Amortisation of revaluation reserve		-	(6,112)	6,112	-
Release revaluation reserve on disposals		-	(91)	91	-
Deferred tax on revaluation and retained earnings transfer1	6	-	1,551	(1,551)	-
		-	(4,652)	(4,348)	(9,000)
At 31 March 2023		49,312	213,254	22,754	285,320
All transactions relate to the equity holders of the group. 1 The movement between the revaluation reserve and retained earnings arise			s from the dep	reciation and	associated

deferred tax on the fair value uplift of assets at the time of transition to IFRS. 

Group statement of cash flows

for the year ended 31 March 2023

	Note	2023 £000	2022 £000
Cash flows from operating activities
Loss for the year Adjustments for		(55,437)	(28,910)
Depreciation and impairment of property, plant and equipment		58,541	55,666
Amortisation of intangible assets including impairment		2,934	3,013
Finance income	5	(1,925)	(705)
Finance expense	5	117,459	67,565
Loss on sale of property, plant and equipment		244	884
Insurance proceeds from loss of property, plant and equipment		-	(6,000)
Difference between pension contributions paid and amounts recognised in the income statement		(4,796)	(5,181)
Income tax (credit)/charge	6	(18,798)	45,880
Movements in working capital		98,222	132,212
(Increase)/decrease in trade and other receivables		(8,538)	3,286
Increase in inventories		(281)	(178)
Increase in trade and other payables		15,592	533
Cash generated from operations		104,995	135,853
Income taxes paid		(1,332)	(1,100)
Interest element on lease liability payments		(153)	(100)
Interest received		387	6
Interest paid		(41,618)	(36,913)
Net cash generated from operating activities		62,279	97,746
Cash flows from investing activities
Purchase of property, plant and equipment		(91,158)	(89,016)
Proceeds from disposal of property, plant and equipment		201	314
Purchase of intangible assets		(2,431)	(2,520)
Insurance proceeds from loss of property, plant and equipment		-	6,000
Net cash outflow from investing activities		(93,388)	(85,222)
Cash flows from financing activities
Credit facility drawdown/(repayment) of borrowings		30,000	(80,000)
Debenture redemption		(4)	(5)
Loan notes issued		-	50,000
Payment of lease liabilities		(376)	(337)
Issue costs of debt		(48)	(260)
Dividends paid to shareholders	7	(9,000)	(9,000)
Net cash generated from/(used in) financing activities		20,572	(39,602)
Net decrease in cash and cash equivalents		(10,537)	(27,078)
Cash and cash equivalents at the beginning of year		14,539	41,617
Cash and cash equivalents at the end of the year		4,002	14,539

Notes to the group financial statements

for the year ended 31 March 2023

1.  Basis of preparation and authorisation of financial statements

The financial statements of South East Water Limited and its subsidiary (the "group") for the year ended 31 March 2023 were authorised for issue by the board of Directors on 14 July 2023 and the Statement of Financial Position was signed on the board's behalf by David Hinton and Andrew Farmer. South East Water Limited is a private company that has limited liability by shares and is incorporated in the United Kingdom and registered in England and Wales.

These consolidated and company only financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 as applicable to companies using IFRS and UK adopted international financial reporting standards.

The group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£000) except where otherwise indicated.

1.1  Basis of measurement

The financial statements have been prepared on the historical cost basis except for the following items, which are measured on an alternative basis on each reporting date.

Items                                                    Measurement basis

Pension assets                                                   Fair value

Certain assets in property,                                 Measured at deemed cost by reference to fair

plant and equipment                                           value on adoption of IFRS on 1 April 2014

1.2  Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the company and the group has adequate resources to continue in operational existence for the foreseeable future. The directors have considered the current economic uncertainty and the impact that this might have on the business. The directors have concluded that it is correct to continue to adopt the going concern basis of accounting in preparing the financial statements. Further details are provided in the Strategic Report.

1.3  Basis of consolidation

These financial statements incorporate the financial information of South East Water Limited and its subsidiary, South East Water (Finance) Limited (together the "group").

Transactions and balances between the company and its subsidiary have been eliminated fully on consolidation. Subsidiaries are consolidated from the date on which control is transferred to the group and cease to be consolidated from the date on which control is transferred out of the group.

2.  Total Income

The following is an analysis of the group and company's revenue and other income for the year from continuing operations:

Group and Company	2023 £000	2022 £000
Revenue
Unmetered water income	20,480	20,343
Metered water income	226,812	219,244
Other sales	10,190	11,689
Total revenue Other income	257,482	251,276
Rent receivable	1,228	1,134
Other income	15,771	20,794
Total other income	16,999	21,928
	274,481	273,204

All revenue is from customers within the United Kingdom.

Other sales comprise a number of income streams, including those associated with activities typically performed for property developers, which impact the group's infrastructure network assets, including diversions works to relocate water assets, and activities that facilitate the creation of an authorised connection through which properties can obtain water services. Other sales includes new connections income of £4.1 million (2022: £5.2 million), infrastructure income of £1.6 million (2022: £2.7 million) and capital contributions of £2.2 million (2022: £2.3 million).

Other income includes charges for billing and cash collection services amounting to £7.1 million (2022: £6.9 million), final insurance proceeds in respect of an insurance claim relating to the Aylesford sinkholes of £4.6 million (2022: interim proceeds of £10.0 million) and laboratory income of £3.0 million (2022: £2.7 million).

Under the terms of the group's insurance policies we are able to claim for the additional costs of working, or business interruption, arising from the damage to the service reservoirs at Aylesford in 2020 caused by a series of sinkholes. The cover is for additional costs of working incurred for up to a year from the date of the damage. An interim payment of £4.0 million was received in respect of business interruption cover in March 2022. We also received insurance proceeds of £6.0 million in respect of the damage caused to the service reservoirs.

In 2022/23 final insurance payments were agreed of £3.4 million in respect of business interruption cover and £1.2 million in respect of damage to the reservoirs.

3. Net Operating Costs

Group	Note	2023 £000	2022 £000
Employee benefits expense	4	36,165	32,416
Asset expense:
Depreciation - owned assets		57,361	54,702
Depreciation - right-of-use assets		1,180	964
Amortisation of intangible assets		2,934	2,994
Impairment of intangible assets		-	19
Loss on disposal of property, plant and equipment		244	884
		61,719	59,563
Other operating expenses: Operating lease rentals:
Vehicles and office equipment		481	364
Land and buildings		(23)	63
Fee payable to group's auditors (see below)		435	410
Energy costs		29,300	20,858
Rates		18,467	18,470
Contractors		41,831	26,894
Bulk water supplies and abstraction licences		11,831	8,326
Chemicals		6,492	4,037
Insurance and related costs		4,008	2,840
Compensation and donations		6,875	1,045
Other		15,407	13,629
Other operating expenses charged to capital projects		(4,576)	(4,551)
		130,528	92,385
Total operating costs		228,412	184,364

The other operating costs includes admin fees of £3,000 (2022: £5,000) for South East Water Finance.

Group and Company	2023 £000	2022 £000
Fees payable to the group's auditors in respect of: Audit of the group and company financial statements	347	329
Audit of subsidiary	1	1
Total audit	348	330
Regulatory accounts	71	65
Other assurance services	16	15
Total non-audit services	87	80
Total fees payable to the group's auditors	435	410

4. Employees and directors

Group and Company	2023 £000	2022 £000
Employee benefit expenses (including directors) comprise:
Wages and salaries	37,448	34,549
Social security costs	3,933	3,465
Defined contribution pension cost	2,749	2,512
Defined benefit scheme charge	1,340	586
Labour costs capitalised	(9,305)	(8,696)
	36,165	32,416

Key management personnel compensation

Emoluments of the directors, who are the group's key management, were:

	2023 £000	2022 £000
Aggregate emoluments including bonuses (short-term employee benefits)	974	1,176
Pension scheme costs - defined contribution plans	16	4
	990	1,180

Emoluments of the highest paid director including bonuses were: £405,000 (2022: £528,000).

One director (2022: one) has a deferred pension from the defined benefit pension schemes which closed to future accrual in 2015. There are currently two directors (2022: two) under a defined contribution scheme.

The monthly average number of persons, including the directors, employed by the group during the year was as follows:

	2023 No.	2022 No.
Operations	427	429
Management and Administration	584	572
	1,011	1,001

5. Finance income and expense

Group	2023 £000	2022 £000
Finance income
Interest receivable on bank balances and short-term deposits	389	13
Net interest income on defined benefit asset	1,536	692
Total finance income	1,925	705
Finance expense
Debenture interest	42	42
Effective interest on listed debt	14,582	13,997
Interest on lease liabilities	153	100
Financing guarantee fees	1,237	1,291
Bank interest and other finance charges	11,552	8,419
Amortisation of loan issue costs	652	624
Indexation on index linked bonds	25,107	13,563
Interest payable on index linked loans	14,441	13,114
Indexation on index linked loans	51,512	18,601
Interest capitalised	(1,819)	(2,186)
Total finance expense	117,459	67,565

Interest is capitalised at the weighted average rate of interest on the group senior long-term debt of 4.7 per cent (2022: 3.7 per cent).

Indexation on index linked bonds and loans are higher due to the increased inflation and higher RPI compared to prior year.

6. Taxation

6.1  Income tax recognised in profit or loss

Group	2023 £000	2022 £000
Current tax
Current tax on profits for the year	7	1,476
Adjustments in respect of prior years	(82)	(894)
Total current tax (credit)/charge	(75)	582
Deferred tax expense
Origination and reversal of timing differences	(13,467)	1,383
Adjustments in respect of prior years	(5,256)	3,091
Impact of rate change	-	40,824
Total deferred tax (credit)/charge	(18,723)	45,298
Total tax expense (credit)/charge	(18,798)	45,880

Total tax expense above consists of a tax credit of £18,805,000 (2022: £45,877,000 charge) for South East Water Limited and a charge of £7,000 (2022: £3,000 charge) for South East Water (Finance) Limited.

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to losses for the year are as follows:

Group	2023 £000	2022 £000
Loss for the year	(55,437) (18,798)	(28,910) 45,880
Income tax (credit)/charge (including income tax on associate, joint venture and discontinued operations)
(Loss)/profit before income taxes	(74,235)	16,970
Tax using the company's domestic tax rate of 19% (2022:19%)	(14,105)	3,224
Expenses not deductible for tax purposes, other than goodwill, amortisation and impairment	645	607
Adjustments to current tax charge in respect of prior periods	(82)	(894)
Adjustments to deferred tax charge in respect of prior periods	(5,256)	3,091
Tax effect of income not taxable in determining taxable profit	-	(972)
Impact of rate change	-	40,824
Total tax expense (credit)/charge	(18,798)	45,880

As enacted by the Finance Act 2021, the main rate of UK corporation tax increases from 19 per cent to 25 per cent, effective 1 April 2023. The impact of the change in corporation tax has been included in the prior year deferred tax liability.

6.1  Income tax recognised in profit or loss continued

The deferred tax on temporary differences as at 31 March 2023 have been calculated using 25 per cent, the enacted future rate for the periods during which the temporary differences are expected to unwind.

The adjustments to current and deferred tax charge in respect of previous years represent the changes between the prior year financial statements and the prior year tax computations submitted. The expenses not deductible for tax purposes are primarily driven by the movement on general provisions, non- deductible entertainment expenditure, and depreciation on non-qualifying capital expenditure.

Changes in tax rates and factors affecting the future tax charges

Capital investment is expected to remain at similar levels and the group expects to be able to claim capital allowances in excess of depreciation in future years. There are losses of £46.6 million available within the company to mitigate future profits. The UK Government's Budget announcement to grant 100 per cent first year full spending capital allowance for qualifying plant and machinery and 50 per cent allowance for special rate assets expenditures from 1 April 2023 to 31 March 2026, with the possibility of becoming permanent thereafter, provides greater incentive to boost capital investment. The main rate of UK corporation tax increases from 19 per cent to 25 per cent, effective 1 April 2023.

6.2  Income tax recognised directly in equity

Group and Company	2023 £000	2022 £000
Deferred tax Impact on deferred tax rate change on revaluation reserve	-	(13,551)

No impact of rate change has been recognised directly in equity in respect of fixed assets revaluation reserves at 31 March 2023 (2022: £13.5 million).

6.3  Income tax recognised in other comprehensive income

Group and Company	2023 £000	2022 £000
Deferred tax
Deferred tax on defined benefit pension schemes	9,862	(4,352)
Impact of deferred tax rate change in respect of pension schemes	-	1,639
	9,862	(2,713)

The net credit recognised in other comprehensive income for the year ended 31 March 2023 is £9.9 million (2022: £2.7 million net charge). There is no impact of rate change on pension schemes that goes to equity in the year (2022: £1.6 million credit).

6.4  Deferred tax balances

The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statement of financial position:

Group and Company	2023 £000	2022 £000
Deferred tax liabilities	(200,205)	(228,790)

Group and Company	Opening balance £000	Recognised in profit or loss £000	Recognised directly in equity £000	Closing balance £000
2023 Deferred tax (liabilities)/assets in relation to:
Property, plant and equipment	(215,171)	8,657	-	(206,514)
Losses carried forward	-	11,649	-	11,649
Defined benefit obligations	(13,619)	(1,583)	9,862	(5,340)
	(228,790)	18,723	9,862	(200,205)

Group and Company	Opening balance £000	Recognised in profit or loss £000	Recognised in other comprehensive income £000	Recognised directly in equity £000	Closing balance £000
2022 Deferred tax (liabilities)/ assets in relation to:
Property, plant and equipment	(161,330)	(2,976)	-	-	(164,306)
Impact of rate change on property, plant and equipment	-	(37,314)	-	(13,551)	(50,865)
General provisions - NI and incentive plan	29	(29)	-	-	-
Defined benefit obligations	(5,927)	(1,469)	(4,352)	-	(11,748)
Impact of deferred tax rate change in respect of pension schemes	-	(3,510)	1,639	-	(1,871)
	(167,228)	(45,298)	(2,713)	(13,551)	(228,790)

Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. All of the deferred tax assets were available for offset against deferred tax liabilities and hence the net deferred tax liability at 31 March 2023 was £200.2 million (2022: £228.8 million).

Temporary timing differences

All temporary timing differences are recognised in the deferred tax calculation.

The total amount of qualifying tangible fixed assets for R&D claims recognised in the deferred tax liability for the year ended 31 March 2023 is £174,000 (2022: £169,000).

7. Dividends

	2023 £000	2022 £000
Final dividend of 4.56 pence (2022: 4.56 pence) per Ordinary share paid during the year	2,250	2,250
Interim dividend of 4.56 pence (2022: 4.56 pence) per Ordinary share paid during the year	2,250	2,250
Interim dividend of 4.56 pence (2022: 4.56 pence) per Ordinary share paid during the year	2,250	2,250
Interim dividend of 4.56 pence (2022: 4.56 pence) per Ordinary share paid during the year	2,250	2,250
	9,000	9,000

There were no dividends proposed for approval as at 31 March 2023 and 31 March 2022.

8. Earnings per share

Group	2023 £000	2022 £000
Loss for the year from continuing operations	(55,437)	(28,910)

	2023 Number	2022 Number
Basic and diluted weighted average number of shares	49,312,354	49,312,354

	2023 Pence	2022 Pence
Basic and diluted loss per share from continuing operations	(112.42)	(58.63)

 

END