Interim results

Overview

Expectations of what the water industry can achieve have rarely been higher. Our customers expect excellent service and that we are having a positive impact on the environment. This is set against a backdrop of a climate that is rapidly changing, regulations that are rightly getting more stringent, an economic outlook that is still difficult, and an industry that is not trusted.

Our 2025-2030 business plan is an ambitious one. We will be investing over £2bn more than the previous investment period and tackling a range of issues that are important to our customers and the environment. We plan to further reduce leakage, tackle spilling from storm overflows, and increase the resilience of our water supply network. We want to do all of this in ways that enhance the environment by using nature-based solutions, working in partnership, and decarbonising.

To be credible and trusted, we must not only demonstrate to customers we spend their money prudently, but we must also show we perform well. Our principal quality regulators, the Environment Agency (EA) and Drinking Water inspectorate (DWI), publish annual reports on our performance. It is a matter of pride to the whole team at Wessex Water that we should be industry-leading in these reports.

Since our last annual report, we have had a general election and a change of government, both of which offer the water industry new challenges but also real opportunities. Defra has commissioned Dan Corry to undertake a review that “... will examine whether the inherited regulatory landscape is fit for purpose and develop recommendations to ensure that regulation across the Department is driving economic growth while protecting the environment”.

Importantly, the new government has also established an Independent Commission chaired by Sir Jon Cunliffe to undertake the widest ranging review of the water industry since privatisation with the intention of reporting in 2025. This is welcome news, and we look forward to engaging with these reviews to shape a future for the water industry that meets customer expectations, enhances the environment, is resilient to climate change and continues to be an attractive place for long term investors.

Strong performance

The first six months of 2024-25 has seen continued work and investment to improve performance and build resilience to a rapidly changing climate, all within tightening regulatory standards. We are pleased to see performance generally being maintained or improving on last year, although we recognise there is still more we can do, especially in certain areas.

In 2023, the EA judged us as industry leading and a 4-star company (the maximum star rating) through their Environmental Performance Assessment (EPA). The EPA is an integrated assessment of environmental performance across a range of metrics and to be judged 4-star is not easy. The EA is currently consulting on changes to the EPA for the next business plan period, and we will be encouraging them to ensure that it properly reflects companies’ contributions to the environment.

Wessex Water has long understood that providing clean and safe water for our customers is the most fundamental service we provide; for us this is non-negotiable. This has again been recognised by the DWI through their annual performance review, where we continue to be the top performing water and sewerage company.

A skilled workforce

Colleagues across the business are integral to our success and we will continue to work hard to empower our people and ensure Wessex Water is a great place to work for all. The health, safety and wellbeing of our staff and contractors is of highest priority.

It is also important that we have a strong pipeline of future leaders in our industry. The YTL Wessex Academy is a unique offering that gives opportunities for interns, apprentices, and graduates to develop in their chosen areas. We expect this year to be able to offer 60 places on these programmes across the full range of our functions.

Delivering financial stability

We are acutely aware of the media and public concern around the financial stability of a small number of water companies. However, our financial position remains very stable, and our investors are committed to maintaining simple financial structures and robust credit metrics.

Results for the half year show operating profit increased by £19.7m from £78.0m to £97.7m, while the position after taxation improved from a loss of £8m last year to a profit after taxation of £19.6m this year.

Total revenues increased by £45.5m from £287m to £332.5m. Regulated tariff revenue increased by £42.1m, mainly due to price rises permitted under the regulatory mechanism.

Operating costs increased by £25.6m from £211m to £236.6m. Labour costs of £89.9m were £11.7m higher partly driven by an increase in headcount to drive operational improvements and to deliver the step up in capital programme. Annual pay increases, which take effect from 1 April each year, increased costs by £3.9m period-on-period. The increases in labour costs were partly offset by a £5.2m increase in capitalisation.

There were upward pressures on business rates and Environment Agency charges with a combined increase of £2.9m or 20%. Higher technology third-party costs and insurance contracts resulted in £2.4m of additional costs.

Bad debt charges grew by £0.7m as a result of the effect of new pricing but were lower as a proportion of overall household revenues. New obligations such as phosphorus removal added a further £3.2m of costs. Depreciation and amortisation increased by £3.7m from £60.6m to £64.3m primarily as a result of new asset construction.

Net financing expenses decreased by £16.7m from £91.1m to £74.4m. Financial expenses decreased by £21.6m as a result of lower inflation on the index linked bond portfolio against which there was a £0.2m increase in the interest costs relating to IAS 19 pension accounting. Financial income fell by £4.9m as a result of reduced funds held in short and medium term deposits.

Net capital investment for the six months was £248.0m, a significant increase on £189.6m last year and remains consistent with the timing of the construction programme for the current regulatory period. The increased level of spend meant regulatory gearing eroded by 7.2%.

The regulatory capital value increased by £218m to £4,402.3m primarily as a result of the high levels of capital investment applied as part of the calculation. Since privatisation the regulatory capital value has continued to reflect the growth of the size of the business and the investment programme.

Total taxation, including deferred tax, reversed from a credit of £5.1m last year to a charge of £3.7m this year.

There was no tax paid in either period due to the availability of full expensing for capital expenditure.

Dividends declared for the six months to 30 September 2024 were £37m, unchanged from the same period last year.

Cash and cash equivalents ended the period overdrawn at £4.8m, reducing by £10.6m from an opening cash reserve of £5.8m. The net cash inflow from operating activities was £112.3m less cash outflows from investment activities of £219.4m plus net cash inflows from financing of £96.5m.