RNS Number:3858Y
Sutton & East Surrey Water PLC
15 June 2007
Sutton & East Surrey Water plc
The Company announces today its preliminary results for the year ended 31 March
2007.
Sutton & East Surrey Water continues to provide good value to customers in terms
of price, service and quality. Our environmental track record is also strong and
we remain, for example, one of the most successful companies in minimising water
loss from the network.
We started the year with much public and media attention focused on the drought
affecting south-east England, following two dry winters. In our distribution
area the drought was severe, leading to the need for us to take appropriate
steps to secure the water supply. We therefore sought and obtained the grant of
a Drought Order, with its special powers to restrict non-essential uses.
I am pleased to report that this measure was successful in conserving water.
Average water consumption reduced by 9% and peak demand by 21%, assisting us to
maintain essential supplies. We are grateful to customers for their positive
response. To preserve resources we significantly increased our leakage control
expenditure, with the result that leakage was at the lowest level ever recorded.
As a further precaution we also purchased additional water from other companies.
The Drought Order expired in November 2006. Since then higher levels of winter
rainfall have recharged the aquifers and Bough Beech Reservoir. We are
constantly reviewing our resource position, but despite rainfall in April being
some of the lowest ever recorded we do not anticipate the need for restrictions
in the summer of 2007.
We have continued our policy, of providing information and guidance on water
conservation, including distributing simple practical devices to households.
Wise use of water has to become second nature in our densely-populated region,
as climate change threatens to accentuate extremes in the weather.
In business terms, the Drought Order has inevitably resulted in reduced volumes
of water sales and higher costs in this reporting year. The associated
procedural and public relations costs of obtaining and applying the Order (#0.3
million), the purchasing of additional water supplies (#0.3 million), the fall
in revenue and the additional leakage costs are all reflected in the financial
results, with our underlying operating profit, (excluding FRS gains) 9% down on
the previous year.
Our decisive action in tackling the drought is a demonstration of how seriously
we take our responsibility as guardians of the public water supply. Our vision
of corporate social responsibility is published in our full Annual Report. Our
CSR Policy shows how our business objectives are located within the context of
the needs of our stakeholders - those that we affect and those that affect us
i.e. our Customers, Staff, Suppliers, Community, Shareholders, and Environmental
Surroundings. For each case we have identified key performance indicators.
I am pleased to welcome John Biles to the Board as an independent non-executive
director. He is a director of several public companies and has extensive
experience of infrastructure businesses. I would also like to record my
appreciation of Phil Holder's contribution to the Company's fortunes over many
years, as he has now joined Deutsche Bank. During his time as Managing Director
he led the Company in its successful appeal to the Competition Commission,
supervised its innovative bond issue and, at the previously quoted Group Level,
completed the very successful acquisition of Phoenix Natural Gas.
Our position within the water industry and its reputation for customer service
and efficiency are only achievable through the loyal commitment and
professionalism of our staff. I would like to thank everyone for all their hard
work and dedication during the past year.
Pat Barrett,
Chairman
15 June 2007
Business Review
OUR BUSINESS
Sutton & East Surrey Water supplies water to 248,000 homes and 16,000 businesses
in an area extending across the London Boroughs of Croydon, Merton and Sutton,
as well as East Surrey and parts of Kent and Sussex. We serve 645,000 people in
an area of 835 square kilometres, including the towns of Redhill, Reigate,
Dorking, Leatherhead, Cobham, Sutton, Purley, Caterham, Coulsdon, Edenbridge and
Horley. We are the supplier of water to Gatwick Airport, located near the
southern boundary of our distribution area. Last year the Company's 9 treatment
works input approximately 150 million litres/day into a mains network 3,400 kms
in length, owned and managed by the Company. Average domestic consumption rates
of 166 litres/head/day in our area are among the highest in the country,
reflecting the socio-economic profile of the population.
The Company's 'raw' sources of water include one surface reservoir, at Bough
Beech, accounting for 15% of the supply. To supplement rainfall collected in
Bough Beech, water is abstracted from the River Eden during the winter, normally
from November to April. Aquifers yield the remaining 85% of supply -
groundwater, extracted via boreholes and wells. Water quality is generally very
good, although the presence of minerals in some places in the area (for example,
in chalky zones) makes the water naturally hard. The Company's treatment process
includes softening, by adding lime.
Sutton and East Surrey Water is a regulated supplier of water only (it is not
responsible for the collection and disposal of sewage).
Regulation
The water industry in England is subject to a range of UK and European laws and
is closely regulated: for customer levels of service and prices, by Ofwat; for
environmental protection, by the Environment Agency (EA); and for drinking water
quality, by the Drinking Water Inspectorate (DWI). The Consumer Council for
Water (CCW) monitors service quality on behalf of customers. This report
describes how the Company works with the regulators and the other stakeholders
who have an interest in the services it provides.
As economic regulator, Ofwat sets the limits to water charges, through the award
of percentage price increases over a five year period. Prices vary across
different regions of England. The last price determination was in December 2004
for the period 2005 to 2010. This determination is made by Ofwat following input
from the regulators described above and consideration of the Company's Business
Plan, which covers all aspects of its operations. This Plan can be seen on the
Company's website (www.waterplc.com). Ofwat sets price limits which it believes
will allow an efficient company to finance its operations and deliver acceptable
levels of customer service. Companies are allowed to increase prices to
customers annually by inflation (RPI) plus or minus the price limits set by
Ofwat. For the current period of 2005 to 2010, the Company's permitted maximum
price increase limit is 16% over five years. This figure is translated into
standard annual prices to customers.
The EA licenses water supplies through abstraction permits, and oversees water
resources planning. It also sets the guidelines in accordance with which
companies plan for drought conditions.
The DWI sets water quality standards, currently comprising 40 parameters for
measuring water companies' compliance at consumers' taps.
Water companies are essentially natural monopolies. However, the Government is
slowly opening the large industrial and commercial sector of the market to
competition. During the year we have made preparations for this by publishing
our Access Code, which sets out the conditions according to which other
suppliers may use our water supply network and Access prices.
The Company reviews its resource planning every year. This takes into account
new housing developments and expected changes in consumption patterns. We are
currently in the process of preparing its Water Resources Plan for the next 25
years, which will be subject to public consultation in the summer.
BUSINESS STRATEGY
Our business objectives are: to maintain the supply of high quality water and a
high level of service to our customers, and to retain our position as one of the
most efficient and technically advanced water companies; and to conduct all
aspects of our operation with regard to the environment.
The Company has a clear strategy that is focused on meeting the demands of all
its stakeholders in such a way as to balance the investment required to provide
consistently high levels of customer service with reasonable returns to our
shareholders. The major components of this policy are:-
*manage water resources with a view to the future;
*meet new challenges and obligations;
*comply with all relevant legislation and similar obligations;
*maintain the asset base;
*be efficient and effective;
*meet obligations to the environment;
*continue to innovate and make the most effective use of modern
technologies;
*maintain credit ratings; and
*be a good and progressive employer.
Water Resources
The principal challenge in the current year has been managing the drought which
affected the south-east of England.
The situation was particularly severe in the Company's distribution area. Here,
critical supply challenges occur in the event of multi-season droughts, rather
than a single dry season, because they have the capacity to restrict the overall
water resource balance. That is the balance between available supplies of water
on the surface (reservoir) or in the ground (aquifers), and the sum of demand.
Winter rainfall is particularly important for replenishing the aquifers from
which the Company draws most of its supplies.
After two winters of low rainfall, 2004/05 and 2005/06, with little effective
recharge of aquifers, the Company faced in Spring 2006 the worst drought in its
area since the 1930's. Groundwater levels were close to all time recorded lows
in many locations and the Company's one surface source, Bough Beech reservoir,
was barely half full although this was expected at that time of year.
The Company's role as water manager means that it has to take account of the
medium term outlook as well as short term demands. The level of rainfall which
was to occur during the winter of 2006/07 could not be predicted. It was clear
that a continuation of below average precipitation would represent a threat to
future supply, with potentially major public health risks.
From 1st March, 2006, the Company imposed a ban on all use of hosepipes over the
whole of its distribution area. Soon after, in April 2006, it applied to the
Secretary of State for a Drought Order.
Under Drought Orders non-essential water uses may be prohibited, e.g. the
cleaning of windows and watering of golf courses or other recreational grounds.
The aim is to manage demand so as to remove peaks during the summer and as a
result preserve resources for essential purposes. The Company accompanied its
application with an intensive communication campaign to inform its customers and
the public of the reasons for the restrictions.
The Environment Agency was supportive of the Company's application and the
Planning Inspector presiding at the public hearing - part of the lengthy legal
process - accepted our case for introducing use restrictions. In view of the
"exceptional shortage of rainfall", the inspector noted it was likely that
demand would exceed supply during the summer, at its critical dry season peak
"unless restrictions on water uses were introduced". The Company's drought
application, he concluded, was "a prudent water management measure".
The Drought Order was brought in from May 2006, for 6 months. While several
other water companies in the south-east had also applied for an Order, none of
them subsequently implemented one.
The response from customers was extremely positive. The message was understood
and widely accepted, according as it did with warnings in the press and
government appeals for a reduction in water consumption. Customers showed
considerable awareness of the problem, as well as a general willingness to adapt
their habits. A substantial drop in consumption resulted. Average daily demand
during the year was 6% lower than the previous year (159ml per day).
The Company did not take the major step of applying for a Drought Order without
considerable forethought. The situation was unlike any encountered previously
and it was clear that restrictions on water use were essential to keep water
demand under control, thereby preserving resources for essential domestic use in
the medium term.
The Drought Order expired in November 2006. Since then rainfall has been
sufficient to replenish substantially the Company's groundwater sources, and its
surface reservoir at Bough Beech has reached full capacity. The hosepipe and
sprinkler ban was removed in January 2007. The Company does not anticipate any
need for restrictions in the Summer of 2007, although the situation will be
closely monitored and efforts to promote the efficient use of water by customers
will continue. Dry spells may be expected to recur and demand management will
form an essential part of the response.
As a further precaution during the drought, the bulk supply arrangement with
Thames Water was used by the Company to purchase a modest additional resource.
The Company is now actively participating in discussions led by the Environment
Agency to review the status of water resources in the south east, in relation to
any short term difficulties and longer term solutions. This group is examining
transferability of water supplies between different distribution areas in the
long term.
Water Resource Plans
The Company's current Water Resources Plan (WRP) runs from 2005-2030. WRP's are
drawn up and agreed with the Environment Agency and involve the assessment of
future water availability over a 25 year period, incorporating all the key
trends in housing, consumption patterns, population growth etc but assuming
normal dry year conditions - in contrast with a Drought Plan which is designed
to deal with extreme dry weather.
The Company is beginning to examine the outlook for water resources during the
period 2010-2035, with a first draft Plan currently under review. Next year, for
the first time, the law requires Plans to be submitted for public consultation.
Our aim is to maximise current water availability, but where we need to develop
new resources we do so with real care to protect rivers and the wider
environment.
The Company strives to minimise losses from our system through leakage and our
programme of relining and replacement of our mains network continues. For both
tasks the Company engage outside contractors, and in the past year 68 kilometres
of mains have been laid or relined. Liaison with the Highways Authority and
local councils is an important part of the project management role.
Leakage
The Company has agreed with Ofwat that the economic level of leakage is 27.2Ml/
day, although the current pragmatic target is 24.5Ml/day, which has been
achieved in previous years. However in the year under review, to assist in
preserving supplies, the Company decided to try to reduce leakage even further.
In the event we achieved a figure of 24.0Ml/day, but it cost us an additional
#0.3m to achieve this. In 2005-6 the Company had the third lowest leakage levels
of all water companies.
Water Quality
The Company has again carried out a comprehensive programme of testing to ensure
that the quality of water for its customers meets the high standards in the
Water Supply (Water Quality) Regulations. Over 43,000 samples of water at
different points in the system, from source to tap, were taken during the year.
"Wholesomeness" is a term used in legislation to refer to overall acceptability
of water quality to customers. It covers both safety and aesthetic aspects:
colour, taste and odour. The Company checks these regularly and has not
experienced any problems this year.
Results to the end of December 2006 indicate that our water achieved 99.95%
compliance with mandatory quality standards ('mean zonal compliance' - the
principal measure used by the DWI). The Company continues to invest in the
technology at its treatment works to ensure that this high level of performance
is maintained. Mains relining and replacement referred to above also contributes
to improving water quality.
Water Efficiency
Through a range of initiatives, we have been successful in increasing water
efficiency during the year. These initiatives include:-
- cistern displacement devices: approximately 5,500 'Save-a-Flush' or 'Hippo'
bags were issued to customers during the year. The Company is conducting
follow-up research to help us to understand the effectiveness of these;
- meters: the number of properties where meters have been fitted exceeded 11,000
compared with 5,300 for the whole of the previous year (we are statutorily
obliged to fit meters at no cost to customers). All customers who have a meter
fitted following a change of occupancy are given cistern displacement devices;
- water butts: the Company has a special water butt offer available to customers
which is advertised on the Company's website;
- water efficient appliances: developers are encouraged to install water
efficient fittings in new homes;
- supply pipes: the Company offers a free repair service for customers supply
pipes (the pipes connecting individual properties to the mains);
The Company will continue to offer help and advice in all areas of water
efficiency. A new 'Saving Water' section has been opened on our website:
www.waterplc.com.
The Company is currently engaged upon an important joint project with Reigate
Council with the aim of reducing the water consumption in a group of established
properties. This includes retrofitting water efficient devices, introducing grey
water systems and using specialist water efficiency advisors.
Capital Investment
During the year the Company has invested #23.3 million in new plant and
infrastructure. Of this #9.2 million was spent on the renewal of its below
ground infrastructure, continuing its programme of replacing mains (68 km
replaced/relined in the year) that suffer from structural deterioration, thereby
causing bursts and leaks.
The remainder was spent on above ground assets, principally #7.7 million on
treatment works, #2.5 million on customer metering and #1.0 million on new
resources. A major project started this year was the refurbishment of Cheam
works, and there was also significant expenditure in emergency equipment and
facilities.
In the coming year, 2007/08, expenditure will be maintained at similar levels.
The Company continues with the Cheam project and will be starting important
refurbishment works at Bough Beech. Further investment will be made in new
resources.
The Company is confident that during this 'quinquennium' it will achieve a level
of expenditure consistent with its Ofwat target of #93.0 million (as stated in
the Ofwat 'PR04' price determination).
Health and Safety
The Company is committed to maintaining high levels of Health and Safety at work
for its employees and contractors. During the year there was, unfortunately, 1
reportable incident where a major injury was sustained but only 6 incidents
where more than three days were lost.
The Company has regular meetings and training sessions with its employees to
discuss Health and Safety matters. Safety forms part of the induction process
for new employees and safety information is on the Company's intranet.
Financial Performance
Turnover increased by 2.9% to #46.7 million (#45.4 million). The allowed price
increase for the year was "K" of 2.0% and RPI of 2.43%. Revenue per measured
customer was adversely affected by the Drought Order and consequent fall in
demand. However, during the year nearly 9,000 customers switched to meter which
increased measured revenues by #0.9 million. This large movement of customers
from unmeasured supply to metered supply decreased unmeasured revenues by #0.4
million.
During the year the Company benefited the demand management in the drought
period that resulted in it producing less water. This saved some costs but the
drought also required the Company to purchase additional supplies and bear the
costs of additional leakage control and of obtaining the Drought Order. The
Company was also affected by a significant increase in electricity costs due to
prevailing conditions in the power market. The Company benefited from an FRS17
pension fund curtailment gain of #1.9 million. As a result of these changes
overall operating profits increased to #13.0 million from #12.2 million last
year, but underlying profits (excluding the FRS 17 gain) fell to #11.1m.
Net operating cash flow for the year was #25.2 million (#21.1 million). At the
end of the year there was a significant increase in creditors resulting from the
large increase in capital expenditure.
Net Debt
Net debt for the Company at 31 March, 2007 was #103.3 million (#84.0 million),
including #12.4 million of Irredeemable Preference Shares. Debt has increased
because of the high level of capital expenditure and the #14.9 million dividend
payments. #12.0 million of this was paid to remove surplus cash from the
Company.
Tight control of the Company's finances has resulted in cash balances totaling
#15.0 million (#30.4 million). Under the terms of our index-linked Bond, #4.7
million of the Bond proceeds must be retained in the Company in order to fund
future capital investment. During the year the Company negotiated a #10.0
million, 5 year loan from the Royal Bank of Scotland.
Pensions
The Company is a member of the Water Companies Pension Scheme (WCPS), details of
which are disclosed in these Financial Statements under the requirements of
FRS17. The latest FRS17 valuation completed for these purposes shows a pre-tax
surplus of #8.2 million (#1.4 million) for the whole scheme.
Risk Management
The Company views the careful management of risk as a key management activity.
It maintains a register in which risks are assessed and ranked in terms of
possibility of occurrence and severity of impact. Risks monitored and managed
include potential operational problems, for example pollution incidents
affecting raw water sources, contamination of water in the distribution network
and major unplanned interruptions in supply. Examples of financial risks are
exceptional increases in costs of key recurrent items (e.g. energy) or a failure
in the billing system.
Security of water supply
A threat to future water supply is one among a number of risks faced by the
water industry.
The Company reviews annually its system of risk management, and particularly the
controls by which the degree of probability of any such failures may be reduced.
Despite our strategies to reduce, substantially, the likelihood of risks
occurring, it is not possible to eliminate them completely. This year, aside
from the risk of 'large scale water supply failure' controlled by means of the
Drought Order, there have been no major incidents arising from the 30 risks
listed by the Company.
Energy costs
Rising energy prices are however having an impact on the Company's day-to-day
operating costs. Due to the topography of its distribution area, pumping costs
are among the highest in the country. The Company seeks to limit these costs by
a process of obtaining competitive tenders from all potential power suppliers.
Interest Rate and Liquidity Risks
The most important financial risks faced by the Company are those associated
with interest rates and liquidity. The Company regularly reassesses these risks
and its policies for managing them.
The Company has controlled its principal interest rate risk by issuing an Index
Linked Bond in 2001. The interest rate on this Bond is 2.874% in addition to
index linking.
The Company's liquidity is protected by its cash balances available at 31 March,
2007, a #10 million term loan from the Royal Bank of Scotland and a #2.0 million
overdraft facility, both of which remain undrawn.
Nick Fisher
Managing Director
Profit and Loss Account
for the year ended 31 March 2007
2007 2006
#000 #000
Turnover 46,739 45,390
Operating costs (33,737) (33,227)
Operating profit 13,002 12,163
Net interest payable and similar charges (7,416) (6,448)
Other finance income 1,257 737
Profit on ordinary activities before taxation 6,843 6,452
Taxation on profit on ordinary activities (1,894) (2,786)
Profit on ordinary activities after taxation 4,949 3,666
Statement of Total Recognised Gains and Losses
for the year ended 31 March 2007
2007 2006
#000 #000
Profit for the financial year 4,949 3,666
Actuarial gain recognised in the pension scheme 3,542 4,679
Deferred tax arising on gains in the pension scheme (974) (1,404)
Total recognised gains and losses relating to the 7,517 6,941
financial year
Balance Sheet
as at 31 March 2007
2007 2006
#000 #000
Fixed assets
Intangible assets 8,754 9,727
Tangible assets 151,267 140,781
160,021 150,508
Current assets
Stocks 868 818
Debtors 13,501 8,320
Cash at bank and in hand 15,005 30,370
29,374 39,508
Creditors: amounts falling due within one year (24,249) (21,558)
Net current assets 5,125 17,950
Total assets less current liabilities 165,146 168,458
Creditors: amounts falling due after more than one year (118,301) (114,168)
Provisions for liabilities and charges (8,798) (8,860)
Net assets
38,047 45,430
Capital and reserves
Called up share capital 3,105 3,105
Profit and loss account 34,942 42,325
Equity Shareholders' funds 38,047 45,430
Cash Flow Statement
for the year ended 31 March 2007
2007 2006
#000 #000
Cash flow from operating activities 25,236 21,089
Return on investment and servicing of finance:
Interest received 1,074 1,388
Interest paid (3,296) (3,255)
Preference dividends paid to shareholders (966) (966)
Net cash inflow for returns on investments
and servicing of finance 22,048 18,256
UK corporation tax received 36 151
Capital expenditure and financial investment
Purchase of tangible fixed assets (22,395) (10,508)
Sale of tangible fixed assets 56 146
Dividends paid on shares classified in shareholders' funds (14,900) (5,460)
Cash (outflow) / inflow before management of liquid
resources and financing (15,155) 2,585
Management of liquid resources 10,901 (774)
(Decrease) /increase in cash in the year (4,254) 1,811
Financing
Capital element of finance lease rental payments (210) -
(Decrease) /increase in cash in year (4,464) 1,811
Notes
The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years ended 31 March 2007 or 2006. The
financial information for the year ended 31 March 2006 is derived from the
statutory accounts for that year, which were prepared under UK GAAP, which have
been delivered to the Registrar of Companies. The auditors' opinion on those
accounts was unqualified and did not contain a statement under s237(2) or (3)
Companies Act 1985.
The statutory accounts for the year ended 31 March 2007 will be delivered to the
Registrar of Companies in due course.
This information is provided by RNS
The company news service from the London Stock Exchange
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