Anglian Water Services Limited Financial results for the year ended 31 March 2020

16 June 2020

News

Consolidating five years of leading performance

 

  • Strong performance drives a projected total of £62.6 million of outperformance payments for AMP6 (2015-2020)[1], with £12.5 million of rewards expected for 2019/20
  • Award of The Queen’s Award for Enterprise: Sustainable Development concludes year of enshrining public interest into Anglian Water constitution
  • Statement of Case submitted to the Competition and Markets Authority (CMA) as part of Anglian Water request for redetermination of PR19 Final Determination

Commenting on Anglian Water’s preliminary results for the full year to 31 March 2020, Chief Executive Peter Simpson said:

 

“As we come to the end of our latest five-year plan and begin the next, the world looks very different than it did five years ago. Yet amid undoubted challenges there is much we can reflect on with pride. Anglian Water has delivered consistently leading performance.

 

“This year we have met our pioneering and hugely ambitious 2020 carbon reduction targets, reducing capital carbon by 61 per cent on our 2010 baseline, and operational carbon by 34 per cent against a 2015 baseline. We are now sharing our learnings by co-leading the industry’s road map to net zero carbon by 2030.

 

“We have led the water industry on leakage reduction, beating our regulatory target for the ninth year running. The quality of the water flowing through our region’s taps is at its best-ever levels. We were delighted to be ranked by Ofwat as top-performing water and water recycling company in its 2019 service delivery report, and to have been awarded the prestigious Queen’s Award for Enterprise: Sustainable Development for a second five-year period in April.

 

“We end the 2015-2020 Business Plan period (AMP6) with a projected £62.6 million of outperformance payments, reflecting how well we have delivered for customers across a range of very stretching Outcome Delivery Incentives.

 

“And, importantly, we enter our next five years with a sure and certain sense of our environmental and social purpose, having become the first major UK utility to enshrine our longstanding focus on working in the public interest into the fabric of our company constitution when we enhanced our Articles of Association in July 2019.

 

“Our stated purpose will provide a strong foundation to deal with the enormous challenges we and others are facing. The global impact of Covid-19 is stark, and it is compounded by the increasing pace of climate change, population growth and a very tough Final Determination from our regulator Ofwat, which poses significant financial challenges for our business, and others in the water industry.

 

“When we emerge from the immediate crisis, our planning for the next five years will undoubtedly be influenced by the new circumstances in which we find ourselves.

 

“As we reflect on the profound economic, societal and environmental shockwaves triggered by Covid-19, we and others will be focusing on how to build a more sustainable, resilient future in the face of climate change and, critically, to do all we can to play our part in the recovery.

 

“In our own region, it will be more important than ever to invest in the resilience of our infrastructure, safeguard our environment and work to bring social prosperity to our communities.

 

“Yet we must do so for now within the constraints of a Final Determination which falls far short of the investment required for the next five years. Anglian Water’s strong track record of performance is founded in large part on the significant investments we have made in delivering high-quality infrastructure and services over multiple AMPs.

 

“The plans we set out in our Business Plan for AMP7, endorsed by sector-leading engagement with more than 500,000 customers and stakeholders, and rooted in externally validated assessments of our region’s needs, were our most ambitious ever. They included £6.5 billion of investment to support the long-term resilience of our water supplies and the growth of our region.

 

“The determination awarded by Ofwat in December 2019 leaves us almost £750 million short of the funding required to deliver those plans, as well as setting the lowest ever rate of return to investors, limiting our ability to deliver growth in what is the driest and one of the fastest-growing areas of the country.

 

“Accepting it would inevitably mean adopting sub-optimal short-term solutions, kicking the can down the road rather than tackling issues head on and creating infrastructure fit for the future, as we and our customers agreed that we should. It would lead to poorer outcomes, not just in the next five years but for many years to come, threatening our fundamental ability to deliver on our stated Purpose: to bring environmental and social prosperity to the region we serve.

 

“That is why we felt we had no choice but to pursue the redetermination process which is now underway with the Competition and Markets Authority. In a post-Covid-19 world, and with the pace of climate change only accelerating, it will be more critical than ever to run our business in a way which drives the long-term sustainability and resilience of our region and our communities. We hope the outcome of the process will allow us to continue to do so.”

 

Responding to Covid-19

Positive Difference Fund: The Company has accelerated plans for a shareholder-funded £1 million Positive Difference Fund, which doubles the £1 million already available through the Anglian Water Assistance Fund.

 

The fund is being distributed through a locally appointed partner which has expertise in getting money quickly to areas in which it is most needed. Organisations such as food banks, outreach programmes and those helping the most vulnerable will all be supported across our region. Half of the fund has immediately been made available to support community organisations on the front line of the battle against Covid-19, with the remainder released to meet emerging needs later in the year.

 

Supporting customers, employees and supply chain partners: Anglian Water has continued to deliver its vital service to customers throughout the Covid-19 outbreak, while supporting its colleagues to work safely. The Company has offered an extensive package of support to customers in financial difficulty, including payment holidays, tariff schemes, affordable instalment plans and settlement agreements, as well as signposting customers to an extensive range of affordability measures, income benefit channels and relevant external charities and help organisations. Employees in financial difficulty are being supported via an Employee Assistance Fund, financed separately from the business.

 

Some 3,000 employees have been transferred to home working, while clear safeguards have been put in place for those carrying out critical and essential tasks in the community and at our sites. Steps have also been taken to support the supply chain, including reducing the time taken to pay suppliers, advising small and medium suppliers and issuing key worker permits.

 

Liquidity: The Company has modelled a range of risks associated with the disruption caused by Covid-19, including potential reductions in revenue collection and cost shocks. The business has significant cash balances, including deposits of £1,048.1 million, following the drawdown of £600 million of liquidity facilities and access to a further £450 million if required. This drawdown is expected to provide an adequate buffer to ensure payments can be met as they fall due.

 

Financial, social and environmental highlights

  • Strong performance drives a projected total of £62.6 million of outperformance payments for AMP6 (2015-2020), based on 2019/20 prices, with £12.5 million of rewards expected for 2019/20 Fifteen years of upper quartile service delivery have culminated in Anglian Water being ranked by Ofwat as  top-performing water and water recycling company in its 2019 service delivery report, ending the AMP ranked top of Ofwat’s Service Incentive Mechanism, based on ratings from customers, and as reigning Water Company of the Year
  • Successful final year of AMP6 investment programme AMP6 gross capital expenditure for the year of £470.9 million (£250.1 million on capital maintenance, £220.8 million on capital enhancement), compared to £440.0 million in the fourth year of AMP6
  • Group revenue of £1,419.9 million, an increase of £65.2 million (4.8 per cent) on 2019 This is consistent with the regulatory pricing mechanism, offsetting reduced demand for both household and non-household customers
  • Adjusted profit before tax for the period of £74.0 million, up £13.5 million, excludes fair value losses on derivatives of £30.4 million (2019: £98.4 million). These are volatile non-cash annual movements which distort actual economic performance and therefore should be excluded when assessing underlying profit. Including these fair value movements, profit before tax for the period is £43.6 million, up £81.5 million from a loss of £37.9 million
  • Dividend payments were marginally down on prior year. Dividend paid in the year of £67.8 million (2019: £68.0 million) were retained within the Group and used to finance Group operating costs and working capital needs.  No dividends were paid to the shareholders of Anglian Water Group Limited (AWGL), the ultimate parent company, in the year (2019: £nil). Based on the available free cash flow there was capacity to pay a further dividend of £192.2 million. However, the Directors have not proposed to pay a final dividend in line with their de-gearing target. This decision to retain £192 million, follows on from the previous £165 million shareholder investment into the resilience of the Company. Both of these decisions reduced shareholders’ returns in AMP6 for the benefit of the company
  • Award of The Queen’s Award for Enterprise: Sustainable Development concludes year of enshrining public interest into Anglian Water company constitution The award, for the period 2020-2025, cites the Company’s “clear sustainability leadership, adopting an exemplary approach in formalising its commitment through amendments to its Articles of Association”
  • Anglian Water beats stretching 2020 carbon goals Pioneering programme of carbon reduction sees capital carbon reduce by 61 per cent against a 2010 baseline, while operational carbon is down by 34 per cent against 2015 baseline
  • Best-ever performance on renewable energy 131 GWh renewable energy produced from biogas, solar power and wind across our sites, enough to power 40,000 homes for a year
  • Best-ever performance on water quality, with the lowest ever number of contacts from customers about the appearance, taste and odour of their water
  • Launch of £1 million Positive Difference Fund brought forward as part of Anglian Water’s response to Covid-19, together with a package of measures to support local communities, employees and supply chain partners
  • Statement of Case submitted to the Competition and Markets Authority (CMA) as part of Anglian Water appeal against Final Determination Following the Board’s unanimous decision to request a redetermination of its PR19 Final Determination, Anglian Water submitted its Statement of Case to the CMA on 2 April
  • Contract worth more than £350 million awarded to construction and engineering firms Costain, Farrans, Jacobs and Mott MacDonald Bentley in a new Anglian Water enterprise alliance The enterprise alliance will seek innovative solutions to support the delivery of Anglian Water’s Water Resource Management Plan, securing the region’s water supplies for the next 25 years
  • Contract signing with Arqiva marks the beginning of ambitious multi-AMP smart meter upgrade programme, with plans to upgrade existing and new water meters for homes and businesses across the region as part of long-term demand management strategy
  • A total of £876 million of Green Bond funding secured to date to fund around 850 capital projects, with £51 million of bonds issued in 2019/20
  • New Chairman John Hirst CBE appointed on 1 April 2020 Mr Hirst, a former Chief Executive of the Met Office, who joined the Board of Anglian Water Services in 2016, replaces Stephen Billingham, who retired after five years as Chairman on 31 March 2020

 

Further financial updates

  • Operating costs including impairment losses up by £34.8 million (5.5 per cent). The increase reflects a £14 million increase in bad debt charge, primarily as a result of Covid-19, and £5 million of restructuring costs. In addition, increases in below-ground infrastructure repairs and inflationary pressure on costs, partially mitigated by savings from efficiency initiatives
  • Cash generated from operations of £686.0 million, down 2.1 per cent on last year, reflecting the reduction in cash collection from non-household retailers as a result of the agreement to defer 50 per cent of the March invoice
  • Gross regulated capital investment in the period of £470.9 million (2019: £440.0 million). This concludes our commitment to reinvest £100 million of efficiencies and £65 million in resilience

 

Future challenges

  • The 2019/20 financial year has seen the conclusion of Ofwat’s Price Review process covering the five-year period from 2020 to 2025. Anglian Water’s plan proposed investment of £6.46 billion alongside bill reductions of around 1 per cent, on top of the largest bill reduction of any water company in the previous five years. Ofwat’s Final Determination allowed expenditure of just £5.71 billion, a gap of £750 million, with bills coming down by c.10 per cent. The Board of Directors concluded that the Final Determination was not financeable and that accepting it would compromise the Company’s ability to deliver on its stated purpose. It therefore requested that Ofwat refer the Final Determination to the Competition and Markets Authority (CMA) to be redetermined, asking the CMA to consider whether Ofwat has struck the right balance between bills and investment. The CMA’s findings will be published no later than 18 March 2021. In the interim, Anglian Water will operate within the funding allocated under the Final Determination, with plans scaled back to reflect reduced investment
  • The Covid-19 emergency has meant the pausing of routine maintenance and planned infrastructure programmes, delaying the start of the AMP7 programme; there will be an as-yet unknown impact on the Company’s ability to meet its Operational Delivery Incentives in the short-term

 

Enshrining public interest

  • Industry-leading change to Anglian Water’s Articles of Association in July 2019, supported by investors, codifies the Company’s long-held public purpose, enshrining its longstanding commitment to conduct its business and operations for the benefit of shareholders while delivering long-term value for the Company’s customers, the region and the communities it serves, and seeking positive outcomes for the environment and society. The Company also developed and adopted a new Corporate Governance Code incorporating Ofwat’s Board Leadership, Transparency and Governance Principles (the BLTG Principles), as well as adopting more stretching corporate governance requirements found in the 2018 UK Corporate Governance Code

 

Supporting customers, colleagues and communities

  • ExtraCare teams launched in June 2020 to signpost customers to the wide range of support available to them, from the Priority Services Register to financial advice using income maximisation tools, signposting customers to an extensive range of affordability measures, income benefit channels and relevant external charities and help organisations. In total some 345,000 vulnerable customers received support
  • Average bills for 2020-2021 down to £412 a year, or £1.13 a day. Customers with a water meter will pay even less, with the average metered bill dropping to £385 a year. Anglian Water has seen the largest price reduction of any water company over the previous five years
  • Business Plan for 2020-2025 informed by sector-leading dialogue with more than 500,000 customers and stakeholders, with customers’ views sought at every stage of the process. The Plan was praised by Ofwat for its “high quality, ambitious and innovative approach to customer engagement and participation”
  • Building on the nationally recognised collaborative regeneration programme in Wisbech, joined new Lowestoft Place Board to support the regeneration of the town, working alongside partners including Business in the Community and Alliance partner Kier
  • Extended multi-skills talent expansion partnership developed by Anglian Water and its Alliance partners to four colleges (West Suffolk College, Bury St Edmunds; Milton Keynes College; the College of West Anglia, Wisbech; and Grimsby Institute), with 200 per cent increase in applications
  • Winner of Business in the Community’s Health and Wellbeing award 2019
  • Anglian Water education programme reached more than 35,000 people in 2019/20 with opportunities for interactive sessions to enhance understanding of the water cycle

 

Leading on sustainability

  • Investment of more than £1.4 billion planned for 2020-2025 to safeguarding water resources and the environment, supported by investors who share our commitment to sustainable financing
  • Ambitious AMP6 Environment Programme completed in full, with all 97 obligations to the Environment Agency under its Environmental Compliance ODIs fulfilled, avoiding significant penalties for non-delivery
  • Biodiversity baseline study completed to support commitment to 10 per cent biodiversity gain (that is, an improvement to wildlife habitats) in construction and land management activities
  • £36 million investment programme completed at Heigham Water Treatment Works, safeguarding delicate ecosystem of the River Wensum and supporting future population growth
  • Innovative circular economy initiative launched with partners Oasthouse Ventures and Green Capital, using renewable waste heat from Anglian Water treatment facilities to heat two of the UK’s largest greenhouses
  • Construction of 43,000 panel solar array at Grafham Water concludes AMP6 solar investment programme; new solar partnership with Next Energy Capital will constitute the UK’s largest unsubsidised solar and storage framework
  • Percentage of Anglian Water’s 49 sites of special scientific interest (SSSIs) judged as in favourable condition by Natural England increased from 49% to 99% in AMP6

 

Unlocking economic growth

  • Working with multi-sector Water Resources East network to develop an integrated flood risk strategy for the future of the Fens to enable housing and economic growth, transform transport links and build a more climate-resilient community, as well as benefit to the natural environment
  • Continuing development of proposals to support the economic growth of Cambridge by relocating the Cambridge Waste Water Treatment Plant, paving the way for around 5,600 much-needed new homes, enabling sustainable housing growth and transport links and unlocking regional employment opportunities
  • Supporting exceptional population growth, with 24,000 new water connections made in the past 12 months

 

Driving future resilience

  • Anglian Water became the first company to set out how it is preparing for the impacts of climate change in Defra’s latest round of adaptation reporting under the Climate Change Act. The report details the actions the Company has already undertaken to adapt its operations to the changing climate and sets out its plans for substantial further investment over the next five years
  • Continuing progress on leakage with the creation of an enlarged Optimisation Team to push system efficiency and proactive initiatives, combining noise logging, pressure monitoring, transient mitigation, pressure optimisation and drought response
  • 2019 Water Resources Management Plan published, setting out how Anglian Water will safeguard water supplies in the face of climate change over the next 25 years through a blend of demand and supply side measures, including the installation of smart meters across the region
  • The new Anglian Water enterprise alliance – the Strategic Pipeline Alliance – will create up to 500km of interconnecting pipelines and associated infrastructure to enable the movement of water to areas where it is most needed. The programme will also make it possible to reduce the amount of water taken from the environment, as well as strengthening resilience by reducing the number of homes and businesses which rely on a single water source.

 

Full report available to view here.