Anglian Water Services Limited Half-yearly report for the six months ended 30 September 2019

Performing strongly against a challenging backdrop

Financial, social and environmental highlights

• Ground-breaking Articles of Association change makes Anglian Water the first UK water company – and, we believe, the first utility – to embed a commitment to community and the environment in our company constitution and puts us in line with European best practice for public interest entities. Following on from the Public Interest Commitments developed by Anglian Water and adopted by all water companies in April 2019, this industry-leading change codifies our long-held public purpose and will see us adopt and report against a set of responsible business principles, while directors will consider the impact on society and the environment of every decision they make.
• Anglian Water ranked as top-performing company in Ofwat’s 2018/19 Service Delivery Report, scoring in the top 25 per cent for seven of the 10 measures cited (wholesale, customer service, meeting performance commitments, earning financial incentives, leakage, water quality contacts and internal sewer flooding) and in the top 50 per cent for the remaining three (retail, supply interruptions and pollution incidents).
• Anglian Water ranked top water and waste water company for the final year of Ofwat’s Service Incentive Mechanism measure of customer service and number one across the whole business plan cycle.
• Group revenue of £717.0 million, an increase of £22.4 million (3.2 per cent) on 2018. This is consistent with the regulatory pricing mechanism, customer growth and increased housing development activity, partially offset by lower demand compared with the hot, dry summer in 2018.
• Underlying profit before tax for the period of £54.7 million, down £7.2 million, excludes fair value losses on derivatives of £171.3 million (2018: gains of £56.3 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, loss before tax for the period of £116.6m, down £234.8m from a profit of £118.2m.
• Dividend payments marginally down on prior year. Dividend paid in June of £67.8 million (2018: £68.0 million) with no further dividends planned for the rest of the year in line with the Board’s commitment to reduce gearing.
• Five Green Bonds issued to date, funding 850 green projects and reducing CO2 emissions by more than 162,000 tonnes.
• Ambitious programme underway to install solar power at more than 100 further Anglian Water sites, cutting carbon emissions and lowering the cost to power our network.
• Agenda-setting cross-sector innovation event held to tackle important challenges. Three-day Innovate East event in partnership with Essex and Suffolk Water attracted 1,800 delegates from 400 organisations and saw actionable plans developed to reduce leakage, extend smart use of data and digital twinning and create a new initiative to help communities adapt to climate change.
• Anglian Water one of only two companies to gain approval in the Drinking Water Inspectorate’s new Risk Management Approval Scheme to meet exacting new water industry standards.
• Current holder of prestigious Utility of the Year award and shortlisted for this year’s award.
• Winner of Business in the Community’s Health and Wellbeing award 2019.
• Anglian Water Chairman Stephen Billingham made a Commander of the Order of the British Empire (CBE) in the Queen’s Birthday Honours in recognition of his service to Government-owned, public and regulated companies.

Further financial updates

• Operating costs up by £16.1 million (5.3 per cent). The increase reflects reinvestment in proactive leakage maintenance, increases in below-ground infrastructure repairs and inflationary pressure on costs, partially mitigated by savings from efficiency initiatives. Although we had extreme weather events in 2019, we had no repeat of last year’s ‘Beast from the East’ and hot, dry summer 2018.
• Cash generated from operations of £366.2 million, up 1.5 per cent on last year and consistent with higher revenues, partially offset by increased operating costs.
• Gross regulated capital investment in the period of £204.8 million (2018: £211.7 million). On track to deliver all our regulatory obligations. This includes £25.2 million (2018: £16.9 million) of reinvestment spend out of the £165 million of reinvestment previously announced over the last three years.

Looking to the future

• We await Ofwat’s Final Determination on our proposals for 2020-2025, due on 16 December, and will work with the regulator to secure a settlement that works for our customers and the environment. The rating agencies that rate Anglian Water’s debt have Anglian Water on ‘negative outlook’ which is in line with their industry outlooks and the majority of individual issuers. Should the Final Determination be unchanged from the Draft, this could result in a downgrade of credit ratings.
• Preferred bidders identified for £500 million Strategic Pipeline Alliance which will see around 500km of large pipeline inter-connectors installed as part of our commitment to support making the East of England resilient to the risks of drought. The new system will facilitate the movement of water more easily across the Anglian Water region and will be supported by a digital twin (a digital replica of the network which helps us test, plan, anticipate and resolve issues in the virtual world).
• Developing proposals to support the economic growth of Cambridge by relocating the Cambridge Waste Water Treatment Plant, paving the way for the construction of 5,600 new homes, enabling sustainable housing growth and transport links and unlocking regional employment opportunities.
• Continuing development of customer journey with launch of My Account app on Apple and Android platforms.
• Ambitious programme underway to install solar power at more than 100 further Anglian Water sites, cutting carbon emissions and lowering the cost to power our network.
• Additional support to be offered to an average of 475,000 vulnerable customers each year from 2020-2025.
• New collaborative community project underway in Lowestoft with partners including Business in the Community and Anglian Water Alliance partner Kier, following nationally recognised Wisbech regeneration.
• Safeguarding our environment
• Signed up to an ambitious £120 million multi-sector partnership which will see waste heat from Anglian Water treatment facilities used to heat two of the UK’s largest greenhouses, being built in Suffolk and Norfolk, with the added benefit that water returned to the environment is cooled, removing excess heat from the river systems.
• Committed with other water companies to plant 11 million trees by 2030; Anglian Water’s contribution will include at least 30 new treatment wetlands developed over the next five years.
• Renewable energy generation from combined heat and power (CHP) plants on track to reach 120 GWh in 2019/20, enough to power 50,000 homes for 100 days.
• Adapting infrastructure to protect valuable chalk streams, including moving the abstraction point for Heigham Water Treatment Works in Norwich away from the delicate upstream stretch of river, to the works itself.
• Anglian Water awarded Employer Champion status by the Society for the Environment to recognise commitment to developing employees specialising in environmental disciplines.

Leading on innovation

• Leading Coalition partnerships forged with Spanish water company Global Omnium and Dutch water company Vitens to share expertise and drive international collaboration.
• Saving money and cutting carbon: newly developed mobile sludge thickeners enabling saving of £1 million a year and cutting CO2 emissions.
• Cutting-edge project underway using advanced transient pressure logging and online bacteria monitoring to ensure high standards of water quality at key storage locations in our network.

Building a resilient network

• £33 million investment programme installing new water mains in towns and cities across the region, including Milton Keynes, Norwich, Ipswich, Grimsby, Scunthorpe and Spalding, supporting future population growth and ensuring that water pressure can be maintained despite growing demand.
• Near-real time modelling and digital twinning projects driving faster diagnosis and resolution of issues.
• Planning underway for installation of one million smart meters in our region, supporting reduction of water consumption and effective leak management.

People at our heart

• Extended multi-skills talent expansion partnership developed by Anglian Water and its 12 Alliance partners to a further three colleges (West Suffolk College, Milton Keynes College and Grimsby Institute) following successful College of West Anglia pilot.
• Peter Simpson named UK’s top CEO for second year running by users of job site Glassdoor, with a 99 per cent approval rating.
• Four awards secured at Institute of Water annual awards, including Training Organisation of the Year.
• Anglian Water awarded Employer Recognition Scheme Gold Award for outstanding support for the armed forces community.

Commenting on Anglian Water’s results for the half year to 30 September 2019, Chief Executive Peter Simpson said:

“As we enter the final six months of our current five-year business plan we continue to provide best-in-class customer service to our seven million customers, leading the industry on reducing leakage, creating and maintaining a resilient network, and safeguarding our environment for future generations, while delivering strong financial performance. We were called out for praise by Ofwat in its 2018/19 Service Delivery Report, published in October, in which we were ranked the top-performing water company in England and Wales for our record across a wide range of performance measures.

“Yet of all our activity this year, I am most proud of the ground-breaking steps we have taken to set out Anglian Water’s purpose as an organisation and embed public interest into our company constitution for the long term. In July we became the first UK water company – and, we believe, the first UK utility – to make a legal commitment to consider the impact of every decision we make on our community and the environment, as well as ensuring fair returns for our shareholders. This change to our Articles of Association crystallises a journey we’ve been on for many years and will ensure that public interest remains at the heart of Anglian Water for generations to come.

“In a period in which we have seen the impacts of climate change becoming ever more apparent in the East of England, the social and environmental challenges our fast-growing region faces have been brought into sharp focus. Groundwater levels in some areas have been at their lowest for 30 years; we’ve seen the UK’s hottest ever temperature recorded in Cambridge, and our customers faced some of the most significant flooding seen in our region after unprecedented heavy rainfall at Wainfleet in Lincolnshire in June.

“We continue to prepare ourselves to meet these challenges over our next five-year business plan and beyond, through a long-term programme of strategic investment. Our plans include the installation of a million smart meters and the creation of a new Alliance partnership which will deliver 500km of pipeline to ensure we can move water around our network in times of need. We must invest now to ensure resilient supplies for the generations to come, a view supported by the majority of our customers, 500,000 of whom were engaged in the development of our plans.

“We passionately believe that our plan is the right one to safeguard the future of our region and enable it to flourish. However, it is not financeable based on Ofwat’s Draft Determination, as we stated in our formal response in August. We have striven to find further cost efficiencies, made changes to our total expenditure (totex) plan and accepted Ofwat’s proposal to test its new funding model, Direct Procurement for Customers, to finance a vital new treatment works at Elsham in the north of our region. These changes will see bills reduce by around 1.1 per cent over five years. We continue to work with Ofwat in the run up to Final Determination, to be issued later this month, and hope to reach an outcome which will meet the needs of our customers and the environment.

“Our priority over the remainder of the year is to complete our current investment programme of work, our largest to date. It has enabled us to deliver the best customer service of any water and water recycling company in England and Wales, as rated by Ofwat’s qualitative measure. Not only that, we are on track to improve on our industry-leading performance on leakage and deliver our best-ever performance on drinking water quality – ready, in short, to hit the ground running at the start of our next five-year plan in April 2020.”

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