Southern Water has faced a year of “significant change and challenge” and has fundamentally changed the way it works, according to its newly-published Annual Report & Financial Statements for 2017–18.

The water company has reported a fall in operating profit for the year of £22.3 million to £236.6 million, mainly due to increased operating costs during financial year ended 31 March 18.

Revenue increased to £829.7 million (2017: £809.7 million). The increase partly results from changes to inflation-linked water and wastewater tariffs, which were in part offset by the loss of income following the sale of its non-household retail business to specialist retailer Business Stream on 1 April 2017.

During the year the water company also saw a significant increase in its capital investment programme as it completed the third year of its current AMP6 business plan, spending over £440 million in total. This included the completion of a scheme to replace 30 kilometres of water mains in Kent, the ongoing redevelopment of the Woolston wastewater treatment works and an upgrade to wastewater treatment works at Eastbourne.

Between 2015–20, the current AMP6 investment programme, Southern Water is spending a total of £3.2 billion on operating, maintaining and improving assets. Up to 2020 it will also be spending an additional £80 million above the AMP6 business plan to futureproof assets.

The average bill for household customers who received both water and wastewater services during 2017–18 was £420, equivalent to £1.15 per household a day. The same combined service bill is expected to be £436 for 2018–19, which is £1.19 a day – an increase of 3.8%, or £16 a year, compared with 2017–18.

Sunday Times - dividend criticism contains a number of discrepancies

The Annual Report describes 2017–18 as a year of “significant change and challenge” for Southern Water. The water company is currently in the process of dismantling its Cayman Islands subsidiary which it said was created to solve a problem accessing international markets for raising debt to fund investment.

Southern Water has responded to a report in last week’s Sunday Times newspaper criticising it for making a big payout of £117.3m in dividends - 10% up on the previous year - to shareholders in its latest financial year.

In a statement, Southern Water said there had been a number of discrepancies in the story, which had described the water company as paying out a “bumper dividend’, commenting:

“As shown on page 98 of our annual report for 17/18 the dividend declared to investors is not £117.3m it is Nil. In fact in 16/17 we declared a total of £108m to investors, which fell to Nil for 17/18.”

“The figure of £117.3m relates to the payment of the final dividend for 16/17 of £63.2m together with payments totalling £54.1m to other group companies to cover interest payments on loans.”

“Of the £54.1m, £46.1m was paid to SWSG (a group company) and then paid straight back to Southern Water. None of the £54.1m is paid to investors.”

“In the past we have fallen short of expectations – we have fundamentally changed the way we work”

Commenting in the Annual Report on matching rewards for executives and shareholders with outcomes for customers, Ian McAulay, Southern Water chief executive said:

"We are implementing a major transformation of the company. Our goals have always been to deliver excellent affordable and environmentally-sustainable services in drinking water and treatment of waste water.

"In the past we have fallen short of the expectations of our customers, regulators and stakeholders. In response we have fundamentally changed the way we work.

"We are developing a modern transparent and ethical framework, matching rewards for executives and shareholders with outcomes for customers.”

“Quite simply, the standards and behaviour that had led to some of the legacy issues we are now facing, will not be tolerated.”

“Board is clear that standards and behaviours that may have been followed in the past are not acceptable”

In the Report, Southern Water’s Chairman Bill Tame has also separately acknowledged the challenges:

“Being attentive to public opinion is part of responding to criticism and so, although Southern Water and all companies in our group, pay all taxes in the UK, we are planning to close our financing company, Southern Water Services (Finance) Ltd, which is registered in the Cayman Islands, which we know contributes to misconceptions about our business practices.

“We also acknowledge Ofwat’s recent publications regarding governance in the water sector and its proposals for the next business plan for 2020–25. In light of these we will be reviewing our dividend policy and performance related executive pay to ensure that they strike the right balance between the interests of customers, investors and the executive management team.”

“The Board and I are clear that Southern Water is facing a number of historical issues with aspects of internal culture and behaviours that have not always led to the right outcome for customers, regulators, the environment and other stakeholders.

“The Board and I are also clear, therefore, that the standards and behaviours that may have been followed in the past are not acceptable and will be dealt with openly and decisively.”

“Question about nationalisation is a fair debate - but would customers and environment truly benefit from a re-nationalised water sector?”

Commenting in the Annual Report on criticism of the wider water sector, Southern Water said it had also been a challenging year for the water industry, which has faced “tough questions about its financial structures and calls to defend its delivery record.“

The report says:

“The question about nationalisation is a fair debate to have but we need to consider whether customers and the environment would truly benefit from a re-nationalised water sector.

“Water UK estimates that £150 billion has been invested in the industry since privatisation. It is vital that any future structure of the sector has access to similar funding that keeps pace with a growing population and the impact of climate change while continuing to deliver a high standard of drinking water and the protection of our environment.

“We also recognise that while there has been some innovative work taking place in our industry over the years, collectively we have not always shared our achievements, adding to negative public perceptions of our sector.”

Water consumption, leakage, customer service and data transformation among key highlights

Key highlights and initiatives flagged up in the Report during 2017-18 include:

Water consumption

Southern Water customers are now among the most water-efficient in the UK and use around 16% less water than they did in 2010 - average of 129 litres per person, per day compared to UK average of 141 - following an industry-leading universal metering programme.

A new initiative - Target 100 - aims to help customers manage their water consumption more efficiently and cut their water use to 100 litres per person, per day by 2040.

Via Target 100 Southern Water will:

• make better use of data to provide more customers with bespoke water-efficiency support – including products and advice
• use a range of levers to incentivise customers to reduce their consumption and maintain low levels of usage
• encourage new homes to be even more water efficient through incentives and the planning process
• pressure government to introduce water labelling across all products to increase customers’ awareness of how much is used to create them
• upgrade all meters to smart meters – giving customers access to real-time information
• educate customers on the true value of water to instil lasting cultural change
• use its influence with other water companies and stakeholders to push for universal metering – regardless of water-stressed status.

Data transformation programme

Led by a newly-created Data Team, a data transformation programme which started in September 2017 has enabled Southern Water to make more use of advanced analytics and data science and look forward to maximising its use of artificial intelligence and machine-learning.

In November 2017 the Data Team began a cross-sector initiative to create a shared portal for common regulatory data and to release open data sets. The portal, called DataWell, now has seven water companies, a group of universities, Ofwat, the EA and Open Data Institute involved in the project.

Leakage

Southern Water has put an expanded leakage team in place, made up of more than 120 people focused solely on finding leaks in the water mains network. Additional support is provided by a further 160 Southern Water employees and contractors who also detect leaks and repair them.

Renewable energy

Southern Water has beat its target of increasing the proportion of renewable energy used at its sites to 16.5% by 2020 - in 2017–18, it exceeded this by taking 17.2% of the energy needed to power its business from sustainable sources. Of this, 17% was from waste and 0.2% was from solar power. The sources include converting biogas generated as a by-product of wastewater sludge digestion into electricity.

Customer service

Southern Water implemented an organisational restructure during the year we to help deliver its improved strategy for customer service and plans to use more insight into customer trends to design a broader range of tailored services and training for employees.

Next step in improving service is to change the way the company works with outsourced partners - Southern Water has identified how working with a number of different companies has caused customer issues. As a result the company is currently in the process of appointing a new, single outsourced partner.

Bringing significant investment capability in house

The utility is transforming its capability during the course of the current capital investment programme to bring significant investment capability in house. This includes the establishment of an in-house engineering function, a specialist programme management function and asset planning systems, processes and capabilities.

Southern Water has separately also been raising awareness of its future proposals for the business via marketing campaigns on social media and through its relationships with local sporting associations, including

• Brighton & Hove Albion Football Club
• Gillingham Football Club
• Hampshire County Cricket Club
• Kent County Cricket Club
• Portsmouth Football Club
• Southampton Football Club
• Sussex County Cricket Club