Extreme weather events and inflationary pressures have had an impact on company finances and on some key performance commitments, according to Affinity Water’s Annual Report and Financial Statements for the year ended 31 March 2023, the third year of the AMP7 2020-25 price control period.

The company has reported a loss before tax for 2022/23 of £112.7 million -  a £57.1 million increase on prior year (2022: loss of £55.6 million).

Affinity is on track to meet most of its five-year performance commitments for the 2020 – 2025 period. Howver, while the firm met key targets for leakage reductions, water quality and its environment programme, it failed to meet performance commitments on Interruption to Supply and Per Capita Consumption.

The region experienced two extreme weather events in 2022/23 with record breaking summer temperatures of 40c and a freeze/thaw event in December 2022.

The dry ground conditions experienced in last summer’s drought, caused ground movement, which resulted in many more bursts than usual. The utility’s network was put under further strain in December 2022 due to a sudden thaw following weeks of sub-zero temperatures. These conditions cause pipes to expand and contract, leading to an increase in bursts, which ultimately impacted on Affinity’s Interruptions to Supply performance commitment.

The significant demand for water in the summer period, coupled with post covid norms on water use has also impacted the water company’s Per Capita Consumption (PCC) target.

During the pandemic, water use changed dramatically after the first lock down was introduced. In 2020/21, PCC in the area rose to an average 171 litres from a pre covid average of 155 litres per person. In 2022/23, PCC was 160 litres per person per day (based on a 3-year average) and the company failed to meet its target in this area, which was set before the pandemic occurred.

In contrast, Affinity beat its leakage target for the year and reduced leakage by 15.8%, putting it “well on track” to deliver its five-year 20% reduction target by 2025.

The company also met all its targets under the Water Industry National Environment Programme (WINEP) – completing various river restoration and habitat improvement schemes. Affinity is also on track to meet its five-year target to reduce the amount of water it takes from chalk groundwater by 36 million litres a day by 2025. The company has started construction on a new treatment facility, which will allow it to do this, meaning that it will have reduced abstractions from chalk groundwater by 100 million litres a day since the 1990s.

Financial performance

Commenting on financial performance in 2022/23, a number of external factors, such as high inflation, the rising cost of energy, the hot weather over the summer of 2022 and the freeze/thaw event in December 2022, have had an impact on the business.

The treatment and distribution of water to our 3.8million customers make energy one of Affinity Water’s biggest costs – and energy prices have risen sharply over the last year. Despite a pro-active hedging strategy for energy which has protected it from the worst impacts, locking in prices to 2025. the hedges are at “higher prices than anyone could have planned” for putting pressure on costs.

The company has solar farms at two of its operational sites, which generated 1,641,000 kWh and saved 317 t CO2e in 2022/23. Looking ahead, Affinity Water is continuing its renewables programme and has been looking at how it can integrate solar installations with some of its below ground reservoirs and deliver further solar sites in 2023/24.

Revenue for 2022/23 was £323.3 million - a £3.6 million (1.1%) increase on the prior year (2022: £319.7 million). The increase is primarily due to higher nonhousehold wholesale revenue as final settlement runs continue to be higher than expected, as well as an increase in household tariffs due to billing of empty properties, additional transfers from unmeasured tariffs and the hot summer weather driving additional consumption.

Developer experience also activity increased during the year, resulting in additional contributions towards new connections in the current year.

Operating costs for the year increased by £27.2 million (8.9%) £331.3 million (2022: £304.1 million) with year-on-year inflation (RPI) being 13.5% higher and higher wholesale energy prices.

Network costs increased as a result of a global increase in chemicals costs. Bad debt costs also increased during the year as a result of a decline in cash collection rates.

Operating profit decreased by £20.6 million (59.5%) to £14.0 million (2022: £34.6 million).

Net finance expense of £100.0 million was £18.1 million (15.3%) lower than last year (2022: £118.1 million), primarily due to a fair value gain on inflation swaps.

However, there was a fair value loss of £26.6 million on energy swaps due to a fall in the market forward price compared to last year.

Loss before tax for 2022/23 was £112.7 million - a £57.1 million increase on prior year (2022: loss of £55.6 million)

Net debt as at 31 March 2023 was £1,257.7 million, an increase of £177.9 million since last year (2022: £1,079.8 million). The increase reflects a net cash outflow of £56.8 million, primarily driven by capital expenditure on the company’s network.

Affinity Water’s gearing at 31 March 2023 was 73.4% (2022: 73.0%), below its internal maximum of 80% of RCV and materially below its trigger level of 90.0%.

No equity dividends were paid during the year (2022: £nil), reflecting the shareholders’ commitment to reinvest all planned returns from the company’s appointed business for the benefit of customers during AMP7.

Capital expenditure in the year was £127.7 million (2022: £139.9 million), and was incurred principally in leakage, mains renewals, trunk main replacement, water treatment and integrated water savings programmes. This excluded £21.1 million (2022: £22.2 million) of infrastructure renewal expenditure,

Total capital expenditure for 2022/23 includes an element of spend that had been scheduled for earlier years in AMP7 but was delayed due to Covid-19 restrictions in place at the time. The total capital expenditure also includes spend on HS2 schemes that have been fully compensated for.

Affinity Water CEO, Keith Haslett commented:

“Despite the difficulties posed by inflation and extreme weather, we made significant progress in reducing leakage to the lowest ever levels we’ve had as a company, maintaining one of the best water quality scores in the industry and delivering on our environmental commitments. We are confident in our ability to meet most of our five-year performance commitments by 2025. Furthermore, we are well-prepared to enter the next asset management period (2025-2030) in a strong position, to continue delivering high quality, reliable supply of water to our customers, whilst taking care of our environment.”