Wessex Water Chairman Sir Francis Yeoh has said current projections suggest that investment will need to increase at least threefold from current levels and “we stand ready to invest further in Wessex Water for a fair return, to help finance the much enlarged future investment programme.”

Announcing the company’s annual results for 2022/23, Sir Francis said that the company’s financial health has always been, and remains robust with stable gearing, a simple financial structure and a solid credit rating.

Resilient financial stewardship

Despite last year’s many uncertainties and challenges, the water company’s financial performance has been marked by its resilience, the report says.

Profit before tax fell from £68.5 million last year to a loss before tax of £28.9 million this year, mainly due to the challenges posed by inflationary pressures on index linked interest, labour, power and chemical costs.

Operating costs were affected by inflationary and global market pressures, including energy and chemicals costs. Wessex also saw a near-term impact on earnings driven by inflationary pressures, especially on indexed debt. Net interest charges increased by £58.1 million from £82.1 million last year to £140.2 million this year. The increase resulted from the high inflation impact on index-linked borrowings combined with an overall increase in net debt during the year from £2,419.0 million to £2,622.2 million.

The company’s regulatory gearing improved as high inflation affected regulatory capital value, leaving gearing at the end of the year at 64.3% compared to 66.9% last year. 

During the year Wessex declared dividends of £70.6 million representing a yield of 5.4% on the company’s regulatory equity. The report points out the utility did not use the additional gearing headroom available, “recognising our commitment to re-investing cashflow to deliver for customers and the environment.”

Executive bonuses totalling £0.5 million were paid during the year, down from £0.7 million last year. However, the company has not paid any of the 30% bonus potential relating to environmental performance. The report says:

“We were extremely disappointed that we failed to maintain our record on environmental performance. We have undertaken a detailed root cause analysis, made Director and management changes, and established a separate compliance directorate with Board level leadership. The Board is determined to do whatever it takes to restore our industry-leading position. As a result of last year’s results, no director has received any of the 30% bonus potential relating to environmental performance. “

Capital investment

Gross capital investment was broadly in line with management expectations at £292.2 million, up £12.8 million from the £279.4 million delivered last year, despite “continuing challenges posed by material shortages and rising prices.”

The report says Wessex Water is committed to doing more and moving quickly to help improve river health and tackle storm overflows. Around £3 million a month (at no additional cost to customers) is already being invested to improve overflows with schemes already under way across the region which will make a 25% reduction in the operation of storm overflows by 2025, from the 2020 level.

After 2025, the company is proposing a threefold increase in investment to £9 million per month, with the aim of fully treating or eliminating any discharge from storm overflows by 2050.

Chief Executive Colin Skellett commented:

“We fully understand the public concerns about river health and, in particular, storm overflows; and we are committed to doing more, doing it faster and transparently reporting progress.

“Storm overflows are the legacy of over 100 years, when sewerage systems were built using the same pipe to carry both sewage and rainwater, with overflows designed to protect property from flooding during very heavy rain. We have 1,300 overflows on our 35,089 kilometres of sewers and we have been steadily eliminating or improving these, but not fast enough.

“Unfortunately, there are no quick fixes; solving this problem will take many years of sustained effort and investment. It is also vital that the solutions we employ stand the test of time, against a background of climate emergency and changing rainfall patterns. So wherever possible we will use nature-based treatment or, even better, the separation of surface water from the sewerage network.”

Planning for the future

One of the largest drivers for Wessex Water’s investment programme for the current AMP7 2020-2025 programme is to meet tough new standards for the level of nutrients and requiring any new development to be nutrient-neutral.

The report says:

“Significant investment is required to improve river water quality and we are pressing for changes to allow much greater use of more sustainable, lower cost nature-based solutions which would mean much smaller bill increases. We are continuing to discuss this with government and regulators.

“We will continue to champion innovation and markets to drive down costs and, as a result, bills. In particular, we are seeking to implement nature-based solutions and partnerships, which would have multiple benefits in keeping costs down, having a lower carbon footprint, supporting nature recovery and improving resilience.”

YTL has owned Wessex Water for more than 20 years, making it the longest single owner of a UK water and sewerage company and shown responsible ownership, making the company one of the best performers in the sector.

Current projections suggest "investment will need to increase at least threefold from current levels, with consequent impact on customers and investors"

Chairman Sir Francis Yeoh comments in the foreword to the report:

“As I write this foreword, we are preparing to submit our business plan for the five years beginning 1 April 2025. This will be a challenging time, given the significant increase in statutory and regulatory improvements we will be required to make. Current projections suggest that investment will need to increase at least threefold from current levels, with consequent impact on customers and investors.

“This brings me to the role of investors in this vital sector. Experience across the world shows that the availability of public finance is seldom able to keep pace with investment needs – indeed that was the main rationale for water privatisation in the UK. I was delighted that YTL Corporation was recently named as the UK-Malaysia Business of the Year because of our commitment to invest in the UK.

“We stand ready to invest into Wessex Water, for a fair return, to help finance the much enlarged investment programme. The cost of efficient investment is closely linked to regulatory and political risk, so the greater the certainty, the more attractive the sector will be to investors.”

Click here to download the Annual Report & Financial Results 2022-23