South East Water has paid out £2.25 million in dividends to investors for the six months tended 30 September 2023, compared to £4.5 million for the same period in 2022, according to its latest financial statements.

The dividend was in line with SEW’S dividend policy and was lower than Ofwat's view of what is a reasonable nominal dividend yield, which is 4 per cent.

The loss before tax for the six months to 30 September 2023 was £18.1 million (2022: loss of £12.7 million). The result was significantly impacted by the increase in operating and finance expenses in the period, the company said.

The group has recorded a loss after tax of £12.9 million for the period (2022: loss of £8.2 million). 

The financial statements incorporate the performance of South East Water Ltd and its subsidiary, South East Water (Finance) Ltd.

Revenue for the period was £147.1 million (2022: £137.8 million). The additional £9.3 million of revenue was due to tariff increases of £15.2 million, partially offset by £5.9 million of lower consumption experienced this year when compared with last year’s record consumption.

Operating costs, excluding bad debt, were £115.4 million for the six months to 30 September 2023. This compares to costs of £107.9 million in the corresponding period for the previous year. SEW said the increase of £7.5 million was driven by increased reactive maintenance costs of £2.8 million, due to additional leakage gangs being employed, and by inflationary pressures, such as chemicals (£0.8 million), bulk supply and abstraction charges (£0.8 million) and power (£0.7 million).

The joint report by the Chair and CEO in the interim report said it was set against the backdrop of another challenging, dry, hot early summer. In June the company introduced a Temporary Use Ban (TUB) following supply interruptions when network treatment and distribution capacity was exceeded as SEW responded to unprecedented high levels of demand.

Although this was the second temporary use ban imposed by SEW in two years, it was the first temporary use ban implemented due to demand alone. In November, Ofwat launched an investigation into the company’s supply resilience.

The joint report states:

“Despite all our assets functioning at full capacity, with demand rising to 678 million litres per day, our ability to keep up with demand was severely impacted, which regrettably led to customer outages.”

Staff costs also increased by £1.3 million driven by an average staff pay award of 6.6 per cent, a budgeted increase in average FTE and higher underlying overtime, plus the transition to the cloud added a further £0.6 million in computer costs.

Operating profit for the six months period was £35.9 million (2022: £33.8 million), an increase of £2.1 million.

The results for the six months to 30 September 2023 included £3.0 million of costs associated with the high temperatures in June 2023, including customer compensation of £1.5 million, bottled water costs of £0.7 million and other related charges of £0.8 million. This was £1.9 million lower than the weather-related costs incurred in the first half of the previous year.

Finance expenses for the period were £54.8 million (2022: £47.4 million). The increase of £7.4 million reflects higher indexation charges on four indexed linked loans of £2.9 million, due to a significant rise in inflation over the period. Additionally, cash interest on index linked loans has increased by £1.2 million and interest on our variable rate bank loan has increased by £2.1 million due to the increase in the SONIA rate. During the period the company drew an additional £23 million (2022: £nil) from the revolving credit facility resulting in an increased interest charge during the period of £1.2 million.

During the six months to 30 September 2023, cash generated from operations was £67.0 million (2022:

£69.2 million). Net payments in respect of capital activities in the period totalled £61.5 million (2022: £42.5 million). Net payments in respect of interest and other finance income and costs were £19.1 million (2022: £14.8 million).

Going concern - "reasonable expectation that South East Water Ltd has sufficient resources to continue in operation for the foreseeable future"

In preparing the financial statements the directors considered the group's ability to meet its debts as they fall due for a period of one year from the date of this report. The interim report says the directors have considered the current economic uncertainty associated with various factors including high inflation, pressures on household finances, supply chain constraints and high power prices caused by Russia's invasion of Ukraine.

The report states:

“The directors of South East Water Limited have a reasonable expectation that South East Water Limited has sufficient resources to continue in operation for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial statements.”

The group finances its working capital requirements through cash generated from operations and committed facilities that can be called upon as required. The group said it has significant headroom in its £125 million revolving credit facility, of which £53 million had been drawn at 30 September 2023.

The report states that In forming their view on going concern, the directors are aware that the financial statements of HDF (UK) Holdings Ltd for the year ended 31 March 2022 contained a material uncertainty in respect of going concern.

South East Water Ltd is the principal operating company within the group HDF (UK) Holdings Ltd - the ultimate UK holding company of a group of companies which are owned by Utilities of Australia Pty Ltd (50%), NatWest Pension Trusteee Ltd.(25%) and three entities of the Desjardins cooperative financial group (25%)  based in Quebec Canada.

South East Water’s interim report states:

“HDF had £150 million of debt that was due for repayment on 18 December 2023. The directors are aware that the debt was refinanced on 26 September 2023. The directors of HDF are in the process of evaluating the going concern position of that company.”