Southern Water has reported a loss before tax for FY 2023-24 of £207.6 million, compared to £368.6 million profit in 2023, according to its newly-published Annual Report and Financial Statements for the year ended 31 March 2024.

Revenue increased to £859.4 million (2023: £792.5 million) - principally due to the application of inflationary increases, totalling £56.3 million.

Operating costs, including the charge for bad and doubtful debts, for the year increased by £109.5 million from £488.8 million to £598.3 million. As a result of the increase in operating costs and depreciation, Southern Water incurred an operating loss of £72.8 million (2023: £18.4 million loss). The loss before tax for the year amounted to £207.6 million (2023: £368.6 million profit).

Over the course of the year, the most significant cost increases were:

Inflation – general inflation added a significant amount to underlying costs, £36.2 million, with average inflation rates across most of the company’s cost base lying between 7% and 11%.

Power prices – power costs increased by £21.2 million during the year, with an average inflationary rise of 40% following the end of fixed price arrangements.

High groundwater levels – during 2023–24 Southern Water experienced the wettest period of weather on record. On average in the past six months the region experienced 825mm of rainfall, more than it would normally expect to receive in a year. As a result of this exceptional weather, the utility incurred significant additional tankering costs of £27.9 million, dealing with ground water levels.

Debt collection and bad debt charge rose during the year, while an increased number of customers took advantage of support tariffs aimed at helping those in financial difficulty in the current economic climate. The firm has also experienced some reduction in cash collection, resulting in an increase in its bad debt charge of £3.4 million to £15.4 million (2023: £12.0 million) as well as increased debt collection costs of £0.9 million.

Overall, during 2023–24 capital investment in property, plant and equipment was £811.5 million (2023: £707.7 million). The step-up in expenditure was targeted at making refurbishments to assets to improve operational performance as well as schemes to enhance the level of wastewater treatment the company undertakes, e.g. to reduce phosphorus and nitrogen levels, improve storm tank capacity and increase the amount of wastewater the utility’s works can treat.

In October 2023, funds managed by Macquarie Asset Management, the majority shareholder in Southern Water’s ultimate parent company Greensands Holdings, increased their investment in the group with new equity totalling £375.0 million.

More than a year on from the publication of its Turnaround Plan, the annual report sets out how Southern Water teams have focused on reducing total pollutions (a 35% annual drop), as well as building more resilience into operations, improving drinking water quality, and our wastewater treatment works’ compliance record.

It also highlights areas for further improvement, which the Turnaround Plan – supported by shareholder support of £1.6bn since 2021 – is on course to deliver as the company moves toward the next investment period of 2025 to 2030, and beyond.

Commenting on the results, Lawrence Gosden, Southern Water CEO, said:

“Our performance has significantly improved in critical areas like total pollutions, water quality and compliance. While we will still have challenges in meeting some of our targets, every Southern Water colleague and our partners – engineers, scientists, operators, analysts and office-based teams alike – is committed to continuing to build on this improvement, delivering real benefits for our customers and the environment.”

“We are transparent about our performance. I want to start by highlighting that we are reporting another year of financial loss as a business due to the investments we have made to improve services for customers and the environment, and no dividends have been paid to our shareholders.

“At the same time, our shareholders have injected a total of around £1.6 billion into the Southern Water group to support our turnaround, helping us to manage above inflation costs, and invest more to improve our performance.”

Southern Water said that more than a year on from the publication of its Turnaround Plan, it is starting to see an improvement in performance. The company has focused teams across the business on building more resilience into operations, reducing total pollutions, improving water quality and its wastewater treatment works’ compliance record. The report says:

“There are some key areas where the company’s 2020–25 targets remain challenging but the Turnaround Plan – supported with further significant additional funding from our largest shareholder, Macquarie, bringing our total capital investment to over £3 billion for this asset management period – is delivering a step change to prepare our business to deliver our ambitious plans for the next investment period to 2030 and beyond.”

Planning for the future in AMP8

At around £8 billion, Southern Water’s AMP8 2025–30 business plan is double the investment in the AMP7 2020–25 investment period.

Key investment plans include £3.41 billion in wholesale water services to:

• Reduce leakage by 13% and reduce average water use to 121 litres per person per day.
• Provide 189 million litres per day of new sources and capacity and a further 82 million litres per day by 2035.
• Increase the resilience of the four largest water supply sites serving 62% of customers.
• Install over one million smart meters, improving customer awareness of water use and the accuracy of billing.

Planned investment of £4.1 billion in wastewater services to:

• Reduce use of storm overflows by a further 12% across 179 priority sites.
• Reduce overall pollution incidents by more than 50% and eliminate serious pollution incidents.
• Accommodate over 86,000 new homes by building a new treatment works at Whitfield near Dover.
• Improve water quality in over 1,000km of rivers.
• Two new advanced bioresources treatment centres, increasing power generation.

The report says that subject to regulatory approval on the final scope of new business plan, bills will need to increase by between 50% to 75% by 2030, explaining:

“This enables us to keep pace with the rising cost of materials and energy, but also fund the scale of ambitious investment needed to ensure a resilient water future for our customers.”

“We are mindful, as we plan this step change in levels of investment in our infrastructure, that we must work within the means of what customers are willing to pay. And we must work with our regulators to determine how quickly required investment programmes are delivered.

“We have invested time with our customers in developing our plans and believe we have struck the right balance between the rate of investment, necessary increases in customer bills and the support mechanisms for those least able to afford any changes to charges.”

Ofwat’s draft determination for Southern Water published last week provides Southern Water with a total expenditure allowance of £6.9 billion over the 2025-30 period. This is £2.9 billion more than the company was provided with in the current price review period (2020-25) - and over £1 billion less than its AMP8 proposed investment of nearly £8 billion.

Ofwat says in the determination:

“We consider that Southern Water can deliver its performance commitments and obligations for less cost than it requested, and our proposed allowances are 12% lower than the company's plan.”