Affinity Water is reporting an increase of overall operating profit of £7.5 million to £22.1 million, a 51.4% compared to £14.6 million in 2023, alongside a loss before tax for 2023/24 of £49.0 million, a £63.7 million decrease on a loss of £112.7 million in 2023, according its annual results for the year ended 31 March 2024.

The results show a net loss of £37.3 million after tax - reduced from £100.4 million in 2022/23.

Revenue for 2023/24 rose £32.6 million to £347.6 million, an increase of 10.3%, on the prior year (2023: £315.0 million). The increase is primarily due to higher household revenue driven by inflationary increases on tariffs and increases in customer numbers.

Operating costs for the year increased by £24.3 million to £346.6 million (a 7.5% increase) (2023: £322.3 million) with a significant driver being cost inflation and higher energy prices (one of Affinity’s biggest costs.)

The report says that the water company has minimised the impact on its operating costs leading to a small increase in operating profit. Affinity has also successfully delivered an increase in its AMP7 capital programme delivering on its PR19 commitments.

Capital expenditure in the year was £159.1 million (2023: £127.7 million), which was incurred principally in the company’s leakage, mains renewals, trunk main replacement, water treatment and integrated water savings programmes.Net cash flow before tax and financing for the year was £36.0 million outflow, a £13.1 million increase on last year (2023: £22.9 million outflow) - the increase in the outflow is primarily due to higher net investment in fixed assets in the current AMP7 period.

Total capital expenditure for 2023/24 included an element of spending 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.

Operational highlights during 2023-24

Operational highlights during 2023-24 highlighted in the report include:

• achievement of 24 out of 28 performance commitments.
• continued improvement in customer service performance with leakage targets outperformed
• best ever reduction in customer supply interruptions.
• launch of a tariff trial with 1500 customers in Stevenage to explore if different ways of charging make bills more affordable and encourage water saving.
• continuing to drive down leakage and beat its target by reducing leakage by 18.3% and on target to deliver a 20% reduction by 2025 and 50% by 2050.
• meeting all targets set by the Water Industry National Environment Programme (WINEP), including delivery of 10 environment innovation projects and 30 river restoration projects during AMP7
• reduced abstraction by 267 million litres in the year from environmentally sensitive sites when flows or levels were low
• helping customers reduce their water usage by 36Ml/d.

Affinity Water is on track to meet most of the five-year performance commitments for the 2020 – 2025 period and has invested £157.1 million over 2023/24 to improve performance and enhance the environment.

However, Affinity failed to meet its water quality performance commitment (PC) for compliance risk index (CRI) in 2023, where 50 results did not meet the relevant standard; the utility had similar results of 46 in 2022. Affinity says the shortfall was explained in the main part in 2023, by the two exceedances from Iver Water Treatment Works (WTW), its highest output treatment works. Investigations identified the root cause of the issue and mitigation measures have been implemented to reduce the risk in the short term, including: cleaning and maintenance carried out throughout the treatment works. In the long term, the company is enhancing the treatment process with new rapid gravity filters – in Affinity’s view this work will prevent further similar exceedances.

Leakage has been reduced by 18 % in the year, outperforming the in year target of 17%. This means that over the last two asset management periods (AMPs) a reduction of 35% has been achieved. Affinity is therefore on target to achieve the commitment of a 50% reduction by 2050.

In a first for the water industry, Affinity launched a tariff trial on October 1 2023, which involved a group of around 1500 customers in Stevenage. The aim of the trial is to discover whether a different way of charging makes water bills more affordable and if it encourages water saving. The trial tariffs rise with consumption so that customers pay little for the water they need for everyday essential use, but as consumption rises, so that charges increase. It is estimated that two thirds of the customers in the trial will pay less for drinking water if their consumption remains the same.

The commissioning of the Sundon water treatment facility is the priority scheme that must be delivered ahead of March 2025 to allow the Abstraction Reductions to be implemented on time and commissioning will be complete in December 2024.The new facility in Central Bedfordshire will help Affinity to treat and distribute water from Grafham Reservoir, which is managed by neighbouring water company Anglian Water.

The water company currently fulfils the highest demand per person for water in England and Wales, at 157 litres per person per day, compared to the average of 145 litres.

Financing and AMP8

Net debt as at 31 March 2024 was £1,382.3 million, an increase of £124.6 million since last year (2023: £1,257.7 million). The increase reflects a net cash outflow of £19.0 million, primarily driven by capital expenditure on the network.

While Affinity Water’s gearing of 74.6% is higher than some of its peers in the water industry, it is below the internal maximum of 80% of RCV and materially below the utility’s trigger level of 90.0%. Affinity said its financial policies and capital structure align with target credit ratings of A3/BBB+/BBB+ for its Class A Bonds with Moody’s, Standard & Poor’s and Fitch.

With regard to long-term sources of debt finance, Affinity Water considers the most cost effective way to raise long-term debt to be through the debt capital markets. The utility’s financing subsidiaries have outstanding external bonds totalling £1,130.0million, raised in the debt capital markets and on-lent to the company on

the same terms.

No equity dividends were paid from the regulated business during the year, reflecting the shareholders’ commitment to re-invest all planned returns from the company’s appointed business for the benefit of customers during AMP7.

Affinity has spent £1.25 billion during AMP7 to date of which £375.8 million was spent in 2023/24 (2023: spend of £233.2 million).

Looking ahead to AMP8 2025-30 the report says Affinity Water needs to raise significant capital to fund its largest ever investment programme of £2.12 billion, with shareholders potentially pledging to include up to £150 million equity to enable that.

Commenting on the results, Affinity Water CEO Keith Haslett said:

“I continue to be extremely proud of the passion and dedication to serve our customers, which I see across the company. Over the last year, we have focussed on galvanising our three areas of operation, uniting our commitment to serving our region and taking care of our customers and the environment every day.

“We have seen some positive improvements in performance as well as some challenges and I have every confidence that we will continue to build on this strong performance in the coming year with a highly engaged workforce and delivering transformational activities for key operational areas of the business.”