RNS Number:1064F
Sutton & East Surrey Water PLC
26 June 2006
Sutton & East Surrey Water plc
The Company announces today its preliminary results for the year ended 31 March
2006.
Chairman's Statement
The Company has seen many changes during the past few months. In October it was
purchased by Kellen Acquisitions Ltd as part of its acquisition of East Surrey
Holdings plc. At the end of January 2006 the Company was sold again, this time
to Deutsche Bank AG as part of its acquisition of East Surrey Holdings.
Throughout this process Deutsche Bank has been keen to retain the existing
management of the Company. It has, therefore, retained the Non-executive
directors, myself and John Newton, and all the executive directors. We are
delighted to have been joined by two directors appointed by Deutsche Bank, Paul
Malan and Daniel Agostino.
We continue to be among the best performing companies in the water industry,
leading the way in distributing high quality water to our customers supported by
high levels of service. Our environmental track record is also strong - indeed,
we remain one of the most successful companies in minimising water loss from the
network.
The most difficult problem that we have had to face during the year was the
persistent drought, although we continued to meet all our customers' demands
during the period. Our ability to achieve this depends on the level of rainfall,
particularly in the winter months. The recent rainfall pattern has been the
worst since the 1930's and we are currently experiencing one of the severest
droughts in the Company's history. Rainfall in the winter replenishes the
aquifers and reservoirs for use in the summer. Therefore it is important that
there is sufficient rainfall in the winter, but for the last two winters
rainfall has been significantly below the long-term average. Our resources will
generally be able to cope when one winter's rainfall is below average, as we did
last year, but when two winters suffer below average rainfall our resources
become very stressed. As a result our boreholes, which supply 85% of our water,
are at very low levels.
We have been granted a Drought Order which will allow us to restrict water used
for "non-essential" purposes. Clearly it is also important that our customers
use water wisely during this summer so that resources can be managed
effectively.
As for other operational matters OFWAT has confirmed that we have continued to
provide an excellent service to customers, that we have achieved our leakage
targets and have met exacting quality standards for our water.
That the Company has been able to achieve such good results in a year of
uncertainties is entirely due to the commitment of its management and employees
at every level and I would like to thank everyone for all their hard work and
dedication throughout the past year.
Pat Barrett
Chairman
15 June 2006
Operating Review
Sutton and East Surrey Water is a regulated water supplier. During the year, we
delivered water to 643,000 people in 251,000 homes and 19,000 commercial
properties. Our licence area extends across the London Boroughs of Croydon,
Merton and Sutton, East Surrey and parts of Kent and Sussex.
The Company's prime objectives are to provide customers with the highest levels
of service and excellent quality water, and to make a reasonable return for
shareholders. All these objectives have been achieved this year.
We continue to be among the best performing companies in the water industry,
leading the way in distributing high quality water to our customers and backing
it up with exemplary levels of service. Our environmental track record is also
strong - indeed, we remain one of the most successful companies in minimising
water loss from the network.
Principal risks and uncertainties
The principal risks and uncertainties facing the Company are:
* large scale water quality failure;
* large scale cash fraud or embezzlement;
* failure of billing systems; and
* large scale resource shortfall (lack of rainfall).
The Company views the careful management of risk as a key management activity.
This is done using a simple and flexible framework which provides consistent and
sustained way of implementing the Company's values. These risks have been
understood and given visibility. The Company has developed effective strategies
to mitigate these risks but these, no matter how well they are implemented, can
never completely eliminate all risks.
The Company's performance during the year and its position at the 31 March 2006
is fully explained in this report.
The main challenge facing the Company at the moment is the lack of rainfall.
This is fully discussed in the "Water Resources and Leakage" section of this
report. The other major uncertainty is the large increase in power and
associated costs not reflected in the PR04 price determination. Both will be
constantly reviewed by management to reduce any impact on the Company to a
minimum but, given the nature of these matters, the effect of any action may be
limited.
Regulation
The management of regulation is an ongoing process, which presents constant
challenges. In common with other utilities, Sutton and East Surrey Water
operates in an exacting and rigorous regulatory environment, which involves
compliance with strict pricing, quality and environmental controls.
Within this framework, a key task is to manage our regulatory affairs in a way
that ensures that we can balance the investment needed to provide consistently
high levels of customer service with reasonable returns to our shareholders.
Operating Efficiency
Ofwat has set challenging operating cost savings of 1.8% per annum for the
period to 2010, particularly so since a large proportion of our operating costs
are not controllable by management.
However, we have made a good start to the quinquenium, keeping operating costs
to #22.5 million compared to the Ofwat forecast of #23.0 million. The Company's
Key Performance Indicator (KPI) for operating costs (as defined by Ofwat) was
#22.8m. This result was achieved despite significant increases in power and
pension costs.
Services to Customers
The Company continues to provide excellent service to customers. Ofwat reported
during the year that we had remained at the highest levels of objectively
measured service to customers and we achieved 95% in the Overall Performance
Assessment. The Company's KPI for objectively measured service to customers was
at the highest level for each service category.
During the year we have improved service to customers by introducing a facility
to accept payments over the telephone network that is available 24 hours a day,
7 days a week. This service is considered so innovative that it has won an
international award for systems integration. We are currently extending the
system so that it will take customer meter readings and requests for meter
fitting.
Water Quality
The Company has well tested systems that extract, treat and deliver wholesome
water to its customers. The quality of water is now subject to even more
rigorous testing and review due to the Water Supply (Water Quality) Regulations
2000, which came into effect last year. We have been testing our water against
these standards for the past five years. Results to the end of December indicate
that our water achieved 99.97% compliance with mandatory quality standards. A
commitment to ongoing investment in leading edge technology at our treatment
works ensures that the quality of our water will remain among the best in the
country.
Water Resources and Leakage
We take very seriously our guardianship of the water environment. Where we need
to develop new resources, we do so with real care to protect rivers and the
wider environment. In addition, we strive to minimize losses from our system
through leakage and, for the last few years have led the industry in leak
reduction. Ofwat has commended us for our work in this important area of
conservation and we continue to meet tough annual leakage targets set by the
Regulator. The Company's KPI in this area was to achieve Ofwat's target of
24.5Mld and we actually achieved 24.3 Mld.
Nevertheless, our ability to meet all our customers' demands depends on the
level of rainfall, particularly in the winter months. The recent rainfall
pattern has been the worst since the 1930's and we are currently experiencing
one of the severest droughts in the Company's history. Rainfall in the winter
replenishes the aquifers and reservoirs for use in the summer. Therefore, it is
important that there is sufficient rainfall in the winter, but for the last two
winters rainfall has been significantly below long-term average. Our resources
will generally be able to cope when one winter's rainfall is below average but
when two winters give below average rainfall our resources become very stressed.
This lack of rainfall has affected all of South-East England. The consequence of
this is that our boreholes, which supply 85% of our water are at very low
levels. Our reservoir, Bough Beech, is currently reasonably full due to prudent
management by the Company and an extended river extraction period allowed by the
Environment Agency.
This position is unprecedented and we are taking action to reduce demand. In
April 2005 we instituted a ban on using garden sprinklers. This resulted in a
reduction in customer demand and we were able to maintain supplies through the
summer of 2005. Abnormally low rainfall again occurred during the winter of 2005
/06 and we introduced a full hosepipe ban in March 2006. We also applied to the
Secretary of State for a Drought Order which will allow us to restrict water
used for "non-essential" purposes. A Public Hearing was held in March to discuss
the application and it was granted by the Secretary of State in mid-May. We are
now implementing this in stages, so that the Company receives the maximum
reduction in demand while causing the minimum disturbance to our customers. We
have not taken these steps lightly and believe that these restrictions on water
use are essential in order to keep water demand under control and to preserve
resources for essential domestic use. Clearly it is important that our customers
use water wisely during this summer so that resources can be managed
effectively.
Capital Investment
During the year the Company has invested #11.5 million in new plant and
infrastructure. Of this amount we invested #5.8 million was spent on renewing
our below ground infrastructure as part of our maintenance programme, to replace
mains suffering from structural deterioration and high levels of bursts.
The remainder was spent on above ground assets, principally #1.2 million on
treatment works, #1.2 million on customer metering and #1.0 million on new
resources.
Expenditure next year is expected to increase to #24.5 million in 2006/7. We are
currently starting major projects at our treatment works at Bough Beech and
Cheam. We are also accelerating our programme of resource development.
Overall, during this quinquenium, we plan to achieve the levels of expenditure
consistent with those in the PR04 price determination.
All works are undertaken by third party contractors, on either a fixed price or
'open book' contract, and managed by our engineering team.
Working in the Community
We also take seriously our education programme which provides us with an
important opportunity to inform a new generation of water consumers, and last
year a total of 16,201 pupils visited one of our treatment works or listened to
an educational talk.
We continue to support the Kent Wildlife Trust in their work at their
educational centre at Bough Beech reservoir.
Health and Safety
The Company is committed to maintain very high levels of Health and Safety at
work for its employees and contractors. During the year there were no reportable
incidents where a major injury was sustained and only 6 incidents where more
than three days were lost. In all there were 23 accidents in the year, 15 of
which did not result in any time off work. In the year there were only 0.22
strikes per team of other underground utility equipment compared to 0.75 strikes
per team last year. The Company KPI in this area is 1.00 strike per team per
year. We have regular meetings with our employees to discuss Health and Safety
matters.
Financial Performance
Turnover increased by 14.9% to #45.4 million (#39.5 million), essentially as a
result of the price increases determined by Ofwat in the 2005 price review. The
price determination increased expenditure on the network which has resulted in
higher infrastructure costs but overall operating profits increased to #12.2
million (#10.9 million). The KPI for operating profits was #12.5 million. The
non-appointed elements of the business increased profits by 14% to #0.7 million
which was in line with our KPI.
Tight control of the Company's finances have left us with healthy cash balances
totalling #30.4 million (#27.8 million). Under the terms of our index-linked
bond, #14.9 million of the Bond proceeds must be retained in Sutton and East
Surrey Water in order to fund future capital investment.
Ofwat has now published the Regulated Asset Values (RAV) for the period
2005-2010. During this period the RAV increases, in real terms, from #130.5
million to #135.2 million (2002/03 prices), which reflects the investment in new
assets that forms part of the price determination.
Net operating cash flow for the year was #21.1 million (#24.1 million) which has
been reduced mainly as a result of reductions in general creditors from the
unusually high levels of last year.
Interest Rate and Liquidity Risks
The most important financial risks faced by the Company are those associated
with interest rates and liquidity. The Company regularly assesses these risks
and its policies for managing them. The Company has fixed its interest rate risk
by issuing an Index Linked Bond in 2001. The interest rate on this Bond is
2.874%. The Company's liquidity is protected by its cash balances available at
31 March 2006 and a #2.0 million overdraft facility that remains undrawn.
Net Debt
Net debt for the Company at 31 March 2006 was #84.1 million (#70.6 million). Net
Debt for this year includes #12.4 million of Irredeemable Preference Shares now
classified as debt which were previously treated as equity.
Pensions
The Company is a member of the Water Companies Pension Scheme (WCPS) details of
which are disclosed in these Financial Statements under the requirements of
FRS17. The latest FRS17 valuation completed for these purposes shows a pre-tax
surplus of #1.4 million (2005: Deficit of #4.2 million).
Employees
Our employees are fundamental to the success of our business and the progress
reported above is a product of their determination and hard work to meet the
challenges we have faced. I thank them for their efforts.
Phil Holder
Managing Director
15 June 2006
Profit and Loss Account
for the year ended 31 March 2006
Restated
2006 2005
#000 #000
-------------------------------------------------------------------------------------
Turnover 45,390 39,515
Operating costs (33,227) (28,569)
-------------------------------------------------------------------------------------
Operating profit 12,163 10,946
Net interest payable and similar charges (6,448) (6,241)
Other finance income 737 608
-------------------------------------------------------------------------------------
Profit on ordinary activities before taxation 6,452 5,313
Taxation on profit on ordinary activities (2,786) 2,493
-------------------------------------------------------------------------------------
Profit on ordinary activities after taxation 3,666 7,806
-------------------------------------------------------------------------------------
Reported profits are equivalent to historic cost profits, and relate to
continuing activities.
Statement of total recognised gains and losses
for the year ended 31 March 2006
Restated
2006 2005
#000 #000
-------------------------------------------------------------------------------------
Profit for the financial year 3,666 7,806
Actuarial gain/(loss) recognised in the pension scheme 4,679 (113)
Deferred tax arising on (gains)/losses in the pension scheme (1,404) 34
-------------------------------------------------------------------------------------
Total recognised gains and losses relating to the financial year 6,941 7,727
-------------------------------------------------------------------------------------
Prior year adjustment (2,958)
Effect of adoption of FRS25 (12,384)
-------------------------------------------------------------------------------------
Total gains and losses recognised since last annual report (8,401)
-------------------------------------------------------------------------------------
Balance Sheet
as at 31 March 2006
Restated
2006 2005
#000 #000
-------------------------------------------------------------------------------------
Fixed assets
Intangible assets 9,727 10,699
Tangible assets 140,781 141,440
-------------------------------------------------------------------------------------
150,508 152,139
-------------------------------------------------------------------------------------
Current assets
Stocks 818 768
Debtors 8,320 8,591
Cash at bank and in hand 30,370 27,785
-------------------------------------------------------------------------------------
39,508 37,144
Creditors: amounts falling due within one year (21,558) (24,435)
-------------------------------------------------------------------------------------
Net current assets 17,950 12,709
-------------------------------------------------------------------------------------
Total assets less current liabilities 168,458 164,848
-------------------------------------------------------------------------------------
Creditors: amounts falling due after more than one year (114,168) (110,556)
Provisions for liabilities and charges (8,860) (10,343)
-------------------------------------------------------------------------------------
Net assets 45,430 43,949
-------------------------------------------------------------------------------------
Capital and reserves
Called up share capital 3,105 3,105
Profit and loss account 42,325 40,844
-------------------------------------------------------------------------------------
Shareholders' funds - equity 45,430 43,949
-------------------------------------------------------------------------------------
These financial statements were approved by the Board of Directors on 15 June
2006 and signed on its behalf by:
P A Barrett N J Fisher
Director Director
Cash Flow Statement
for the year ended 31 March 2006
2006 2005
#000 #000
-------------------------------------------------------------------------------------
Cash flow statement
Cash flow from operating activities 21,089 24,075
Return on investment and servicing of finance:
Interest received 1,388 1,626
Interest paid (3,255) (3,146)
Interest element of finance lease rentals - (40)
Preference dividends to shareholders (966) (966)
-------------------------------------------------------------------------------------
Net cash outflow from returns on investments
and servicing of finance 18,256 21,549
UK corporation tax received 151 884
Capital expenditure and financial investment
Purchase of tangible fixed assets (10,508) (22,688)
Sale of tangible fixed assets 146 89
Dividends paid on shares classified in shareholders' funds (5,460) (5,300)
-------------------------------------------------------------------------------------
Cash inflow/(outflow) before management of liquid
resources and financing 2,585 (5,466)
Management of liquid resources (774) 3,644
-------------------------------------------------------------------------------------
Increase/(decrease) in cash in the period 1,811 (1,822)
-------------------------------------------------------------------------------------
Financing:
Capital element of finance lease rental payments - (190)
-------------------------------------------------------------------------------------
Increase/(decrease) in cash in year 1,811 (2,012)
-------------------------------------------------------------------------------------
Notes to the Accounts
General Information
The financial information set out in the announcement does not constitute the
company's statutory accounts for the years ended 31 March 2006 or 2005. The
financial information for the year ended 31 March 2005 is derived from the
statutory accounts for that year, which were prepared under UK GAAP, which have
been delivered to the Registrar of Companies. The auditors' opinion on those
accounts was unqualified and did not contain a statement under s237(2) or (3)
Companies Act 1985.
The figures for 31 March 2005 have been restated following the Company's
adoption of the following new accounting standards:
- FRS 21 'Events after the balance start date'
- FRS 25 'Financial instruments: presentation and disclosure'
- FRS 26 'Financial instruments: 'measurement' and
- FRS 28 Corresponding amounts
The recognition and measurement requirements of FRS 17 'Retirement benefits'
have also been adopted in full, and the figures restated to reflect this,
previously only the transitional disclosures of this standard have been
followed.
The statutory accounts for the year ended 31 March 2006 will be finalised on the
basis of the financial information presented by the directors in this
preliminary announcement and will be delivered to the Registrar of Companies.
This information is provided by RNS
The company news service from the London Stock Exchange
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