Affinity Water has described 2021-22 as “a challenging year financially with a number of external factors having an impact on the business such as high inflation and rising energy prices.”

The water company was commenting on the publication of its Annual Report and Financial Statements for the year ended 31 March 2022.

Energy is one of the utility’s biggest costs and energy prices have risen sharply, particularly in the second half of the year. In addition, inflationary pressures have seen chemical prices rise by 35%.

The utility entered into a series of power hedging swaps between May 2021 and February 2022 in order to hedge against wholesale energy prices. Affinity said its hedging strategy for energy has protected the company to some extent and will do so for the year ahead. “Nevertheless, higher prices than we planned for have been a challenge from a cost perspective,” the company commented.

Operational performance outcomes during the year include:

Progress towards a challenging Per Capita Consumption (PCC) target to reduce demand for water. While has not quite hit the target for 21/22, Affinity said it has still achieved huge savings in unprecedented times - during the pandemic, water use changed dramatically after the first lock down was introduced, rising to an average 171 litres PCC in 2020/2 1from a pre-covid average of 155 litres per person. Affinity is now starting to see a declining trend - in 2021/22 PCC reduced to an average of 157 litres per person.

Leakage reduction target – while the utility narrowly missed its 21/22 target, leakage was driven down to its lowest ever level Affinity has had as a company. Leakage has been reduced by 10.5% since the start of the current 5-year period in 2020 - this did not achieve the targeted rate of an 11.1% reduction, but was a reduction of 16.6Ml/d since 2020/21. Failure against the target was mostly due to performance in the prior years; the measure being based on performance over a three-year average.

The company said it was confident it will meet the 20% leakage reduction target by 2025 and will continue to use new innovative methods and technologies, such as artificial intelligence and digital networks, to find and fix leaks faster than ever before.

Mains repairs - performance in the year was 100.2 repairs per 1,000km of mains against a target of no more than 148.6 in the year (2020: 155.8). Weather is a strong contributing factor in the number of mains repairs required in a year. Affinity said that 2021/22 experienced a benign summer and winter and, therefore, the year’s figures cannot be directly compared to the previous year’s without taking this into account.

Customer Measure of Experience (C-Mex) C-Mex is a mechanism to incentivise water companies to provide an excellent customer experience for residential customers, across both the retail and wholesale parts of the value chain. Moving up one place on the ladder since 2020/21, Affinity achieved 14th position out of 17 companies assessed against C-MeX with a score for the year of 76.57, compared to the industry median of 80.43.

Financial highlights

In terms of financial performance, investment in enhancing and maintaining infrastructure and assets during the year was £162.1 million – up from £155.9 million in 2021.

Revenue rose to £319.7 million compared to £286.8 million in 2021, while operating profit was up £34.6 million from £11.9 million in 2021. However, net loss (after tax)increased to £96.9 million compared to a net loss of £43.1million in 2021 – attributed primarily to the result of increased finance costs impacted by inflation on index-linked bonds and an increased tax charge due to the change in tax rate from 19% to 25%..

During the year Affinity Water put a Green Finance Framework in place which aligns its strategic and sustainability priorities with its funding and financial strategy. In October 2021, the company issued issued its first green bond with a nominal amount of £130.0 million and total proceeds of £147.8 million. The money will be used to fund projects which are fundamental to Affinity’s Sustainability Strategy and will support its environmental objectives.

All of the firm’s credit ratings were confirmed and remain investment grade.

As in 2021, no equity dividends were paid during the year from the regulated business. No dividends were paid from the non-appointed business in the year (2021: £1.0m to service group debt).

The firm’s dividend policy allows a dividend from the non-appointed business to service any group debt above Affinity Water Limited before a distribution to shareholders is considered. The dividend policy was revised during the year allowing further dividends from the non-appointed business subject to the company’s economic gearing being below that of its internal business plan, and reducing the base dividend for the appointed business from 5% to 4%.

The company said:

“Our shareholders are re-investing dividends to enable the substantial investments to improve resilience and protect the environment. In determining the level of dividend, the financial performance of the appointed and non-appointed businesses is considered separately.”

Moving forward to PR 24 with a re-branding, new leadership team and revitalised organsation culture

Commenting on the results, Affinity Water CEO Stuart Ledger said:

“We have made good progress this year. Our performance has improved across all of our key areas of performance. We have redefined who we are, launching a new look for the company and re-branded, we have put in place a new leadership team, and are revitalising the culture of the organisation. We have advanced our planning for our water resources management plan, our PR24 (Price Review) plan and our longer-term strategy. We have also launched a green financing framework and a green bond. I believe we are really moving forward as a business, but also know that we have much more to do over the next couple of years.

“We still have a lot to do on our journey to 2025, but we have really moved forward in the first two years of AMP 7. After a tough price review previously, we were behind where we needed when we came into this regulatory period, and I now feel we’ve turned a corner and are moving in the right direction.

“I think we can achieve an excellent performance next year and through the AMP by focusing on our key eight performance indicators. But it’s also the year when we set out our water resources plan and our PR 24 plan, so it is a key year for us. Our success will be based on a robust and credible PR 24 plan that makes compelling arguments for what we aim to achieve, which of course sets us up for the longer-term future.”