Wessex Water has reported a pre-tax loss of £43.2 million, a 44% increase in capital investment to £421 million, and dividend payment of £66.5 million. according to its Annual Report and Accounts for the financial year 2023-24.

Wessex Water recorded a loss in the year, driven by high operating and interest costs, partly offset by higher prices allowed by Ofwat from April 2023. The higher operating costs related principally to exposure to energy market prices, new obligations and other inflationary pressures, including a new pay deal.

The increase in interest costs related to the indexation features of its bond portfolio in particular. In March 2023 Wessex issued its inaugural £300 million sustainability bond, followed by the successful placement of £200 million of private placement bonds in November 2023.

The net proceeds from the issue of the bonds in November were loaned to Wessex Water to fund its investment programme and repay £100 million of European Investment Bank term loans due in January and March 2024.

Financial highlights include:

• operating profit increased by £27.2 million from £111.3 million to £138.5 million
• turnover increased by £43.9 million or 8.3%
• operating cost increases of £15.1 million or 3.6% related principally to exposure to energy market prices, new obligations, supporting improvements to leakage and pollutions performance and other inflationary pressures
• the cost of debt increased from 5.2% to 7.3%
• net financing costs increased by £41.5 million (29.6%) to £181.7 million primarily reflecting the impact of inflation on index linked borrowings
• investment expenditure on tangible and intangible assets (including infrastructure maintenance expensed through the income statement) delivered during the year was £421.1 million, an increase of £128.9 million (44.1%) over £292.2m last year and in line with expectations
• loss before tax increased by £14.3 million from £28.9 million last year to a loss of £43.2 million, primarily due to the underlying increase in interest costs

Total borrowings, including amounts owed to subsidiary companies, were £2,969.2 million as of 31 March 2024 (2023: £2,916.7 million). Gearing, as measured by net debt to regulatory capital value (RCV), stands at 68.8% which the Board considers an acceptable level.

During the year Wessex Water declared dividends of £66.5 million representing a yield of 5.0% on the company’s regulatory equity.

Wessex Water’s latest published rating agency credit ratings are as follows:

• Fitch BBB+ Stable November 2023
• Moody’s Baa1 Stable January 2024

Although inflation has fallen throughout the year, the report says Wessex has continued to feel its impact through higher energy and payroll costs and raised interest rates which has affected its financial performance in the year.

The higher operating costs related principally to exposure to energy market prices, new obligations and other inflationary pressures, including a new pay deal.

The increase in interest costs related to the indexation features of its bond portfolio in particular.

However, the report says liquidity remains healthy and combined with YTL Group’s continued investment, Wessex’ financial foundations remain strong, allowing it to invest for the future.

Capital investment increased by 44% in the year from £292 million to £421 million, driven by the profiling of the Water Industry National Environmental Programme (WINEP) delivery programme, the impact of delays to work arising from the Covid-19 period, strategic maintenance projects and increased cost of inputs to construction.

Looking towards AMP8, Wessex says seeking alternative approaches to traditional capital investment will be more important than ever as it transitions into the next price review period. The company is proposing to double its current level of investment and will have new obligations to deliver, including ambitious phosphorus reduction targets.

The step change in investment brings with it delivery challenges, the report says, and Wessex is now planning the scale-up of its delivery capability.

"Next few months will feature leadership changes and launch of major new cross-sector delivery business"

Commenting in the Chairman’s Foreword Tan Sri (Sir) Francis Yeoh KBE said:

“It is a significant time of change for Wessex Water and the wider YTL UK group. The next few months will feature leadership changes and the launch of a major new cross-sector delivery business, which underline YTL’s long-term commitment to infrastructure in the UK.”

Photo: Colin Skellett, Chief Executive

After 36 years of service as Chief Executive, Colin Skellett is standing down - Wessex Water’s Chief Compliance Officer Ruth Jefferson will take up the role of Chief Executive.

Colin Skellett will continue as Group Chief Executive of YTL Construction UK - a new venture which will bring together YTL’s global expertise and supply chains with Wessex Water’s capabilities to create a new construction business. The new business will work across all major construction areas, including opportunities within the wider UK water industry. John Thompson, Chief Operating Officer of Wessex Water, will lead the construction business.

Commenting in his last Chief Executive’s overview, Colin Skellett said:

“Let me also highlight a broader point, given the media coverage of the financial fragility of some water companies. Wessex Water is not in that position. YTL has been our sole owner for 22 years and has maintained a simple structure, with a straightforward and ethical approach to financing. Our financial foundations are strong and we are committed to the longterm sustainable stewardship of our business.”

The UK group structure has remained the same since 2002 with the company wholly owned by Wessex Water Ltd, which in turn is wholly owned by YTL Utilities (UK) Ltd. There is no intragroup funding to the company - all debt is raised by the company at market rates and is provided by external third parties.

Operational highlights include:

Storm overflows

The company is currently investing £3 million each month on storm overflows – rising to over £6 million a month after 2025, subject to regulatory approval of its AMP8 Business Plan by Ofwat. Wessex has now deployed monitors on every overflow in its region and says it is “working at pace to deliver both asset and naturebased solutions” to protect properties and waterways, as well as to provide better information to users of coastal and inland waters.

Leakage

In 2023, Wessex reduced its annual average level of leakage by 1.4 Ml/d (2.0%) from 71.2Ml/d to 69.8Ml/d - achieved by pressure management and leakage control improvements, which included installing over 6,000 permanent acoustic loggers in its network to aid leak detection

AI Technology

Below ground, Wessex has been using AI to help spot problems across its 35,000km network of sewer pipes in partnership with research and development firm Molfar. The company previously surveyed around 400km of sewer a year using CCTV equipment relying on colleagues manually recording any defects they spot while watching the footage live. AI technology automatically detects and classifies defects from survey footage to help improve efficiency and reduce business costs.Implementing the AI-enabled CCTV solution that means Wessex can survey twice as much sewer length in any given time

Wessex is also using AI monitoring devices to detect levels in sewer pipes and trigger an alarm when storm overflows are in use. High sewer levels can be caused by blockages like flushed wet wipes – the utility has partnered with AI service StormHarvester to identify these early before the network becomes overwhelmed. StormHarvester uses machine learning and hyperlocal rainfall forecasts to predict sewer levels and detect early blockage formations.

GHG emissions, energy use and renewable energy generation

Wessex met Ofwat’s 2023-24 target.for gross greenhouse gas emissions – despite the fact that these were up slightly on the year at 105 KtCO2e, due to increased power usage,

Electricity use, at 268 gigawatt hours, was high in the context of the last five years, in part due to the very wet weather experienced from July onwards. The company is continuing to pursue energy efficiency opportunities to offset rising energy use. This is driven by tighter water and sewage treatment standards and the operation of Wessex Water’s regional water supply grid.

Energy generation – during the year Wessex generated 17GWh of renewable energy and exported 9 million cubic metres of biomethane to the gas grid, double the volume of natural gas it consumed itself.

Storm overflows

Wessex completed a £1.3 million project in the east of Bath to safeguard local homes and businesses from flooding by easing pressure on the sewer system. The project is one of 13 investment schemes the company is prioritising between now and 2025 to tackle the overflows in the region that previously discharged most frequently.

The company has upgraded sewage treatment assets to increase capacity at 42 water recycling centres to help in tackling storm overflows, together with introducing more nature-based and low-carbon treatment methods such as reedbeds and wetlands.

During the year Wessex increased investigation and monitoring of storm overflows in the region, alongside the continuation of an extensive programme of sewer relining to help keep wastewater within the system and prevent infiltration of groundwater that can lead to flooding

Nearly 100 improvement projects relating to the discharge of untreated water are being completed in the region between 2020 and 2025, part of a £3 million a month investment to reduce the number of hours storm overflows operate by around 25%. The company is looking to go much further and have unveiled AMP8 proposals to invest a record £400 million on reducing overflow operation in the next five-year investment period between 2025 and 2030, subject to Ofwat approval.

Photo: Durleigh water treatment centre

Completion of a £50 million project which began in 2019 after more than four years of planning.at Durleigh water treatment centre to provide an improved water supply to customers in the Bridgwater area. Wessex partnered with infrastructure consulting firm AECOM, which delivered the detailed design. They established that some large structures and tanks could be built offsite and craned into position, saving an estimated 20% of programme time and £1.1 million, as well as reducing construction waste on site by up to 20%.

The success of the Durleigh project has resulted in the creation of a dedicated Wessex Water off-site build department, at which equipment can be designed, manufactured and supplied pre-assembled, reducing labour, carbon footprint and costs.

The step change in investment brings with it delivery challenges, the report says, and Wessex is now planning the scale-up of its delivery capability. .