NORTHUMBRIAN WATER LIMITED

FINANCIAL STATEMENTS AND ANNUAL PERFORMANCE REPORT 2023/24

Northumbrian Water Limited (NWL) has today published its Annual Performance Report (APR) and its Annual Report and Financial Statements (AR&FS) for the year ended 31 March 2024.

Chief Executive Officer, Heidi Mottram, said "I am pleased that, yet again, we have achieved a significant number of our stretching targets, which we set in line with our ambition to be the national leading water company.  We have maintained our strong environmental performance with no serious pollution incidents for the second successive year and have achieved all of our sewer flooding targets this year as well as some the lowest levels of leakage ever recorded in each of our operating regions.

"However, we are never complacent and continue to challenge ourselves to go further, investing heavily and working hard to further demonstrate our track record for protecting and enhancing the environment, with some of the highest standards for bathing water quality, the cleanest rivers, and the lowest levels of pollution."

Performance review

Our APR describes our performance in the year against a wide range of measures. We set out our ambitious goals for the 2020-25 period in our PR19 Business Plan, reflecting the feedback from our customers. This has been the fourth year of delivering against those goals and the tough performance commitments we have made.

We have maintained our strong environmental performance and we had no category 1 or 2 pollution incidents for the second successive year. Our bathing waters continue to be amongst the cleanest in the country, with 32 out of 34 classed as Excellent or Good, and we reduced our greenhouse gas emissions further. We've committed to significant investments in the current regulatory period to minimise our reliance on storm overflows and enhance our wastewater infrastructure and have proposed a substantial increase in environmental investment in our plan for the next five years, prioritising nature-based solutions whenever feasible. Caring for the environment is a core part of our purpose and this year we launched 'Restore and Regenerate: Our Environment Strategy to 2050', setting out our direction for the future.

We are in the upper quartile in our industry for the service we provide to our customers and developers and retain an unwavering commitment to delivering unparalleled customer experiences. We also know that it's really important to our customers that we keep our services as affordable as possible and have increased the number of our customers receiving support with their bills by 25% to over 130,000.

Our purpose is to care for the essential needs of our environment and communities, now and for generations to come. Our partnership approach is pivotal in achieving our goal to build successful economies in our regions and we have surpassed our target of spending at least 60p in every £1 with local suppliers. Our collaboration with like-minded businesses, exemplified by the County Durham Pound group, has earned accolades like the Best Public Sector Project award. We've been named on the World's Most Ethical Companies list, compiled by the Ethisphere Institute, for the 13th time, the only water company recognised, and remain the only water company to be awarded the Good Business Charter.

Financial performance

The Annual Report and Financial Statements, published on our website today, reports our financial performance in the year, on a consolidated basis. Operating profit increased from £222.5m to £233.2m. Revenue increased by £57.7m to £918.9m, which included 9.4% CPIH inflation on wholesale revenue. Operating costs also rose by £47.0m to £685.7m, largely due to increased employment costs, inflationary pressures and increased depreciation as a result of our capital investment programme.

Net finance charges have again been impacted by high levels of inflation, falling by £41.7m to £234.4m but still materially higher than historic levels due to the accretion on index-linked bonds. This is non-cash in nature and accretion is expected to reduce significantly in 2024/25 given lower levels of inflation. Our overall performance for 2023/24, after taking account of these impacts, has resulted in a loss before tax of £1.2m and a loss after tax of £1.7m

Higher inflation has also been reflected in significant growth in our Regulatory Capital Value from £5.1bn to £5.5bn. This underpins the financial strength and long term value of the business.

We invested £466m in our assets in the year, including £279m invested in maintaining the health of our assets to ensure the continued provision of sustainable water and wastewater services in the areas we serve. In addition, as well as supporting growth from developers in our areas, we continued to deliver our AMP7 enhancement programme which will deliver environmental improvements through the Water Industry National Environmental Programme, improved resilience of our water and wastewater assets, as well as cyber resilience and smart metering.

To meet our ongoing funding requirements, in particular our capital investment programme, we drew down loan agreements with two banks with a combined value of £150m in June 2023 and in March 2024 we issued £250m of fixed rate bonds and £100m of index-linked bonds under our European Medium Term Note programme, the proceeds from which were received after the balance sheet date. We have a committed bank facility of £450m for the purpose of maintaining general liquidity, of which £355m was undrawn at 31 March 2024.

NWL retains investment grade credit ratings of Baa1 (stable outlook) from Moody's and BBB+ (stable outlook) from Fitch Ratings.

The Directors have assessed the future prospects of the Company and have confirmed that the business remains financially resilient over the long term.

Assurance and Governance

We have robust governance and assurance arrangements in place to ensure that the data we publish is accurate, clear and transparent in order to give Ofwat and our customers a high level of trust and confidence in our reporting. We have produced a separate Data Assurance Summary, published on our websites today, which sets out the assurance that we have carried out on our APR, Financial Statements and other areas of risk over the past year, and the outcomes of these assurance activities.

Outlook

We have completed four years of our current five-year price review period and have made significant progress towards the ambitious goals we set out in our PR19 Business Plan. We will continue to drive this forward over the coming year, building on our strong foundations in areas such as our highly engaged workforce, our industry leading customer service and ever improving environmental performance. Although we are pleased to be the most trusted water company in England, we are committed to driving up standards further. There is more work to do to improve our performance across water quality and discharge permit compliance and we continue to invest in the resilience of our assets.

We submitted our PR24 Business Plan for the period 2025-2030 in October 2023, setting out our ambitious goals for upgrading infrastructure, restoring and regenerating the environment and continuing to raise the bar on service quality. Our aim is to emerge as an even more customer focused, environmentally conscious industry leader. We expect to receive our Draft Determination of prices on 11 July 2024.

We have committed to a significant increase in environmental improvements and water supply resilience and have already started work on these areas, establishing our Living Water Enterprise with twelve strategic supply chain partners to deliver this programme, founded on the principles of economic sustainability and delivering social value. Alongside additional contributions from our investors and borrowing by the company, the increased investment will require an increase in customer bills, which we appreciate will be unwelcome. To make this more manageable for our customers we have committed to a four-fold increase in financial support for those customers who need it most.

We are proud of our achievements to date, but we are never complacent and will continue to drive further improvements for our customers and the environment over the coming years.

For more information, our reports can be found on our website via the following link:

https://www.nwg.co.uk/about-us/nwl/how-we-are-performing/annual-performance-report/