Chairman's introduction

I am pleased to present our interim report for the six months ended 30 September 2018.

Our vision is to be the water company people want to be supplied by and want to work for. This has been a period of intense activity for the company and its employees as we continue to strive to realise our vision and deliver on the commitments within our 2015 to 2020 business plan, deal with particular operational challenges from this summer's drought, and at the same time look to the future with the preparation of our draft Water Resources Management Plan (WRMP) and our ambitious business plan for the 2019 Price Review (PR19), which will take us through to 2025 and beyond.

Our 2015 to 2020 business plan puts customer satisfaction at the heart of everything we do. Our future plans build on this and on our commitments to both the environment and the communities in which we work, as we aim to take the lead on responsible business practice and to make a positive contribution to wider society.

Customer satisfaction, responsibly delivered

Our business plan for the 2020 to 2025 period was submitted to Ofwat in early September and simultaneously published on our website. This plan has been shaped with strong involvement of customers and community groups throughout the areas we serve and will see the company invest a further £472.0 million to improve the local water infrastructure over the five year period.

We have carried out a very extensive programme of research, discussions and consultations with some 13,000 customers, stakeholders, retailers, businesses, employees and an independent Customer Challenge Group chaired by Zoe McLeod. We would like to thank everyone who played a part in helping to shape our plans.

Our plan incorporates a comprehensive suite of ambitious commitments to improve performance in areas such as leakage and interruptions, water quality, greenhouse gas emissions, environmental impact, support for vulnerable customers and, of course, customer satisfaction. These commitments are backed by performance penalties if targets are missed, and rewards for out-performance. As an illustration of the level of ambition implicit in the plan, if we were unable to improve on our current performance levels we would incur a penalty of £35.0 million.

While delivering all these improved outcomes, the proposed average annual household bill is maintained at £204 before inflation for the next five years.

We now await Ofwat's assessment of our plan through a process which will run to the end of 2019.

Results and key financial performance indicators

The results published in this statement summarise our performance for the six month period to 30 September 2018. The financial statements are prepared under International Financial Reporting Standards (“IFRS”) and incorporate the performance of South East Water Limited and our subsidiary, South East Water (Finance) Limited.

Revenue for the period was £121.0 million compared with £114.5 million for the same period in the previous year. The increase of £6.5 million is largely due to the change in our accounting policy for developer contributions and similar receipts following the adoption of IFRS 15 which has led to £3.1 million of additional revenue being reported in the income statement. An increase in prices averaging 4.6 per cent for the year amounted to £5.1 million of increased revenue coupled with an increase in consumption due to the hot summer weather amounted to £0.7 million. This is partially offset by the impact of metering which has reduced revenue by £2.0 million and £0.5 million less revenue from non-household customers.

Net operating costs for the period to 30 September 2018 were £84.9 million, which is some £5.9 million higher than the corresponding period last year. This was primarily due to higher contractor and staff costs due to an increase in reactive maintenance, including mains bursts on the network, of £1.8 million and the impact of IFRS 15 on the treatment of the costs and associated contributions for properties that are connected to our water supply of £1.0 million.

Additionally, increased depreciation due to the continued high investment in the company's assets of £1.3 million, additional costs of £0.8 million relating to the heatwave during the summer and £1.0 million of other inflationary costs added to the higher operation costs in the year when compared to the previous year.

Operating profit was £42.4 million for the period to 30 September 2018 which compares with £39.3 million in the prior year. Operating profit as a percentage of revenue has increased from 34.3 per cent in the first half of 2017/18 to 35.1 per cent in the current year.

Finance costs have decreased by £1.2 million from £27.0 million to £25.8 million. This reflects the lower fair value charge for our interest rate swap, as it nears maturity, of £2.6 million offset by £1.4 million of increased indexation on our other loans and bonds due to higher inflation during the period to 30 September 2018.

Profit before tax was £27.7 million compared with £14.7 million for the same period last year. This represents 22.9 per cent of revenue compared with 12.8 per cent for the corresponding period last year.

The company has incurred a tax charge of £2.7 million in the period compared to £1.7 million for the period to 30 September 2017, being £0.1 million of current tax on our ordinary operations and £2.6 million of deferred tax.

As a result of the above, profit after tax has increased from £13.0 million to £25.0 million for the first six months of the year.

Our dividend policy allows for dividends to be paid to our parent company which ensures that intercompany financial obligations are able to be settled. The increase in dividend this year of £5.0m, compared with the same period last year, relates to additional financial requirements of our parent and is in line with our dividend policy. The dividend paid by the Group's ultimate UK parent company was maintained at the same level as the prior year.

Net cash generated from operations was £79.4 million for the period to 30 September 2018 compared to £64.5 million in the same period for the previous year. This reflects a £14.9 million improvement in cash collections across the business, including £2.0 million in respect of income from commercial operations, when compared to the prior year.

Interest of £9.1 million (2017: £8.8 million) due on 30 September 2018 has been paid in October in both the current and previous financial years due to the due date falling at a weekend.

Looking ahead

For the rest of this year and through 2019 we will continue to focus on delivering improved customer service and successfully closing out the current business plan while devoting increasing attention to developing detailed and innovative proposals for the execution of the next five year business plan. Innovation is key to delivering these ambitious targets and we are working with staff, partners and the supply chain to drive this innovation forward.

On behalf of the Board I would like to thank all the employees and business partners at South East Water who have worked tirelessly over the last six months. It has been an exceptional start to the year and our people have worked with dedication and passion throughout in order to keep delivering great customer service in challenging operational conditions, while also planning ahead for the long-term growth of the south east region and ensuring we maintain an excellent and resilient water service and a sustainable future for the local communities we work for.

Nick Salmon

Chairman

14 December 2018

The impact of the adoption of IFRS 15 on the Group's financial statements in the period has been: