TIDMSVT
RNS Number : 1288U
Severn Trent PLC
21 November 2019
Half Yearly Financial Report
21 November 2019
Interim results for the six months to 30 September 2019
A strong first half, laying solid foundations for AMP7
Operationally strong
- Customer and community focus reflected in encouraging results
from shadow reporting of C-MeX, the new customer service measure
for AMP7
- Strong performance in Water driven by improvement in measures
our customers care about the most
- On track to hit our leakage target for the eighth time in nine
years, improve supply interruptions by at least 40% this year, and
deliver a 25% reduction in water quality complaints over the
AMP(1)
- Continuing leadership in Waste, with GBP190 million in waste
customer ODIs earned over four years and on track to deliver
substantial environmental schemes to improve 1,600km of rivers in
our region
- Performance supports full year customer ODI guidance of at least GBP25 million net reward
- Continued high levels of investment, with capital expenditure
of GBP374 million for the first half
- Reinvestment of GBP100 million totex outperformance
progressing well, with projects such as the insourcing of our
Network Response team setting us on the right glide path for a fast
start in AMP7
Contributing to society
- Our fast-tracked PR19 plan ensures our customers' bills will
remain one of the lowest in the land for at least the next five
years, while supporting 200,000 vulnerable customers per year by
2025
- Self-generating 51% of our energy needs following the
integration of Agrivert, supporting our Triple Carbon Pledge of
100% renewables, 100% electric vehicles(2) , and net zero carbon by
2030
- Recognised as a top three employer by the Social Mobility
Index and the Hampton-Alexander gender diversity report, reflecting
our continued efforts to ensure Severn Trent is an inclusive place
to work
- Financing our business responsibly with the launch of our
Sustainable Finance Framework, and receiving the Fair Tax Mark for
FY19/20
Good financial results
- Group turnover of GBP910.0 million, up GBP28.5 million (3.2%)
- Group underlying PBIT(3) of GBP286.3 million, down GBP12.8
million (4.3%), following Teal Close property sale in the prior
year, deferral of customer ODIs and increased investment in
infrastructure renewals
- Group reported PBIT of GBP285.3 million, down GBP13.8 million (4.6%)
- Further fall in effective interest rate from last year end of
20 basis points to 3.7%, part of a reduction of 170 basis points in
AMP6, positioning us well for AMP7
- Underlying basic EPS(4) of 68.8 pence (down 9.7%) and basic
EPS from continuing operations of 61.7 pence (down 11.6%),
reflecting lower PBIT and our share of the loss from our joint
venture, Water Plus
- IAS 19 pension deficit reduced by GBP62 million to GBP391
million; future funding plans now agreed
- Interim dividend of 40.03p
Footnotes: see definitions on page 2 of this RNS
Liv Garfield, Chief Executive Severn Trent Plc, said:
"This has been another six month period where we have delivered
for all of our stakeholders through strong performance, continued
investment and environmental improvement, helping us to fulfil our
goal of being the most trusted water company in England.
Operationally we have made further progress over the last six
months, with leakage, supply interruptions and water quality
complaints all improving while delivering important environmental
improvement schemes. We have continued to offer the lowest bills in
the country while also investing for the long term, including in
our biggest ever capital project, the GBP300 million Birmingham
Resilience Programme, which is on track for completion by the end
of the AMP.
At the same time, we have worked hard to be in the best possible
shape for the next five years. Our job is to deliver for all of our
stakeholders as we build a sustainable business that positively
contributes to the society and environment we operate in and we are
truly excited about delivering on the plans we've set out."
Group results from continuing operations
Underlying results
2019 2018 Increase/ (decrease)
GBPm GBPm %
Group turnover 910.0 881.5 3.2
Underlying group PBIT(3) 286.3 299.1 (4.3)
-------------------------- ------ ------ ---------------------
pence/ pence/
--------------------------- -----------------
share share
--------------------------- ------- ------- -----------------
Underlying basic EPS(4) 68.8 76.2 (9.7)
Interim dividend declared 40.03 37.35 7.2
--------------------------- ------- ------- -----------------
Reported results
2019 2018 Increase/ (decrease)
GBPm GBPm %
Group turnover 910.0 881.5 3.2
Group PBIT 285.3 299.1 (4.6)
---------------- ------ ------ ---------------------
pence/ pence/
-------------------------------------- ----------------------
share share
-------------------------------------- ------- ------- ----------------------
Basic EPS from continuing operations 61.7 69.8 (11.6)
-------------------------------------- ------- ------- ----------------------
Footnotes to pages 1 & 2 of this RNS
1. AMP: Asset Management Period; AMP6: the regulatory period
from 2015-2020; AMP7: the regulatory period from 2020-2025.
2. Assumes suitable specialist vehicles such as tankers become
available within that time window.
3. Underlying profit before interest and tax (PBIT) - see note 17 to the financial statements.
4. Underlying earnings per share (EPS) - see note 7 to the financial statements.
Note: Technical guidance is included in the Chief Financial
Officer's section of this announcement
Enquiries
Investors & Analysts
Richard Eadie Severn Trent Plc +44 (0) 788 980 6578
Head of Investor Relations
Rachel Martin Severn Trent Plc +44 (0) 782 462 4011
Investor Relations Manager
Media
Jonathan Sibun Tulchan Communications +44 (0) 207 353 4200
Press Office Severn Trent Plc +44 (0) 247 771 5640
Interim Results Presentation and Webcast
There will be a presentation of these results at 9:30am GMT on
Thursday 21 November 2019 at the Rothschild Sky Pavilion, New
Court, St Swithin's Lane, London, EC4N 8AL. This presentation will
be available as a simultaneous webcast on the Severn Trent website
(www.severntrent.com) and will remain on the website for subsequent
viewing.
Capital Markets Day
We will be hosting a Capital Markets Day on 4 March 2020 at
Severn Trent Centre, Coventry.
Chief Executive's Review
With less than six months left of the AMP6 regulatory period we
are proud of the progress we have made in shaping our business for
the future, while delivering significant benefits for our
customers, communities, investors and the environment. Our hard
work over the last five years has allowed us to:
-- Help more than 50,000 of our most vulnerable customers a year with their bills;
-- Invest over GBP6bn wisely, including our biggest ever scheme
to enhance resilience for Birmingham;
-- Deliver sector-leading performance on ODIs - the measures that matter most to customers; and
-- Exceed our target of self-generating 50% of our energy needs from renewable sources.
We have achieved this while maintaining the lowest bills in the
land for our customers and fulfilling our vision to be the most
trusted water company in England(1) . In the next five years we
will build on this progress and deliver our most ambitious plans to
date for the benefit of all of our stakeholders.
Operationally, we are in a good position. In Water, targeted
investment based on our understanding of each component of our
network, combined with the momentum we generated last year, has set
us up well for AMP7. This year we are confident we will:
-- Deliver a second consecutive annual reduction of 40% in supply interruptions;
-- Hit our leakage target for the eighth time in nine years; and
-- Reduce water quality complaints by 25% since the beginning of the AMP.
In Waste, we continue to demonstrate leadership in the areas
that matter most to our customers. Last year we committed to
tougher targets, in line with our best ever performance on certain
measures. In return, Ofwat agreed to increase the waste customer
ODI cap to allow us to be rewarded for the considerable investment
and effort we put in to delivering environmental improvements in
our region. Our activity on programmes such as the Water Framework
Directive ensures that we continue to recycle water back into the
environment that is cleaner than the water we abstract.
Across the business as a whole, we are investing wisely, and the
GBP100 million reinvestment of totex outperformance we announced
last year is progressing well. It has funded a range of projects
which will allow us to enter AMP7 in a strong position. For example
our new Network Response team enables us to respond more quickly
and effectively when we have issues affecting customers. Our shadow
reporting of AMP7 customer ODIs means we understand exactly what
activities we need to focus on to drive further improvement.
We are committed to building a sustainable business for the long
term that positively contributes to the society and environment in
which we operate. We recently applied to Ofwat to add a condition
that embeds social purpose within our licence to operate and today
we have launched our Sustainable Finance Framework to strengthen
the ties between how we finance our business and the delivery of
our environmental and social programmes. We also remain one of only
a handful of companies in the UK to make the triple carbon pledge,
committing to 100% of renewable energy, 100% electric vehicles(2)
and net zero carbon emissions by 2030.
(1) Future Thinking survey names Severn Trent as the most
trusted water and waste water company in England, on average over
two years.
(2) Assumes suitable specialist vehicles such as tankers become
available within that time window.
AMP6 and in-year performance
Consistent improvements in Water - We are encouraged by our
Water performance in the first half of this year, following a
strong finish last year. Taking learnings from our waste business,
we understand how each part of our network drives the right
outcomes. By optimising these individual components we can maintain
a consistency within the network and reduce the risk of failure.
When things do go wrong, our understanding of our network and its
interdependencies helps us to target solutions that prioritise
restoring service to customers first before implementing a longer
term fix. We are now delivering consistent improvements in our key
water measures, in particular:
-- Leakage - our new operating model and the accelerated roll
out of new technology last year gives us confidence we can exceed
this year's target to deliver a 6% reduction in leakage since the
beginning of the AMP, the second largest reduction in the
sector.
-- Supply interruptions - our newly-created Trunk Main Repair
team has helped reduce the time taken to fix complex and high
impact bursts in a more cost efficient way, while insourcing our
Network Response team has enabled us to get customers back on
supply more quickly. As a result, we expect to deliver a second
consecutive 40% reduction in supply interruptions.
-- Water Quality complaints - our continued programme of mains
flushing, abrasive cleaning and catchment management continues to
drive a steady decline, making this the fourth consecutive year of
improvement and driving a reduction of at least 25% since the start
of the AMP.
Continuing to perform in Waste - We have delivered substantial
improvements in our waste performance over the course of AMP6,
including a 62% reduction in external sewer flooding, 38% reduction
in internal sewer flooding, and an 11% reduction in Category 3
pollutions in the first four years of the AMP, generating sector
leading Waste customer ODIs of GBP190 million. With the
outperformance cap now increased in return for targets set at
record levels of performance across three of our traditionally
strong measures, we are likely to see a small penalty on these this
year. However we now have the opportunity to be rewarded for our
end of AMP schemes, which are a key driver of our guidance of at
least GBP25 million of customer ODI reward this year, and an area
of the business we have been working hard on for the last five
years.
Our Environmental Programme - We have invested hundreds of
millions of pounds in delivering a number of large environmental
schemes over AMP6. These will make a significant improvement to the
environment we interact with every day, something we know is
important to both our colleagues and local communities. Our key
programmes include:
-- Water Framework Directive - This aims to improve all
waterbodies in England to "good ecological status" by 2027,
enabling the natural environment and local biodiversity to thrive.
For us, this means finding new ways to reduce the chemical content
in waste water and use different abstraction methods to influence
our impact on natural river flows. As a result, we will improve
over 1,600km of river quality this AMP - equivalent to the distance
from Birmingham to Rome. This programme will continue into AMP7,
with GBP350 million of totex in our plan to improve 2,100km of
river quality, and a 'real option', which provides a further GBP121
million of funding should additional programmes receive government
approval.
-- Sustainable Sewage Treatment - This delivers sustainable
solutions to the pressures on our waste water system caused by
population and industrial growth. We have explored a number of
pioneering solutions as part of this project, including the
"BioMag" system which uses the addition of iron ore to allow
existing assets to process more waste water and return a higher
quality effluent to the watercourse. Solutions such as BioMag not
only reduce our impact on the environment, but also save on totex
over the long term, helping keep customer bills low.
Increasing resilience for Birmingham - Last year was our largest
year of capital investment in a decade, and this year is set to
match it, with GBP374 million invested in the first six months.
This includes work on our Birmingham Resilience Programme, a GBP300
million programme to improve the resilience of our network. The
scheme will allow us to better maintain the 119km gravity-fed Elan
Valley Aqueduct into Frankley Water Treatment Works, protecting a
low carbon supply for Birmingham's 1.2 million customers for years
to come. This is the biggest engineering project Severn Trent has
ever embarked upon, involving almost 26km of new pipeline, an
increase in supply of 130Ml/d, a new water treatment plant, and a
significant programme of customer education and communication. We
are pleased with the progress made so far and remain on track to
complete construction by the end of the AMP.
AMP7 readiness
Reinvesting for a fast start - In May 2018 we announced that we
were reinvesting an additional
GBP100 million of totex efficiencies to give us a fast start to
AMP7. Of this, GBP40 million was allocated to asset health
projects, targeted at reducing failure across our works. The
remaining GBP60 million will get us on the right glide paths for
both costs and customer ODIs ahead of AMP7, by investing in our
people, smart data and the right technology. We believe that this
reinvestment will be a key element of a successful AMP7.
Preparing for performance commitments - AMP7 will push the
performance of the sector forward, to deliver more for customers
and the environment than ever before. While challenging, we feel
confident that our preparations have set us up to succeed. We have
been shadow reporting measures for a number of months, and with our
calendar measures due to commence in just six weeks, we feel ready
for the challenges and opportunities ahead.
Enhancing the customer experience - Customer perception makes up
50% of the AMP7 customer experience measure, C-MeX, and we believe
this means the broader work we do in our area, in building trust
within the communities we serve, will be better reflected in our
performance. The positive impact we can have with our community
initiatives, volunteering schemes, 'Wonderful on Tap' advertising
campaign, and the recent 'Sewer Men' documentary, all help our
customers to see the work we do every day in the areas they live.
Service continues to be a crucial element of C-MeX, and improving
our service remains a priority for us. While the measure is in its
infancy, shadow reporting from the past two quarters has yielded
encouraging results.
Culture
Building a sustainable company for the future requires a company
culture that is in step with this objective. The vast majority of
our colleagues live in the regions we serve, and are highly engaged
with the role we play in our communities. This is only possible
when we have an environment our colleagues can thrive in. Our most
recent employee engagement survey places us in the top 5% of Global
Utilities, and 13% above the UK Utilities average, reflecting our
efforts to create an awesome place to work, with initiatives
in:
-- Social Mobility - We are proud to be one of the UK's top
three companies in the Social Mobility Index. This achievement
reflects the way we work, from targeting students in schools in
areas of low social mobility, to using a fairer, anonymised
recruitment process that gives equal opportunities to all
applicants. In the past year, 44% of our new hires were from areas
identified as being social mobility cold spots, and 41% of all
internal promotions were awarded to staff living in these
areas.
-- Employability - For the past four years, Severn Trent has
partnered with Hereward College to offer internships which provide
real work experience to young people with disabilities and
additional educational needs. Interns on our program are 56% more
likely to gain paid employment than the national average, and four
of our recent interns have taken permanent positions with us.
-- Mental Health - We strive to create a supportive environment
in which mental health is no longer a taboo subject. We have
trained 1,944 employees, representing 28% of our workforce, in
mental health awareness - the second highest in the FTSE100. We
also provide mental health training to new apprentices and
graduates when they join, to instil healthy working practices early
in their careers.
All of this translates into a workforce that feels connected to
Severn Trent. Around 70% of our employees participate in our
Sharesave scheme, setting aside an average of GBP276 each month,
linking their personal savings to the long-term future of our
business. We are especially pleased that 44% of our colleagues aged
16-24 chose to save with us this year, compared to a FTSE100
average of 7%, and that our Sharesave scheme has recently been
recognised as one of the top five performing schemes in the UK.
Sustainability
As stewards of an essential resource, deeply rooted in the
communities we serve, acting sustainably is integral to the long
term success of our company. We have recently asked Ofwat to
reflect this commitment in our licence to operate with a new
condition "to make decisions for the long term, adding value for
our customers, the communities we serve and the environment, and
treating all of our employees and other stakeholders fairly".
Within the next few weeks we will also launch a consultation
proposing a package of supporting measures to help us fulfil our
social purpose.
To complement our triple carbon pledge, we are pleased today to
announce our Sustainable Finance Framework, strengthening the bond
between financing our business and delivering our environmental and
societal commitments.
We look forward to sharing more about our plans to create a
sustainable future at our upcoming Capital Markets Day, to be held
on 4 March 2020 at Severn Trent Centre in Coventry.
Chief Financial Officer's Review
We have delivered a good financial performance in the first six
months of 2019/20. Our results reflect continued cost control in
our regulated business, substantial investment in our
infrastructure and our conscious deferral of rewards to benefit
AMP7. We achieved good growth in our Business Services operations
but property profits were lower compared to last year's notable
gains.
Underlying PBIT in our Regulated Water and Waste Water business
was, as expected, lower than the first half of the previous year,
after the increased expenditure on infrastructure renewals to
complete our AMP6 programme.
In Business Services, our Operating Services business showed
strong PBIT growth on stable revenue and our Green Power business
benefited from the rapid integration of the food waste business
acquired from Agrivert last year. Overall Business Services PBIT
was down, as the GBP6.2 million earned from property disposals was
lower than 2018/19 (GBP18.4 million, which included the sale of
Teal Close). We remain on track to generate GBP100 million of PBIT
from property over the ten years to 2027, with GBP33 million
delivered to date.
Our underlying basic earnings per share were 68.8 pence
(2018/19: 76.2 pence) as the lower underlying PBIT in our two
segments and the loss from our joint venture were only partially
offset by a lower effective tax rate. Basic earnings per share from
continuing operations were 61.7 pence (2018/19: 69.8 pence).
The interim dividend has increased to 40.03 pence in line with
our policy for the remainder of AMP6 to increase the dividend by
RPI plus 4%.
Our funding position is strong. Capital investment and other
cash flow needs through to September 2021 are covered by cash and
committed facilities. During the period we took action that:
-- increased the proportion of our debt at low fixed rates;
-- reduced our effective interest rate; and
-- moved more of our index-linked debt to CPI.
We are in a strong position to raise the GBP3 billion needed in
AMP7 with a diverse range of sources to lock in favourable rates,
now supported by a Sustainable Finance Framework.
On pensions the IAS 19 position at 30 September reflects strong
investment performance and the protection provided by a sound
hedging policy, with the deficit down GBP62 million to GBP391
million (net), despite a significant reduction in the discount
rate. And we have now reached agreement in principle with the
Trustee, ahead of schedule, on the 2019 triennial pension
valuation, providing certainty on cash contributions over AMP7,
broadly in line with the amounts included in our Business Plan.
Full details of the revised contribution schedule are included on
page 13.
We are pleased to have been awarded the Fair Tax Mark, an
independent accreditation awarded to companies for paying the right
tax at the right time and applying the 'gold standard' of tax
transparency. We were also pleased to have our low risk category
rating renewed for a further three years by HMRC.
A brief overview of our financial performance for the six month
period is as follows:
-- Group turnover from continuing operations was GBP910.0
million (2018/19: GBP881.5 million), an increase of 3.2%, due to
tariff increases in Regulated Water and Waste Water revenue and
growth in Business Services' external turnover.
-- Underlying Group PBIT decreased by 4.3% to GBP286.3 million
(2018/19: GBP299.1 million). Profits in our Regulated Water and
Waste Water segment were down by 3.1% due to below inflationary
revenue growth and higher infrastructure renewals expenditure.
Underlying Business Services PBIT was down GBP7.4 million as
increased operating profits in our Renewable Energy business in the
current year following the acquisition of Agrivert's food waste
business in November 2018 were offset by lower property profits of
GBP6.2 million following the prior year GBP18 million sale of Teal
Close near Nottingham.
-- Reported Group PBIT was GBP285.3 million (2018/19: GBP299.1
million). There were no exceptional items in either period.
-- Net finance costs increased marginally to GBP93.8 million
(2018/19: GBP93.1 million) as higher net debt in the period was
mitigated by our lower effective interest rate. We continue to
maintain a low average interest cost well below the draft AMP7
embedded debt allowance.
-- Our share of the loss from our joint venture Water Plus was
GBP9.3 million (2018/19: loss of GBP0.9 million). Market data
issues in this and prior periods have impacted Water Plus's ability
to bill to and collect from its customers in a timely and accurate
way. Work is well underway to resolve these issues, but the
business has taken a prudent view of potentially irrecoverable
revenue, leading to the loss recorded in the first half of this
financial year.
-- The current tax charge of GBP18.2 million (2018/19: GBP23.7
million) benefited from capital allowances on our increased
investment programme. The deferred tax charge was GBP15.8 million
(2018/19: GBP14.8 million) giving a total tax charge of GBP34.0
million (2018/19: GBP38.5 million) and a full effective tax rate of
18.8% (2018/19: 19.1%).
-- Net cash capital expenditure was GBP374.1 million (2018/19: GBP340.1 million).
Regulated Water and Waste Water
Six months ended 30 September
2019 2018 Better/(worse)
GBPm GBPm GBPm %
Turnover 807.5 795.0 12.5 1.6
------------------------------------- -------- -------- ------------- ------------
Net labour costs (64.4) (66.8) 2.4 3.6
Net hired and contracted costs (76.9) (76.7) (0.2) (0.3)
Power (51.4) (49.2) (2.2) (4.5)
Bad debts (18.5) (13.3) (5.2) (39.1)
Other costs (96.2) (96.1) (0.1) (0.1)
(307.4) (302.1) (5.3) (1.8)
------------------------------------- -------- -------- ------------- ------------
Infrastructure renewals expenditure (75.6) (64.9) (10.7) (16.5)
Depreciation (164.4) (159.6) (4.8) (3.0)
------------------------------------- -------- -------- ------------- ------------
Underlying PBIT 260.1 268.4 (8.3) (3.1)
------------------------------------- -------- -------- ------------- ------------
Turnover for the Regulated Water and Waste Water segment was
GBP807.5 million (2018/19: GBP795.0 million) and underlying PBIT
was GBP260.1 million (2018/19: GBP268.4 million).
Turnover increased by 1.6%. Higher tariffs, including the impact
of the annual RPI increase on prices, increased revenue by GBP24.1
million, and the adjustment for prior period revenue billed in
excess of the wholesale allowance was GBP4.0 million favourable.
These were offset by a reduction year-on-year of GBP10.8 million on
the level of customer ODI outperformance payments taken into
revenue. A number of other smaller variances resulted in a further
net reduction of GBP4.8 million.
Net labour costs were GBP2.4 million (3.6%) lower
period-on-period. Gross employee costs increased by 6.2%, due to
the continuation of our strategy to bring more work in-house and
the annual pay award. The value of own labour capitalised, was up
GBP10.5 million on the previous year due to the significant growth
in capital project activity.
Net hired and contracted costs were flat year on year. Increases
in leakage activity and some outsourced debt collection activity
offset the benefit from the in-sourced capital design team and from
the comparable GBP7.2 million of cost incurred in the hot, dry
summer in the previous year.
Power costs were GBP2.2 million higher than the previous period.
Consumption was down by 2% year-on-year, but was more than offset
by increased pass through costs and other price variances.
Bad debt charges were GBP5.2 million higher period-on-period and
represent 2.4% of household revenue, (2018/19 full year: 2.0%). We
continue to see good progress in our collection performance on
current debt, but recovery of aged debt, particularly balances at
the end of the dunning process, remains slow. We have launched an
extensive programme of activities focused on collection of this
older debt and we expect to see the benefits of this start to be
realised in the second half of the year.
Infrastructure maintenance expenditure was GBP10.7 million
higher in the period, as we complete a number of AMP6 projects and
step up our trunk mains renewal programme.
Depreciation was GBP4.8 million higher period-on-period
following increased capital spend in the second half of 2018/19,
and a shift in capital expenditure towards shorter life, data
technology assets.
Business Services
In line with the reorganisation of our segments that we
described in the previous year, we present the performance of the
Business Services segment across five business units:
-- Operating Services includes our contracts business in the UK and Ireland.
-- Green Power includes our generating assets that are outside
the new Bioresources business. This includes anaerobic digestion
from crops and food waste, wind power, hydro-electric and solar
power.
-- Bioresources includes all activities relating to the
treatment of sewage sludge including transport, treatment, energy
generation and disposal.
-- Property Development includes all such activities in both our
regulated and non-regulated companies.
-- Other includes our affinity and searches businesses and segment overheads.
Six months ended 30 September
2019 2018 Better/(worse)
GBPm GBPm GBPm %
---------------------- ------ ------ --------- ---------
Turnover
Operating Services 29.5 29.8 (0.3) (1.0)
Green Power 25.3 9.1 16.2 178.0
Bioresources 50.6 51.4 (0.8) (1.6)
Other 6.9 6.7 0.2 3.0
112.3 97.0 15.3 15.8
---------------------- ------ ------ --------- ---------
Underlying PBIT
Operating Services 3.9 2.1 1.8 85.7
Green Power 3.6 (0.8) 4.4 550.0
Bioresources 12.6 14.0 (1.4) (10.0)
Property Development 6.2 18.4 (12.2) (66.3)
Other 3.6 3.6 -- --
29.9 37.3 (7.4) (19.8)
---------------------- ------ ------ --------- ---------
In Operating Services, turnover remained broadly consistent, but
good margin management increased underlying PBIT by GBP1.8
million.
In Green Power, turnover increased by GBP16.2 million and
underlying PBIT increased by GBP4.4 million. The business acquired
from Agrivert in November 2018 increased turnover by GBP14.9
million and we are pleased with the rapid integration of the
business into the Group.
In our Property Development business, there was a significant
sale of at Teal Close near Nottingham in the previous year that
generated a profit of around GBP18 million.
Corporate and other
Corporate overheads were lower at GBP4.1 million (2018/19:
GBP7.2 million), as the prior year included Agrivert acquisition
costs of GBP3.6 million.
Net finance costs
The Group's net finance costs for the six month period were
GBP93.8 million, marginally up on the prior period (GBP93.1
million). Average net debt in the period increased to GBP5,902.9
million (2018/19: GBP5,405.7 million), and our effective cash cost
of interest (excluding the RPI uplift on index-linked debt) was
3.1% (2018/19: 3.1%) as we continue to benefit from lower interest
rates on new and refinanced debt. Interest cost on RPI debt
decreased by GBP1.0 million due to lower inflation. Interest
capitalised of GBP21.1 million was GBP5.4 million higher than the
prior period due to the higher level of capital work in
progress.
As a result, our effective interest rate for the period was 3.7%
(2018/19: 3.8%).
The Group's EBITDA interest cover was 5.3 times (2018/19: 5.5
times) and PBIT interest cover was 3.2 times (2018/19: 3.5 times).
See note 17 for further details.
Gains/losses on financial instruments
The Group uses financial derivatives solely to hedge risks
associated with its normal business activities including:
-- Exchange rate exposure on borrowings denominated in foreign currencies;
-- Interest rate exposures on floating rate borrowings;
-- Exposures to increases in electricity prices; and
-- Forthcoming changes in the regulatory model from RPI to CPIH.
The Group holds:
-- Interest rate swaps with a net notional principal of GBP225
million to balance our interest rate mix in line with our
strategy;
-- Cross currency swaps with a sterling principal of GBP98
million, which economically act to hedge exchange rate risk on
certain foreign currency borrowings; and
-- Inflation swaps with a notional principal of GBP350 million,
which swap RPI linked cash flows for CPI linked cash flows.
The Group has chosen not to apply the hedge accounting
provisions of IFRS 9 to these instruments. Therefore the changes in
fair value are taken to gains/(losses) on financial instruments in
the income statement.
An analysis of the amounts charged to the income statement in
the period is presented in note 4 to the financial statements.
The Group has fixed around 58% of the estimated wholesale energy
usage for the remainder of 2019/20 through a combination of forward
price contracts and financial derivatives.
Taxation
We are committed to paying the right amount of tax at the right
time, and were pleased to have been awarded the Fair Tax Mark this
month.
As well as corporation tax on profits, which is included in the
tax charge in our accounts, we incur a range of other taxes,
charges and levies imposed by government agencies including
business rates; employer's National Insurance; the Climate Change
Levy; Carbon Reduction Commitment; Landfill Tax; and Insurance
Premium Tax. Our 2018/19 Annual Report and Accounts sets out an
analysis of the taxes incurred in that year and we will set out
this year's amounts in our Annual Report to be published in June
2020.
The corporation tax charge reported in the income statement is
calculated at a rate of 18.8% (2018/19: 19.1%), representing the
best estimate of the annual average tax rate expected for the full
year, applied to the profit for the six month period. The current
tax charge for the period was GBP18.2 million (2018/19: GBP23.7
million) and the deferred tax charge was GBP15.8 million (2018/19:
GBP14.8 million).
The benefit of the capital allowances on our increased capital
programme reduced our underlying effective current tax rate (in
line with guidance) to 10.3% (2018/19: 12.1%). Our tax payments
increased to GBP22.4 million (2018/19 GBP5.8 million) as the timing
of quarterly instalment payments is changing in the current year so
that all instalments are paid in the year to which they relate. In
the first half of the current year we have paid the final two
instalments for 2018/19 and the first two instalments for
2019/20.
Profit for the period and earnings per share
Reported profit for the period from continuing operations was
GBP146.7 million (2018/19: GBP165.1 million).
Basic earnings per share from continuing operations decreased by
11.6% to 61.7 pence (2018/19: 69.8 pence). Underlying basic
earnings per share were 68.8 pence (2018/19: 76.2 pence). For
further details see note 7.
Cash flow
Six months ended 30 September
2019 2018
GBPm GBPm
Cash generated from operations 496.5 489.2
Net capital expenditure (374.1) (340.1)
Net interest paid (72.8) (70.1)
Swap termination payment (0.3) --
Tax paid (22.4) (5.8)
Free cash flow 26.9 73.2
Dividends (133.1) (122.9)
Issue of shares 8.7 10.2
Purchase of own shares (1.6) (1.1)
Change in net debt from cash flows (99.1) (40.6)
Non-cash movements (23.6) (21.3)
-------------------------------------
Change in net debt (122.7) (61.9)
Opening net debt (5,834.1) (5,356.6)
Closing net debt (5,956.8) (5,418.5)
------------------------------------- ---------- ----------
Net debt comprises:
30 September 31 March 30 September
2019 2019 2018
GBPm GBPm GBPm
----------------------------------------------------------- ------------- ---------- -------------
Cash and cash equivalents 23.3 39.6 79.9
Bank loans (1,196.6) (1,120.1) (1,309.6)
Other loans (4,842.7) (4,820.5) (4,245.5)
Lease liabilities (128.7) (112.2) (115.4)
Cross currency swaps 55.9 37.1 30.3
Loans due from joint ventures and associated undertakings 132.0 142.0 141.8
----------------------------------------------------------- ------------- ---------- ---------------
Net debt (5,956.8) (5,834.1) (5,418.5)
----------------------------------------------------------- ------------- ---------- ---------------
At 30 September 2019 we held GBP23.3 million (31 March 2019:
GBP39.6 million) in cash and cash equivalents. Average debt
maturity is 14 years. Including committed facilities, the Group's
cash flow requirements are funded until September 2021.
We invest cash in deposits with highly rated banks and liquidity
funds and the Board regularly reviews the list of
counterparties.
Net debt at 30 September 2019 was GBP5,956.8 million (31 March
2019: GBP5,834.1 million). Balance sheet gearing (net debt/net debt
plus equity) at the half year was 82.9% (31 March 2019: 83.3%).
Group net debt, expressed as a percentage of estimated Regulatory
Capital Value at 30 September 2019 was 63.1% (31 March 2019:
63.0%).
In April we took action to reduce our exposure to interest rate
risk by closing out pay floating swaps with a notional principal of
GBP575 million that were "in the money" and using the proceeds to
close out pay fixed swaps with a notional principal value of GBP100
million and a fixed rate of around 5%. This reduced our floating
rate exposure by GBP475 million at a net cost of GBP0.3 million
while also reducing our effective interest rate. We now hold 60% of
our debt at fixed rates. In preparation for the introduction of
CPIH indexation in AMP7 we amended and extended an existing RPI
index-linked loan to a GBP125 million ten year CPI index-linked
loan in May and in August we entered into a further GBP100 million
forward starting ten year CPI/RPI basis swap, taking the total
amount of such swaps to GBP350 million.
The estimated fair value of debt at 30 September 2019 was
GBP1,640.1 million higher than book value (31 March 2019:
GBP1,219.6 million higher). The increase in the difference to book
value is largely due to lower prevailing market long-term interest
rates.
Pensions
Formal three-yearly actuarial valuations were completed as at 31
March 2016 for the Severn Trent schemes and as at 31 March 2017 for
the Dee Valley Water scheme.
The Group operates three defined benefit pension schemes, of
which the Severn Trent Pension Scheme (STPS) is by far the largest.
The STPS closed to future accrual on 31 March 2015 and from 1 April
2015 new benefits have been provided within the defined
contribution Severn Trent Group Personal Pension Scheme. A formal
triennial actuarial valuation and funding agreements for STPS were
last completed as at 31 March 2016. The triennial valuation
exercise for 31 March 2019 is well advanced, and the Company and
the Pension Trustees have agreed the future funding plan, which is
summarised below.
A revised schedule of deficit reduction contributions (replacing
the previous schedule agreed for the 2016 triennial valuation) will
be put in place to meet the deficit and ongoing administration
expenses that will include:
-- Inflation linked deficit recovery payments starting at
GBP32.4 million in 2020, for eight financial years ending 31 March
2027.
-- Continued payments under the existing asset-backed funding
(ABF) arrangements which provide the following:
o GBP8.2 million per annum, potentially continuing to 31 March
2032. These payments will only continue beyond the 2025 valuation
if the Scheme assets (excluding this ABF) are less than the value
of the Technical Provisions at this time.
o Inflation-linked payments, which started at GBP15 million per
annum in 2017/18, potentially continuing to 31 March 2031. These
payments will cease earlier should a subsequent valuation of the
STPS show that these contributions are no longer needed
-- In addition to these payments, the Company will continue to
pay the annual Pension Protection Fund levy incurred by the STPS
(GBP1.4 million for 2018/2019).
Payments are typically made in the second half of the year and
there were no material payments in the six month period to 30
September 2019.
On an IAS 19 basis, the estimated net position (before deferred
tax) of all of the Group's defined benefit pension schemes at 30
September 2019 was a deficit of GBP390.6 million. This compares to
a deficit of GBP452.9 million as at 31 March 2019.
The movements in the net deficit during the period were as
follows:
Fair value of scheme assets Defined benefit obligations Net deficit
GBPm GBPm GBPm
-------------------------------------------- ---------------------------- ---------------------------- ------------
At start of the period 2,418.9 (2,871.8) (452.9)
Amounts credited/(charged) to income
statement 28.0 (34.8) (6.8)
Actuarial gains/(losses) taken to reserves 312.6 (243.8) 68.8
Net contributions received and benefits
paid (54.5) 54.8 0.3
At end of the period 2,705.0 (3,095.6) (390.6)
-------------------------------------------- ---------------------------- ---------------------------- ------------
The obligations increased as the impact of the lower discount
rate applied at the end of the period was only partially mitigated
by the lower long-term inflation assumption. However, strong asset
performance more than compensated for this and, on an IAS 19 basis,
the funding level has improved to 87% (31 March 2019: 84%).
Dividends
The Board has declared an interim ordinary dividend of 40.03p
per share (2018/19: 37.35p per share), which will be paid on 3
January 2020 to shareholders on the register at 29 November
2019.
Principal risks and uncertainties
The Board considers the principal risks and uncertainties
affecting the business activities of the Group for the remainder of
the financial year to be those detailed below:
Customer perception
-- We may be unable to improve or maintain our levels of
customer service sufficiently to deliver what our customers tell us
they want.
Legal
-- There is a risk that processes may fail or that our processes
may not effectively keep pace with changes in legislation, leading
to the risk of non-compliance.
Operations, assets and people
-- We may experience loss of data or interruptions to our key
business systems as a result of cyber threats.
-- We may fail to meet our regulatory targets including targets
from Ofwat in relation to operational performance of our assets
resulting in regulatory penalties.
-- Failure of certain key assets or processes may mean we are
unable to provide a continuous supply of clean water and safely
take waste water away within our area.
-- Due to the nature of our operations we could endanger the
health and safety of our people, contractors and members of the
public, as well as negatively impact our local and wider
environment.
-- We are unable to deal with the impact of extreme and
unpredictable weather events on our assets and infrastructure
and/or are unable to successfully plan for future water resource
supply and demand due to climate change.
Political and regulatory environment
-- PR19: The regulatory landscape is complex and subject to
ongoing evolution. We have now received our Draft Determination for
the period 2020 to 2025, however we will not have full clarity on
our plan until we receive our Final Determination on 16 December
2019.
-- The UK's decision to leave the European Union (EU): At the
time of writing, the terms of the UK's departure from the EU
('Brexit') remain uncertain. Brexit does not give rise to a new
principal risk for the Group, but it does have the potential to
impact risks in other areas of our operations, such as supply
chain, interest rates, availability of funding, regulatory changes
and uncertainty for the domestic economy.
-- Renationalisation: The renationalisation of the water
industry remains a possibility in the event of a change of
Government, and any associated changes in Government policy may
fundamentally impact our ability to deliver the Group's strategic
objectives, impacting shareholder value. Our aim is to ensure the
water sector in England and Wales continues to deliver a world
class service for customers, is able to invest for the future and
maximises the benefits to wider society and all stakeholders
through the social and environmental benefits the current model
allows us to deliver. We seek to minimise potential risk and
maximise opportunities through regular communication and robust
scenario planning as Government policy evolves.
Technical Guidance 2019/20
Year-end guidance FY 18/19 Year-on- Year
Regulated Water and Waste Water
Turnover(1) GBP1.61 billion to GBP1.64 billion. GBP1.58bn
Opex Higher year-on-year as continued upward sector-wide GBP600m
cost pressures from energy pass-through
costs, licences and materials offset ongoing
efficiency programmes.
IRE GBP145 million to GBP170 million. GBP141m
Customer ODIs(2,3) At least GBP25 million net reward across Water and GBP(5)m
Waste measures.
---------------------------------- ------------------------------------------------------ ---------- --------------
Business Services
Underlying PBIT (excl. Property) Higher year-on-year. GBP44m
Underlying Property PBIT GBP5 million to GBP10 million. GBP20m
---------------------------------- ------------------------------------------------------ ---------- --------------
Group
Interest charge Higher year-on-year due to increased total debt GBP194m
reflecting end of AMP investment in our capital
programme and the acquisition of Agrivert in the
second half of the prior year.
Total tax rate of c.19% and underlying effective
Tax rate current tax rate between 10% and 12%. 11.6%
Group capex GBP700 million to GBP800 million. GBP769m
Annual dividend growth of at least RPI + 4% until
Dividend(4) March 2020. 2019/20 dividend set at 100.08p. 93.37p
---------------------------------- ------------------------------------------------------ ---------- --------------
Footnotes to technical guidance
1. Includes GBP7 million net penalty for customer ODIs (Customer
Outcome Delivery Incentives, quoted pre-tax in 19/20 prices)
relating to 2017/18 with the balance of that year's net reward
deferred to AMP7.
2. Quoted pre-tax at 2012/13 prices.
3. Excludes AMP6 SIM customer ODI outcome.
4. 2019/20 dividend growth is based on November 2018 RPI of 3.19% plus 4%.
Further Information
For further information, including the Group's interim results
presentation, see the Severn Trent website
(www.severntrent.com).
Investor Timetable
28 November 2019 Ex-dividend date (Interim)
29 November 2019 Dividend record date (Interim)
-----------------------------------
10 December 2019 DRIP election date (Interim)
-----------------------------------
3 January 2020 Interim dividend payment
date
-----------------------------------
5 February 2020 Q3 Trading Update
-----------------------------------
4 March 2020 Capital Markets Day
-----------------------------------
31 March 2020 Financial Year End
-----------------------------------
20 May 2020 Full Year Results Announcement
2019/20
-----------------------------------
11 June 2020 Ex-dividend date (Final)
-----------------------------------
12 June 2020 Dividend record date (Final)
-----------------------------------
26 June 2020 DRIP election date (Final)
-----------------------------------
15 July 2020 AGM
-----------------------------------
17 July 2020 Final dividend payment date
-----------------------------------
For more information please visit:
https://www.severntrent.com/investors/financial-calendar
Condensed consolidated income statement
Six months ended 30 September 2019
2019 2018
Note GBPm GBPm
Turnover 3 910.0 881.5
Other income 5.9 18.3
Operating costs before charge for bad and doubtful debts and
amortisation of acquired intangible
assets (610.8) (587.2)
Charge for bad and doubtful debts (18.8) (13.5)
----------------------------------------------------------------- ----- --------------------- ---------------------
Operating costs before amortisation of acquired intangible
assets (629.6) (600.7)
Amortisation of acquired intangible assets (1.0) --
Total operating costs (630.6) (600.7)
----------------------------------------------------------------- ----- --------------------- ---------------------
Profit before interest, tax and amortisation of acquired
intangible assets 286.3 299.1
Amortisation of acquired intangible assets (1.0) --
Profit before interest and tax 285.3 299.1
----------------------------------------------------------------- ----- --------------------- ---------------------
Finance income 31.0 31.8
Finance costs (124.8) (124.9)
Net finance costs (93.8) (93.1)
Net losses on financial instruments 4 (1.5) (1.5)
Share of net loss of joint ventures accounted for using the
equity method (9.3) (0.9)
Profit on ordinary activities before taxation 180.7 203.6
Current tax 5 (18.2) (23.7)
Deferred tax 5 (15.8) (14.8)
Taxation on profit on ordinary activities 5 (34.0) (38.5)
--------------------- ---------------------
Profit for the period 146.7 165.1
----------------------------------------------------------------- ----- --------------------- ---------------------
Earnings per share (pence)
Basic 61.7 69.8
Diluted 61.5 69.7
--------- ----- -----
Condensed consolidated statement of comprehensive income
Six months ended 30 September 2019
2019 2018
GBPm GBPm
Profit for the period 146.7 165.1
------------------------------------------------------------------- ------- -------
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:
Net actuarial gains 68.8 62.4
Current tax on pension contributions in prior periods 4.8 4.8
Deferred tax on pension contributions in prior periods (4.8) (4.8)
Deferred tax on net actuarial gains (11.7) (10.6)
57.1 51.8
------------------------------------------------------------------- ------- -------
Items that may be reclassified to the income statement:
(Losses)/gains on cash flow hedges (22.4) 10.0
Deferred tax on losses/gains on cash flow hedges 3.9 (1.7)
Amounts on cash flow hedges transferred to the income statement 4.1 4.1
Deferred tax on transfer to the income statement (0.7) (0.7)
(15.1) 11.7
------------------------------------------------------------------- ------- -------
Other comprehensive income for the period 42.0 63.5
------------------------------------------------------------------- ------- -------
Total comprehensive income for the period 188.7 228.6
------------------------------------------------------------------- ------- -------
Condensed consolidated statement of changes in equity
Six months ended 30 September 2019
Equity attributable to owners of the company
-----------------------------------------------------------------------------
Share capital Share premium Other reserves Retained earnings Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------------- -------------- -------------- --------------- ------------------ --------
As at 1 April 2018 235.1 117.7 93.0 551.1 996.9
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Profit for the period -- -- -- 165.1 165.1
Gains on cash flow hedges -- -- 10.0 -- 10.0
Deferred tax on gains on cash flow
hedges -- -- (1.7) -- (1.7)
Amounts on cash flow hedges
transferred to the income statement -- -- 4.1 -- 4.1
Deferred tax on transfer to the income
statement -- -- (0.7) -- (0.7)
Net actuarial gains -- -- -- 62.4 62.4
Current tax on pension contributions
in prior periods -- -- -- 4.8 4.8
Deferred tax on pension contributions
in prior periods -- -- -- (4.8) (4.8)
Deferred tax on net actuarial gains -- -- -- (10.6) (10.6)
Total comprehensive income for the
period -- -- 11.7 216.9 228.6
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Share options and LTIPs
- proceeds from shares issued 0.7 9.5 -- -- 10.2
- value of employees' services -- -- -- 4.0 4.0
- own shares purchased -- -- -- (1.1) (1.1)
Current tax on share based payments -- -- -- 0.1 0.1
Deferred tax on share based payments -- -- -- 0.1 0.1
Dividends paid -- -- -- (122.9) (122.9)
As at 30 September 2018 235.8 127.2 104.7 648.2 1,115.9
--------------------------------------- -------------- -------------- --------------- ------------------ --------
As at 1 April 2019 235.9 128.0 92.8 707.4 1,164.1
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Adjustment (see note 1) -- -- -- (1.2) (1.2)
-------------- -------------- --------------- ------------------ --------
Adjusted as at 1 April 2019 235.9 128.0 92.8 706.2 1,162.9
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Profit for the period -- -- -- 146.7 146.7
Losses on cash flow hedges -- -- (22.4) -- (22.4)
Deferred tax on losses on cash flow
hedges -- -- 3.9 -- 3.9
Amounts on cash flow hedges
transferred to the income statement -- -- 4.1 -- 4.1
Deferred tax on transfer to the income
statement -- -- (0.7) -- (0.7)
Net actuarial gains -- -- -- 68.8 68.8
Current tax on pension contributions
in prior periods -- -- -- 4.8 4.8
Deferred tax on pension contributions
in prior periods -- -- -- (4.8) (4.8)
Deferred tax on net actuarial gains -- -- -- (11.7) (11.7)
Total comprehensive income for the
period -- -- (15.1) 203.8 188.7
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Share options and LTIPs
- proceeds from shares issued 0.5 8.2 -- -- 8.7
- value of employees' services -- -- -- 4.0 4.0
- own shares purchased -- -- -- (1.6) (1.6)
Current tax on share based payments -- -- -- 0.1 0.1
Deferred tax on share based payments -- -- -- 0.1 0.1
Dividends paid -- -- -- (133.1) (133.1)
As at 30 September 2019 236.4 136.2 77.7 779.5 1,229.8
--------------------------------------- -------------- -------------- --------------- ------------------ --------
Condensed consolidated balance sheet
At 30 September 2019
30 September 31 March
2019 2019
Note GBPm GBPm
Non-current assets
Goodwill 91.4 90.9
Right-of-use assets 129.8 --
Other intangible assets 119.0 124.2
Property, plant and equipment 9,250.5 9,085.6
Investments in joint ventures 27.7 37.0
Derivative financial instruments 68.1 68.4
Trade and other receivables 60.9 204.0
Retirement benefit surplus 10 20.4 18.6
9,767.8 9,628.7
---------------------------------- ----- ---------------------- -----------------------
Current assets
Inventory 21.6 20.8
Trade and other receivables 650.3 513.5
Derivative financial instruments 1.1 0.1
Cash and cash equivalents 23.8 41.0
696.8 575.4
---------------------------------- ----- ---------------------- -----------------------
Current liabilities
Borrowings 8 (475.1) (197.0)
Trade and other payables (546.5) (496.7)
Current tax payable (0.2) (9.3)
Provisions for liabilities (23.5) (32.2)
(1,045.3) (735.2)
---------------------------------- ----- ---------------------- -----------------------
Net current liabilities (348.5) (159.8)
Non-current liabilities
Borrowings 8 (5,693.4) (5,857.2)
Derivative financial instruments (137.1) (126.5)
Trade and other payables (1,150.0) (1,082.9)
Deferred tax (776.1) (747.5)
Retirement benefit obligations 10 (411.0) (471.5)
Provisions for liabilities (21.9) (19.2)
(8,189.5) (8,304.8)
---------------------------------- ----- ---------------------- -----------------------
Net assets 1,229.8 1,164.1
---------------------------------- ----- ---------------------- -----------------------
Equity
Called up share capital 12 236.4 235.9
Share premium account 136.2 128.0
Other reserves 77.7 92.8
Retained earnings 779.5 707.4
Total equity 1,229.8 1,164.1
---------------------------------- ----- ---------------------- -----------------------
Condensed consolidated cash flow statement
Six months ended 30 September 2019
2019 2018
Note GBPm GBPm
------------------------------------------------------- ----- -------- --------
Cash generated from operations 13 496.5 489.2
Tax paid 13 (22.4) (5.8)
Net cash generated from operating activities 474.1 483.4
------------------------------------------------------- ----- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (377.3) (357.8)
Purchases of intangible assets and goodwill (21.4) (6.6)
Contributions and grants received 18.1 21.4
Proceeds on disposal of property, plant and equipment 6.5 2.9
Amounts repaid by/(advanced to) joint ventures 10.0 (6.1)
Interest received 0.6 1.1
Net cash outflow from investing activities (363.5) (345.1)
------------------------------------------------------- ----- -------- --------
Cash flow from financing activities
Interest paid (73.4) (71.2)
Dividends paid to shareholders of the parent (133.1) (122.9)
Repayments of borrowings (0.9) (1.9)
Principal elements of lease payments (1.2) --
New loans raised 74.9 90.0
Issues of shares 8.7 10.2
Swap termination payments (0.3) --
Purchase of own shares (1.6) (1.1)
Net cash outflow from financing activities (126.9) (96.9)
------------------------------------------------------- ----- -------- --------
Net movement in cash and cash equivalents (16.3) 41.4
Net cash and cash equivalents at beginning of period 39.6 38.5
Net cash and cash equivalents at end of period 23.3 79.9
------------------------------------------------------- ----- -------- --------
Cash and cash equivalents 7.5 33.8
Bank overdrafts (0.5) (2.9)
Short term deposits 16.3 49.0
23.3 79.9
------------------------------------------------------- ----- -------- --------
Notes to the condensed interim financial information
1. General information
The interim report has been prepared in accordance with the
recognition and measurement criteria of IFRS and the disclosure
requirements of the Listing Rules.
The information for the year ended 31 March 2019 does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006. A copy of the statutory accounts for that
year prepared under IFRS has been delivered to the Registrar of
Companies. The auditor's report on those accounts was unqualified,
did not draw attention to any matters by way of emphasis and did
not contain statements under section 498 (2) or (3) of the
Companies Act 2006.
Accounting policies
The interim financial information has been prepared on the going
concern basis using accounting policies consistent with
International Financial Reporting Standards and in accordance with
IAS 34 'Interim Financial Reporting' as adopted by the European
Union. The same accounting policies, presentation and methods of
computation are followed in the interim financial information as
applied in the Group's annual financial statements for the year
ended 31 March 2019, except as set out below.
Changes in accounting policies - IFRS 16 'Leases'
The Group has adopted IFRS 16 Leases retrospectively from 1
April 2019, but has not restated comparatives for prior reporting
periods, as permitted under the specific transitional provisions in
the standard. The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised in the opening
balance sheet on 1 April 2019.
a) Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the Group's incremental borrowing
rate as at 1 April 2019. The Group's weighted average incremental
borrowing rate applied to the lease liabilities on 1 April 2019 was
3.20%.
For leases previously classified as finance leases the Group
recognised the carrying amount of the right-of-use asset and lease
liability immediately before transition as the carrying amount of
the right-of-use asset and the lease liability at the date of
initial application. There have been no remeasurement amounts of
leases previously classified as finance leases under IFRS 16
principles.
GBPm
--------------------------------------------------------------------------------------------- -------
Operating lease commitments disclosed as at 31 March 2019 17.5
Add: adjustments as a result of a different treatment of extension and termination options 10.0
Add: finance lease liabilities recognised as at 31 March 2019 112.2
Less: short-term leases recognised on a straight-line basis as an expense (1.0)
Less: low-value leases recognised on a straight-line basis as an expense (0.1)
Discounted using the lessee's incremental borrowing rate at the date of initial application (11.1)
--------------------------------------------------------------------------------------------- ---------
Lease liability recognised as at 1 April 2019 127.5
--------------------------------------------------------------------------------------------- ---------
Recognised at 30 September 2019 as:
Current lease liabilities 26.2
Non-current lease liabilities 102.5
--------------------------------------------------------------------------------------------- ---------
128.7
--------------------------------------------------------------------------------------------- ---------
The associated right-of-use assets for property leases were
measured on a retrospective basis as if the new rules had always
been applied. Other right-of-use assets were measured at the amount
equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised in the
balance sheet as at 31 March 2019. There were no onerous lease
contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
1. General information (continued)
The recognised right-of-use assets relate to the following types
of assets:
30 September 1 April
2019 2019
GBPm GBPm
--------------------------- ------------- --------
Land and buildings 8.9 9.3
Plant and equipment 5.4 7.8
Motor vehicles 1.2 0.8
Infrastructure assets 114.3 114.8
--------------------------- ------------- --------
Total right-of-use assets 129.8 132.7
--------------------------- ------------- --------
The change in accounting policy affected the following items in
the balance sheet on 1 April 2019:
GBPm
------------------------------- --------
Property, plant and equipment (118.8)
Right-of-use assets 132.7
Deferred tax 0.2
Borrowings (15.3)
Retained earnings 1.2
------------------------------- --------
b) Impact on segment disclosure and earnings per share
Six months ended 30 September 2019
Regulated Water Business
and Waste Water Services
GBPm GBPm
--------------------- ----------------- ----------
Segment assets 7.8 5.5
Segment liabilities -- --
7.8 5.5
--------------------- ----------------- ----------
Earnings per share decreased by 0.07 pence per share for the six
months to 30 September 2019 as a result of the adoption of IFRS
16.
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
-- reliance on previous assessments on whether leases are onerous;
-- accounting for operating leases with a remaining lease term
of less than 12 months at 1 April 2019 as short-term leases per
asset class;
-- accounting for operating leases of low value assets as at 1
April 2019 on an individual basis;
-- the exclusion of initial direct costs for the measurement of
the right-of-use asset at the date of initial application; and
-- the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract
is, or contains a lease at the date of initial application.
Instead, for contracts entered into before the transition date the
group relied on its assessment made applying IAS 17 and IFRIC 4
Determining whether an Arrangement contains a Lease.
c) Leasing activities
The Group leases various buildings and land, plant and equipment
and vehicles. Rental agreements are typically made for fixed
periods of 1 to 999 years but may have extension options as
described below. Lease terms are negotiated on an individual basis
and contain a wide range of different terms and conditions. The
lease agreements do not impose any covenants, but leased assets may
not be used as security for borrowing purposes.
Until the current financial period, leases of property, plant
and equipment were classified as either finance or operating
leases. Payments made under operating leases (net of any incentives
received from the lessor) were charged to profit or loss on a
straight-line basis over the period of the lease.
1. General information (continued)
From 1 April 2019, leases are recognised as right-of-use assets
with a corresponding liability at the date at which the leased
assets are available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost
is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset's useful life and the
lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable;
-- variable lease payments that are based on an index or a rate;
-- amounts expected to be payable by the lessee under residual value guarantees;
-- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
-- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
Group's incremental borrowing rate is used, being the rate that the
Group would have to pay to borrow the funds necessary to obtain an
asset of similar value in a similar economic environment with
similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following; the amount of the initial measurement of lease
liability; any lease payments made at or before the commencement
date less any lease incentives received; any initial direct costs,
and restoration costs.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of less than 12 months.
d) Extension and termination options
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. The majority of extension and termination options held
are exercisable only by the Group and not by the respective
lessor.
In determining the lease term, the Group considers all facts and
circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated). The assessment is reviewed if a significant
event or a significant change in circumstances occurs which affects
this assessment and that is within the control of the Group. During
the current financial period, there has been no financial effect of
revising lease terms to reflect the effect of exercising extension
or termination options.
Going concern
Including undrawn committed credit facilities, the Group is
fully funded for its investment and cash flow needs until September
2021. After making enquiries the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future and hence the
interim financial information has been prepared on a going concern
basis.
Seasonality
Historically just over half of the Group's PBIT has arisen in
the first half of the year.
2. Segmental analysis
The Group is organised into two main business segments:
Regulated Water and Waste Water includes the wholesale water and
waste water activities of Severn Trent Water Limited (excluding
Bioresources and Developer Services), its retail services to
domestic customers, and Hafren Dyfrdwy Cyfyngedig.
Business Services includes the Group's Operating Services
businesses in the UK & Ireland, the Green Power business, the
Bioresources business, the Property Development business and our
other businesses including Developer Services, affinity products
and searches.
The Severn Trent Executive Committee ('STEC') is considered to
be the Group's chief operating decision maker. The reports provided
to STEC include segmental information prepared on the basis
described above.
Results from interests in joint ventures are not included in the
segmental reports reviewed by STEC.
The measure of profit or loss that is reported to STEC for the
segments is underlying PBIT. A segmental analysis of turnover and
underlying PBIT is presented below.
Goodwill is allocated and monitored at the segment level.
Transactions between reportable segments are included within
segmental results, assets and liabilities in accordance with Group
accounting policies. These are eliminated on consolidation.
The following table shows the segmental turnover and PBIT:
Six months ended 30 September
2019 2018
-------------------------------------- -----------------------------------------------
Regulated Water and Waste Business Regulated Water and Waste
Water Services Water Business Services
GBPm GBPm GBPm GBPm
--------------------------- -------------------------- ---------- --------------------------- ------------------
External turnover 807.5 102.5 795.0 86.5
Inter-segment turnover -- 9.8 -- 10.5
Total turnover 807.5 112.3 795.0 97.0
--------------------------- -------------------------- ---------- --------------------------- ------------------
Profit before interest,
tax and amortisation of
acquired intangible
assets 260.1 29.9 268.4 37.3
Amortisation of acquired -- (1.0) -- --
intangible assets
Profit before interest and
tax 260.1 28.9 268.4 37.3
--------------------------- -------------------------- ---------- --------------------------- ------------------
The reportable segments' turnover is reconciled to Group
turnover as follows:
Six months ended 30 September
2019 2018
GBPm GBPm
--------------------------------- ------- -------
Regulated Water and Waste Water 807.5 795.0
Business Services 112.3 97.0
Corporate and other 0.5 0.4
Consolidation adjustments (10.3) (10.9)
910.0 881.5
--------------------------------- ------- -------
2. Segmental analysis (continued)
Segmental underlying PBIT is reconciled to the Group's profit
before tax as follows:
Six months ended 30 September
2019 2018
GBPm GBPm
---------------------------------------------------------------------------- ------- -------
Regulated Water and Waste Water 260.1 268.4
Business Services 29.9 37.3
Corporate and other (3.6) (6.8)
Consolidation adjustments (0.1) 0.2
Profit before interest, tax and amortisation of acquired intangible assets 286.3 299.1
Amortisation of acquired intangible assets:
Business Services (1.0) --
Net finance costs (93.8) (93.1)
Net losses on financial instruments (1.5) (1.5)
Share of net loss of joint ventures accounted for using the equity method (9.3) (0.9)
Profit on ordinary activities before taxation 180.7 203.6
---------------------------------------------------------------------------- ------- -------
The following table shows segmental capital employed:
30 September 31 March
2019 2019
----------------------------- -----------------------------
Regulated Water Business Regulated Water Business
and Waste Water Services and Waste Water Services
GBPm GBPm GBPm GBPm
------------------------------- ----------------- ---------- ----------------- ----------
Operating assets 9,512.8 615.2 9,214.4 622.3
Goodwill 63.5 29.2 63.5 28.7
Investments in joint ventures -- 27.7 -- 37.0
Segment assets 9,576.3 672.1 9,277.9 688.0
Segment operating liabilities (2,067.1) (48.0) (1,986.3) (68.7)
Capital employed 7,509.2 624.1 7,291.6 619.3
------------------------------- ----------------- ---------- ----------------- ----------
Operating assets comprise other intangible assets, property,
plant and equipment, right-of-use assets, retirement benefit
surpluses, inventory and trade and other receivables.
Operating liabilities comprise trade and other payables,
retirement benefit obligations and provisions.
3. Revenue from contracts with customers
Revenue recognised from contracts with customers is analysed by
business segment below:
Six months ended 30 September 2019
Regulated Water and Corporate Consolidation
Waste Water Business Services and other adjustments Group
GBPm GBPm GBPm GBPm GBPm
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Water and waste water
services 805.5 28.5 -- -- 834.0
Operating services -- 29.5 -- -- 29.5
Renewable energy -- 37.5 -- -- 37.5
Other sales 2.0 7.0 -- -- 9.0
Intra-group sales -- 9.8 0.5 (10.3) --
807.5 112.3 0.5 (10.3) 910.0
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
3. Revenue from contracts with customers (continued)
Six months ended 30 September 2018
Regulated Water and Corporate Consolidation
Waste Water Business Services and other adjustments Group
GBPm GBPm GBPm GBPm GBPm
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Water and waste water
services 793.7 27.5 -- -- 821.2
Operating services -- 29.8 -- -- 29.8
Renewable energy -- 22.5 -- -- 22.5
Other sales 1.3 6.7 -- -- 8.0
Intra-group sales -- 10.5 0.4 (10.9) --
795.0 97.0 0.4 (10.9) 881.5
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Income from diversions of GBP2.3 million (2018: GBP5.4 million),
which is reimbursement of costs incurred for diversions, is
included within infrastructure maintenance expenditure within
operating costs.
4. Net losses on financial instruments
Six months ended 30 September
2019 2018
GBPm GBPm
------ ------
Gain/(loss) on swaps used as hedging instruments in fair value hedges 5.4 (0.5)
(Loss)/gain arising on debt in fair value hedges (1.4) 0.3
Exchange loss on other loans (7.9) (8.2)
Loss on cash flow hedges transferred from equity (4.1) (4.1)
Hedge ineffectiveness on cash flow hedges 2.7 0.5
Gain arising on swaps where hedge accounting is not applied 3.3 9.9
Amortisation of fair value adjustment on debt 0.5 0.6
(1.5) (1.5)
----------------------------------------------------------------------- ------ ------
5. Tax
Six months ended 30 September
2019 2018
GBPm GBPm
------ ------
Current tax
Current year at 18.8% (2018: 19.1%) 18.6 23.7
Prior years (0.4) --
Total current tax 18.2 23.7
---------------------------------------------------- ------ ------
Deferred tax
Origination and reversal of temporary differences:
Current year 16.2 15.1
Prior years (0.4) (0.3)
Total deferred tax 15.8 14.8
---------------------------------------------------- ------ ------
34.0 38.5
---------------------------------------------------- ------ ------
The tax charge in the income statement is calculated at a rate
of 18.8% (2018: 19.1%) representing the best estimate of the annual
average effective income tax rate expected for the full year
applied to the pre-tax income for the six month period.
The underlying effective current tax rate was 10.3% (2018:
12.1%). See note 17.
Current tax credits of GBP4.9 million (2018: GBP4.9 million) and
deferred tax charges of GBP13.2 million (2018: GBP17.7 million)
have been taken to reserves in the period.
6. Dividends
Amounts recognised as distributions to owners of the Company in
the period:
Six months ended 30 September
2019 2018
---------------- ------ ---------------- ------
Pence per share GBPm Pence per share GBPm
-------------------------------------------------------- ---------------- ------ ---------------- ------
Final dividend for the year ended 31 March 2019 (2018) 56.02 133.1 51.92 122.9
-------------------------------------------------------- ---------------- ------ ---------------- ------
The proposed interim dividend of 40.03p per share (2018: 37.35p
per share) was approved by the Board on 20 November 2019 and has
not been included as a liability as at 30 September 2019.
7. Earnings per share
a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the period, excluding
those held in the Severn Trent Employee Share Ownership Trust which
are treated as cancelled.
For diluted earnings per share, the weighted average number of
ordinary shares in issue is adjusted to assume conversion of all
potentially dilutive ordinary shares. These represent share options
granted to employees where the exercise price is less than the
average market price of the Company's shares during the period.
The calculation of basic and diluted earnings per share is based
on the following data:
Number of shares
Six months ended 30 September
2019 2018
m m
------------------------------------------------------------------------------------------ ------ ------
Weighted average number of ordinary shares for the purpose of basic earnings per share 237.8 236.4
Effect of dilutive potential ordinary shares:
- share options and LTIPs 0.7 0.4
Weighted average number of ordinary shares for the purpose of diluted earnings per share 238.5 236.8
------------------------------------------------------------------------------------------ ------ ------
b) Underlying earnings per share
Six months ended 30 September
2019 2018
pence pence
Underlying basic earnings per share 68.8 76.2
--------------------------------------- ------ ------
Underlying diluted earnings per share 68.6 76.1
--------------------------------------- ------ ------
The denominators used in the calculations of underlying basic
and diluted earnings per share are the same as those used in the
unadjusted figures set out above.
The adjustments to earnings are as follows:
Six months ended 30 September
2019 2018
GBPm GBPm
Earnings for the purpose of basic and diluted earnings per share 146.7 165.1
Adjustments for:
- amortisation of acquired intangible assets 1.0 --
- net losses on financial instruments 1.5 1.5
- current tax on net losses on financial instruments (1.3) (1.3)
- deferred tax 15.8 14.8
-----------------------------------------------------------------------------
Earnings for the purpose of underlying basic and diluted earnings per share 163.7 180.1
----------------------------------------------------------------------------- ------ ------
8. Borrowings
30 September 31 March
2019 2019
GBPm GBPm
---------------------------------- ------------- ---------
Bank overdraft 0.5 1.4
Bank loans 1,196.6 1,120.1
Other loans 4,842.7 4,820.5
Lease liabilities 128.7 --
Obligations under finance leases -- 112.2
Borrowings 6,168.5 6,054.2
---------------------------------- ------------- ---------
The borrowings are repayable as follows:
30 September 31 March
2019 2019
GBPm GBPm
---------------------------------------------------------------- ------------- ---------
On demand or within one year - included in current liabilities 475.1 197.0
Over one year - included in non-current liabilities 5,693.4 5,857.2
6,168.5 6,054.2
---------------------------------------------------------------- ------------- ---------
9. Fair value of financial instruments
a) Fair value measurements
The table below describes the valuation technique that the Group
applies for each class of financial instrument which is measured at
fair value on a recurring basis. All techniques are classified as
Level 2 under the hierarchy defined by IFRS 13 except for the
inflation swaps and contingent consideration, which are classified
as Level 3. During the current period a gain of GBP0.5 million has
been recognised in the income statement with respect to these
instruments. There have been no changes in the levels of
classification during the period.
30 September 2019 31 March 2019
GBPm GBPm Valuation techniques and key inputs
-------------------------- ------------------ -------------- ------------------------------------------------------
Cross currency swaps Discounted cash flow
Assets 55.9 37.1 Future cash flows are estimated based on forward
interest rates from observable yield curves
at the period end and contract interest rates
discounted at a rate that reflects the credit
risk of counterparties. The currency cash flows are
translated at spot rate.
-------------------------- ------------------ -------------- ------------------------------------------------------
Interest rate swaps Discounted cash flow
Assets 5.5 26.1 Future cash flows are estimated based on forward
interest rates from observable yield curves
at the period end and contract interest rates
discounted at a rate that reflects the credit
risk of counterparties.
------------------------------------------------------
Liabilities (131.4) (119.9)
-------------------------- ------------------ -------------- ------------------------------------------------------
Energy swaps Discounted cash flow
Assets 7.8 5.3 Future cash flows are estimated based on forward
electricity prices from observable indices
at the period end and contract prices discounted at a
rate that reflects the credit risk of
counterparties.
------------------------------------------------------
Liabilities - (0.4)
-------------------------- ------------------ -------------- ------------------------------------------------------
Inflation swaps Discounted cash flow
Liabilities (5.7) (6.2) Future cash flows on the RPI leg of the instrument
are estimated based on observable forward
inflation indices.
Future cash flows on the CPI leg of the instrument
are estimated based on the future expected
differential between RPI and CPI.
Both legs are discounted using observable swap rates
at the period end, at a rate that reflects
the credit risk of counterparties.
-------------------------- ------------------ -------------- ------------------------------------------------------
Contingent consideration (3.0) (3.0) Management estimate of the amount that is likely to
be payable. This is considered to be a
Level 3 valuation technique.
The contingent consideration arose on acquisition of
Agrivert.
-------------------------- ------------------ -------------- ------------------------------------------------------
Changes in the carrying values of instruments that are measured
using a Level 3 technique were as follows:
Inflation swaps Contingent consideration
GBPm GBPm
----------------------------------------- ---------------- -------------------------
At 1 April 2018 (2.8) -
Losses recognised in profit or loss (3.4) -
Recognised on acquisition of subsidiary - (3.0)
At 31 March 2019 (6.2) (3.0)
Gains recognised in profit or loss 0.5 -
At 30 September 2019 (5.7) (3.0)
----------------------------------------- ---------------- -------------------------
9. Fair value of financial instruments (continued)
b) Comparison of fair value of financial instruments with their
carrying amounts
The Directors consider that the carrying amounts of cash and
short term deposits, bank overdrafts, trade receivables and trade
payables are not materially different from their fair values.
Derivative financial instruments are carried at fair value. The
carrying values and estimated fair values of other non-derivative
financial instruments are set out below. The estimated fair values
do not take into account the impact of interest rate swaps.
31 March
30 September 2019 2019
--------------- ------------------ --------------- -----------
Carrying value Fair value Carrying value Fair value
GBPm GBPm GBPm GBPm
-------------------- --------------- ------------------ --------------- -----------
Floating rate debt
Bank loans 893.3 894.7 818.1 818.3
Other loans 187.0 192.7 185.6 185.9
--------------------
1,080.3 1,087.4 1,003.7 1,004.2
-------------------- --------------- ------------------ --------------- -----------
Fixed rate debt
Bank loans 183.2 184.3 184.1 183.3
Other loans 3,273.9 3,845.2 3,267.2 3,667.0
Finance leases - - 112.2 119.6
Lease liabilities 128.7 125.2 - -
--------------------
3,585.8 4,154.7 3,563.5 3,969.9
-------------------- --------------- ------------------ --------------- -----------
Index-linked debt
Bank loans 120.1 140.4 117.9 126.7
Other loans 1,381.8 2,425.6 1,367.7 2,171.6
--------------------
1,501.9 2,566.0 1,485.6 2,298.3
-------------------- --------------- ------------------ --------------- -----------
6,168.0 7,808.1 6,052.8 7,272.4
-------------------- --------------- ------------------ --------------- -----------
The above classification does not take into account the impact
of unhedged interest rate swaps or cross currency swaps.
Fixed rate sterling and currency bonds are valued using market
prices for similar instruments, which is a Level 2 valuation
technique.
Index-linked bonds are rarely traded and therefore quoted prices
are not considered to be a reliable indicator of fair value.
Therefore, these bonds are valued using discounted cash flow models
with discount rates derived from observed market prices for a
sample of bonds, which is a Level 3 valuation technique.
Fair values of other debt instruments are also calculated using
discounted cash flow models, which is a Level 3 valuation
technique.
10. Retirement benefit schemes
The Group operates three defined benefit pension schemes in the
UK, two for Severn Trent and one for Dee Valley Water. The Severn
Trent schemes are closed to future accrual. The Group also has an
unfunded obligation to provide benefits to certain former employees
whose earnings were in excess of the pensions cap that operated
when the benefits were accrued. The most recent actuarial valuation
of the Severn Trent schemes was at 31 March 2016. The valuation as
at 31 March 2019 is underway. Hafren Dyfrdwy participates in the
Dee Valley Water Limited Section of the Water Companies Pension
Scheme, which is a defined benefit sectionalised scheme. The most
recent actuarial valuation of this scheme was at 31 March 2017.
The assumptions used in calculating the defined benefit
obligations as at 30 September 2019 have been updated to reflect
market conditions prevailing at the balance sheet date as
follows:
30 September 31 March
2019 2019
% %
-------------------------------- ------------- ---------
Price inflation - RPI 3.0 3.2
Price inflation - CPI 2.0 2.2
Discount rate 1.9 2.5
Pension increases in payment 3.0 3.2
Pension increases in deferment 3.0 3.2
--------------------------------- ------------- ---------
The defined benefit assets have been updated to reflect their
market value as at 30 September 2019. Actuarial gains and losses on
the scheme assets and defined benefit obligations have been
reported in the statement of comprehensive income. Service cost,
and the cost of administrating the scheme, are recognised in
operating costs and interest cost is recognised in net finance
costs.
Movements in the net deficit recognised in the balance sheet
were as follows:
Defined
Fair value benefit
of plan assets obligations Net deficit
GBPm GBPm GBPm
--------------------------------------------- ---------------- ------------- ------------
At 1 April 2019 2,418.9 (2,871.8) (452.9)
Current service cost - (0.1) (0.1)
Scheme administration costs (1.3) - (1.3)
Interest income/(cost) 29.3 (34.7) (5.4)
Actuarial gains/(losses) 312.6 (243.8) 68.8
Contributions from the sponsoring companies 0.3 - 0.3
Employees' contributions and benefits paid (54.8) 54.8 -
---------------- ------------- ------------
At 30 September 2019 2,705.0 (3,095.6) (390.6)
--------------------------------------------- ---------------- ------------- ------------
The net deficit is presented on the balance sheet as
follows:
30 September 31 March
2019 2019
GBPm GBPm
-------------------------------- ------------- ---------
Retirement benefit surplus 20.4 18.6
Retirement benefit obligations (411.0) (471.5)
-------------------------------- ------------- ---------
(390.6) (452.9)
-------------------------------- ------------- ---------
11. Acquisitions
On 30 November 2018, Severn Trent Green Power Limited acquired
100% of the issued share capital of Agrivert Holdings Limited.
The acquisition was accounted for using the acquisition method.
Goodwill of GBP28.7 million was capitalised attributable to the
anticipated future synergies and outperformance arising as a result
of the acquisition.
As outlined by IFRS 3, management has until the earliest of the
date at which all information required is received or one year from
the acquisition date in order to satisfy the measurement period
criteria.
The adjustments to fair values recognised as at 31 March 2019
are set out below:
2019
GBPm
----------------------------------------------------------------- -----
Goodwill recognised at 1 April based on provisional fair values 28.7
Adjustment to provisional fair values for:
Revisions to estimated fair value of trade receivables 0.5
Goodwill recognised at 30 September 29.2
------------------------------------------------------------------ -----
12. Share capital
At 30 September 2019 the issued and fully paid share capital was
241.4 million shares of 97(17) /(19) p amounting to GBP236.4
million (31 March 2019: 240.9 million shares of 97(17) /(19) p
amounting to GBP235.9 million).
During the period the Company issued 0.5 million (2018: 0.7
million) shares as a result of the exercise of employee share
options. At 30 September 2019 the Company held 3.6 million (31
March 2019: 3.8 million) shares in treasury.
13. Cash flow
a) Reconciliation of operating profit to operating cash
flows
Six months ended 30 September
2019 2018
GBPm GBPm
----------------------------------------------------------------------- ------- -------
Profit before interest and tax 285.3 299.1
------------------------------------------------------------------------ ------- -------
Depreciation of property, plant and equipment 166.4 161.2
Depreciation of right-of-use-assets 0.9 --
Amortisation of intangible assets 15.5 12.7
Amortisation of acquired intangible assets 1.0 --
Pension service cost 0.1 0.1
Defined benefit pension scheme administration costs 1.3 1.4
Defined benefit pension scheme contributions (0.3) (0.3)
Share based payment charge 4.0 4.0
Profit on sale of property, plant and equipment and intangible assets (5.9) (18.3)
Deferred income movement (7.7) (7.2)
Provisions charged to the income statement 5.2 --
Utilisation of provisions for liabilities and charges (11.2) --
Operating cash flows before movements in working capital 454.6 452.7
(Increase)/decrease in inventory (0.8) 1.2
Increase in amounts receivable (4.3) (56.1)
Increase in amounts payable 47.0 91.4
Cash generated from operations 496.5 489.2
Tax paid (22.4) (5.8)
Net cash generated from operating activities 474.1 483.4
------------------------------------------------------------------------ ------- -------
b) Reconciliation of movements in net debt
Net cash and Finance Cross Loans due
cash Bank leases/lease currency from joint Net
equivalents loans Other loans liabilities swaps ventures debt
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------------- ---------- ------------ -------------- -------------- -------------- ----------
As at 1 April
2019 39.6 (1,120.1) (4,820.5) (112.2) 37.1 142.0 (5,834.1)
IFRS 16
transition
adjustment -- -- -- (15.3) -- -- (15.3)
-------------- -------------- ---------- ------------ -------------- -------------- -------------- ----------
Adjusted as
at 1 April
2019 39.6 (1,120.1) (4,820.5) (127.5) 37.1 142.0 (5,849.4)
Cash flow (16.3) (74.0) -- 1.2 -- (10.0) (99.1)
Fair value
adjustments -- -- (0.9) -- 18.8 -- 17.9
Inflation
uplift on
index-linked
debt -- (2.3) (14.7) -- -- -- (17.0)
Foreign
exchange -- -- (7.9) -- -- -- (7.9)
Other
non-cash
movements -- (0.2) 1.3 (2.4) -- -- (1.3)
-------------- -------------- ---------- ------------ -------------- -------------- -------------- ----------
As at 30
September
2019 23.3 (1,196.6) (4,842.7) (128.7) 55.9 132.0 (5,956.8)
-------------- -------------- ---------- ------------ -------------- -------------- -------------- ----------
14. Post balance sheet events
There have been no significant post balance sheet events.
15. Contingent liabilities
Details of the Group's contingent liabilities were disclosed in
the financial statements for the year ended 31 March 2019 which
were approved on 20 May 2019. There have been no significant
developments relating to the contingent liabilities disclosed in
those financial statements.
16. Related party transactions
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
included in this note. Trading transactions between the Group and
its joint venture, Water Plus, are disclosed below.
Six months ended 30 September
2019 2018
GBPm GBPm
--------------------- ------ ------
Sale of services 156.5 170.9
Net interest income 1.6 1.8
---------------------- ------ ------
Outstanding balances between the Group and the joint venture
were as follows:
30 September 31 March
2019 2019
GBPm GBPm
------------------------------------------------------ ------------- ---------
Trade and other receivables due from related parties -- 2.3
Trade and other payables due to related parties (0.6) --
Loans due from joint ventures 132.0 142.0
------------------------------------------------------- ------------- ---------
131.4 144.3
------------------------------------------------------ ------------- ---------
The retirement benefit schemes operated by the Group are
considered to be related parties. Details of transactions and
balances with the retirement benefit schemes are disclosed in note
10.
17. Alternative performance measures
Financial measures or metrics used in this report that are not
defined by IFRS are alternative performance measures (APMs). The
Group uses such measures for performance analysis because they
provide additional useful information on the performance and
position of the Group. Since the Group defines its own alternative
performance measures, these might not be directly comparable with
other companies' alternative performance measures. These measures
are not intended to be a substitute for, or superior to, IFRS
measurements.
a) Underlying PBIT
Underlying profit before interest and tax is profit before
interest and tax excluding exceptional items as recorded in the
income statement and amortisation of intangible assets recognised
on acquisition of subsidiaries. This provides a consistent measure
of operating performance excluding distortions caused by
exceptional items. The calculation of this APM is shown on the face
of the Income Statement and in note 2 for reportable segments.
b) Underlying earnings per share
Underlying earnings per share figures are presented for
continuing operations. These exclude the effects of exceptional
items, amortisation of intangible assets recognised on acquisition
of subsidiaries, net gains/(losses) on financial instruments,
current tax on exceptional items and on net gains/(losses) on
financial instruments, exceptional current tax and deferred tax.
The directors consider that the underlying figures provide a useful
additional indicator of performance and remove non-performance
related distortions. See note 7.
c) Net debt
Net debt comprises borrowings including remeasurements for
changes in fair value of amounts in fair value hedging
relationships, cross currency swaps that are used to fix the
sterling liability of foreign currency borrowings (whether hedge
accounted or not), net cash and cash equivalents, and loans to
joint ventures. See note 13.
17. Alternative performance measures (continued)
d) Effective interest rate
The effective interest rate is calculated as net finance costs,
excluding net finance costs from pensions, plus capitalised finance
costs divided by the monthly average net debt during the
period.
(net finance costs - net finance costs from pensions +
capitalised finance costs)
(monthly average net debt)
2019 2018
GBPm GBPm
-------- --------
Net finance costs 93.8 93.1
Net finance costs from pensions (5.4) (6.9)
Capitalised finance costs 21.1 15.7
109.5 101.9
--------------------------------- -------- --------
Annualised 219.0 203.8
--------------------------------- -------- --------
Monthly average net debt 5,902.9 5,405.7
Effective interest rate* 3.7% 3.8%
--------------------------------- -------- --------
* the rate is the annualised equivalent interest rate based on
that calculated for the six month period
This APM is used as it shows the average interest rate that is
attributable to the net debt of the business.
e) Effective cash cost of interest
The effective cash cost of interest is calculated on the same
basis as the effective interest rate except that it excludes
finance costs that are not paid in cash but are accreted to the
carrying value of the debt (principally inflation adjustments on
index-linked debt).
(net finance costs - net finance costs from pensions - inflation
adjustments + capitalised finance costs)
(monthly average net debt)
2019 2018
GBPm GBPm
---------------------------------- -------- --------
Net finance costs 93.8 93.1
Net finance costs from pensions (5.4) (6.9)
Inflation adjustments (17.0) (18.0)
Capitalised finance costs 21.1 15.7
----------------------------------
92.5 83.9
---------------------------------- -------- --------
Annualised 185.0 167.8
----------------------------------
Monthly average net debt 5,902.9 5,405.7
---------------------------------- -------- --------
Effective cash cost of interest* 3.1% 3.1%
---------------------------------- -------- --------
* the rate is the annualised equivalent interest rate based on
that calculated for the six month period
This is used as it shows the average cash interest rate based on
the net debt of the business.
17. Alternative performance measures (continued)
f) PBIT interest cover
The ratio of underlying PBIT (see (a) above) to net finance
costs excluding finance costs from pensions.
Underlying PBIT
(net finance costs - net finance costs from pensions)
2019 2018
GBPm GBPm
------ ------
Underlying PBIT 286.3 299.1
------------------------------------------------------------- ------ ------
Net finance costs 93.8 93.1
Net finance costs from pensions (5.4) (6.9)
Net finance costs excluding net finance costs from pensions 88.4 86.2
------------------------------------------------------------- ------ ------
ratio ratio
PBIT interest cover ratio 3.2 3.5
------------------------------------------------------------- ------ ------
This is used to show how the underlying PBIT of the business
covers the financing costs associated only with net debt on a
consistent basis.
g) EBITDA and EBITDA interest cover
The ratio of underlying PBIT before, depreciation and
amortisation to net finance costs excluding net finance costs from
pensions.
(underlying PBIT + depreciation + amortisation)
(net finance costs - net finance costs from pensions)
2019 2018
GBPm GBPm
--------------------------------------------------------------------- ------ ------
Underlying PBIT 286.3 299.1
Depreciation 167.3 161.2
Amortisation (excluding amortisation of acquired intangible assets) 15.5 12.7
EBITDA 469.1 473.0
--------------------------------------------------------------------- ------ ------
Net finance costs 93.8 93.1
Net finance costs from pensions (5.4) (6.9)
Net finance costs excluding finance costs from pensions 88.4 86.2
--------------------------------------------------------------------- ------ ------
ratio ratio
EBITDA interest cover ratio 5.3 5.5
--------------------------------------------------------------------- ------ ------
This is used to show how the EBITDA of the business covers the
financing costs associated only with net debt on a consistent
basis.
17. Alternative performance measures (continued)
h) Underlying effective current tax rate
The current tax charge for the year on continuing operations,
excluding prior year charges, exceptional current tax, current tax
on exceptional items, financial instruments and acquired intangible
assets, divided by profit from continuing operations before tax,
exceptional items, net gains/losses on financial instruments,
amortisation of acquired intangible assets and share of net
profit/loss of joint ventures accounted for using the equity
method.
(current period current tax charge in the income statement - tax
on exceptional items - tax on financial instruments - tax on
amortisation of acquired intangible assets)
(PBT - share of net profit/loss of JVs - exceptional items - net
gains/losses on financial instruments - amortisation of acquired
intangible assets)
2019 2018
Current tax thereon Current tax thereon
GBPm GBPm GBPm GBPm
-------------------------------------------- ------ -------------------- ------ --------------------
Profit before tax 180.7 (18.6) 203.6 (23.7)
-------------------------------------------- ------ -------------------- ------ --------------------
Adjustments
Share of net loss of joint ventures 9.3 -- 0.9 --
Net losses on financial instruments 1.5 (1.3) 1.5 (1.3)
Amortisation of acquired intangible assets 1.0 -- -- --
192.5 (19.9) 206.0 (25.0)
-------------------------------------------- ------ -------------------- ------ --------------------
Underlying effective current tax rate 10.3% 12.1%
-------------------------------------------- ------ -------------------- ------ --------------------
This APM is used to be remove distortions in the underlying tax
charge and create a metric broadly consistent with the calculation
of underlying earnings per share in note 7. Share of net loss of
joint ventures is excluded from the calculation because this is
calculated after tax and the tax on joint venture losses is
therefore not included in the current tax charge.
Responsibility statement
We confirm to the best of our knowledge:
(a) the condensed set of financial statements has been prepared
in accordance with IAS 34 "Interim Financial Reporting"; and
(b) the interim management report includes a fair review of the
information required by Disclosure and Transparency Rules 4.2.7R
and 4.2.8R of the United Kingdom Financial Conduct Authority.
Signed on behalf of the Board who approved the half yearly
financial report on 20 November 2019.
Andrew Duff James Bowling
Chairman Chief Financial Officer
Independent review report to Severn Trent Plc
We have been engaged by the Company to review the condensed set
of financial statements in the half yearly financial report for the
six months ended 30 September 2019 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated statement of changes in equity, the
condensed consolidated cash flow statement and related notes 1 to
17. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the Company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our review
work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2019 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
20 November 2019
Glossary
Asset Management Plan (AMP)
Price limit periods are sometimes known as AMP (Asset Management
Plan) periods. The current period is known as AMP6 (2015-2020)
because it is the sixth cycle since the water industry was
privatised in 1989.
C-MeX (Customer Measure of Experience)
The proposed Customer Measure of Experience (C-MeX) will replace
the SIM (see below) as the incentive for companies to improve the
experience of residential customers from 1 April 2020 onwards.
Customer ODI (Outcome Delivery Incentive)
A framework made up of outcomes, measures, targets and
incentives which provides companies with rewards for achieving
stretching performance targets and compensates customers if
performance is below performance targets. This was first introduced
at the 2014 price review (PR14) by the regulator, Ofwat.
Final Determination (FD)
The outcome of the price review process that sets price,
investment and services packages that customers receive.
Ofwat
The water industry's economic regulator in England &
Wales.
Notional Net Debt
For each price review Ofwat sets a nominal capital structure for
companies in determining prices limits. This includes a notional
(assumed) regulatory gearing level. Notional net debt is the RCV
multiplied by the notional regulatory gearing level.
PR14 / PR19
The price review (PR) is a financial review process led by Ofwat
where wholesale price controls for water and sewage companies are
set every five years. PR19 (Price Review 2019) will set wholesale
price controls for water and sewerage companies for 2020 to
2025.
Price limits
The price limits are set to enable water companies to deliver
the services required of them over the AMP period. These include
allowing for capital maintenance of assets, ensuring security of
supply and meeting drinking water and environmental quality
requirements.
Regulatory Capital Value (RCV)
The regulatory capital value is used to measure the capital base
of a company when setting price limits. The regulatory capital
value represents the initial market value of a company, including
debt, plus new capital expenditure.
Regulatory Gearing
Regulating gearing is calculated as net debt divided by the
RCV.
RoRE
Return on Regulated Equity (RoRE) measures the returns (after
tax and interest) that companies have earned by reference to the
notional regulated equity, where regulated equity is calculated
from the RCV and notional net debt.
Service Incentive Mechanism (SIM)
The SIM allows comparison of companies' performance. It measures
the following aspects of service delivery:
i) Where customers have made contact regarding a service issue,
for example, phoning about a billing error or writing to complain
about a water supply problem.
ii) A customer survey measuring how well companies have handled
all types of customer contacts, not just when things have gone
wrong.
Companies receive rewards or penalties in the price review
depending on their SIM performance.
Totex
Totex (shortened form of total expenditure) includes operating
expenditure (opex), infrastructure renewals expenditure (IRE) and
capital expenditure (capex).
Waste cap
The limit on the amount of outperformance payments for waste
water related ODIs. In December 2018 this was increased from 2.0%
of RoRE to 2.6% of RoRE for Severn Trent.
WRFIM (Wholesale Revenue Forecasting Incentive Mechanism)
A mechanism to reduce the impact of deviations on customer bills
arising from revenue forecasting deviations by
adjusting companies' allowed revenues for each year to take
account of differences between actual and projected revenues, and
incentivising companies to avoid revenue forecasting errors through
applying a penalty to variations that fall outside a set
uncertainty band (or 'revenue flexibility threshold').
Cautionary statement regarding forward-looking statements
This document contains statements that are, or may be deemed to
be, 'forward-looking statements' with respect to Severn Trent's
financial condition, results of operations and business and certain
of Severn Trent's plans and objectives with respect to these
items.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would',
'should', 'expects', 'believes', 'intends', 'plans', 'projects',
'potential', 'reasonably possible', 'targets', 'goal', 'estimates'
or words with a similar meaning, and, in each case, their negative
or other variations or comparable terminology. Any forward-looking
statements in this document are based on Severn Trent's current
expectations and, by their very nature, forward-looking statements
are inherently unpredictable, speculative and involve risk and
uncertainty because they relate to events and depend on
circumstances that may or may not occur in the future.
Forward-looking statements are not guarantees of future
performance and no assurances can be given that the forward-looking
statements in this document will be realised. There are a number of
factors, many of which are beyond Severn Trent's control, that
could cause actual results, performance and developments to differ
materially from those expressed or implied by these forward-looking
statements. These factors include, but are not limited to: the
Principal Risks disclosed in our latest Annual Report and Accounts
(which have not been updated since the date of its publication);
changes in the economies and markets in which the Group operates;
changes in the regulatory and competition frameworks in which the
Group operates; the impact of legal or other proceedings against or
which affect the Group; and changes in interest and exchange
rates.
All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to Severn
Trent or any other member of the Group or persons acting on their
behalf are expressly qualified in their entirety by the factors
referred to above. No assurances can be given that the
forward-looking statements in this document will be realised. This
document speaks as at the date of publication. Save as required by
applicable laws and regulations, Severn Trent does not intend to
update any forward-looking statements and does not undertake any
obligation to do so. Past performance of securities of Severn Trent
Plc cannot be relied upon as a guide to the future performance of
securities of Severn Trent Plc.
Nothing in this document should be regarded as a profits
forecast.
This document is not an offer to sell, exchange or transfer any
securities of Severn Trent Plc or any of its subsidiaries and is
not soliciting an offer to purchase, exchange or transfer such
securities in any jurisdiction. Securities may not be offered, sold
or transferred in the United States absent registration or an
applicable exemption from the registration requirements of the US
Securities Act of 1933 (as amended).
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR VBLFLKFFEFBL
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November 21, 2019 02:00 ET (07:00 GMT)
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