Half-yearly Report
Half Yearly Financial Report
27 November 2007
Interim Results for the six months to 30 September 2007
FOCUS ON WATER
Highlights
* Good progress achieved in driving higher standards and greater efficiency
* PBIT1 up 14.2% to £250.0 million
* Basic EPS up 15.9% to 64.7 pence/share
* On target to meet Ofwat determination for operating costs in 2007/08
* Interim dividend increased by 6.9% to 24.34 pence per share - in line with
3% real growth policy
Group results
30 Sept 30 Sept Increase/
2007 2006 (Decrease)
£m £m %
Group turnover 774.0 746.2 3.7
Group PBIT 1 250.0 219.0 14.2
Profit before tax 2 161.5 142.3 13.5
Profit before tax 149.5 159.8 (6.4)
pence/ pence/
share share
Adjusted basic EPS 3 47.6 42.1 13.1
Basic EPS 64.7 55.8 15.9
Interim dividend declared 24.34 22.77 6.9
1 before exceptional items (see note 3)
2before exceptional items and IAS39 fair value adjustments
3 from continuing operations, before exceptional items, IAS39 fair value
adjustments and deferred tax (see note 6)
Sir John Egan, Chairman Severn Trent Plc, said:
"I am pleased to report today on what has been a period of good progress. We
have moved from restructuring the business to the implementation of our plans
to raise standards and drive efficiency through continuous improvement. Given
our continued momentum, I am delighted to announce, in line with our policy, a
6.9% increase in the interim dividend to 24.34p."
Tony Wray, Chief Executive Severn Trent Plc, said:
"These results demonstrate that our strategy of focusing on water is already
showing early signs of success. Our improvement plans are leading to rising
standards of customer service, a significant reduction in levels of leakage and
a continuing downward trend in pollution incidents. We are on track to meet
Ofwat's determination for operating costs for the full year and to deliver our
capital programme for the remainder of the period. We continue to be in line to
achieve around 6% capital efficiencies compared to Ofwat's Final Determination
for AMP4.
Raising standards of performance is my absolute priority and we have set
ourselves ambitious objectives for the coming years. By raising standards we
expect to continue to improve customer service and generate sustained financial
returns for our shareholders."
Enquiries:
Tony Wray Severn Trent 020 7353 4200 (on the
Plc day)
Chief Executive 0121 722 4938
Mike McKeon Severn Trent 020 7353 4200 (on the
Plc day)
Finance Director 0121 722 4319
Peter Gavan Severn Trent 020 7353 4200 (on the
Plc day)
Director of External Affairs 0121 722 4310
Venetia Cooper Severn Trent 020 7353 4200 (on the
Plc day)
Investor Relations Manager 0121 722 4523
David Trenchard Tulchan 020 7353 4200
Peter Hewer Communications
Interim Results Presentation and Webcast
There will be an interim results presentation at 9:30am on Tuesday 27 November
2007. This presentation, together with the presentation slides, will be
available as a simultaneous webcast on the Severn Trent web site
(www.severntrent.com) and will remain on the web site for subsequent viewing.
Interim Management Report
Operating Review
Focus on Water
With the appointment of Tony Wray as Chief Executive on 2 October 2007, we have
completed the integration of the head office and Severn Trent Water teams and
now have one executive team focused on our core water activities. This final
step in the integration completes the process of reducing the number of
management layers between the Board and the front line of customer service
delivery and aligns with our aim to continue our focus on raising standards.
Water and Sewerage
As described in our Annual Report published in June 2007, we have set ourselves
ambitious objectives to raise standards and drawn up action plans for achieving
them, including the establishment of a comprehensive suite of Key Performance
Indicators (KPIs) to measure and raise standards. The successful execution of
these improvement activities is planned to radically change our business over a
period of years.
The period under review represents the first step in our journey of continually
striving to raise standards and driving greater efficiency across the business.
We have maintained our existing high standards in a number of areas, including
water quality and the control of category 1 and 2 (the more serious) pollution
incidents and we continue to focus on improving health and safety standards.
Our focus on continuous improvement is delivering tangible results in our
improved performance on leakage management, with a significant reduction in
levels of leakage in the period to date compared to the previous financial
year. We remain committed to achieving the Ofwat annual target for the year
ending 31 March 2008. We are also able to report continuing progress on
improving customer service levels. Whilst we are making strong progress in many
areas, we understand that we need to continue this process as there are still
areas where we need further improvement.
We are on track to deliver on our ambition to meet the Ofwat determination for
operating costs for the full year 2007/08. The capital programme is also
continuing to proceed according to plan. The previously announced efficiencies
of around 6% over the Ofwat determination continue to be deliverable over the
remaining AMP4 period and are consistent with meeting our full regulatory
commitments.
The unprecedented wet weather in the summer of 2007 brought significant
challenges to the organisation, with significant levels of flooding across
Tewkesbury, Cheltenham and Gloucester.
Our mission was to get our customers back on supply as quickly as possible.
Full restoration of supplies was achieved within 17 days thanks to our
customers' support and the diligent work carried out by the staff of Severn
Trent, our suppliers, local authorities, other water companies, the armed
forces and the emergency services.
It was a magnificent response to the biggest single incident the UK Water
industry has ever faced.
Although the financial cost to the company is still to be fully evaluated, the
costs incurred and committed to date have been provided for in these results.
These costs amount to £18.2 million (£23.2 million of gross costs, before £5.0
million interim insurance payments). We are continuing to assess the long-term
damage to over 150 Waste Water sites, however we currently have no reason to
revise our previous estimates of £25 million to £35 million gross economic
cost. Our estimates of insurance recoveries also remain unchanged at between £
10 million and £20 million.
Despite the challenges of the summer flooding, we have made good progress in
the period, restructuring our organisation and focusing on delivery of the
KPIs; but much remains to be done and this will remain our focus over the
remainder of this year and beyond.
Water Technologies and Services
Water Technologies and Services' growth strategy is to focus on our core
strengths, by expanding our existing technologies into new geographical markets
and by taking new technologies into our existing markets. This is expressed by
the business continuing to deliver against three key financial criteria:
continued revenue growth, margin growth and an improving return on invested
capital. The results in the period show progress on all three.
Group Financial Performance
In this Interim Results announcement PBIT is profit from continuing operations
before interest and tax; PBIT1 is PBIT excluding exceptional items as set out
in note 3.
Group turnover from continuing operations was £774.0 million (£746.2 million),
an increase of 3.7% over the same period last year. The growth in reported
turnover was mainly due to the price increases in Severn Trent Water.
Group PBIT1 increased by 14.2% to £250.0 million (£219.0 million). Beyond the
net increase in turnover, the factors affecting PBIT1 were an increase in the
level of infrastructure renewals expenditure and an increase in depreciation,
reflecting the growing asset base in Water and Sewerage. There was margin
growth in Water Technologies and Services. There were net exceptional charges
of £21.4 million (exceptional gain of £4.2 million). Group PBIT has increased
2.4% to £228.6 million (£223.2 million).
Water and Sewerage
Turnover in Water and Sewerage increased by 4.9% in 2007/08, to £640.6 million.
Sales prices increased by 5.87% (including inflation) from 1 April 2007.
PBIT1 was up by 9.5% on the same period last year, to £247.1 million. Beyond
the increase in turnover, a number of factors impacted PBIT1, principally; a
decrease in energy costs of £5.8 million, other cost increases (net of
efficiencies) of £6.8 million, increase in infrastructure renewals expenditure
of £4.2 million, and an increase in depreciation charges of £3.5 million
reflecting the growing asset base.
During the period, Severn Trent Water invested £258.1 million (UK GAAP, gross)
in fixed assets and maintaining and improving its infrastructure network.
Included in this total was net infrastructure maintenance expenditure of £46.7
million, charged to the income statement under IFRS.
Adjusting for minor timing differences and modifications to the AMP4 (Asset
Management Plan) capital programme (notified to Ofwat through the change
control process) we are on track to deliver this programme over the AMP4
period. We continue to be in line to achieve around 6% efficiencies compared to
Ofwat's Final Determination for AMP4.
Water Technologies and Services
Turnover in Water Technologies and Services at £146.4 million in the period was
down 2.1% on the same period last year. As set out in the table below,
adjusting for the effect of the sale of a small business (Pipeline Services)
and removing the impact of changing exchange rates, turnover rose by 6.3%.
30 Sept 30 Sept Increase/
2007 2006 (Decrease)
£m £m %
Turnover 146.4 149.5 (2.1)
Pipeline Services - (5.2)
146.4 144.3
Exchange rate impact - (6.6)
146.4 137.7 6.3
Water Technologies and Services' PBIT1 increased by 12.2% to £10.1 million. The
improvement mainly arises from improved margins across all principal
businesses. The impact of changing exchange rates was immaterial.
Corporate and Other
Following the sale of Severn Trent Property and other property interests, the
sole remaining "other" business in this segment is the Group's captive
insurance company. Henceforth, this is reported together with unallocated
corporate costs as "Corporate and Other" in our segmental analysis. All prior
period numbers have been restated for comparative purposes.
Corporate and Other incurred a loss before interest, tax and exceptional items
of £5.3 million (loss of £14.8 million). Corporate costs have now reduced by £
7.6 million from £13.5 million in the prior period.
Exceptional items
There was a net exceptional operating charge, on continuing operations, in the
six months to 30 September 2007 of £21.4 million (exceptional gains £4.2
million) comprising:
* Costs, net of £5.0 million interim insurance payments, of £18.2 million
arising from the impact of flooding in the summer of 2007; and
* Charge of £3.2 million in Severn Trent Water arising from the continuing
programme to improve, restructure and realign the business.
We estimate that we are likely to incur around £8 million of costs in relation
to our improvement plans in the full year 2007/08.
Profit from continuing operations
After net finance costs of £88.6 million (£77.3 million) and share of results
of associates and joint ventures of £0.1 million (£0.6 million), Group profit
from continuing operations before tax, exceptional items and IAS 39 fair value
adjustments, increased by 13.5% to £161.5 million (£142.3 million). Group
profit from continuing operations before tax was £149.5 million (£
159.8 million).
Taxation
The total tax credit for the period was £2.6 million (£46.2 million charge), of
which current tax represented a charge of £46.1 million (£43.8 million) and
deferred tax was a credit of £48.7 million (charge of £2.4 million). Profit for
the period from continuing operations was £152.1 million (£113.6 million).
The effective rate of current tax on continuing businesses, excluding prior
year charges and exceptional items, calculated on profit before tax,
exceptional items and IAS 39 fair value adjustments was 30.5% (30.8% restated).
Going forward, we expect the effective current tax rate for the full year 2007/
08 to be in the range of 28% to 32%.
The Finance Act 2007 implemented a reduction in the corporation tax rate from
30% to 28% with effect from 1 April 2008. The impact of this rate reduction on
the deferred tax provision has been reflected in these financial statements and
has resulted in a deferred tax credit of £54.0 million in the profit and loss
account and a credit of £5.4 million to reserves. As well as the reduction in
corporation tax rate, the 2007 Budget also announced the phasing out of
Industrial Buildings Allowances. However, the legislation to implement this
change has not been enacted and therefore no adjustment to the deferred tax
provision has been made in respect of this.
Earnings per share
Basic earnings per share from continuing and discontinued operations were 64.7
pence (55.8 pence). Adjusted basic earnings per share from continuing
operations (before exceptional items, IAS 39 fair value adjustments and
deferred tax) were 47.6 pence (42.1 pence).
Cash flow
Total Total
30 Sept 30 Sept
2007 2006
£m £m
Cash generated from operations 390.3 392.5
Net capital expenditure (217.5) (192.7)
Net interest paid (55.2) (59.6)
Tax paid (37.0) (21.1)
Other cash flows - 0.4
Free cash flow 80.6 119.5
Dividends (90.8) (111.3)
Acquisitions and disposals - 69.7
Issue of shares 7.1 7.7
Change in net debt from cash flows (3.1) 85.6
Non cash movements (35.5) 9.0
Change in net debt (38.6) 94.6
Net debt at 1 April (3,127.6) (2,961.1)
Net debt at 30 September (3,166.2) (2,866.5)
Net debt comprises:
Cash and cash equivalents 423.2 475.2
Borrowings - current liabilities (430.4) (541.1)
Borrowings - non-current (3,159.0) (2,800.6)
liabilities
(3,166.2) (2,866.5)
Cash generated from operations was £390.3 million (£392.5 million). Capital
expenditure net of grants and proceeds of sales of fixed assets was £217.5
million (£192.7 million). Net interest paid decreased to £55.2 million (£
59.6 million) due to a higher proportion of indexed linked debt (and therefore
lower cash interest payments) compared to the prior period.
Net debt at 30 September 2007 was £3,166.2 million (£2,866.5 million). Balance
sheet gearing (net debt/ net debt plus equity) at the half year is 72.4% (31
March 2007 73.3%). The group's net interest charge, excluding IAS 39 fair value
adjustments, was covered 4.1 times (4.8 times) by profit before interest, tax,
depreciation and exceptional items, and 2.8 times (2.8 times) by PBIT1.
Pensions
The group has four defined benefit pension schemes, of which the Severn Trent
Pension Scheme (STPS) is by far the largest. Formal actuarial valuations were
last undertaken for the STPS and another scheme, the Severn Trent Senior Staff
Pension Scheme (SSPS), as at 31 March 2004. The actuarial valuation for the
STPS as at 31 March 2007 is currently in progress and will impact the financial
statements from March 2008.
On an IAS 19 basis, the estimated net position (before deferred tax) of all of
the group's defined benefit pension schemes was a deficit of £118.5 million as
at 30 September 2007. This compares to a deficit of £135.1 million as at 31
March 2007.
On an IAS 19 basis, the funding level has improved from around 91% at 31 March
2007 to around 92% at 30 September 2007.
As at 30 September 2007 the group's defined benefit pension schemes had total
assets of approximately £1,404.0 million.
Treasury management
The group's policy for the management of interest rate risk requires that no
less than 50% of the group's borrowings should be at fixed interest rates, or
hedged through the use of interest rate swaps or forward rate agreements. At 30
September 2007, interest rates for some 69% of the group's net debt of £3,166.2
million were so fixed, at a weighted average interest rate of 5.6% for a
weighted average period of around 20 years. Indexed linked debt grew by around
£400 million in the period and now amounts to £1,024 million, 31% of total
debt.
Exchange rates
The trading results of overseas subsidiaries are translated to sterling at the
average rate of exchange ruling during the period and their net assets are
translated at the closing rate on the balance sheet date.
Regulatory matters
Severn Trent Plc announced on 22 November 2007 that the Serious Fraud Office
(SFO) is to bring three charges against Severn Trent Water Ltd under section
207 Water Industry Act 1991, namely, providing false information to Ofwat. The
three charges will relate to the leakage data in the June Returns for 2000,
2001 and 2002.
The SFO has also informed Severn Trent that no individual will be charged with
any offences.
The company will consider carefully the details of the charges and take legal
advice before deciding how to respond.
Ofwat had been conducting its own investigation following allegations of false
reporting made by an employee of Severn Trent Water in May 2004. On 7 March
2006 Ofwat published its interim report concerning the allegations of false
reporting made against Severn Trent Water in 2004. In responding to the report
Severn Trent apologised to customers and has credited customers' accounts and
reduced future tariffs.
Severn Trent also acknowledged that Ofwat may expect further amends to be made
to customers. Ofwat has stated that this sum will be considered with Severn
Trent Water on completion of the SFO investigation into leakage.
In April 2006 Severn Trent Plc announced that Severn Trent Water had uncovered
misstated customer relations data in submissions to Ofwat. Consequently, in
June 2006 Ofwat issued a notice under Section 22A(4) of the Water Industry Act
in relation to performance standards and a notice under Section 203 of that Act
in relation to regulatory reporting. Ofwat has indicated that it proposes to
fine Severn Trent Water in relation to these matters. Ofwat has communicated
with Severn Trent regarding the fines that it intends to impose although the
process is ongoing and no conclusion has been reached.
No reliable estimates can currently be made of amounts that may become payable
for any of these issues and therefore no provisions have been recognised in
these interim financial statements.
Dividend
In line with its policy for growing dividends by 3% above the rate of inflation
until March 2010, the Board is proposing an interim ordinary dividend of 24.34p
(2006/07 - 22.77p), an increase of 6.9% over the 2006/07 interim ordinary
dividend. The interim ordinary dividend is payable on 16 January 2008 to
shareholders on the register at 7 December 2007.
Strategic Direction Statement
Severn Trent has been active in promoting the longer term view. We published
our draft Strategic Direction Statement (SDS) on 17 October 2007 and are now in
the process of reviewing the results from the consultation period.
The SDS highlights eight "Key Strategic Intentions" (KSIs) which have been
developed to address the needs of our key stakeholders over the next 25 years
into AMP9.
The service improvements we have proposed in the SDS would result in an
investment of about 10% higher than the levels observed in the last 10 years.
This would amount to a 34% growth in Regulatory Capital Value (RCV) over the 25
year period and would result in a 1% real increase in bills per annum.
A full copy of the draft SDS is available at www.stwater.co.uk/sds.
Principal risks and uncertainties
The principal risks and uncertainties affecting the business activities of the
Group remain those detailed on page 33 in the Report and Accounts for the year
ended 31 March 2007, a copy of which is available on the Company's website at
www.severntrent.com.
With regard to the remaining six months of the year, there are two principal
areas of risk which could have a material impact on the Group's performance
during that period and cause actual results to differ materially from expected
and historical results.
Significant asset failure and inability to carry out critical operations. We
are subject to risks that are largely outside of our control, such as the
impact of climate change, weather or unlawful acts of third parties, including
terrorist attacks, sabotage or other intentional acts which may physically
damage our business or otherwise cause a significant interruption to the supply
of our services.
Regulatory risk. We comment in "Regulatory matters" above on the primary
uncertainties affecting Severn Trent for the remaining six months of the year,
in that we are unable to make a reliable estimate of the amounts that might
become payable as a result of the SFO charges and Ofwat investigations. In
addition, Severn Trent Water has given Ofwat an s.19 undertaking with regard to
achieving compliance with leakage targets for the full year to 31 March 2008.
As described in the Operating Review section above, we have achieved
significant reductions in the levels of leakage and remain committed to
achieving the Ofwat target.
Outlook
Excluding the exceptional impact of the flooding, performance at our principal
business, Severn Trent Water, has been as expected in the first half of 2007/
08, with a continued focus on the operating cost challenge of the AMP4
contract. We are on track to meet the Ofwat determination for operating costs
for the full year 2007/08.
The capital programme is proceeding according to plan and we expect that the
previously announced efficiencies of around 6% over the Ofwat determination
continue to be deliverable over the remaining AMP4 period.
As a result of the implementation of our improvement plans we are likely to
incur around £8 million of restructuring costs in the full year 2007/08.
Severn Trent is a high quality business whose investment programme drives
strong growth prospects. The management team has a clear and focused strategy
and is engaged in the single minded pursuit of higher standards as the means to
achieve both higher levels of customer satisfaction, and also sustained strong
financial returns to shareholders.
Further information
For further information, including the group's interim results presentation,
see the Severn Trent website (www.severntrent.com).
Condensed consolidated income statement
Six months ended 30 September 2007
Six months ended 30 September 2007 2006
(Restated)
Notes £m £m
Turnover 2 774.0 746.2
Operating costs before exceptional items (524.0) (527.2)
Exceptional flood costs 3 (18.2) -
Exceptional restructuring costs 3 (3.2) -
Exceptional demerger costs 3 - (10.1)
Total operating costs (545.4) (537.3)
Exceptional profit on disposal of property and 3 - 14.3
businesses
Profit before interest, tax and exceptional 2 250.0 219.0
items
Exceptional items 3 (21.4) 4.2
Profit before interest and tax 2 228.6 223.2
Finance income 58.4 45.1
Finance costs (147.0) (122.4)
Net finance costs before fair value movements (88.6) (77.3)
on treasury instruments
Fair value movements on treasury instruments 9.4 13.3
Total net finance costs (79.2) (64.0)
Share of results of associates and joint 0.1 0.6
ventures
Profit before tax, fair value movements on 161.5 142.3
treasury instruments and exceptional items
Exceptional items (21.4) 4.2
Fair value movements on treasury instruments 9.4 13.3
Profit on ordinary activities before taxation 149.5 159.8
Taxation on profit on ordinary activities
- current tax (46.1) (43.8)
- deferred tax 48.7 (2.4)
Total taxation 4 2.6 (46.2)
Profit for the period from continuing 152.1 113.6
operations
Discontinued operations
Profit for the period from discontinued - 16.8
operations
Profit for the period 152.1 130.4
Attributable to:
Equity holders of the Company 150.9 129.5
Equity minority interests 1.2 0.9
152.1 130.4
Earnings per share (pence)
From continuing operations
Basic 6 64.7 48.6
Diluted 6 64.2 48.1
From continuing and discontinued operations
Basic 6 64.7 55.8
Diluted 6 64.2 55.3
Condensed consolidated balance sheet
At 30 September 2007
30 S 31 March
eptember
2007 2007
(Restated)
Notes £m £m
Non current assets
Goodwill 48.4 49.1
Other intangible assets 100.4 101.2
Property, plant and equipment 5,612.0 5,521.1
Interests in joint ventures 0.5 0.5
Interests in associates 3.5 3.4
Derivative financial instruments 20.1 19.1
Available for sale financial assets 0.2 0.2
5,785.1 5,694.6
Current assets
Inventory 23.8 22.4
Trade and other receivables 432.6 387.1
Derivative financial instruments 1.4 1.6
Cash and cash equivalents 423.2 143.2
881.0 554.3
Total assets 6,666.1 6,248.9
Current liabilities
Borrowings 7 (430.4) (631.8)
Derivative financial instruments (13.9) (9.6)
Trade and other payables (519.3) (405.1)
Current income tax liabilities (64.6) (59.0)
Provisions for other liabilities and charges (1.5) (6.7)
(1,029.7) (1,112.2)
Non-current liabilities
Borrowings 7 (3,159.0) (2,639.0)
Derivative financial instruments (91.3) (113.7)
Trade and other payables (186.6) (188.3)
Deferred tax liabilities (841.3) (891.1)
Retirement benefit obligations 8 (118.5) (135.1)
Provisions for other liabilities and charges (34.7) (32.2)
(4,431.4) (3,999.4)
Total liabilities (5,461.1) (5,111.6)
Net assets 1,205.0 1,137.3
Capital and reserves attributable to the Company
's equity shareholders
Called up share capital 9 229.5 228.3
Share premium account 63.4 57.5
Other reserves 418.9 419.0
Retained earnings 489.4 429.4
Equity attributable to the Company's equity 1,201.2 1,134.2
shareholders
Minority interests 3.8 3.1
Total equity 1,205.0 1,137.3
Condensed consolidated cash flow statement
Six months ended 30 September 2007
Six months ended 30 September 2007 2006
Notes £m £m
Cash generated from operations 10 390.3 392.5
Interest paid (68.1) (60.7)
Interest element of finance lease rental payments - (1.0)
Tax paid (37.0) (21.1)
Net cash generated from operating activities 285.2 309.7
Investing activities
Interest received 12.9 2.1
Net cash inflow from available for sale fixed - 0.4
asset investments
Proceeds on disposal of subsidiaries net of cash - 40.4
disposed
Proceeds on disposal of associate - 29.3
Proceeds on disposal of property, plant and 4.2 4.8
equipment
Purchases of intangible assets (13.2) (11.8)
Purchases of property, plant and equipment (227.5) (200.0)
Contributions and grants received 19.0 14.3
Net cash used in investing activities (204.6) (120.5)
Financing activities
Dividends paid to shareholders of the parent (90.4) (111.3)
Dividends paid to minority interests (0.4) -
Repayments of borrowings (510.9) (684.5)
Repayment of obligations under finance leases - (0.8)
New finance lease obligations 5.7 -
New loans raised 789.7 964.8
Issue of shares 7.1 7.7
Net cash generated from financing activities 200.8 175.9
Increase in cash and cash equivalents 281.4 365.1
Net cash and cash equivalents at beginning of the 143.1 110.4
period
Effect of foreign exchange rates (1.9) (1.6)
Net cash and cash equivalents at the end of the 422.6 473.9
period
Net cash and cash equivalents comprise
Cash and cash equivalents 423.2 475.2
Bank overdrafts (0.6) (1.3)
Net cash and cash equivalents at the end of the 422.6 473.9
period
Condensed consolidated statement of recognised income and expense
Six months ended 30 September 2007
Six months ended 30 September 2007 2006
£m £m
Exchange movement on translation of overseas results (2.4) (17.2)
and net assets
Exchange differences on hedges of net investment - 5.1
Tax on exchange differences on foreign currency hedging - (1.5)
Gains on cash flow hedges taken to equity 0.7 2.0
Deferred tax on gains on cash flow hedges taken to 0.2 (0.6)
equity
Actuarial losses on defined benefit pension schemes (7.5) (48.2)
Deferred tax on actuarial losses 2.2 14.5
Change of tax rate on deferred tax previously 5.4 -
recognised directly in equity
Net expense recognised directly in equity (1.4) (45.9)
Transfers
Amounts on cash flow hedges transferred to the income 2.8 2.3
statement in the period
Deferred tax on transfers to income statement (0.8) (0.7)
2.0 1.6
Profit for the period 152.1 130.4
Total recognised income for the period 152.7 86.1
Attributable to:
Equity shareholders of the Company 151.5 85.2
Minority interests 1.2 0.9
152.7 86.1
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 2007 does not constitute statutory
accounts as defined in section 240 of the Companies Act 1985. A copy of the
statutory accounts for that year prepared under IFRS has been delivered to the
Registrar of Companies. The auditors' report on those accounts was unqualified
and did not contain statements under section 237 (2) or (3) of the Companies
Act 1985.
Accounting policies
The interim financial information has been prepared using accounting policies
consistent with International Financial Reporting Standards and in accordance
with IAS 34 "Interim Financial Reporting". 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 2007 except as set out below.
The comparative figures for the balance sheet as at 31 March 2007 have been
restated to reclassify the analysis of derivative financial instruments between
current and non-current amounts. This balance sheet was originally prepared on
the basis of widely prevailing practice at that time which was to classify as
current assets or liabilities all derivative instruments that were not
designated as hedges. However, in May 2007 the International Financial
Reporting Interpretations Committee reported that it had recommended to the
IASB that IAS 1 be amended to remove the implication that such classification
was required. In view of this decision the Group now classifies all derivative
financial assets and liabilities according to their maturity. The impact on the
comparative balance sheet as at 31 March 2007 is to decrease current assets and
increase non current assets by £12.5 million and to decrease current
liabilities and increase non current liabilities by £57.5 million.
The comparative figures for the income statement for the six months ended 30
September 2006 have been restated to disclose the results of Biffa Plc as
discontinued.
Changes in accounting policies
In the current financial year the Group will adopt International Financial
Reporting Standard 7 "Financial Instruments: Disclosures" (IFRS 7) for the
first time. As IFRS 7 is a disclosure standard, there is no impact of that
change in accounting policy on the interim financial statements. Full details
of the change will be disclosed in the Group's financial statements for the
year ending 31 March 2008.
Seasonality
The Group's businesses are not seasonal in nature.
2 Segmental analysis
The Group is organised into two main business segments:
Water and Sewerage: Provides water and sewerage services to domestic and
commercial customers in England and Wales.
Water Technologies and Services: Provides services and products associated with
water, waste water and contaminated land principally in the US, UK and Europe.
Six months ended 30 September 2007
Water and Water Corporate Eliminations Consolidated
Sewerage Technologies and Other
and Services
£m £m £m £m £m
External sales 640.5 133.5 - - 774.0
Inter-segment sales 0.1 12.9 2.6 (15.6) -
Total sales 640.6 146.4 2.6 (15.6) 774.0
Profit before 247.1 10.1 (5.3) (1.9) 250.0
interest, tax and
exceptional items
Exceptional items (21.4) - - - (21.4)
(note 3)
Profit before 225.7 10.1 (5.3) (1.9) 228.6
interest and tax
Share of results of - 0.1 - - 0.1
associates and joint
ventures
Segment result 225.7 10.2 (5.3) (1.9) 228.7
Total net finance (79.2)
costs
Profit before tax 149.5
Tax 2.6
Profit for the period 152.1
Six months ended 30 September 2006 (Restated)
Water and Water Corporate Eliminations Consolidated
Sewerage Technologies and Other
and Services
£m £m £m £m £m
External sales 609.2 136.5 0.5 - 746.2
Inter-segment sales 1.2 13.0 - (14.2) -
Total sales 610.4 149.5 0.5 (14.2) 746.2
Profit before 225.6 9.0 (14.8) (0.8) 219.0
interest, tax and
exceptional items
Exceptional items - 14.3 (10.1) - 4.2
(note 3)
Profit before 225.6 23.3 (24.9) (0.8) 223.2
interest and tax
Share of results of - 0.8 (0.2) - 0.6
associates and joint
ventures
Segment result 225.6 24.1 (25.1) (0.8) 223.8
Total net finance (64.0)
costs
Profit before tax 159.8
Tax (46.2)
Profit for the period 113.6
Discontinued operations include:
Waste US Eliminations Total
Management Laboratories
£m £m £m £m
External sales 386.9 64.0 - 450.9
Inter segment sales 3.9 1.3 (5.2) -
Total sales 390.8 65.3 (5.2) 450.9
Profit before interest, tax 50.1 5.5 - 55.6
and exceptional items
Exceptional items (note 3) 10.2 (31.5) - (21.3)
Share of results of 0.4 - - 0.4
associates and joint
ventures
Segment result 60.7 (26.0) - 34.7
Total net finance costs (0.2)
Profit before tax 34.5
Tax (17.7)
Profit for the period 16.8
3 Exceptional items
The Group classifies as exceptional items items of income or expenditure which
individually or, if of a similar type, in aggregate should, in the opinion of
the directors, be disclosed by virtue of their size or nature if the financial
statements are to give a true and fair view.
An exceptional charge of £21.4 million arose in the period. This comprised:
* A net cost of £18.2 million arising from the flooding incidents that
affected the Water and Sewerage networks during the summer of 2007. This
includes costs of £23.2 million which have been identified to date less
insurance recoveries of £5 million which have been received. The work to
identify the full extent of the costs resulting from these incidents and to
agree the amount of the insurance recoveries continues; and
* A charge of £3.2 million relating to the programme to improve, restructure
and realign the Water and Sewerage business that commenced in the year
ended 31 March 2007.
In the six months ended 30 September 2006 an exceptional credit of £4.2 million
from continuing operations and an exceptional charge of £21.3 million from
discontinued operations arose in the period ended 30 September 2006. These
comprised:
* In Water Technologies and Services, an exceptional gain on the disposal of
the Group's interest in Aquafin NV amounting to £14.3 million;
* In Corporate Expenses, exceptional costs relating to the demerger of Biffa
Plc amounting to £10.1 million; and
* In discontinued operations, an exceptional charge relating to the
impairment of goodwill in relation to the US Laboratories assets held for
sale amounting to £31.5 million and an exceptional gain on the disposal of
Biffa Belgium amounting to £10.2 million.
4 Tax
Income tax for the period is credited in the income statement at 1.7% (six
months ended 30 September 2006: charged at 28.9%), representing the best
estimate of the average annual effective income tax rate expected for the full
year applied to the pre tax income of the six month period.
The effective rate of current tax on continuing businesses, excluding prior
year charges and exceptional items, calculated on profit before tax,
exceptional items and fair value movements on treasury instruments was 30.5%
(2006: 30.8%).
The Finance Act 2007 implemented a reduction in the corporation tax rate from
30% to 28% with effect from 1 April 2008. The impact of this rate reduction on
the deferred tax provision has been reflected in these financial statements and
has resulted in deferred tax credits of £54.0 million in the profit and loss
account and £5.4 million in reserves.
Current tax of £3.3 million and deferred tax of £1.1 million (including the £
5.4m credit arising from the change in rate) has been credited directly to
reserves in the period.
5 Dividends
Amounts recognised as distributions to equity holders in the period:
Six months ended 30 September 2007 2006
Pence £m Pence £m
per per
share share
Final dividend for the year ended 31 March 2007/ 38.68 90.4 31.97 111.3
2006
Proposed interim dividend for the year ending 31 24.34 57.0
March 2008
The proposed interim dividend was approved by the board on 26 November 2007 and
has not been included as a liability as at 30 September 2007.
On the demerger of Biffa Plc the ordinary share capital of the Company was
consolidated with the intention that the share price of Severn Trent Plc shares
would be similar before and after the demerger. Two new Severn Trent shares
were issued for every three old Severn Trent shares held. The per share amounts
disclosed above are the amounts that were declared on the shares in issue at
the time. They have not been restated for the share consolidation.
6 Earnings per share
Basic earnings per share are 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 and LTIP awards where the vesting conditions have been satisfied at the
balance sheet date.
The calculation of basic and diluted earnings per share is based on the
following data:
Earnings
Six months ended 30 September 2007 2006
(Restated)
£m £m
Earnings for the purpose of basic and diluted earnings per
share from continuing and discontinued operations being:
Profit for the period attributable to the equity holders of 150.9 129.5
the Company
Adjustment to exclude:
Profit for the period from discontinued operations - (16.8)
Earnings for the purpose of basic and diluted earnings per 150.9 112.7
share from continuing operations
Number of shares
Six months ended 30 September 2007 2006
m m
Weighted average number of ordinary shares for the purpose of 233.4 232.0
basic earnings per share
Effect of dilutive potential ordinary shares:
Share options and LTIPs 1.7 2.1
Weighted average number of ordinary shares for the purpose of 235.1 234.1
diluted earnings per share
The weighted average number of shares for the six months ended 30 September
2006 has been adjusted to reflect the 2 for 3 share consolidation that was
approved at the extraordinary general meeting on 6 October 2006. The
denominators used for calculations of earnings per share from continuing and
discontinued and from continuing operations are the same.
Adjusted earnings per share
Six months ended 30 September 2007 2006
(Restated)
Pence Pence
Adjusted basic earnings per share 47.6 42.1
Adjusted diluted earnings per share 47.2 41.7
Adjusted earnings per share figures are presented for continuing operations.
These exclude the effects of deferred tax, fair value movements on treasury
instruments and exceptional items in both 2007 and 2006. The directors consider
that the adjusted figures provide a useful additional indicator of performance.
The denominators used in the calculations of adjusted 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:
Adjustments to earnings
Six months ended 30 September 2007 2006
(Restated)
£m £m
Earnings for the purpose of basic and diluted earnings per 150.9 112.7
share from continuing operations
Adjustments for:
Exceptional flood costs 18.2 -
Exceptional restructuring costs 3.2 -
Exceptional demerger and related costs - 10.1
Exceptional profit on disposal of property and businesses - (14.3)
Current tax related to exceptional items at 30% (3.2) -
Fair value movements on treasury instruments (9.4) (13.3)
Deferred tax (48.7) 2.4
Earnings for the purpose of adjusted basic and diluted 111.0 97.6
earnings per share
7 Borrowings
30 September 31 March
2007 2007
£m £m
Bank overdrafts 0.6 0.1
Bank loans 888.1 462.6
Other loans 2,276.2 2,399.6
Obligations under finance leases 424.5 408.5
Borrowings 3,589.4 3,270.8
30 September 31 March
2007 2007
£m £m
The borrowings are repayable as follows:
On demand or within one year (included in current 430.4 631.8
liabilities)
In the second year 169.4 254.6
In the third to fifth years inclusive 189.1 296.2
After five years 2,800.5 2,088.2
Included in non-current liabilities 3,159.0 2,639.0
3,589.4 3,270.8
During the period the Group has raised £789.7 million in new debt.
The Group has also repaid £510.9 million during the period.
8 Retirement benefit schemes
The Group operates three defined benefit schemes being the Severn Trent Pension
Scheme, the Severn Trent Mirror Image Scheme and the Severn Trent Senior Staff
Pension Scheme. 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 retirement benefit obligation as at 30 September 2007 has been calculated
on a year to date basis, using the actuarial valuation as at 31 March 2007.
There have not been any significant fluctuations or one time events since that
date that would require adjustment to the actuarial assumptions made at 31
March 2007. However, the market based assumptions have been updated for
conditions prevailing at the balance sheet date as follows:
30 September 31 March
2007 2007
Discount rate 5.8% 5.4%
Inflation rate 3.2% 3.0%
The defined benefit assets have been updated to reflect their market value as
at 30 September 2007. Differences between the expected return on assets and the
actual return on assets have been recognised as an actuarial loss in the
statement of recognised income and expense in accordance with the Group's
accounting policy.
Amounts recognised in the income statement in respect of these defined benefit
schemes are as follows:
Six months ended 30 September 2007 2006
(Restated)
£m £m
Amounts charged to operating costs:
Current service cost (15.3) (18.2)
Amounts charged to net finance costs:
Interest cost (40.4) (34.2)
Expected return on scheme assets 46.7 40.9
6.3 6.7
Total amount charged to the income statement (9.0) (11.5)
Actuarial gains and losses have been reported in the statement of recognised
income and expense.
The amount included in the balance sheet arising from the Group's obligations
under defined benefit schemes is as follows:
30 September 31 March
2007 2007
£m £m
Present value of defined benefit obligations - funded (1,512.5) (1,492.2)
schemes
Total fair value of assets 1,404.0 1,364.6
Present value of defined benefit obligations - unfunded (10.0) (7.5)
schemes
Liability recognised in the balance sheet (118.5) (135.1)
Movements in the liability recognised in the balance sheet were as follows:
Six months ended 30 September 2007 2006
£m £m
At 1 April (135.1) (221.9)
Service cost (15.3) (18.2)
Interest cost (40.4) (34.2)
Expected return on scheme assets 46.7 40.9
Contributions from the sponsoring companies 33.1 8.7
Costs relating to discontinued operations - (4.5)
Actuarial losses recognised in the statement of recognised (7.5) (48.2)
income and expense
At 30 September (118.5) (277.4)
9 Share capital
Share capital as at 30 September 2007 amounted to £229.5 million. During the
period the Group issued 1,277,012 shares as a result of the exercise of
employee share options.
10 Net cash inflow from operating activities
Six months ended 30 September 2007 2006
(Restated)
£m £m
Profit before interest and tax from continuing operations 228.6 223.2
Profit before interest and tax from discontinued operations - 34.3
228.6 257.5
Depreciation of property, plant and equipment 102.0 133.0
Amortisation of intangible assets 15.3 15.2
Impairment of goodwill - 31.5
Pension service cost 15.3 23.3
Pension contributions (33.1) (8.7)
Share based payments charge 1.6 2.6
(Profit) on sale of property, plant and equipment (0.4) (2.3)
Profit on sale of subsidiaries and associates - (24.5)
Deferred income movement (2.9) (3.1)
Provisions for liabilities and charges 1.7 10.3
Utilisation of provisions for liabilities and charges (4.4) (15.0)
Decrease/(increase) in working capital 66.6 (27.3)
Cash generated from operations 390.3 392.5
Interest paid (68.1) (60.7)
Interest element of finance lease rental payments - (1.0)
Tax paid (37.0) (21.1)
Net cash inflow from operating activities 285.2 309.7
11 Post balance sheet events
Other than as disclosed in note 12 there were no significant post balance sheet
events.
12 Contingent Liabilities
Details of the Group's contingent liabilities were disclosed in the financial
statements for the year ended 31 March 2007 which were approved on 5 June 2007.
No further contingent liabilities have been identified since that date.
Developments relating to the matters disclosed are set out below.
On 10 July the Group received notification from Veolia Proprete S.A. that its
claim for alleged breach of warranty in relation to the disposal of Biffa
Belgium had increased to €28.4 million. However, the Group continues to believe
that there is no basis for this claim and hence no provision has been recorded
in the financial statements for this matter.
Severn Trent Plc announced on 22 November 2007 that the Serious Fraud Office
(SFO) is to bring three charges against Severn Trent Water Ltd under section
207 Water Industry Act 1991, namely, providing false information to Ofwat. The
three charges will relate to the leakage data in the June Returns for 2000,
2001 and 2002.
The SFO has also informed Severn Trent that no individual will be charged with
any offences.
The company will consider carefully the details of the charges and take legal
advice before deciding how to respond.
Ofwat had been conducting its own investigation following allegations of false
reporting made by an employee of Severn Trent Water in May 2004. On 7 March
2006 Ofwat published its interim report concerning the allegations of false
reporting made against Severn Trent Water in 2004. In responding to the report
Severn Trent apologised to customers and has credited customers' accounts and
reduced future tariffs.
Severn Trent also acknowledged that Ofwat may expect further amends to be made
to customers. Ofwat has stated that this sum will be considered with Severn
Trent Water on completion of the SFO investigation into leakage.
In April 2006 Severn Trent Plc announced that Severn Trent Water had uncovered
misstated customer relations data in submissions to Ofwat. Consequently, in
June 2006 Ofwat issued a notice under Section 22A(4) of the Water Industry Act
in relation to performance standards and a notice under Section 203 of that Act
in relation to regulatory reporting. Ofwat has indicated that it proposes to
fine Severn Trent Water in relation to these matters. Ofwat has communicated
with Severn Trent regarding the fines that it intends to impose although the
process is ongoing and no conclusion has been reached.
No reliable estimates can currently be made of amounts that may become payable
for any of these issues and therefore no provisions have been recognised in
these interim financial statements.
13 Forward-looking statements
This document contains certain "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", "should", "expects", "believes", "intends", "plans", "targets",
"goal" or "estimates". 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 will occur in the
future.
There are a number of factors that could cause actual results and developments
to differ materially from those expressed or implied by these forward-looking
statements. These factors include, but are not limited to, changes in the
economies and markets in which the Group operates; changes in the regulatory
and competition frameworks in which the Group operates; changes in the markets
from which the Group raises finance; 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. Severn Trent does not intend to
update these forward-looking statements.
14 Cautionary statement
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).
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; 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 Services Authority.
Signed on behalf of the Board who approved the half yearly financial report on
26 November 2007.
Sir John Egan Michael McKeon
Chairman Finance Director
Further copies of this half yearly financial report may be obtained from the
Company Secretary, Severn Trent Plc, 2297 Coventry Road, Birmingham B26 3PU.
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 2007 which comprises the condensed income statement, the condensed
balance sheet, the condensed statement of recognised income and expense, the
condensed cash flow statement and related notes 1 to 14. 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 2410 issued by the Auditing Practices Board. Our
work has been undertaken so that we might state to the Company those matters we
are required to state to them 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 and Transparency
Rules of the United Kingdoms' Financial Services 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 Auditing
Practices Board 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 Ireland) 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 2007 is not prepared, in
all material respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and Transparency Rules of
the United Kingdom's Financial Services Authority.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditor
26 November 2007
London, UK
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