Half-yearly Report
Half Yearly Financial Report
25 November 2008
Interim Results for the six months to 30 September 2008
RAISING STANDARDS AND CONTINUOUS IMPROVEMENT
Highlights
- Underlying PBIT1 up 4.6% to £262 million
- DPS up 8.0% to 26.29p
- Strong liquidity position; funded at least until the end of AMP4
- Continued progress in driving higher standards and greater efficiency
- Delivering 3% operating cost outperformance against Ofwat final determination
- On target to deliver 6% efficiency on the AMP4 capital programme
Group results
30 Sept 30 Sept Increase/
2008 2007 (Decrease)
£m £m %
Group turnover 814.3 774.0 5.2%
Underlying Group PBIT 1 261.5 250.0 4.6%
Underlying Profit before tax 2 154.5 161.5 (4.3%)
Profit before tax 137.9 149.5 (7.8%)
pence/ pence/
share share
Adjusted basic EPS 3 50.0 47.6 5.0%
Basic (loss)/earnings per share4 (35.8) 64.7 (155.3%)
Interim dividend declared 26.29 24.34 8.0%
1 before exceptional items (see note 3)
2 before exceptional items and gains/losses on financial instruments
3 before exceptional items, gains/losses on financial instruments and deferred
tax (see note 6)
4 after exceptional deferred tax charge of 79.2 pence/share (30 Sept 2007
credit of 23.4 pence/share)
Sir John Egan, Chairman Severn Trent Plc, said:
"I am pleased to report today on a period of good progress. We are delivering
our plans to raise standards and drive efficiency through our focus on
continuous improvement in all processes. Given this momentum, I am delighted to
announce, in line with our policy, an 8.0% increase in the interim dividend to
26.29p."
Tony Wray, Chief Executive Severn Trent Plc, said:
"These results demonstrate continuing improvement across the business. We
continue to improve customer service standards, maintain an improved level of
leakage performance and drive sustained reductions in customer supply
interruptions and sewer flooding. We are on track to outperform against Ofwat's
determination for operating costs by around 3% for the full year and to deliver
our capital programme for the remainder of the period, while achieving around
6% capital efficiencies compared to Ofwat's determination for 2005-10.
"While continuing to improve, we still have further to go as we strive for
upper quartile performance across our 20 Key Performance Indicators. We remain
committed to raising standards still higher and investing further in improving
operational efficiency, because we believe that this approach will deliver
improved customer service and enhanced shareholder value. I believe we are now
better placed to satisfy the expectations of our customers, regulators and
shareholders."
Enquiries:
Tony Wray Severn Trent Plc 0207 353 4200 (on the day)
Chief Executive 0121 722 4938
Mike McKeon Severn Trent Plc 0207 353 4200 (on the day)
Finance Director 0121 722 4319
Peter Gavan Severn Trent Plc 0207 353 4200 (on the day)
Director of External Affairs 0121 722 4310
Venetia Cooper Severn Trent Plc 0207 353 4200 (on the day)
Investor Relations Manager 0121 722 4523
Peter Hewer Tulchan 0207 353 4200
Mal Patel Communications
Interim Results Presentation and Webcast
There will be an interim results presentation at 9:30am on Tuesday 25 November
2008. 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
Water and Sewerage
We continue to execute on our plans to raise standards and drive greater
efficiency across the business. The 20 Key Performance Indicators (KPIs)
remain the primary basis on which we measure and demonstrate raised standards.
We have now completed our update of the benchmarks we use to assess our
relative performance and can confirm that our opening position remains
unchanged compared to the position we reported in June 2008.
Our aim is to achieve upper quartile performance across our 20 KPIs and we will
continue to update our benchmarks on an annual basis. As companies in our
sector or elsewhere redefine what upper quartile means, so we expect our
objectives to move with them.
In the period under review, progress has been good. We have continued to
deliver improvements in customer service and further reductions in the number
of written complaints and have maintained our leakage performance at levels
commensurate with meeting the Ofwat annual target for the year ending 31 March
2009. Our continued focus on driving improvements in health and safety
performance has delivered a 26% reduction in lost time incidents over the year
end position. We are also able to report sustained improvements in our
performance with regard to customer supply interruptions and sewer flooding
incidents. Both of these KPIs were lower quartile and we understand that
whilst we are making strong progress we need to continue to drive further
improvements to achieve our ambition of upper quartile performance.
We are on track to deliver 3% annual outperformance against the Ofwat
determination for operating costs across the final two years of AMP4,
notwithstanding significant increases in commodity prices in the first six
months of this financial year.
Aside from the progress made to date, we continue to develop our plans to
optimise the performance of the company and sustain the improvements in the
longer term. These plans remain focused on three broad areas:
- Process improvements,
- The technology and systems that support these processes, and
- The location, training and development of our people to operate in this new
environment.
These improvement plans are integrated into our business plan, are the basis of
our future improvements in effective and efficient operation and formed a major
part of the Severn Trent Water Draft Business Plan submitted to Ofwat in August
2008. Over the last two years of the AMP4 period, we expect to incur
exceptional restructuring costs of around £24 million, with £5.4 million
incurred in the period under review. These costs represent the continuing
implementation of our improvement plans that extend beyond the end of the
current AMP period, as we continue to deliver against our objective of raising
standards and improving efficiency.
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.
Severn Trent Water Draft Business Plan
In August 2008, we submitted our Draft Business Plan to Ofwat. This plan
aligns to Severn Trent Water's 25 year Strategic Direction Statement (published
in December 2007, which is available on its website at www.stwater.co.uk/sds)
and reflects customer priorities including a more resilient water supply
network, stable bills and a smaller carbon footprint.
The key elements of the draft business plan include:
- Broadly flat bills in real terms (rising only slightly above inflation over
the five year period),
- Challenging efficiency targets,
- A capital investment programme of around £3.2 billion (at today's prices) in
the period 2010 to 2015. This level of investment is needed to deliver
improved services, such as stronger network resilience (including reinforcing
the network following last summer's flooding) and reduction in sewer
flooding, environmental improvements through improving sewage treatment, and
increased spending on assets to ensure that environmental and drinking water
quality improvements achieved in the past two decades are continued,
- An assumed cost of capital of 4.94% real, post tax, consistent with
maintaining an appropriate credit rating to allow Severn Trent Water to raise
the funds it requires to finance future investment at a reasonable rate. Our
plans cannot be financed by customers' bills alone and shareholders expect an
adequate return on their investment. The Company published a paper "The
World has turned: but which way?" on 5 August 2008 setting out its views on
issues to be considered in how the weighted average cost of capital (WACC)
should be determined. This paper and a summarised update setting out the
Company's current views as at 25 November 2008 is available on its website at
www.severntrent.com.
We have engaged with Ofwat and are responding to the feedback we have received
from them to date and will submit our Final Business Plan to Ofwat in April
2009. As the general economic conditions and state of the financial markets
continue to evolve, we are also maintaining a close watch on these factors and
their potential impact on our assumptions around the weighted average cost of
capital.
Severn Trent Services (previously Water Technologies and Services)
Severn Trent Services' growth strategy remains focused on organic growth and
building global presence; expanding existing technologies and services into new
geographical markets and taking new technologies into existing markets. We
have made good progress in the area of geographic expansion, in particular with
our electrochlorination product in the Middle East. In new technologies, the
development of the new MicroDynamics microwave powered UV product is
progressing well, increasing the order book and growing the pipeline of new
project activity.
The core areas of the business continue to deliver against three key financial
criteria: continued revenue growth, profit growth and an appropriate return on
invested capital. The results in the period demonstrate all three.
Group Financial Performance
In this Interim Results Announcement PBIT is profit before interest and tax;
underlying PBIT is PBIT excluding exceptional items as set out in note 3.
Group turnover was £814.3 million (£774.0 million), an increase of 5.2% over
the same period last year. The growth in reported turnover was mainly due to
the price increases in Severn Trent Water.
Underlying Group PBIT increased by 4.6% to £261.5 million (£250.0 million).
Beyond the net increase in turnover, the primary factors affecting underlying
PBIT were rising energy and commodity costs and an increase in the level of
infrastructure renewals expenditure in Water and Sewerage. There were net
exceptional charges of £4.4 million (£21.4 million). Group PBIT has increased
12.5% to £257.1 million (£228.6 million).
As highlighted in our preliminary results published in June 2008, Severn Trent
Retail and Utility Services (previously reported in Water and Sewerage) is now
reported within Severn Trent Services. Comparatives have been restated to
reflect this change as set out below:
Water Severn Corporate
Six months ended and Trent and
30 September 2007 Sewerage Services Other Eliminations Consolidated
£m £m £m £m £m
Total Sales (As previously reported) 640.6 146.4 2.6 (15.6) 774.0
Retail and Utility Services (6.4) 6.8 - (0.4) -
Total Sales (As restated) 634.2 153.2 2.6 (16.0) 774.0
Underlying PBIT (As previously reported) 247.1 10.1 (5.3) (1.9) 250.0
Retail and Utility Services (2.6) 2.6 - - -
Underlying PBIT (As restated) 244.5 12.7 (5.3) (1.9) 250.0
Water and Sewerage
Turnover in Water and Sewerage increased by 5.4% in 2008/09, to £
668.4 million. Sales prices increased by 5.07% (including inflation) from 1
April 2008. We have previously noted a decline in consumption across our
measured income base and turnover in the first half of 2008/09 was £5.4 million
lower than the same period last year as a consequence of this trend. We expect
this to continue and estimate it will impact revenues by around £12 to £15
million in the current financial year.
Underlying PBIT was up by 4.4% on the same period last year, to £255.3
million. Beyond the increase in turnover, a number of factors impacted
underlying PBIT, principally; an increase in infrastructure renewals
expenditure of £10.8 million, an increase in energy and commodity costs of £7.8
million, bad debt charge of £2.7 million and other cost increases (net of
efficiencies) of £3.5 million. Through our continued focus on raising
standards, upskilling our workforce and improving our processes we are now
delivering efficiencies across many areas of the business, including areas such
as leakage management which has led to reduced contractor costs. These
efficiencies have partly mitigated the impact of inflation on our cost base in
the first half of this year.
During the period, Severn Trent Water invested £295.3 million (UK GAAP, gross)
in fixed assets and maintaining and improving its infrastructure network.
Included in this total was net infrastructure maintenance expenditure of £57.5
million, charged to the income statement under IFRS.
Severn Trent Services
Turnover in Severn Trent Services at £157.1 million in the period was up 2.5%
on the same period last year.
Severn Trent Services' underlying PBIT increased by 4.7% to £13.3 million. As
detailed below, excluding the impact of Retail and Utility Services (STRS),
where margins have fallen due to the declining property market, underlying PBIT
has increased by 9.9% to £11.1 million.
30 Sept 30 Sept Increase/
Six months ended 2008 2007 (Decrease)
£m £m %
Sales (Excluding STRS) 150.1 146.4 2.5%
STRS 7.0 6.8 2.9%
Total Sales 157.1 153.2 2.5%
Underlying PBIT (Excluding STRS) 11.1 10.1 9.9%
STRS 2.2 2.6 (15.4%)
Underlying PBIT 13.3 12.7 4.7%
Corporate and Other
Corporate and Other incurred a net charge before interest, tax and exceptional
items of £6.5 million (net charge of £5.3 million).
Exceptional items
There was a net exceptional operating charge, on continuing operations, in the
six months to 30 September 2008 of £4.4 million (£21.4 million) comprising:
- A net credit of £7.2 million arising from the flooding incidents that
affected the Water and Sewerage networks during the summer of 2007. This
includes insurance recoveries of £9.3 million less costs of £2.1 million;
- A charge of £5.4 million in Water and Sewerage arising from the programme to
restructure and realign the business;
- A charge of £7.2 million arising from Severn Trent Water's settlement of the
regulatory issues that arose in previous years. This includes a court
imposed fine of £2 million and costs of £0.2 million from two offences
relating to leakage data supplied to Ofwat in 2001 and 2002 and a provision
of £5 million for additional contributions to the Severn Trent Charitable
Trust as agreed with Ofwat (see note 13); and
- In Severn Trent Services, a credit of £1 million arising from the release of
an exceptional provision made in the prior year relating to third party legal
costs.
Net finance costs
The Group's net finance costs were £107.1 million, compared to £88.6 million in
the prior period. The increase was largely due to higher interest charges on
index linked debt of £33.2 million (£25.3 million) caused by higher RPI and the
interest on the increased average Group net debt. Finance costs on pension
obligations also increased as a result of a higher discount rate, whilst the
expected return on assets was lower because the value of investments declined.
Profit before tax
After net finance costs of £107.1 million (£88.6 million) and share of results
of associates and joint ventures of £0.1 million (£0.1 million), Group profit
before tax, exceptional items and gains/losses on financial instruments,
decreased by 4.3% to £154.5 million (£161.5 million). Group profit before tax
was £137.9 million (£149.5 million).
Taxation
The total tax charge for the period was £221.1 million (£2.6 million credit),
of which current tax represented a charge of £37.7million (£46.1 million) and
deferred tax (see note 4) was a charge of £183.4 million (credit of £48.7
million), including an exceptional charge of £185.6 million in relation to the
phased withdrawal of Industrial Buildings Allowances. The loss for the period
was £83.2million (profit of £152.1 million).
The effective rate of current tax, excluding prior year charges and exceptional
items, calculated on profit before tax, exceptional items and gains/losses on
financial instruments was 24.1% (30.7%). Reasons for the reduction include the
decrease in the UK corporation tax rate from 30% to 28% and the tax impact of
increased spend on the capital programme.
Going forward, we expect the effective current tax rate for the full year 2008/
09 to be in the range of 24% to 26%.
Earnings per share
Basic loss/earnings per share was a loss of 35.8 pence (earnings of 64.7
pence). Adjusted basic earnings per share (before exceptional items, gains/
losses on financial instruments and deferred tax) were 50.0 pence (47.6 pence),
see note 6.
Cash flow
30 Sept 30 Sept
2008 2007
£m £m
Cash generated from operations 369.6 390.3
Net capital expenditure (226.4) (217.5)
Net interest paid (82.5) (55.2)
Tax received/(paid) 26.6 (37.0)
Free cash flow 87.3 80.6
Dividends (97.8) (90.8)
Issue of shares 6.3 7.1
Purchase of own shares (2.4) -
Change in net debt from cash flows (6.6) (3.1)
Non cash movements (36.3) (35.5)
Change in net debt (42.9) (38.6)
Net debt at 1 April (3,432.8) (3,127.6)
Net debt at 30 September (3,475.7) (3,166.2)
Net debt comprises:
Cash and cash equivalents 576.3 423.2
Borrowings - current liabilities (280.0) (430.4)
Borrowings - non-current liabilities (3,772.0) (3,159.0)
(3,475.7) (3,166.2)
Cash generated from operations was £369.6million (£390.3 million). Capital
expenditure net of grants and proceeds of sales of fixed assets was £226.4
million (£217.5 million). Net interest paid increased to £82.5 million (£
55.2 million), principally due to the increase in net debt and timings on cash
interest payments.
Net debt at 30 September 2008 was £3,475.7 million (March 2008 £
3,432.8 million). Balance sheet gearing (net debt/net debt plus equity) at the
half year is 78.2% (31 March 2008 74.0%). The Group's net interest charge,
excluding gains/losses on financial instruments and net finance costs from
pensions, was covered 3.6 times (3.9 times) by profit before interest, tax,
depreciation and exceptional items, and 2.5 times (2.6 times) by underlying
PBIT.
Pensions
The Group operates three defined benefit pension schemes, of which the Severn
Trent Pension Scheme (STPS) is by far the largest. Formal triennial actuarial
valuations and funding agreements were last undertaken for the STPS and another
scheme, the Severn Trent Senior Staff Pension Scheme (SSPS), as at 31 March
2007. The key actuarial assumptions from these valuations have been updated
for the accounts as at 30 September 2008 though overall contribution levels
remain unchanged.
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 £226.3 million as
at 30 September 2008. This compares to a deficit of £126.0 million as at 31
March 2008. The movements in the net deficit were:
Defined
benefit Fair value of
obligations plan assets Net deficit
At 1 April 2008 (1,458.3) 1,332.3 (126.0)
Employer contributions - 18.3 18.3
Employee contributions (4.0) 4.0 -
Benefits paid 35.3 (35.3) -
Service cost (13.9) - (13.9)
Net finance cost (46.3) 44.2 (2.1)
Experience losses (0.2) (151.7) (151.9)
Change in assumptions 49.3 - 49.3
At 30 September 2008 (1,438.1) 1,211.8 (226.3)
On an IAS 19 basis, the funding level has reduced from around 91% at 31 March
2008 to around 84% at 30 September 2008.
Treasury management
In the context of the "credit crunch", the Group is in a strong liquidity
position today. The Group renewed for 5 years a £200 million bank facility in
July 2008. The Group has in excess of £570 million in cash and liquid reserves,
following the issue of a €700m Eurobond in March 2008. The Group also has an
undrawn £500 million committed bank facility that matures in 2013. The average
debt maturity is unchanged at around 20 years (September 2007 20 years).
The Board continues to watch the debt markets carefully and will consider
appropriate opportunities to raise funds consistent with the Group's needs.
However, the Group is funded for its investment and cash flow needs at least
until the end of the AMP4 period in March 2010.
The Group's policy for the management of interest rate risk requires that no
less than 45% 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 2008, interest rates for some 70% of the Group's net debt of £
3,475.7 million were so fixed, with the remaining 30% index-linked to RPI. The
effective interest rate for the period to September 2008 was 6.1%.
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. The impact of
changing exchange rates was immaterial.
Dividend
In line with its policy for growing dividends by 3% above the rate of inflation
until March 2010, the Board has declared an interim ordinary dividend of 26.29p
(2007/08 24.34p), an increase of 8.0% over the 2007/08 interim ordinary
dividend. The interim ordinary dividend is payable on 16 January 2009 to
shareholders on the register at 5 December 2008.
Principal risks and uncertainties
With regard to the remaining six months of the year, the Board consider the
principal risks and uncertainties affecting the business activities of the
Group to be those detailed below:
- Changes in law or regulation in the countries and types of business in which
we operate could have an adverse effect on our business and operations.
- The results of our operations depend on a number of factors relating to
business performance, including the ability to outperform regulatory targets
and deliver anticipated cost and efficiency savings.
- Changes in government environmental protection and health and safety laws and
regulations governing our businesses.
- The failure of our assets, systems or our ability to carry out critical
operations could have a significant impact on our financial position and our
reputation.
- External factors could affect the Group's pension schemes and adversely
impact on our financial position.
- External financial market factors could adversely impact on our financial
position.
Outlook
Performance at our principal business, Severn Trent Water, has been as expected
in the first half of 2008/09, with a continued focus on improving our
performance. We remain on track to deliver around 3% annual outperformance
against the Ofwat determination for operating costs in 2008/09 and 2009/10,
notwithstanding significant increases in commodity prices in the first six
months of this financial year.
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.
We anticipate performance at Severn Trent Services to continue as in the first
half, delivering sustained year on year growth, with the exception of the
smaller Retail and Utility Services business, where current market conditions
are anticipated to remain difficult and performance is likely to be down year
on year.
The Group has a strong liquidity position and is funded for its investment and
cash flow needs at least until the end of the AMP4 period in March 2010.
Severn Trent continues to believe that the appropriate long term gearing level
of the company is 60% net debt/RCV. However, given the current and ongoing
uncertainties in the credit markets the Board believes it is prudent in the
near term for the company to retain as much liquidity and flexibility as
possible. As such the Board does not expect to pursue the target gearing level
of 60% net debt/RCV until the credit markets improve.
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 2008
Six months ended 30 September 2008 2007
Notes £m £m
Turnover 2 814.3 774.0
Operating costs before exceptional items (552.8) (524.0)
Exceptional flood income / (costs) 3 7.2 (18.2)
Exceptional restructuring costs 3 (5.4) (3.2)
Exceptional charge relating to regulatory matters 3 (7.2) -
Exceptional release of provision for third party legal
costs 3 1.0 -
Total operating costs (557.2) (545.4)
Profit before interest, tax and exceptional items 2 261.5 250.0
Exceptional items 3 (4.4) (21.4)
Profit before interest and tax 2 257.1 228.6
Finance income 64.2 58.4
Finance costs (171.3) (147.0)
Net finance costs (107.1) (88.6)
(Losses)/gains on financial instruments (12.2) 9.4
Share of results of associates and joint ventures 0.1 0.1
Profit before tax, (losses)/gains on financial
instruments and exceptional items 154.5 161.5
Exceptional items (4.4) (21.4)
(Losses)/gains on financial instruments (12.2) 9.4
Profit on ordinary activities before taxation 137.9 149.5
Taxation on profit on ordinary activities
- current tax 4 (37.7) (46.1)
- deferred tax 4 2.2 (6.0)
- tax charge before exceptional tax 4 (35.5) (52.1)
- exceptional deferred tax (charge)/credit 4 (185.6) 54.7
Total taxation 4 (221.1) 2.6
(Loss)/profit for the period (83.2) 152.1
Attributable to:
Equity holders of the Company (83.8) 150.9
Equity minority interests 0.6 1.2
(83.2) 152.1
(Loss)/earnings per share (pence)
Basic 6 (35.8) 64.7
Diluted 6 (35.8) 64.2
Condensed consolidated balance sheet
At 30 September 2008
30 31
September March
2008 2008
Notes £m £m
Non current assets
Goodwill 53.7 50.2
Other intangible assets 105.9 107.2
Property, plant and equipment 5,854.8 5,731.2
Interests in joint ventures 0.2 0.1
Interests in associates 4.1 4.1
Derivative financial instruments 48.2 51.3
Available for sale financial assets 0.1 0.1
6,067.0 5,944.2
Current assets
Inventory 28.9 24.8
Trade and other receivables 457.8 434.1
Derivative financial instruments 9.2 5.3
Cash and cash equivalents 576.3 654.4
1,072.2 1,118.6
Total assets 7,139.2 7,062.8
Current liabilities
Borrowings 7 (280.0) (459.5)
Derivative financial instruments (0.8) (8.9)
Trade and other payables (468.0) (423.4)
Current income tax liabilities (94.3) (32.4)
Provisions for other liabilities and charges (10.6) (50.4)
(853.7) (974.6)
Non current liabilities
Borrowings 7 (3,772.0) (3,627.7)
Derivative financial instruments (77.2) (73.8)
Trade and other payables (247.7) (220.4)
Deferred tax liabilities (965.8) (808.3)
Retirement benefit obligations 8 (226.3) (126.0)
Provisions for other liabilities and charges (27.1) (26.8)
(5,316.1) (4,883.0)
Total liabilities (6,169.8) (5,857.6)
Net assets 969.4 1,205.2
Capital and reserves attributable to the Company's
equity shareholders
Called up share capital 9 230.6 229.7
Share premium account 10 69.6 64.3
Other reserves 10 440.2 427.4
Retained earnings 10 224.6 479.6
Equity attributable to the Company's equity 965.0 1,201.0
shareholders
Minority interests 10 4.4 4.2
Total equity 10 969.4 1,205.2
Condensed consolidated cash flow statement
Six months ended 30 September 2008
Six months ended 30 September 2008 2007
Notes £m £m
Cash generated from operations 11 369.6 390.3
Interest paid (94.2) (68.1)
Interest element of finance lease rental payments (8.9) -
Tax received/(paid) 26.6 (37.0)
Net cash generated from operating activities 293.1 285.2
Investing activities
Interest received 20.6 12.9
Proceeds on disposal of property, plant and 2.9 4.2
equipment
Purchases of intangible assets (10.0) (13.2)
Purchases of property, plant and equipment (235.2) (227.5)
Contributions and grants received 15.9 19.0
Net cash used in investing activities (205.8) (204.6)
Financing activities
Dividends paid to shareholders of the parent (97.0) (90.4)
Dividends paid to minority interests (0.8) (0.4)
Repayments of borrowings (78.8) (510.9)
Repayment of obligations under finance leases (5.1) -
New finance lease obligations - 5.7
New loans raised 4.5 789.7
Issue of shares 6.3 7.1
Purchase of own shares (2.4)
-
Net cash (used in) /generated from financing (173.3) 200.8
activities
(Decrease) / increase in cash and cash (86.0) 281.4
equivalents
Net cash and cash equivalents at beginning of the 653.4 143.1
period
Effect of foreign exchange rates 2.4 (1.9)
Net cash and cash equivalents at the end of the 569.8 422.6
period
Net cash and cash equivalents comprise
Cash and cash equivalents 576.3 423.2
Bank overdrafts (6.5) (0.6)
Net cash and cash equivalents at the end of the 569.8 422.6
period
Condensed consolidated statement of recognised income and expense
Six months ended 30 September 2008
Six months ended 30 September 2008 2007
£m £m
Exchange movement on translation of overseas results and net 11.1 (2.4)
assets
Gains on cash flow hedges taken to equity 0.4 0.7
Deferred tax on gains on cash flow hedges taken to equity (0.1) 0.2
Actuarial losses on defined benefit pension schemes (102.6) (7.5)
Tax on actuarial losses 28.7 2.2
Change of tax rate on deferred tax previously recognised - 5.4
directly in equity
Net expense recognised directly in equity (62.5) (1.4)
Transfers
Amounts on cash flow hedges transferred to the income 2.4 2.8
statement in the period
Deferred tax on transfers to income statement (0.7) (0.8)
1.7 2.0
(Loss)/profit for the period (83.2) 152.1
Total recognised (loss)/income for the period (144.0) 152.7
Attributable to:
Equity shareholders of the Company (145.0) 151.5
Minority interests 1.0 1.2
(144.0) 152.7
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 2008 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 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 waste water services to domestic and
commercial customers in England and Wales.
Severn Trent Services (formerly 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 2008
Water Severn Corporate
and Trent and
Sewerage Services Other Eliminations Consolidated
£m £m £m £m £m
External sales 668.4 145.9 - - 814.3
Inter-segment sales - 11.2 2.1 (13.3) -
Total sales 668.4 157.1 2.1 (13.3) 814.3
Profit before
interest, tax and 255.3 13.3 (6.5) (0.6) 261.5
exceptional items
Exceptional items (5.4) 1.0 - - (4.4)
(note 3)
Profit before interest 249.9 14.3 (6.5) (0.6) 257.1
and tax
Share of results of
associates and joint - 0.1 - - 0.1
ventures
Segment result 249.9 14.4 (6.5) (0.6) 257.2
Total net finance costs and (losses)/gains on (119.3)
financial instruments
Profit before tax 137.9
Tax (221.1)
Loss for the period (83.2)
Six months ended 30 September 2007
Water Severn
and Trent Corporate
Sewerage Services and
(restated) (restated) Other Eliminations Consolidated
£m £m £m £m £m
External sales 633.8 140.2 - - 774.0
Inter-segment 0.4 13.0 2.6 (16.0) -
sales
Total sales 634.2 153.2 2.6 (16.0) 774.0
Profit before
interest, tax and 244.5 12.7 (5.3) (1.9) 250.0
exceptional items
Exceptional items (21.4) - - - (21.4)
(note 3)
Profit before 223.1 12.7 (5.3) (1.9) 228.6
interest and tax
Share of results
of associates and - 0.1 - - 0.1
joint ventures
Segment result 223.1 12.8 (5.3) (1.9) 228.7
Total net finance costs and (losses) /gains on financial (79.2)
instruments
Profit before tax 149.5
Tax 2.6
Profit for the 152.1
period
Six months ended 30 September 2007 (Restated)
With effect from 1st April 2008 Severn Trent Retail Services Ltd and its
subsidiary company Complete Credit Management Ltd (together "STRS") were
transferred from Water and Sewerage to the Severn Trent Services segment. The
comparative information has been restated to reflect this revised
classification as follows:
Water
Water Technologies
and and
Sewerage Services
£m £m
External sales as originally stated 640.5 133.5
Transfer STRS Group sales (6.7) 6.7
Restated external sales 633.8 140.2
Inter-segment sales as originally stated 0.1 12.9
Reanalysis of inter segment sales following transfer 0.3 0.1
Restated inter-segment sales 0.4 13.0
Total sales as originally stated 640.6 146.4
Transfer STRS external group sales (6.7) 6.7
Reanalysis of inter segment sales following transfer 0.3 0.1
Restated total sales 634.2 153.2
Profit before interest, tax and exceptional items as 247.1 10.1
originally stated
Transfer STRS group (2.6) 2.6
Restated profit before interest, tax and exceptional 244.5 12.7
items
3 Exceptional items
The Group classifies as exceptional 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.
In the six months ended 30 September 2008 an exceptional charge of £4.4 million
arose. This comprised:
- A net credit of £7.2 million arising from the flooding incidents that
affected the Water and Sewerage networks during the summer of 2007. This
includes insurance recoveries of £9.3 million less costs of £2.1 million;
- A charge of £5.4 million in Water and Sewerage arising from the programme to
restructure and realign the business;
- A charge of £7.2 million arising from Severn Trent Water's settlement of the
regulatory issues that arose in previous years. This includes a court
imposed fine of £2 million and costs of £0.2 million from two offences
relating to leakage data supplied to Ofwat in 2001 and 2002 and a provision
of £5 million for additional contributions to the Severn Trent Charitable
Trust as agreed with Ofwat (see note 13); and
- In Severn Trent Services, a credit of £1 million arising from the release of
an exceptional provision made in the prior year relating to third party legal
costs.
In the six months ended 30 September 2007 an exceptional charge of £21.4
million arose. 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 included
costs of £23.2 million which had been identified at that date less insurance
recoveries of £5 million which had been received; 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.
4 Tax
Income tax for the period before exceptional deferred tax is charged in the
income statement at 25.7% (six months ended 30 September 2007: credited at
34.8%), 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, excluding prior year charges and exceptional
items, calculated on profit before tax, exceptional items and gains/losses on
financial instruments was 24.1% (2007: 30.7%).
Current tax of £1.8 million and deferred tax of £25.3 million has been credited
directly to reserves in the period.
Exceptional deferred tax
The Finance Act 2008 includes legislation which will prevent the group claiming
industrial building allowances on affected assets after 2011. This change is
being introduced by reducing the rate of allowances that may be claimed from 1
April 2008 to 31 March 2011 at which point the allowances will be removed. The
removal of these allowances has resulted in an exceptional deferred tax charge
of £185.6 million in the period. The directors estimate that the proposed
changes will increase the future corporation tax charge by up to £12 million in
aggregate in the three years up to the abolition of the allowance.
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 was reflected in the prior year and resulted in
deferred tax credits of £54.7 million in the profit and loss account and £5.4
million in reserves.
5 Dividends
Amounts recognised as distributions to equity holders in the period:
Six months ended 30 September 2008 2007
Pence Pence
per per
share £m share £m
Final dividend for the year ended 31 March 41.34 97.0 38.68 90.4
Proposed interim dividend for the year ending 31 26.29 61.9 24.34 57.0
March
The proposed interim dividend was approved by the board on 24 November 2008 and
has not been included as a liability as at 30 September 2008.
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. Potential ordinary shares which would reduce a loss per
share are not considered to be dilutive and hence in these circumstances
diluted loss per share is equal to basic loss per share.
The calculation of basic and diluted earnings per share is based on the
following data:
Earnings
Six months ended 30 September 2008 2007
£m £m
Earnings for the purpose of basic and diluted earnings per share
from continuing and discontinued operations being:
(Loss)/profit for the period attributable to the equity holders (83.8) 150.9
of the Company
Number of shares
Six months ended 30 September 2008 2007
m m
Weighted average number of ordinary shares for the purpose of 234.4 233.4
basic earnings per share
Effect of dilutive potential ordinary shares:
Share options and LTIPs 1.1 1.7
Weighted average number of ordinary shares for the purpose of 235.5 235.1
diluted earnings per share
Adjusted earnings per share
Six months ended 30 September 2008 2007
Pence Pence
Adjusted basic earnings per share 50.0 47.6
Adjusted diluted earnings per share 49.8 47.2
Adjusted earnings per share figures. These exclude the effects of deferred tax,
(losses)/gains on financial instruments and exceptional items in both 2008 and
2007. 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 2008 2007
£m £m
Earnings for the purpose of basic and diluted earnings per (83.8) 150.9
share from continuing operations
Adjustments for:
Exceptional flood (income)/costs (7.2) 18.2
Exceptional restructuring costs 5.4 3.2
Exceptional charge relating to regulatory matters 7.2
-
Exceptional release of provision for third party legal costs (1.0) -
Current tax related to exceptional items 1.0 (3.2)
Gains/(losses) on financial instruments 12.2 (9.4)
Deferred tax 183.4 (48.7)
Earnings for the purpose of adjusted basic and diluted 117.2 111.0
earnings per share
7 Borrowings
30 September 31 March
2008 2008
£m £m
Bank overdrafts 6.5 1.0
Bank loans 744.6 742.7
Other loans 2,920.5 2,958.1
Obligations under finance leases 380.4 385.4
Borrowings 4,052.0 4,087.2
30 31
September March
2008 2008
£m £m
The borrowings are repayable as follows:
On demand or within one year (included in current 280.0 459.5
liabilities)
In the second year 197.0 233.5
In the third to fifth years inclusive 807.5 155.3
After five years 2,767.5 3,238.9
Included in non-current liabilities 3,772.0 3,627.7
4,052.0 4,087.2
Movements in the Group's net debt in the six months ended 30 September are
shown below:
Borrowings Cash Net debt
£m £m £m
New debt 4.5 (4.5) -
Interest rolled up 22.9 - 22.9
Capital repayments (83.9) 83.9 -
Fair value adjustments 14.2 - 14.2
Exchange and other adjustments 1.6 (2.4) (0.8)
Non cash movements in net debt (40.7) 77.0 36.3
Cash movements in net debt 5.5 1.1 6.6
Movement in net debt in the period (35.2) 78.1 42.9
Net debt at 1 April 2008 4,087.2 (654.4) 3,432.8
Net debt at 30 September 2008 4,052.0 (576.3) 3,475.7
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 2008 has been calculated
on a year to date basis, using the actuarial valuation update as at 31 March
2008. 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 2008. However, the market based assumptions have been updated for
conditions prevailing at the balance sheet date as follows:
30 September 31 March
2008 2008
Discount rate 6.6% 6.4%
Inflation rate 3.4% 3.4%
The defined benefit assets have been updated to reflect their market value as
at 30 September 2008. 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 2008 2007
£m £m
Amounts charged to operating costs:
Current service cost (13.9) (15.3)
Amounts charged to net finance costs:
Interest cost (46.3) (40.4)
Expected return on scheme assets 44.2 46.7
(2.1) 6.3
Total amount charged to the income statement (16.0) (9.0)
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 31
September March
2008 2008
£m £m
Present value of defined benefit obligations - funded (1,431.7) (1,451.9)
schemes
Total fair value of assets 1,211.8 1,332.3
Present value of defined benefit obligations - unfunded (6.4) (6.4)
schemes
Liability recognised in the balance sheet (226.3) (126.0)
Movements in the liability recognised in the balance sheet were as follows:
Six months ended 30 September 2008 2007
£m £m
At 1 April (126.0) (135.1)
Service cost (13.9) (15.3)
Interest cost (46.3) (40.4)
Expected return on scheme assets 44.2 46.7
Contributions from the sponsoring companies 18.3 33.1
Actuarial losses recognised in the statement of recognised (102.6) (7.5)
income and expense
At 30 September (226.3) (118.5)
9 Share capital
At 30 September 2008 the issued and fully paid share capital was 235.6 million
shares of 9717/19 p amounting to £230.6 million (31 March 2008: 234.6 million
shares of 9717/19 p amounting to £229.7 million).
During the period the Group issued 978,591 shares as a result of the exercise
of employee share options.
10 Movements in total equity
Share Share Other Retained Minority Total
capital premium reserves earnings interests equity
£m £m £m £m £m £m
At 1 April 2008 229.7 64.3 427.4 479.6 4.2 1,205.2
Shares issued 0.9 5.3 - - - 6.2
Share based payments - - - 0.5 - 0.5
Tax on share based - - - (0.7) - (0.7)
payments
Dividends paid - - - (97.0) (0.8) (97.8)
Recognised income for - - 12.8 (157.8) 1.0 (144.0)
the period
At 30 September 2008 230.6 69.6 440.2 224.6 4.4 969.4
11 Net cash inflow from operating activities
Six months ended 30 September 2008 2007
£m £m
Profit before interest and tax 257.1 228.6
Depreciation of property, plant and equipment 104.5 102.0
Amortisation of intangible assets 12.0 15.3
Pension service cost 13.9 15.3
Pension contributions (18.3) (33.1)
Share based payments charge 2.7 1.6
(Profit) on sale of property, plant and equipment (2.0) (0.4)
Deferred income movement (2.4) (2.9)
Provisions for liabilities and charges 4.0 1.7
Utilisation of provisions for liabilities and charges (43.6) (4.4)
Decrease in working capital 41.7 66.6
Cash generated from operations 369.6 390.3
Interest paid (94.2) (68.1)
Interest element of finance lease rental payments (8.9) -
Tax received/(paid) 26.6 (37.0)
Net cash inflow from operating activities 293.1 285.2
12 Post balance sheet events
There were no significant post balance sheet events.
13 Contingent Liabilities
Details of the Group's contingent liabilities were disclosed in the financial
statements for the year ended 31 March 2008 which were approved on 4 June
2008. No further contingent liabilities have been identified since that date.
Developments relating to the matters disclosed are set out below.
- On 1 July 2008 Severn Trent Plc announced that at the Central Criminal Court
Severn Trent Water Limited was fined £2 million and ordered to pay £220,000
costs after pleading guilty to two offences relating to leakage data supplied
to Ofwat in 2001 and 2002. These costs have been included as an exceptional
item in these financial statements (see note 3).
- Severn Trent Plc announced on 1st August 2008 that it accepted the fines of £
35.8 million imposed by Ofwat for deliberately providing false information to
Ofwat in the period 2005-06, and for delivering poor service to its customers
in the same period. A provision for this amount was included in the
financial statements for the year ended 31 March 2008.
- Severn Trent Plc has also concluded discussions with Ofwat concerning the
resolution of the Ofwat interim report of March 2006. As a result, Severn
Trent Water Limited has agreed to provide targeted financial support to its
low-income customers who are in most need of financial support in the current
difficult economic climate by making payments totaling £5m to the Severn
Trent Charitable Trust Fund. This is likely to be paid £2m in each of the
two years 2008-09 and 2009-10 and £1m in 2010-11 but has been provided in
full in these financial statements (see note 3).
14 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.
15 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
24 November 2008.
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 2008 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 15. 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 2008 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
24 November 2008
London, UK
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