Final Results
Severn Trent PLC
11 June 2002
11 June 2002
Preliminary Results for the year to 31 March 2002
SEVERN TRENT WATER OUTPERFORMS AS GROWTH BUSINESSES INCREASE TOTAL REVENUES &
PROFITS
Financial and operating highlights
Group
• Turnover up 6.7% to £1,794.3m (£1,681.6m)
• PBITA before exceptional items up 4.6% to £418.8m (£400.2m)
• Profit before tax and exceptional items up 5.2% to £233.3m (£221.7m)
• Adjusted EPS up 3.6% to 63.2p (61.0p)
• Full year dividend increased by 2% to 45.9p (45.0p)
• Net debt broadly unchanged; interest costs lower
Severn Trent Water
• Turnover up 1.4% to £899.9m (£887.2m)
• PBIT up 1.1% to £334.1m (£330.5m)
• Continued Capex and Opex outperformance; though cost pressures growing
• £350m invested, significant customer benefits delivered
Growth businesses:
• Turnover from Biffa and Services combined up 17.4% to £876.4m (£746.4m)
• PBITA from Biffa and Services combined up 25.3% to £105.0m (£83.8m)
Biffa
• Turnover up 24.9% to £494.8m (£396.0m)
• PBITA up 59.7% to £73.0m (£45.7m)
• Underlying growth in the UK of 11%
• UK Waste integration completed ahead of schedule, delivering £16m of
synergies in 2001/02
• Biffa is UK's largest supplier of integrated waste management services
Services
• Turnover up 8.9% to £381.6m (£350.4m)
• PBITA down 16.0% to £32.0m (£38.1m) amid difficult trading conditions in
the USA
• Cost reduction through job cuts and facility closures
• Market leader in analytical services in US and UK
David Arculus, Chairman Severn Trent Plc, said:
'This has been another year of progress for the Group with satisfactory results
overall. There is a growing recognition of our position as a leading
environmental services business in the UK.'
'While the Board has not changed the Group's dividend policy, we have decided to
increase this year's dividend in recognition of the Group's performance for the
year just ended.'
Robert Walker, Group Chief Executive, Severn Trent Plc, said:
'I am pleased to report that in 2001/02 the Group has increased its profit
before tax and exceptional items by 5.2% to £233.3 million. Water continued to
outperform its regulatory targets and, despite cost pressures and a 1% real
reduction in prices, increased its profits. Services had a good first half but
was adversely impacted by a clear weakening in the US economic environment in
the second half of the financial year. Biffa had another good year; it completed
the integration of UK Waste ahead of all its targets and delivered synergy
benefits in 2001/02 of £16 million.'
'We are encouraged by the broad consensus between government, regulators and the
industry that UK water has been a success and by moves towards greater
regulatory transparency and towards a long-term vision for this vital industry.'
'Overall, the Group is likely to experience a challenging year in 2002/03. While
the Board is confident in Severn Trent Water's ability to outperform its
regulatory targets for gross operating cost efficiencies, 2002/03 will see
continuing offsetting cost pressures and broadly unchanged prices. Biffa and
Services, with their lowered cost bases, have leading positions in their key
markets but much will depend on the speed and timing of economic recovery in the
UK and the USA.'
Enquiries:
Robert Walker Severn Trent Plc 020 7404 5959 (on the day)
Group Chief Executive 0121 722 4775
Alan Perelman Severn Trent Plc 020 7404 5959 (on the day)
Group Finance Director 0121 722 4176
Peter Gavan Severn Trent Plc 020 7404 5959 (on the day)
Director of Corporate Affairs 0121 722 4310
Simon Holberton, Mike Smith Brunswick Group Ltd 020 7404 5959
or Catherine Bertwistle
Chairman's statement
2001/02 was another year of progress for the Severn Trent Group, with Group
profit before tax and exceptional items of £233.3 million, an increase of 5.2%.
Severn Trent Water has continued to outperform its regulatory targets for gross
operating cost efficiencies although there are mounting cost pressures (for
example, climate change levy) not allowed for in the 1999 price determination.
Despite another 1% real reduction in average prices charged to water customers
from 1 April 2001, Water's profit before interest and tax at £334.1 million was
1.1% above the prior year. Biffa, the Group's integrated waste company,
performed well. Having acquired UK Waste in September 2000, Biffa delivered
synergy benefits in 2001/02 of £16 million. However, Services was impacted by a
clear weakening in the US economic environment in the second half of 2001/02.
Overall, the non-regulated businesses increased profit before interest, goodwill
amortisation and exceptional items by 21.7% to £100.8 million.
The Group's strategy is to increase shareholder value by establishing Severn
Trent as the UK's leading integrated environmental services business and by
building on Services, particularly its leadership position in the analytical
services market in the USA and the UK.
Environmental Leadership
• Since privatisation, Severn Trent Water has seen river quality improve by
47%, effluent quality improve by 71% and leakage fall by 30%. Severn Trent
Water has more than doubled investment and increased productivity by 40%.
• Once again, Severn Trent Water was classified by the Drinking Water
Inspectorate as supplying water 'significantly above average' quality, with
an overall compliance of over 99.9%.
• Biffa also continues to achieve environmental landmarks. It is among
Britain's largest producers of green energy from landfill gas. Under its
waste contract on the Isle of Wight, Biffa is now delivering landfill
diversion levels of over 45% - well in excess of the Government's targets
and a shop window for what potentially can be achieved nationwide.
• Severn Trent Services launched its Environmental Leadership Alliance and
made the inaugural award to the City of Daytona Beach, Florida, for
exemplary environmental and economic performance.
• Severn Trent was named as the leading utility in the Dow Jones
Sustainability World Index. The index rates companies' social and
environmental activity alongside their economic performance.
• The Group remains the only water, waste water and solid waste company to
have received an AAA rating from Innovest. The US institutional investment
research firm commended Severn Trent's treatment of the environment as a
source of competitive advantage.
Group Results
Group turnover was £1,794.3 million, an increase of 6.7% over last year,
benefiting from a full year's contribution from the acquisition of UK Waste. The
growth in turnover was mainly due to the contribution of the non-regulated
businesses, which increased turnover by £72.4 million to £981.4 million.
Turnover from water and sewerage increased by £12.7 million to £899.9 million.
Group profit before interest, tax, goodwill amortisation and exceptional costs
increased by 4.6% to £418.8 million. The water and sewerage business increased
by 1.1% to £334.1 million. The Group's non-regulated businesses in total
increased their profit before interest, tax, goodwill amortisation and
exceptional costs by 21.7% to £100.8 million, the combined performance of Biffa
and Severn Trent Services being a 25.3% increase to £105.0 million.
After goodwill amortisation of £26.5 million (£17.4 million) and interest
charges of £159.0 million (£161.1 million), Group profit before tax and
exceptional items was £233.3 million, an increase of 5.2%. In 2001/02, the
contribution to the Group from the non-regulated businesses increased to 52.2%
(50.6%) of group revenues and 18.2% (16.5%) of profit before interest, tax and
exceptional items.
Net exceptional costs in the year were £17.0 million, all within Severn Trent
Systems (see Note 3). The charge for current tax was £16.1 million (£12.4
million), an effective rate of 6.9% on profit after interest but before
exceptional items. In accordance with FRS19, the Group has provided for deferred
tax, giving rise to a charge of £42.3 million (£52.4 million) and a provision in
the balance sheet amounting to £366.3 million. The results for the prior year
have been restated to reflect the application of FRS19. Profit after tax and
minority interests was £157.3 million (£141.0 million).
Basic earnings per share were 45.9 pence (41.2 pence). Adjusted basic earnings
per share (before exceptional items and deferred tax) were 63.2 pence (61.0
pence), an increase of 3.6%.
Net debt at 31 March 2002 was £2,411.7 million (£2,410.5 million). Gearing,
reflecting the provision for deferred tax, was 105%. The Group's net interest
charge was covered 4.4 times (4.1 times) by profit before interest, tax,
depreciation, goodwill amortisation and exceptional items.
Dividend
Following the announcement of the OFWAT price determination for the period 2000/
01 to 2004/05, the Board stated its intention that for the period up to 31 March
2005, barring unforeseen circumstances, dividends per share would as a minimum
be maintained at the same level as was paid for the year ended 31 March 2000,
ie, a full year dividend of 45.0 pence. This remains the Group's dividend
policy.
The Board considers that an increase in the final dividend is appropriate given
the performance of the Group for the year just ended. The Board is therefore
proposing a final dividend of 28.56 pence per share (28.0 pence) to be paid on 1
October 2002. This gives a total dividend for the year of 45.9 pence per share
(45.0 pence), a total year-on-year increase of 2%.
Operational Review
Water and sewerage
In 2001/02, turnover from water and sewerage increased by 1.4% to £899.9
million. Profit before interest and tax rose by 1.1% to £334.1 million.
Direct operating costs of the regulated water business were £357.4 million, a
reduction in real terms of £2.7 million, or 0.7%. Excluding the impact of
inflation, gross operating cost efficiencies in 2001/02 amounted to £21.0
million, a reduction of 5.9% compared to the previous year. However, these
efficiencies were offset by cost pressures of £18.3 million.
The programme for reducing costs in Severn Trent Water has continued to make
good progress. Since the beginning of AMP3, gross operating cost efficiencies
were £47 million, offset by cost pressures amounting to £36 million. The £47
million of gross operating cost efficiencies is £11 million ahead of the OFWAT
target.
Severn Trent Water also continued to deliver efficiencies against the £2 billion
investment programme for the five-year period 2000/01 to 2004/05, resulting in
around 7% savings against OFWAT's targets. In the year, £350 million was
invested and significant customer benefits were delivered. This total was less
than the amount originally budgeted for the year because some schemes were
delayed when the foot-and-mouth crisis denied engineers and contractors access
to farmland. Despite the slippage in capital expenditure, the Company is
confident that regulatory physical outputs and scheme completions will be
achieved in the current regulatory period.
The initial phase of a £70 million investment has been delivered at Derby sewage
treatment works. The overall scheme will significantly improve the quality of
effluent and reduce odour. In the year, work was started on a major water supply
link between Birmingham and Coventry. This scheme, costing some £20 million,
will significantly increase the security of water supplies to these two major
cities for years to come.
Climate change remains a long-term issue and the most recent projections from
the UK Climate Change Impacts Programme once again suggest a significant impact
on the Severn Trent region. Severn Trent Water must prepare for the expected
change in rainfall patterns to protect and enhance its water resources. In
addition, its sewerage systems will need considerable investment if they are
required to cope with heavier rainfall.
A recent legal case (Marcic vs Thames Water) has the potential to require water
and sewerage companies to spend very significant amounts to further protect
their customers from sewer flooding. Clarification on this issue is awaited from
OFWAT. Severn Trent Water has long argued that it is unacceptable for customers
to suffer from sewer flooding.
For some years the Group has challenged government and OFWAT to set out more
clearly the position of competition in the water industry. The Government's new
proposal to extend competition to include 1,900 large-scale industrial and
commercial water users across the UK is welcomed. Severn Trent Water is well
placed as a result of its 10 years of account management experience and contacts
with national account customers.
Waste management
In 2001/02, waste management's turnover increased by 24.9% to £494.8 million,
benefiting from a full year's contribution from UK Waste, which was acquired in
September 2000. After goodwill amortisation of £16.8 million, profit before
interest, tax and exceptional costs (in the prior year) was £56.2 million (£37.0
million). Profit before interest, tax, goodwill amortisation and exceptional
costs increased 59.7% to £73.0 million. The enlarged Biffa in the UK, excluding
the benefit of synergies from the UK Waste acquisition, is estimated to have
delivered underlying growth in profit before interest, tax, goodwill
amortisation and exceptional costs of around 11%.
Turnover in the UK increased by 27.1% to £449.5 million, while Belgian turnover
increased by 7.1% to £45.3 million.
The integration of UK Waste with Biffa was completed ahead of schedule,
achieving synergy savings in 2001/02 estimated at approximately £16 million;
this was ahead of the target run rate of £15 million per annum. These synergies
contributed significantly to the increase in profit margin on sales for Biffa in
the UK (before interest, tax, goodwill amortisation and exceptional costs) to
16.0% (11.8%).
Biffa is the largest supplier of integrated waste management services in the UK.
Its position as an integrated supplier - with collection, landfill and special
waste capabilities - offers a competitive advantage in the market place. Biffa
has around 1,000 trucks and more than 60 depots throughout the UK and has 33
operational landfill sites handling around 7 million tonnes per annum.
In 2001/02, collection turnover in the UK increased to £260.8 million (£212.7
million) as integration with UK Waste completed Biffa's national network.
Collection volumes rose by about a quarter and sales margins (before interest,
tax, goodwill amortisation and exceptional items) increased from 13.2% to 17.4%,
driven by the benefit from synergies. The collection division contributed a
profit before interest, tax, goodwill amortisation and exceptional items of
£45.3 million (£28.1 million).
Landfill turnover in the UK increased by 30.2% to £147.4 million. Landfill
volumes increased by 20%, including the contribution from UK Waste, and average
unit revenues were up 24%. Biffa was the first waste management company to act
on the foot-and-mouth crisis under the guidance of the Ministry of Agriculture,
Food and Fisheries and the Environment Agency. Foot-and-mouth activity produced
a profit contribution in 2001/02 of approximately £5 million. Biffa remained
sensitive to local community concerns about this issue; no infected carcasses or
ash from the pyres were taken to Biffa landfill sites. Profit from the landfill
division, before interest, tax, goodwill amortisation and exceptional items was
up 69.7% at £34.1 million (£20.1 million).
The Special Waste division, which includes the important power generation
activity, achieved a 48.6% increase in turnover to £41.3 million and contributed
profit before interest, tax, goodwill amortisation and exceptional items of £6.1
million (£3.6 million).
Biffa currently has interests in 75MW of electricity generation in the UK
(including from Biffa sites leased to third parties). Although permit delays
frustrated the ambition to achieve 90MW in 2001/02, electricity generation is
planned to increase to over 100MW within four years.
In Belgium, turnover increased by 7.1% to £45.3 million; this business was
adversely impacted in 2001/02 by rising disposal costs in Flanders and by
changes in environmental taxation. However, there were signs of improvement in
the second half of 2001/02.
Services
Services' turnover increased by 8.9% to £381.6 million but profit before
interest, tax and goodwill amortisation fell by 16.0% to £32.0 million.
Services' profit in 2001/02 was adversely affected by the unfavourable economic
environment in the USA, changes in product mix and margins and some one-off
costs.
The USA is both the division's base and its largest market; some 85% of
services' turnover arose in the USA. In the second half of 2001/02 there was a
clear weakening in the US economic environment and federal government spending
priorities moved away from environmental protection to security. To mitigate the
effects of the difficult US market, the business initiated cost reductions,
through job cuts and the announced closure of some facilities.
After eliminating the share of associated undertakings' profit, where the
corresponding turnover is not consolidated into services' results, the profit
margin on sales (before interest, tax and goodwill amortisation) reduced to 6.0%
(8.6%).
Turnover in analytical services, the largest business, increased by 10.6% to
£171.6 million, with the USA growing 9.7% to £149.4 million and the UK up 16.2%.
The change in the US administration delayed agreement of Federal funding from
the start of the year. This, together with the impact of a weakening US economic
environment and the lower priority being given to environmental protection,
reduced the amount of analytical services' higher margin testing work which has
had to be replaced by more routine, lower margin work.
The analytical services business, which is the market leader in both the USA and
the UK, continued to focus on developing complete solutions, from collecting
samples to laboratory analysis and reports. Clean Environment Equipment, of
Oakland, California was acquired; this business is a leading manufacturer of
pumping systems for the collection of groundwater samples. The acquisition of
Coventry-based City Analytical Services ('CAS') strengthened analytical
services' leading position in the UK market. CAS provides a major presence in
the contaminated land sector, which is growing rapidly as more building takes
place on brownfield sites.
Turnover in the water purification business increased by 21.1% to £95.3 million.
In order to consolidate the business onto fewer sites, in 2001/02 water
purification announced closures in Goffstown, New Hampshire and San Jose,
California. Ecometrics and Environmental Systems Technology were acquired to
complement and strengthen its chemical disinfection offering. The water
purification business is the market leader in the USA in disinfection services.
Turnover in operating services declined by 1.5% to £114.7 million. Severn Trent
Services now operates around 600 water and wastewater facilities across the USA.
Aquafin, an associated undertaking in Belgium, which provides sewerage services
for Flanders, performed well. In Italy, a consortium led by Severn Trent Water
International, was awarded a 30-year contract to operate water and wastewater
services at Terni, north of Rome.
Systems
Total turnover for systems reduced to £62.0 million (£70.0 million), largely
reflecting the disposal of Stoner Associates in May 2001. The systems business
generated a loss before interest, tax, goodwill amortisation and exceptional
items of £5.7 million (loss of £5.4 million). However, the Group continued the
strategic repositioning of the overall business. As part of this re-alignment,
Stoner Associates was sold generating an exceptional profit of £8.0 million and
the UK operations were restructured to achieve better efficiencies and customer
service.
As previously indicated at the announcement of the Group's half-year results,
Severn Trent Systems has continued to experience problems with some CIS-Open
Vision contracts in the USA, with implementation taking longer than anticipated
and involving extra resources and much higher costs. £25.0 million has been
recognised as an exceptional charge (compared to £21.5 million at the half year)
to cover the anticipated total costs of completing these loss-making contracts
(see Note 3). The net cost of exceptional items in the year's results, including
the profit from the sale of Stoner Associates, was £17.0 million. Despite
problems in the USA, the CIS-Open Vision system has been successfully
implemented in other locations, not least in the UK for Severn Trent Water.
Property, Engineering Consultancy and Insurance
Total turnover from these businesses in the year was £43.0 million (£92.6
million) generating profit before interest and tax of £1.5 million (£4.4
million).
In 2001/02, Severn Trent Property sold some sites formerly occupied by Severn
Trent Water. At Thorpe Park, Leeds, where Severn Trent Property is involved in a
business park development totalling 1.8 million square feet, further office
developments have been completed for Cable & Wireless and IBM. Daventry
International Rail Freight Terminal remains the largest scheme to be undertaken
by the Group.
Charles Haswell & Partners is an engineering design consultancy. After many
years of predominantly working for Severn Trent Water, more than 50% of revenues
now comes from external clients.
Derwent Insurance, based in Guernsey, provides insurance cover to Severn Trent
Group companies.
Supplementary Information
For supplementary information, including the Group's presentation to analysts,
see the Severn Trent web site at www.severntrent.com.
Management
In 2001/02, the Board welcomed two new additions. Alan Perelman, formerly Group
Finance Director of Whitbread, took over as Group Finance Director from Alan
Costin. Alan Costin spent nine and a half years at Severn Trent and the Board
thanks him warmly for his contribution.
Marisa Cassoni, the Group Finance Director of Consignia, joined the Board as a
non-executive director. Her experience of both regulation and finance will be
valuable to Severn Trent; she has joined the Audit and Treasury Committees.
Andrew Simon, the Group's senior independent non-executive director, has decided
to stand down. His huge experience and dedication will be greatly missed. Martin
Flower has agreed to take over the duties of senior independent non-executive
director, with Eric Anstee becoming Chairman of the Audit Committee.
Outlook
Overall, the Group is likely to experience a challenging year in 2002/03. While
the Board is confident in Severn Trent Water's ability to outperform its
regulatory targets for gross operating cost efficiencies, 2002/03 will see
continuing offsetting cost pressures and broadly unchanged prices (pricing for
2002/03 is based on the low RPI outcome in November 2001). Biffa and Services,
with their lowered cost bases, have leading positions in their key markets but
much will depend on the speed and timing of economic recovery in the UK and the
USA.
David Arculus
Chairman
Group profit and loss account
Year ended 31 March 2002
2002 2001
Notes (restated)
£m £m
Turnover: group and share of joint ventures 1,799.1 1,685.9
Less: share of joint ventures' turnover (4.8) (4.3)
Turnover 2 1,794.3 1,681.6
Operating costs before goodwill amortisation and
exceptional costs (1,385.4) (1,290.2)
Goodwill amortisation (26.5) (17.4)
Exceptional contract costs 3 (25.0) -
Exceptional restructuring costs 3 - (15.5)
Total operating costs (1,436.9) (1,323.1)
Group operating profit 357.4 358.5
Share of operating profit of joint ventures and associates 9.9 8.8
Exceptional profit on disposal of business 3 8.0 -
Profit before interest, goodwill amortisation
and exceptional items 2 418.8 400.2
Goodwill amortisation 2 (26.5) (17.4)
Profit before interest and exceptional items 2 392.3 382.8
Exceptional costs 2 (25.0) (15.5)
Exceptional profits 2 8.0 -
Profit before interest 2 375.3 367.3
Net interest payable (159.0) (161.1)
Profit after interest before exceptional items 233.3 221.7
Exceptional items 3 (17.0) (15.5)
Profit on ordinary activities before taxation 216.3 206.2
Taxation on profit on ordinary activities - current tax 4 (16.1) (12.4)
- deferred tax 4 (42.3) (52.4)
Total taxation 4 (58.4) (64.8)
Profit on ordinary activities after taxation 157.9 141.4
Equity minority interests (0.6) (0.4)
Profit for the financial year 157.3 141.0
Dividends (including non-equity dividends) 5 (157.6) (154.5)
Retained loss for the financial year (0.3) (13.5)
Earnings per share (pence)
Basic 6 45.9 41.2
Diluted 6 45.7 41.0
Adjusted basic before exceptional items and deferred tax 6 63.2 61.0
Adjusted diluted before exceptional items and deferred tax 6 62.9 60.7
There is no difference between the profit on ordinary activities before taxation
and the retained loss for the financial years stated above, and their historical
cost equivalents.
The results for the year-ended 31 March 2001 have been restated as a result of
applying FRS19 'Deferred Tax' (note 4).
All items dealt with in arriving at operating profit relate to continuing
activities.
Group Balance sheet
At 31 March 2002
2002 2001
(restated)
£m £m
Fixed assets
Intangible assets - goodwill 474.8 466.6
Tangible assets 4,891.8 4,815.6
Investments in joint ventures:
Share of gross assets 6.0 6.6
Share of gross liabilities (4.6) (5.4)
Loans to joint ventures 4.7 3.8
6.1 5.0
Investments in associates 17.3 17.2
Other investments 5.7 5.4
Total Investments 29.1 27.6
5,395.7 5,309.8
Current assets
Stocks 97.2 82.6
Debtors 390.5 414.7
Short-term deposits 19.1 81.0
Cash at bank and in hand 28.9 35.0
535.7 613.3
Creditors: amounts falling due within one year (1,112.8) (1,444.0)
Net current liabilities (577.1) (830.7)
Total assets less current liabilities 4,818.6 4,479.1
Creditors: amounts falling due after more
than one year (2,042.8) (1,770.0)
Provisions for liabilities and charges (480.4) (418.0)
Net assets 2,295.4 2,291.1
Capital and reserves
Called up share capital 224.0 223.6
Share premium account 24.4 20.2
Capital redemption reserve 156.1 156.1
Profit and loss account 1,889.5 1,890.0
Total equity shareholders' funds 2,294.0 2,289.9
Minority shareholders' interest (equity) 1.4 1.2
2,295.4 2,291.1
The group balance sheet at 31 March 2001 has been restated as a result of
applying FRS19 'Deferred Tax' (note 4).
Group cash flow statement
Year ended 31 March 2002
2002 2001
Notes £m £m £m £m
Net cash inflow from operating activities 8 665.5 617.8
Dividends received from associates and
joint ventures 1.2 1.0
Returns on investments and servicing of
finance (144.9) (126.8)
Taxation (6.7) (6.4)
Capital expenditure and financial investment (352.1) (365.7)
Acquisitions and disposals - (427.9)
Equity dividends paid (154.1) (153.7)
Net cash inflow/(outflow) before use of
liquid resources and financing 8.9 (461.7)
Management of liquid resources 62.0 (44.9)
Financing
(Decrease)/increase in debt (81.5) 515.7
Redemption of shares - (9.1)
Issue of shares 3.4 6.7
(78.1) 513.3
(Decrease)/increase in cash (7.2) 6.7
Reconciliation of net cash flow to
movement in net debt
Notes 2002 2001
£m £m £m £m
(Decrease)/increase in cash (as above) (7.2) 6.7
Cash flow from movement in net debt and
financing 81.5 (515.7)
Cash flow from movement in liquid resources (62.0) 44.9
Change in net debt resulting from cash flows 12.3 (464.1)
Net (debt)/cash assumed/relinquished with
acquisitions and disposals (8.7) 13.7
Rolled up interest on finance leases (2.2) (14.4)
Currency translation differences (0.7) (6.0)
Other non cash items (1.9) (0.3)
Increase in net debt (1.2) (471.1)
Opening net debt (2,410.5) (1,939.4)
Closing net debt 7 (2,411.7) (2,410.5)
Statement of total recognised gains and losses
Year ended 31 March 2002
2002 2001
(restated)
£m £m
Profit for the financial year - group 155.7 139.4
- joint ventures 0.6 0.6
- associates 1.0 1.0
Total profit for the financial year 157.3 141.0
Currency translation differences (1.4) 25.7
Goodwill written off to reserves on pre April 1998
acquisition (earn-out consideration) (0.7) -
Goodwill charged to profit on disposal, previously
written off to reserves pre April 1998 3.1 -
Total recognised gains and losses for the year 158.3 166.7
Reconciliation of movements in shareholders' funds
2002 2001
(restated)
£m £m
Opening shareholders' funds
(2001 as previously stated) 2,289.9 2,546.7
Prior year adjustment (note 4) - (266.6)
Opening shareholders' funds (2001 restated) 2,289.9 2,280.1
Profit for the financial year
(2001 as previously stated) 157.3 193.4
Prior year adjustment (note 4) - (52.4)
Profit for the financial year (2001 restated) 157.3 141.0
Dividends (including non-equity dividends) (157.6) (154.5)
(0.3) (13.5)
Other recognised gains and losses relating to the year 1.0 25.7
Shares issued 3.4 6.7
Redemption of shares - (9.1)
Net addition to shareholders' funds 4.1 9.8
Closing shareholders' funds 2,294.0 2,289.9
The reconciliation of movements in shareholders' funds and the statement of
total recognised gains and losses for the year ended 31 March 2001 have been
restated as a result of applying FRS19 'Deferred Tax' (note 4).
Notes
1 Basis of preparation
The results for the year ended 31 March 2002 have been prepared on the basis of
accounting policies consistent with those adopted for the year ended 31 March
2001, as set out in the financial statements of the group, except for the
adoption in the year of FRS19 'Deferred Tax'. In addition, the group has for the
first time adopted FRS18 'Accounting Policies' and the transitional provisions
of FRS17 'Retirement Benefits' requiring additional disclosures in relation to
its defined benefit pension arrangements.
Further information in respect of FRS17 is provided in note 9 below.
No changes have been effected to the group's accounting policies as a result of
adopting FRS18.
Further information on FRS19, which introduces a form of full provisioning for
deferred tax, replacing the partial method followed under SSAP15, is set out in
note 4 below. In complying with SSAP15, the group did not previously provide for
deferred tax.
The results have been extracted from the audited financial statements of the
group for the year ended 31 March 2002. These audited statements incorporate an
unqualified audit report. The results do not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985. Statutory accounts
for the year ended 31 March 2001, which incorporated an unqualified auditors'
report, have been filed with the Registrar of Companies.
2 Segmental analysis
Analysis of turnover and profit before interest by geographical origin and type
of business
United Kingdom Other-principally Group
USA and Europe
2002 2001 2002 2001 2002 2001
£m £m £m £m £m £m
Group turnover
Water and sewerage 899.9 887.2 - - 899.9 887.2
Waste management 449.5 353.7 45.3 42.3 494.8 396.0
Services 46.0 49.1 335.6 301.3 381.6 350.4
Systems 52.1 43.7 9.9 26.3 62.0 70.0
Property, Engineering consultancy
and Insurance 41.0 92.6 2.0 - 43.0 92.6
Inter segment trading (84.2) (114.0) (2.8) (0.6) (87.0) (114.6)
1,404.3 1,312.3 390.0 369.3 1,794.3 1,681.6
Group profit before interest,
goodwill amortisation and
exceptional items
Water and sewerage 334.1 330.5 - - 334.1 330.5
Waste management 71.7 41.8 1.3 3.9 73.0 45.7
Services 1.6 3.9 30.4 34.2 32.0 38.1
Systems (0.2) 1.7 (5.5) (7.1) (5.7) (5.4)
Property, Engineering consultancy
and Insurance 1.5 4.4 - - 1.5 4.4
Unrealised profit on inter segment
trading (1.1) (1.0) - - (1.1) (1.0)
Corporate overheads (15.0) (12.1) - - (15.0) (12.1)
392.6 369.2 26.2 31.0 418.8 400.2
Goodwill amortisation (17.3) (9.1) (9.2) (8.3) (26.5) (17.4)
Group profit before interest and
exceptional items
Water and sewerage 334.1 330.5 - - 334.1 330.5
Waste management 55.0 33.2 1.2 3.8 56.2 37.0
Services 1.0 3.4 21.4 26.2 22.4 29.6
Systems (0.2) 1.7 (5.6) (7.3) (5.8) (5.6)
Property, Engineering consultancy
and
Insurance 1.5 4.4 - - 1.5 4.4
Unrealised profit on inter segment
trading (1.1) (1.0) - - (1.1) (1.0)
Corporate overheads (15.0) (12.1) - - (15.0) (12.1)
375.3 360.1 17.0 22.7 392.3 382.8
Exceptional items
Exceptional contract costs - Systems - - (25.0) - (25.0) -
Profit on disposal of business - - - 8.0 - 8.0 -
Systems
Exceptional restructuring costs -
Waste
management - (15.5) - - - (15.5)
- (15.5) (17.0) - (17.0) (15.5)
Group profit before interest
Water and sewerage 334.1 330.5 - - 334.1 330.5
Waste management 55.0 17.7 1.2 3.8 56.2 21.5
Services 1.0 3.4 21.4 26.2 22.4 29.6
Systems (0.2) 1.7 (22.6) (7.3) (22.8) (5.6)
Property, Engineering consultancy
and Insurance 1.5 4.4 - - 1.5 4.4
Unrealised profit on inter segment
trading (1.1) (1.0) - - (1.1) (1.0)
Corporate overheads (15.0) (12.1) - - (15.0) (12.1)
375.3 344.6 - 22.7 375.3 367.3
Turnover by origin and destination does not differ materially.
The basis on which the geographical analysis of Services' and Systems' results
is determined has been modified to more appropriately reflect the performance of
operations by territory. Comparative figures have been amended accordingly.
The profit and loss account and segmental analysis include the following amounts
in respect of businesses acquired during the year:
Turnover Operating profit
Other - Other -
principally principally
United USA and United USA and
Kingdom Europe Total Kingdom Europe Total
£m £m £m £m £m £m
Services 1.1 6.2 7.3 0.1 1.0 1.1
Services' operating profit in the table above is after charging goodwill
amortisation of £0.3 million.
Analysis of net operating assets by geographical location and type of business
United Kingdom Other-principally Group
USA and Europe
2002 2001 2002 2001 2002 2001
(restated)
£m £m £m £m £m £m
Water and sewerage 4,368.5 4,272.6 - - 4,368.5 4,272.6
Waste management 208.9 223.2 24.1 19.0 233.0 242.2
Services 18.7 20.3 160.3 169.0 179.0 189.3
Systems 5.7 6.9 (16.5) 12.3 (10.8) 19.2
Property, Engineering consultancy,
Insurance and Corporate 27.4 23.3 - - 27.4 23.3
Net operating assets 4,629.2 4,546.3 167.9 200.3 4,797.1 4,746.6
Goodwill:
Waste management 305.2 304.8
Services 169.6 161.1
Systems - 0.7
Short-term deposits, cash,
borrowings,
taxation and dividends payable (2,976.5) (2,922.1)
2,295.4 2,291.1
3 Exceptional items/contingent liability
Exceptional items in the year of £17.0 million all arose in Severn Trent Systems
('Systems') and comprised the net cost of:
- An £8.0 million profit on disposal of Stoner Associates, which was sold in May
2001 for $26.0 million; and
- A £25.0 million charge in respect of costs either incurred in the financial
year just ended or anticipated to arise in completing certain loss-making
CIS-Open Vision contracts in the USA.
The £25.0 million charge (compared to the £21.5 million charge reported at the
half-year) remains an estimate, as there continues to be ongoing work which will
take further time to be completed. In addition, there is always the risk of a
dispute with Systems' customers over the extent of its obligations and/or
amounts due to Systems. One of Systems' customers, the City of Portland, has
made specific reference to the possibility of litigation and has formally stated
its intention to make a claim (as yet unquantified) against Systems. It is
Systems' intention to defend this claim robustly and to continue to pursue with
rigour its entitlements under this contract.
No actual proceedings have been commenced in respect of any of the CIS-Open
Vision contracts. No provision has been made in the financial statements (nor
can it be under current Financial Reporting Standards) for a potential adverse
outcome of any claim (including the City of Portland's claim), dispute or
litigation in connection with any of the CIS-Open Vision contracts in the USA.
Exceptional restructuring costs of £15.5 million in the year to 31 March 2001
related to the costs of restructuring Biffa Waste Services following the
acquisition of UK Waste.
4 Taxation
2002 2001
(restated)
£m £m
Current tax
UK corporation tax - current year at 30% 17.5 8.9
UK corporation tax - prior year (5.1) 0.3
Double taxation relief (0.6) (0.5)
Overseas taxation - current year 3.0 3.0
Overseas taxation - prior year - (0.2)
Share of taxation charges of joint ventures
and associates 1.3 0.9
Total current tax 16.1 12.4
Deferred tax (note 1) 42.3 52.4
Total tax charge 58.4 64.8
The group had adopted FRS19 'Deferred Tax' in the year ended 31 March 2002.
As a consequence of adopting FRS19, the group has been required to reflect a
full provision for deferred tax and to restate prior year figures. A deferred
tax provision of £266.6 million has been introduced at 31 March 2000 with a
corresponding reduction in shareholders' funds. The tax charge for the year
ended 31 March 2001 has been increased by £52.4 million and in the year to 31
March 2002 by £42.3 million. An additional £5.3 million of goodwill has been
capitalised in respect of prior-year acquisitions. As permitted by the Standard,
discounting has been applied. The application of FRS19, and the consequential
charge for deferred tax, has no impact on tax paid or cash flows.
Given the introduction of FRS19, the group's charge for taxation is made up of
two elements - current tax and deferred tax. The total tax charge of £58.4
million (2001: £64.8 million) represents 25.0% (2001: 29.2%) of the group's
profit after interest but before exceptional items.
The group's current tax charge of £16.1 million (2001: £12.4 million) represents
6.9% (2001: 5.6%) of the group's profit after interest but before exceptional
items. Due to the changing shape and maturity of the group, the current tax
charge as a percentage of profit after interest but before exceptional items is
expected to increase. The deferred tax charge is more difficult to predict as,
in particular, it is impacted by changes in interest rates from one balance
sheet date to the next.
5 Dividends
An interim dividend of 17.34p per ordinary share (2001: 17.0p) was paid on 8
April 2002. The Board is proposing a final dividend of 28.56p per ordinary share
(2001: 28.0p) to be paid on 1 October 2002. The shares will be traded
'ex-dividend' with effect from 26 June 2002.
The cost of the proposed equity dividends to the company's shareholders for the
year ended 31 March 2002 amounts to £157.6 million (2001: £154.3 million).
There were no non-equity dividends paid in the year following the redemption of
the B shares on 1 November 2000 (2001: non-equity dividends paid of £0.2
million).
6 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to
ordinary shareholders by the weighted average number of ordinary shares in issue
during the year, 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
year.
Supplementary, adjusted earnings per share figures are presented. These exclude
the effects of deferred tax and exceptional items. The Directors consider that
the adjusted figures provide a useful additional indication of performance.
Year ended 31 March 2002
Weighted
average Per
number share
Earnings of shares amount
£m m pence
Basic earnings per share 157.3 342.8 45.9
Effect of dilutive options - 1.5 (0.2)
Diluted earnings per share 157.3 344.3 45.7
Adjusted earnings per share
Basic earnings per share 157.3 342.8 45.9
Effect of:
Exceptional profit on
disposal of business (8.0) - (2.3)
Exceptional contract costs 25.0 - 7.3
Exceptional restructuring
costs - - -
Deferred tax 42.3 - 12.3
Adjusted basic earnings per
share before exceptional items
and deferred tax 216.6 342.8 63.2
Diluted earnings per share 157.3 344.3 45.7
Effect of:
Exceptional profit on
disposal of business (8.0) - (2.3)
Exceptional contract costs 25.0 - 7.2
Exceptional restructuring
costs - - -
Deferred tax 42.3 - 12.3
Adjusted diluted earnings per
share before exceptional items
and deferred tax 216.6 344.3 62.9
Year ended 31 March 2001 (restated)
Weighted
average Per
number share
Earnings of shares amount
£m m pence
Basic earnings per share 140.8 342.1 41.2
Effect of dilutive options - 1.5 (0.2)
Diluted earnings per share 140.8 343.6 41.0
Adjusted earnings per share
Basic earnings per share 140.8 342.1 41.2
Effect of:
Exceptional profit on
disposal of business - - -
Exceptional contract costs - - -
Exceptional restructuring
costs 15.5 - 4.5
Deferred tax 52.4 - 15.3
Adjusted basic earnings per
share before exceptional items
and deferred tax 208.7 342.1 61.0
Diluted earnings per share 140.8 343.6 41.0
Effect of:
Exceptional profit on
disposal of business - - -
Exceptional contract costs - - -
Exceptional restructuring
costs 15.5 - 4.5
Deferred tax 52.4 - 15.2
Adjusted diluted earnings per
share before exceptional items
and deferred tax 208.7 343.6 60.7
7 Analysis of net debt
2002 2001
£m £m
Cash at bank and in hand 28.9 35.0
Short-term deposits 19.1 81.0
Overdrafts (31.2) (30.0)
Debt due within one year (443.6) (785.7)
Debt due after one year (1,521.3) (1,248.7)
Finance leases due within one year (4.7) (3.4)
Finance leases due after one year (458.9) (458.7)
Net debt (2,411.7) (2,410.5)
8 Reconciliation of operating profit to operating cash flows
2002 2001
£m £m
Operating profit 357.4 358.5
Depreciation charge 281.4 267.4
Amortisation of goodwill 26.5 17.4
Profit on sale of tangible fixed assets (2.0) (0.3)
Deferred income received 3.2 1.0
Deferred income written back (3.4) (2.9)
Provisions for liabilities and charges 40.2 12.2
Utilisation of provisions for liabilities and charges (31.4) (49.5)
Movement in working capital (6.4) 14.0
Net cash inflow from operating activities 665.5 617.8
9 Pensions
FRS17 is a new accounting standard for pensions. Full adoption is not required
in respect of the Severn Trent group until the year ending 31 March 2004. In the
interim, certain additional disclosures are required under the transitional
provisions of FRS17, which will be provided in the group's full financial
statements to 31 March 2002.
The new standard requires that the group's pension fund assets are valued at
market values at each year-end. On an FRS17 basis, the group's final salary
pension schemes in total have a net surplus of £30 million as at 31 March 2002
(before £12 million of surplus deemed irrecoverable and before deferred tax).
During the year, the group completed the formal triennial valuation (as at 31
March 2001) of the Severn Trent Water Pension Scheme ('STWPS') the group's main
pension scheme; the scheme assets were £794 million with funding at 107%. As a
result of this valuation, the SSAP24 charge for the STWPS is reduced from 11.7%
of pensionable salaries to 10.9%. As the impact of this change is not material,
the reduced charge has effectively been made from 1 April 2002.
10 Annual Report
The 2002 Annual Report will be sent to shareholders in late June. Copies may be
obtained from the Company Secretary, Severn Trent Plc, 2297 Coventry Road,
Birmingham B26 3PU.
11 Annual General Meeting
The Annual General Meeting will be held at the Royal Centre, Nottingham, on 26
July 2002 at 2.30pm.
12 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
regulatory framework in which Severn Trent operates; the impact of legal or
other proceedings against Severn Trent or other companies in the environmental
services industry; and changes in interest and exchange rates.
All subsequent written or verbal forward-looking statements attributable to
Severn Trent or any member of the Severn Trent 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.
Ends
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