Severn Trent PLC -Interim results

Continued strong performance while investing for the future

 

·     Ongoing delivery for customers  

−    Upper quartile position in the UK Customer Service Index for utility companies

−    ODIs in line with expectations maintaining sector leading AMP6 ODI performance of £150 million to date1

−    Maintained leading waste performance by employing greater use of data and technology to optimise our network

−    Continued progress on water performance.  Delivering on catchment management customer ODI and forecasting a further 6% reduction in the number of water quality complaints

−    Increased water production during hot, dry summer to meet a 22% increase in customer demand

 

·    Planning and investing for the long term: 

−    Submitted high quality AMP72 business plan delivering 13% Totex efficiency, upper quartile financing and ambitious performance targets while maintaining lowest bills in England and Wales for another five years

−    Excellent progress on our capital programme, with capex of £340 million in the first six months of the year and on track for over £650 million by the end of the year

−    Locked in c.95% of £870 million totex efficiencies, £100 million reinvestment on track setting ourselves up for a fast start in AMP7

−    Investing in renewable energy with our acquisition of Agrivert food waste plants adding an additional 106GWh per annum to our existing portfolio

 

·     Good Group financial results for the half year: 

−    Group turnover of £881.5 million, up £30.5 million (3.6%) 

−    Group underlying PBIT3 of £299.1 million, up £12.4 million (4.3%)

−    Group reported PBIT £299.1 million, up £4.1 million (1.4%)

−    Reduction in effective interest rate by 70 basis points, driving underlying basic EPS4 of 76.2 pence (up 16.3%)basic EPS from continuing operations of 69.8 pence (up 12.2%)

−    Interim dividend of 37.35p (up 7.9%)

Liv Garfield, Chief Executive Severn Trent Plc, said:

"Our job is to deliver for all of our stakeholders - our customers, colleagues and investors - and by that we don't just mean delivering high quality waste and water services. We want to make a fundamental difference in society and in the communities we serve. As such, we're delighted to be one of a handful of companies, and the only utility, to be acknowledged as a Pathfinder Company by the Purposeful Company organisation and we look forward to developing our approach to this further in the future.

 

I'm pleased to be sharing a good set of financial and operational results in what has been a very busy first half of the year. The performance culture we have embedded into the organisation continues to deliver strong performance for our customers, also providing a great platform as we head into AMP7. As we plan and invest for the future, we are on track for our biggest year of capital spend in a decade, with more than £300 million invested in the first six months to improve performance for our customers today and for generations to come.

 

Building a lasting legacy is a key priority for us and we believe our PR19 plans will deliver what our customers have asked for, while maintaining the right balance of affordability and future investment"

 

Group results from continuing operations

 

Underlying results

 

Six months ended 30 September

2018

2017

Increase

 

 

(restated)5

 

 

£m

£m

%

Group turnover

881.5

851.0

3.6

Underlying Group PBIT3

299.1

286.7

4.3

 

 

 

pence/

share

pence/

share

 

Underlying basic EPS4 

76.2

65.5

16.3

Interim dividend declared

37.35

34.63

7.9

 

Reported results

 

Six months ended 30 September

2018

2017

Increase

 

 

(restated)5

 

 

£m

£m

%

Group turnover

881.5

851.0

3.6

Group PBIT

299.1

295.0

1.4

 

 

 

pence/

share

pence/

share

 

Basic EPS from continuing operations

69.8

62.2

12.2

 

 

Footnotes to pages 1 & 2 of this RNS

 

1.     Pre-tax in 2012/13 prices.  Subject to outcome of Ofwat consultation.

2.     AMP7: the 2020-2025 regulatory period

3.     Underlying Profit before interest and tax (PBIT) excludes exceptional operating items - see note 4 to the financial statements

4.     Underlying Earnings per Share (EPS) - see note 9 to the financial statements

5.     Restated for adoption of IFRS 15 - see note 1 to the financial statements

 

Note: Technical guidance is included in the Chief Financial Officer's section of this announcement

 

Enquiries

 

 

Investors & Analysts

 

 

Richard Eadie

Severn Trent Plc

+44 (0) 788 980 6578

Head of Investor Relations

 

 

Rachel Martin

Severn Trent Plc

+44 (0) 782 462 4011

Investor Relations Manager

 

 

 

 

 

Media

 

 

Jonathan Sibun

Tulchan Communications

+44 (0) 207 353 4200

 

 

 

Press Office

Severn Trent Plc

+44 (0) 247 771 5640

 

 

 

 

 

 

 

Chief Executive's Review

Having engaged with thousands of customers while developing our business plans for 2020 to 2025, we have a very strong sense of what they want to see from our company in the future and where we are on that journey. It is our ambition to be a company that truly listens to customers and delivers what they want. In doing so, we believe we will earn the trust of not just customers but also a broad set of stakeholders who can share in the success we deliver. We are proud of what we have achieved through operational performance, customer ODI delivery and totex efficiency to date and will continue to explore further opportunities to improve.

June and July of this year were operationally challenging. The prolonged hot, dry weather over this period placed a significant strain on our assets and our people. While not perfect, I am hugely proud of our response to this event, demonstrating resilience and flexibility in our network to respond to a 22% increase in demand for water from our customers. The activity to support our performance has cost in the region of £10 million in the first half of the year. We expect to absorb a similar amount of cost in the second half of the year to support the operational recovery required from such an event.

In Business Services, we completed a key milestone in our ambition to deliver £100 million of property profits by 2027 with the sale of land near Nottingham, generating a profit of £18 million and enabling 830 new homes to be built in our area. We also announced the acquisition of Agrivert Holdings Limited, a leading energy from food waste business, for a total consideration of £120 million, and are on track to complete the transaction in the next month. Both transactions reflect our strategic focus on Operating Services in the UK, Renewable Energy and Property Development, delivering sustainable returns for investors outside of the regulated business.

A great deal of thought and effort has gone into creating ambitious, but deliverable business plans for Severn Trent Water and Hafren Dyfrdwy for 2020 to 2025. The two plans respond to the unique customer expectations in each region, but have the same sense of societal purpose at their core. In each plan we have carefully considered how to balance affordability with the right levels of investment needed to meet stretching performance commitments, while ensuring we go far beyond the base requirements of what a business is expected to deliver for the communities it serves. Both plans have the lowest bills in England and Wales and we plan to keep it that way for the years to come.

Reflecting on the engagement we have with our stakeholders, it is clear that the relationship between business and communities is evolving. The work we have done to date and our plans for the future show the first steps of how businesses with strong social purpose can deliver better outcomes for all stakeholders. As such, we are delighted to be one of only seven UK companies, and the only utility, to be acknowledged as a Pathfinder company by the Purposeful Company Task Force. We look forward to working with other like-minded companies to continue to develop our approach in the future.

 

Our strategic priorities remain consistent with this approach:

− Embedding customers at the heart of all we do

− Driving operational excellence and continuous innovation

− Investing responsibly for sustainable growth

− Changing the market for the better

− Creating an awesome place to work

Chief Financial Officer's Review

We have delivered good financial performance in the first six months of 2018/19. Our Regulated Water and Waste Water business increased PBIT even after an additional £10 million of operating costs over the hot dry summer. In Business Services we held revenue broadly flat, with lower activity on the MOD contract, and commissioning costs and lower gate fees in our energy business slightly reducing profitability. In May we announced the sale of surplus land near Nottingham, realising a profit for the Group of £18 million to get our new Property Development business off to a good start, although we do not expect any similar sized transactions in the remainder of this AMP. Historically just over half of the Group's PBIT has arisen in the first half of the year and we expect that trend to continue in the current year.

With growth in underlying PBIT and lower finance costs, our underlying basic earnings per share were up 16.3% to 76.2 pence (2017/18: 65.5 pence). Basic earnings per share from continuing operations were 69.8 pence (2017/18: 62.2 pence).

The proposed interim dividend has increased by 7.9% in line with our policy for the remainder of AMP6 to increase the dividend by RPI plus 4%.

Our funding position is strong. Capital investment and other cash flow needs through to January 2021 are covered by committed facilities. We continue to monitor and manage our interest rate exposure, holding 25% of our debt at floating rates. In preparation for the introduction of CPIH indexation in AMP7 we entered into a further £100 million forward starting CPI/RPI swap in April taking the total amount of such swaps to £250 million.  In August, we raised £323 million in our second issue to the US private placement market receiving these funds this month.

A brief overview of our financial performance for the six month period is as follows:

·     Group turnover from continuing operations was £881.5 million (2017/18: £851.0 million), an increase of 3.6%, mainly due to allowed price increases in our Severn Trent Regulated Water and Waste Water business.

·     Underlying PBIT increased by 4.3% to £299.1 million (2017/18: £286.7 million) benefiting from an excellent start in our Property Development business and good operating cost control despite difficult operating conditions over the summer in our Regulated Water and Waste Water business.

·     Reported Group PBIT was £299.1 million (2017/18: £295.0 million). There were no exceptional items in the period. In 2017/18 we recorded an exceptional gain of £8.3 million arising from a pension increase exchange arrangement for the Severn Trent Pension Scheme.

·     Net finance costs fell to £93.1 million (2017/18: £110.5 million) reflecting the impact of lower RPI on our index-linked debt and an effective cash cost of interest around 50 basis points lower than the same period last year as we benefited from lower interest rates on new and refinanced debt.

 

·     The current tax charge of £23.7 million (2017/18: £21.7 million) benefited from capital allowances on our increased investment programme. The deferred tax charge was £14.8 million (2017/18: £12.6 million) giving a total tax charge of £38.5 million (2017/18: £34.3 million) and a full effective tax rate of 19.1% (2017/18: 19.0%).

·     Net cash capital expenditure was £340.1 million (2017/18: £270.4 million).

Dividends

The Board has declared an interim ordinary dividend of 37.35p per share (2017/18: 34.63p per share), which will be paid on 4 January 2019 to shareholders on the register at 30 November 2018.