TIDMSVT
RNS Number : 5453G
Severn Trent PLC
26 November 2020
Half Yearly Financial Report
26 November 2020
Interim results for the six months to 30 September 2020
Resilient financials, strong operational performance, continued
investment
I nvestment and performance culture delivers strong operational
performance:
-- Industry leaders in environmental performance with 4* EPA
accreditation from the Environment Agency.
-- On track for full year ODI reward of at least GBP25
million(1) driven by record performance in reducing environmental
pollutions and customer blockages while delivering a strong start
to ambitious biodiversity plans.
-- Continued customer focus with improving UK Customer
Satisfaction Index scores with both customer complaints and
customer experience measures on track for ODI reward in year
one.
-- Improving water performance across key customer measures such
as leakage, water quality and speed of response, delivering
forecasted positive net outcome on water for the year.
-- Balanced performance across Water, Waste and Environment with
c.80% of measures in positive territory.
-- Capital investment set to exceed GBP500 million for the year
including accelerated activity on strategic renewable projects.
Financially resilient results and strong liquidity:
-- Group turnover of GBP888 million(2) in line with
expectations, down GBP22 million (2.5%), including GBP33 million as
a result of consumption, largely driven by COVID-19 related
decrease in metered revenue. Ofwat regulatory model allows us to
recover this revenue in two years.
-- Group underlying PBIT(3) of GBP226 million, down GBP61
million (21.2%) and Group reported PBIT of GBP225 million, down
GBP61 million (21.3%), both impacted by reduced revenue, increased
bad debt provisioning for COVID-19, higher depreciation and timing
of property profits.
-- Effective interest cost(4) reduced by a further 40 bps to 3.3%, from 3.7% at the full year.
-- Strong financial resilience following sustainable bond issue
GBP300 million and one year extension of our RCF - GBP890 million
of undrawn facilities.
-- Underlying basic EPS(5) of 51.3 pence (down 25.4%) and basic
EPS of 42.7 pence (down 30.8%), reflecting lower PBIT.
-- Interim dividend of 40.63 pence, in line with policy confirmed at the full year.
Supporting our people and our communities:
-- Continued support for colleagues, ensuring our essential
services are maintained while looking after physical, mental and
financial well-being.
-- GBP13 million provided to support customers in financial
need, GBP2 million donated to local organisations to help
communities through the pandemic and over GBP1 million of funding
allocated through the Severn Trent Community Fund to 67 key
projects in our region.
-- Accelerated payments to our supply chain helping 705 small
and medium-sized enterprises in our region with crucial cash
flow.
-- Playing our part for employment in region with no furloughing
or redundancies, while welcoming apprentices and graduates to begin
their careers.
-- Embracing the Government Kickstart Scheme with ambitious
plans to support 500 16 to 24 year olds into employment with paid
work experience and skills development from January 2021.
Liv Garfield, Chief Executive Severn Trent Plc, said:
"The last six months have been challenging for everyone and I am
grateful to our Severn Trent people, whether they've been in a
treatment works, in an office, working from home, or out on the
streets carrying out essential work, for the dedication, resilience
and wonderful can-do spirit they have shown. It's these qualities
which have enabled us to provide our customers with a great service
in such difficult circumstances. I'm incredibly proud of what we've
achieved, whether it's getting the top environmental performance
grade once again from the Environment Agency, improving services
for our customers, increasing our investment to help the country
build back better, or taking a leading role in the Kickstart
Scheme. We've done all of that while striving to do the right thing
for all of our stakeholders, including mental health programmes,
our support schemes for vulnerable customers, and through our GBP1
million emergency COVID-19 fund."
Group results
2020 2019 Increase/ (decrease)
GBPm GBPm %
Group turnover 887.6 910.0 (2.5)
Underlying group PBIT(3) 225.6 286.3 (21.2)
Group PBIT 224.6 285.3 (21.3)
--------------------------- ------ ------ ---------------------
pence/ pence/
share share
--------------------------- ------- -------
Underlying basic EPS(5) 51.30 68.80 (25.4)
Basic EPS 42.70 61.70 (30.8)
Interim dividend declared 40.63 40.03 1.5
---------------------------- ------- ------- -------
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
Selina Soma Severn Trent Plc +44 (0) 797 693 8604
Investor Relations Manager
Media
Jonathan Sibun Tulchan Communications +44 (0) 207 353 4200
Press Office Severn Trent Plc +44 (0) 247 771 5640
Interim Results Presentation and Webcast
A presentation of these results hosted by Liv Garfield, CEO, and
James Bowling, CFO, will be available on our website
(severntrent.com) from 08.30am GMT today, 26 November 2020. We will
be hosting a live Q&A session with Liv, James and our wider
Executive team at 10.00am GMT today via video call.
Footnotes to this RNS
1. Quoted pre-tax at 2017/18 prices.
2. Includes GBP7.8 million revenue previously credited against operating costs - see note 1.
3. Underlying profit before interest and tax (PBIT) - see note 18 to the financial statements.
4. Effective interest cost - see note 18 to the financial statements.
5. Underlying earnings per share (EPS) - see note 8 to the financial statements.
Chief Executive's Review
The business has adapted well to the impact of the pandemic and
delivered resilient performance. We continue to carefully manage
the short-term financial impacts of lower revenue and lower
earnings for the year, in the knowledge that a large portion of
this will be corrected for in later years of the AMP. Our liquidity
position remains strong, giving us the confidence to increase our
investment for the future. Our people have shown adaptability and
commitment in continuing to deliver the best possible service for
the communities that we serve and this is reflected in a strong set
of operational, environmental and customer outcomes, putting us in
a great position for the full year and the AMP as a whole.
Despite the uncertainty, we have maintained focus on the
fundamentals that deliver sustainable outperformance. The
investment we made at the end of AMP6 in assets, technology and our
people is paying off, with around 80% of our ODIs across waste,
water and the environment in positive territory, giving us
confidence in a full-year outturn of at least GBP25 million of ODI
reward. The performance culture we have built over the past five
years is now firmly embedded at every level of our business, making
sector-leading outperformance on customer ODIs a multi-year and
multi-AMP possibility.
Investment has continued strongly into this year, made possible
by the additional time granted by fast-track status. We plan to
invest over GBP500 million by the end of the financial year,
including accelerating GBP80 million from additional capacity in
the infrastructure market created by the pandemic. This strong
start will enable earlier operational outperformance, and in the
case of our renewable asset investments, bring forward carbon and
cost benefits.
I'm particularly proud that many of our investments are designed
to enhance our environment, with over 14% reduction in pollutions,
which puts us on the path to meet our target for a 50% reduction in
the AMP. We've also launched our Great Big Nature Boost in the
period, which has been warmly received by customers and
stakeholders alike, and which we believe will help us make a real
difference in restoring nature in our region. Alongside that, we're
also already committed to deliver 60% of our ambitious plans to
improve the biodiversity of 5,000 hectares of land across the
Midlands. Our catchment management approach continues to help us
forge strong relationships with farmers and other landowners, and
will help us environmentally, operationally and financially for
years to come.
Across a broad context we are hitting our stride to deliver for
all of our stakeholders. We continue to improve in our customer
service metrics, from the UK Customer Satisfaction Index to our
regulatory measures of C-MeX and D-MeX. We have delivered
industry-leading environmental performance through our 4* EPA
status from the Environment Agency and our people continue to be
among the top 5% across global utilities for employee
engagement.
These improvements put us in a credible position to begin
discussions with Ofwat to access material amounts of funding being
made available to invest in the Green Recovery in the next five
years. This has the potential to deliver sustainable improvements
including reduced carbon water treatment, water abstraction,
flooding resilience and river quality for our region. If approved,
it would boost employment in the region both directly and
indirectly as well as support our environmental ambitions for the
long term.
Helping people to thrive
People - both our own teams and our customers - are at the very
heart of our business and its people, and the communities where
they live and work, who've been hit hardest by the pandemic. That's
why it was so important to us to help everyone through these
difficult times as best we could. That means we've heavily promoted
our support schemes, designed to help our most vulnerable customers
and, so far, we've supported more than 100,000 people with GBP13
million worth of support. And, in October, in recognition of the
issues so many were having, we launched our Back on Track scheme
which will help those who may be struggling to pay their bill.
We have seen first-hand just how hard the communities we serve
have been affected by the pandemic, which is why we decided to
provide GBP2 million of additional charitable funding in the first
half of the year to local organisations most in need. We are
inspired by the work they do and through our existing GBP10 million
Severn Trent Community Fund we have already invested over GBP1
million in 67 local projects and we will continue to support them
in the best way we can. Our community includes the ecosystem of
suppliers, both large and small, who we work with every day. We
build partnerships for the long term, which is why we have
accelerated capital investment into this year and in many cases
shortened our payment terms to provide GBP159 million of cash flow
needed to help 705 of our SME partners through this difficult
time.
Our people have been remarkable over the last eight months and
we have supported them through a comprehensive approach to health,
safety, mental well-being and financial security - committing to no
furloughing, no redundancies, honouring our all people bonus and
agreeing a 2.3% annual pay increase for the next three years for
our front-line teams. Given we continued to work throughout the
first lockdown, and will do so again this time, we decided to
continue with our plans to bring in new apprentices and graduates,
and have since also announced our ambition to take on 500 16 to 24
year-olds who are at risk of becoming long-term unemployed on
six-month contracts over the next 12 months as part of the
Government's Kickstart Scheme. Our aim is to equip the young people
we take on with the experience and skills that will stand them in
good stead as they look to find full-time opportunities, possibly
even within Severn Trent.
More widely, we're proud to have topped the EY Female FTSE Board
Report table which shows our continuing commitment to diversity and
inclusion, from our most senior leaders down. Alongside that, we
were top 10 for the second year running in the Social Mobility
Index, which ranks companies by their commitments to taking on, and
progressing, people from all backgrounds. We're also signatories of
the Race at Work Charter which is further proof of our desire to
reflect the wonderful diversity of all of the communities we
serve.
Investing in operational outperformance
We have started this year in the same fashion as we finished the
last - delivering strong operational performance for the benefit of
our customers. Despite more stretching targets, new performance
metrics and the challenges of lockdown, we are pleased to be on
track for at least GBP25 million of ODI reward by the end of the
year, with all three of our performance areas (water, waste and the
environment) in positive ODI territory.
Promising start on Water
Our performance in water continues to be encouraging, with
leakage being cut by 15%, the speed with which we repair those
leaks improving by 9%, and water quality complaints are on track to
fall by 9%, which is great to see as it will mark the first year of
ODI reward for this measure. We're also delighted to be able to
share that we're making good progress on some of the newer, bespoke
measures for AMP7 such as ensuring no customer has to face
persistent low pressure, where we're on track to beat our year one
target. Elsewhere, we've made an excellent start to our long-term
metering commitment and are now likely to deliver almost double the
number we'd targeted in our first year. For our Welsh customers,
served under the Hafren Dyfrdwy banner, we've embraced the Welsh
Government's ambitions for a lead-free principality by delivering
our year-one target for lead pipe replacement four times over.
Inevitably, some of our measures have been affected by COVID-19.
Our customers are using more water due to the requirement for
continuing great hygiene and by the need to work from home. We
continue to push our consumption messages and expect the situation
to improve once we get through the pandemic. The combination of
consumption habits at home and extremely warm weather for parts of
the summer also created challenges for our supply interruptions
performance which continues to be an ongoing focus as we're aware
of the extent to which being without water, especially at the
moment, affects our customers in their daily lives. Our Education
programme has also suffered because of our inability to physically
go into schools during lockdown but our team has developed a new,
virtual presentation that can be streamed live, and we await the
second lockdown to end so we can go back into schools in a safe
manner.
Industry-leading Waste performance
Our waste business has had a really excellent half year,
producing one of our strongest-ever sets of results on pollutions,
with a 14% reduction, which is not only great news in the short
term, it also puts us right on track to hit our target to halve
pollutions by the end of the AMP. This reduction also helped us
gain the top 4* rating from the Environment Agency for our
performance in 2019. The fact that we were one of only two
companies to get the top ranking showed our commitment to remain at
the forefront of the industry for waste performance.
The accelerated "Blockbuster" work we initiated last year to
reduce sewer blockages has been key to driving down both pollutions
and flooding, which we recognise have a significant impact on our
customers. By investing in our waste infrastructure and sewer
cleansing activities while traffic was subdued during the first
lockdown, we've been able to make faster progress to reduce the
causes of blockages, which we expect to see in our ODI performance
for the full year.
Positive impact on our environment
Our ambition to drive genuine environmental improvement through
our Biodiversity programme remains undiminished and we have made a
very strong start to the AMP, we are already signed up to deliver
in the region of 3,000 hectares, exceeding our 5-year regulatory
commitment. We're well on the way to delivering our 2027, 5,000
hectare ambition to deliver a significant environmental legacy for
the region and to play a key role in the Government's National
Recovery Network. One of the additional benefits of our programme
is that it allows our own people and our communities to play their
part in our plans, especially as so many of us have spent so much
time exercising in, and simply appreciating, the nature around us
during lockdown. We launched our Great Big Nature Boost campaign
during the summer with local events, supported by a recent TV
campaign. We're particularly excited by this area of our plans and
look forward to seeing how we can embed it for generations to
come.
Supporting the Green Economic Recovery
We support the Government's approach to investing in a Greener
Recovery and have proposed a number of projects to help to boost
the economy of the Midlands and drive long-term sustainable
benefits for the region. These opportunities support the wider
national agenda on climate change and would deliver long-term
flooding resilience, address national river quality, reduce water
consumption, provide additional water supply resilience and take
care of private supply pipes. In aggregate they would represent a
significant incremental investment opportunity over the next five
years and importantly these projects will supplement the work we do
now in our communities, providing employment, resilience and
improved natural surroundings.
Capital investment delivering short and long-term benefits
Fast-track status provided an early view of the challenges this
AMP would bring and has allowed us to invest thoughtfully but at a
greater pace, clearly linking our investment plans with the
operational outcomes we want to achieve in AMP7, and in doing so,
laying the foundations for continually improving outcomes for our
customers. With our core plan in motion we have taken the
opportunity created by additional capacity in the infrastructure
market to bring forward strategic investment in projects such as
our thermal hydrolysis programme, creating a more efficient
renewable energy process which will ultimately drive cost and
carbon benefits in the business. The benefits from securing early
agreements with our framework partners and insourcing our capital
design team are already being felt in the business and we believe
it will continue to play an important role in delivering immediate
operational benefit while balancing the demands of cost efficiency,
carbon neutrality and waste reduction.
Conclusion
Despite all the challenges we have faced, we have made an
excellent operational start to the year. It is an exciting time
where the stability of a concluded price review has allowed us to
focus on making a positive impact. We can look forward to rest of
the AMP in the knowledge we have the culture and skills to deliver
operational outperformance, the capital delivery model to deliver
innovative solutions in a cost effective way and an approach to
environmental and societal sustainability that is embedded in the
decisions we make every day.
Chief Financial Officer's Review
Our financial performance is in line with our expectations,
taking into account the impacts of the COVID-19 pandemic, for the
first six months of 2020/21. At our results announcement in May and
our trading update we guided to a GBP50 - GBP85 million negative
impact to full year 2020/21 revenue and we have seen a GBP30
million reduction in revenue(1) in the first half of the year. But
it's important to remember that the Ofwat regulatory model allows
us to recover shortfalls in this year's allowed wholesale revenue
in 2022/23.
We have been encouraged by household customer cash collections
that are slightly ahead of the same period a year ago with no
significant increase in direct debit cancellations. However, we
continue to anticipate bad debt increases in line with the guidance
previously given, as recent redundancies and the future increases
in unemployment included in consensus economic forecasts impact our
region. In the first half of the year we therefore recorded an
additional GBP8.2 million in the bad debt charge in our Regulated
Water and Waste Water business for the expected impact on our
customers' ability to pay in full amounts already billed.
These lower revenue and higher bad debt costs impacted
underlying and reported PBIT in our Regulated Water and Waste Water
business as expected.
In Business Services, revenue was broadly in line with the same
period in the prior year but PBIT was down GBP9.4 million.
Operating Services and Other PBIT was lower as our searches
business saw lower volumes of property transactions and our Green
Power and Property Development businesses were impacted by lower
energy prices and fewer transactions respectively.
Our effective interest cost was down to 3.3% from 3.7% for the
previous full year, primarily reflecting the beneficial impact of
lower inflation on our index-linked debt. Somewhat
counter-intuitively, this may result in an adverse impact on the
financing component of our RoRE for this year. This is because
Ofwat's draft methodology calculates financing outperformance
against the allowed real cost of debt inflated by actual CPIH,
which results in a lower financing cost allowance in nominal terms
when inflation is lower than the level assumed in the PR19
determination.
Our cash flow and liquidity remain strong. We have GBP1.075
billion of committed facilities, of which GBP250 million matures
during 2022 and GBP825 million in March 2023. On 2 June Severn
Trent Water issued its first Sustainable Bond, raising GBP300
million at a fixed rate of 2% over 20 years.
We have made a fast start to our capital programme for AMP7,
recording cash capex of GBP283.5 million in the first six months.
To date we have seen no delays to the capital programme from
COVID-19.
At the year end we saw a spike in corporate credit spreads,
resulting in a higher discount rate than would have applied earlier
in the year and a consequent reduction in our net pension deficit.
As expected, this reversed shortly after the year end but the
impact was mitigated as we saw the benefit of our hedging
investment strategy in the increase in the value of our pension
scheme assets by around GBP320 million in the period and our net
deficit at 30 September increased to GBP478.7 million.
The Board continues to recognise the important role that
dividends play in providing income for pensioners and other
investors. Taking into account the Group's prospects and financial
position and the interests of other stakeholders including
customers, our own pension scheme, colleagues and our communities;
the Board determined that it remains appropriate to recommend to
shareholders that the interim dividend for the year ending 31 March
2021 be increased by 1.5% to 40.63 pence in line with our policy
for AMP7 to increase the dividend by CPIH.
Our underlying basic earnings per share were 51.3 pence
(2019/20: 68.8 pence). Basic earnings per share were 42.7 pence
(2019/20: 61.7 pence).
[1] Excludes GBP7.8 million revenue previously credited against
operating costs - see note 1.
A brief overview of our financial performance for the six-month
period is as follows:
-- Group turnover was GBP887.6 million(1) (2019/20: GBP910.0
million), down 2.5%, reflecting lower consumption from
non-household customers as a result of COVID-19 partially offset by
higher household consumption during the first national
lockdown.
-- Underlying Group PBIT was down by 21.2% to GBP225.6 million
(2019/20: GBP286.3 million) and reported Group PBIT was GBP224.6
million (2019/20: GBP285.3 million), both reflecting the lower
revenue, an increase in our bad debt provision due to the expected
impact of unemployment increases included in consensus economic
forecasts and higher depreciation from end of AMP6 schemes coming
into operation.
-- Net finance costs decreased marginally to GBP91.1 million
(2019/20: GBP93.8 million) as the impact of higher net debt in the
period was offset by a lower effective interest cost of 3.3%
(2019/20: 3.7%) due primarily to lower inflation on our
index-linked debt. Our effective cash cost of interest was 3.1%
(2019/20: 3.1%).
-- At the previous year end we wrote down our investment in our
joint venture, Water Plus, to nil. As a result, there is no loss to
record in the current period (2019/20: loss of GBP9.3 million). At
30 September our share of Water Plus's accumulated losses not
recognised was GBP11.1 million (see note 11).
-- The current tax charge for the period was GBP11.0 million
(2019/20: GBP18.2 million). The deferred tax charge was GBP13.8
million (2019/20: GBP15.8 million) giving a total tax charge of
GBP24.8 million (2019/20: GBP34.0 million) and a full effective tax
rate of 19.6% (2019/20: 18.8%).
-- Net cash capital expenditure was GBP283.5 million (2019/20: GBP374.1 million).
[1] Includes GBP7.8 million revenue previously credited against
operating costs - see note 1.
Changes to segmental presentation
In the prior year the Bioresources and Developer Services
businesses were managed by, and included in, Business Services.
Both of these businesses form part of the appointed businesses of
Severn Trent Water and Hafren Dyfrdwy, are included in the
regulatory settlement determined by Ofwat and are now managed by
our Regulated Water and Waste Water team. We have therefore amended
our segmental presentation to include Bioresources and Developer
Services as part of our Regulated Water and Waste Water
business.
We have restated the prior year segmental analysis to present
both years on a consistent basis. Details of the adjustments made
are set out in note 3 to the financial statements.
Regulated Water and Waste Water
Six months ended 30 September
2019 Better/(worse)
2020 (restated)
GBPm GBPm GBPm %
Turnover 829.9 849.9 (20.0) (2.4)
------------------------------------- -------- ------------ -------- --------
Net labour costs (76.7) (72.4) (4.3) (5.9)
Net hired and contracted costs (90.5) (87.2) (3.3) (3.8)
Power (46.4) (45.4) (1.0) (2.2)
Bad debts (24.5) (18.5) (6.0) (32.4)
Other costs (118.0) (101.5) (16.5) (16.3)
(356.1) (325.0) (31.1) (9.6)
------------------------------------- -------- ------------ -------- --------
Infrastructure renewals expenditure (65.6) (75.6) 10.0 13.2
Depreciation (188.6) (176.9) (11.7) (6.6)
------------------------------------- -------- ------------ -------- --------
Underlying PBIT 219.6 272.4 (52.8) (19.4)
------------------------------------- -------- ------------ -------- --------
Turnover for the Regulated Water and Waste Water segment was
GBP829.9 million ( 2019/20: GBP849.9 million) and underlying PBIT
was GBP219.6 million (2019/20: GBP272.4 million).
Turnover decreased by GBP20.0 million. The main movements in
turnover were:
-- The impact of the annual CPIH + K increase on prices, which
increased revenue by GBP16.2 million;
-- A net increase of GBP1.3 million to revenue as a result of a
lower year-on-year adjustment for wholesale revenue billed in
excess of the wholesale revenue allowance in prior periods;
-- An increase year-on-year of GBP2.8 million on the
outperformance payments earned from customer ODIs taken into
revenue;
-- An increase of GBP7.8 million from the reclassification of
deferred income released to the income statement, previously
credited to operating costs (see note 1); offset by
-- A decrease of GBP12.7 million due to tariff changes, largely the PR19 rebasing of revenue;
-- A net decrease of GBP33.2 million due to lower consumption
from commercial customers, mainly from the effects of COVID-19,
partially offset by increases in domestic consumption from the
impact of more people at home during the first national lockdown
and the dry summer period; and
-- A number of other smaller variances resulting in an additional net decrease of GBP2.2 million.
We carried forward ODI rewards from AMP6 amounting to GBP191
million in nominal prices. Our turnover in the six months ended 30
September 2020 includes GBP38.2 million from these rewards.
Net labour costs were GBP4.3 million (5.9%) higher
period-on-period. Gross employee costs increased by 4.9% due to the
annual pay award of 2.3% and insourcing of design activity in our
Capital Delivery team. Our capitalisation of employee costs has
increased by 3.9% largely related to this insourcing activity.
Net hired and contracted costs increased by GBP3.3 million
(3.8%) due to an increase in licence costs associated with new
technology solutions, costs incurred during the hot weather period
in May, and activity brought forward into the first half of the
year.
Power costs were GBP1.0 million higher than the previous period
due to the expected rise in pass-through costs and additional
consumption to meet higher demand for water from household
customers, with some offset from an increase in self-generation and
a reduction in variable tariffs.
Bad debt charges were GBP6.0 million higher than the previous
period and represent 3.7% of household revenue, ( 2019/20 full
year: 3.2%). Cash collection in the period from household customers
has held up well, and was c. 4% higher than the previous year.
However, we are anticipating an impact on collection of our
outstanding trade receivables at 30 September 2020 from the
expected increase in unemployment included in consensus economic
forecasts, attributable mainly to COVID-19. The charge in the
period includes GBP8.2 million specifically for this, equivalent to
1.2% of household revenue.
Other costs rose by GBP16.5 million after reclassifying GBP7.8
million of deferred income to turnover. The remaining increase is
attributable to a number of smaller items including higher chemical
costs, as a result of new Water Framework Directive schemes coming
on line, higher business rates (due to inflationary increases this
year and significant rebates in the prior year) and the costs of
our Community Fund and similar assistance for our local
communities.
Infrastructure renewals expenditure was GBP10.0 million lower in
the period, reflecting the completion of significant AMP6 projects
last year, including our Trunk Mains Renewal Programme.
Depreciation was GBP11.7 million higher period-on-period, as
major AMP6 projects were brought into service.
Business Services
In line with the reorganisation of our segments described above,
we present the performance of the Business Services segment across
three business units:
-- Operating Services and Other includes our contracts business,
our affinity and searches businesses and segment overheads.
-- Green Power includes our generating assets outside the
Bioresources business. This includes anaerobic digestion from crops
and food waste, wind power, hydro-electric and solar power.
-- Property Development includes all such activities in both our
regulated and non-regulated companies.
Six months ended 30 September
2020 2019 (restated) Better/(worse )
GBPm GBPm GBPm %
------------------------------ ----- ---------------- -------- --------
Turnover
Operating Services and Other 34.6 36.3 (1.7) (4.7)
Green Power 24.5 25.3 (0.8) (3.2)
59.1 61.6 (2.5) (4.1)
------------------------------ ----- ---------------- -------- --------
Underlying PBIT
Operating Services and Other 6.7 7.8 (1.1) (14.1)
Green Power 0.1 3.6 (3.5) (97.2)
Property Development 1.4 6.2 (4.8) (77.4)
8.2 17.6 (9.4) (53.4)
------------------------------ ----- ---------------- -------- --------
Business Services turnover was GBP59.1 million (down 4.1%) and
underlying PBIT was GBP8.2 million (down 53.4%). In our Operating
Services and Other businesses, turnover and underlying PBIT
decreased by GBP1.7 million and GBP1.1 million respectively,
largely driven by lower volumes in the Property Searches business
due to the impact of the national lockdown from April to July.
In Green Power, turnover decreased by GBP0.8 million and
underlying PBIT decreased by GBP3.5 million. The decrease in
revenue was due to the reduction in energy prices driven by lower
demand due to COVID-19, and the increase in costs was largely
driven by purchase of alternative feedstocks to offset the reduced
availability of commercial food waste due to the lockdown closure
of the hospitality industry.
Profits from Property Development were GBP4.8 million lower with
no large sales planned for this period, as guided. We remain on
track for our target of GBP100 million PBIT from Property
Development over the ten years to 2027.
Corporate and other
Corporate overheads were lower at GBP2.4 million (2019/20:
GBP4.1 million).
Net finance costs
The Group's net finance costs for the six month period were
GBP91.1 million, marginally down on the prior period (GBP93.8
million). Average net debt increased to GBP6,236.1 million
(2019/20: GBP5,902.9 million), and our effective cash cost of
interest (which excludes the inflation uplift on index-linked debt)
was 3.1% (2019/20: 3.1%). Interest cost on index-linked debt
decreased by GBP11.7 million, due to lower inflation. Interest
capitalised of GBP14.9 million was GBP6.2 million lower than the
prior period due to the higher level of capital work in progress in
the prior period.
As a result of these movements, our effective interest cost for
the period fell to 3.3% (2019/20: 3.7%).
The Group's EBITDA interest cover was 4.8 times (2019/20: 5.3
times) and PBIT interest cover was 2.5 times (2019/20: 3.2 times).
See note 18 for further details.
Net losses on financial instruments
The Group uses financial derivatives solely to hedge risks
associated with its normal business activities including:
-- Exchange rate exposure on borrowings denominated in foreign currencies;
-- Interest rate exposures on floating rate borrowings;
-- Exposures to increases in electricity prices; and
-- Changes in the regulatory model from RPI to CPIH.
The Group holds:
-- Interest rate swaps with a net notional principal of GBP655
million to balance our interest rate mix in line with our
strategy;
-- Cross currency swaps with a sterling principal of GBP141
million, which economically act to hedge exchange rate risk on
certain foreign currency borrowings; and
-- Inflation swaps with a notional principal of GBP350 million,
which swap RPI linked cash flows for CPI linked cash flows.
Where hedge accounting is not applied, if the risk that is being
hedged does not impact the income statement in the same period as
the change in value of the derivative, then an accounting mismatch
arises and there is a net charge or credit to the income statement.
During the period there was a loss of GBP10.0 million (2019/20:
gain of GBP3.3 million) in relation to these instruments.
An analysis of the amounts charged to the income statement in
the period is presented in note 5 to the financial statements.
The Group has fixed around 91% of the estimated wholesale energy
usage for the remainder of 2020/21 through a combination of forward
price contracts and financial derivatives.
Taxation
We are committed to paying the right amount of tax at the right
time, and were pleased to have our Fair Tax Mark accreditation
renewed for another year.
As well as corporation tax on profits, which is included in the
tax charge in our accounts, we pay a range of other taxes, charges
and levies imposed by government agencies including business rates;
employer's National Insurance; the Climate Change Levy; and
Insurance Premium Tax. Our 2019/20 Annual Report and Accounts sets
out an analysis of the taxes incurred in that year and we will set
out this year's amounts in our Annual Report to be published in
June 2021.
The tax charge reported in the income statement is calculated at
a rate of 19.6% (2019/20: 18.8%), representing the best estimate of
the annual average tax rate expected for the full year, applied to
the profit for the six month period.
The current tax charge for the period was GBP11.0 million
(2019/20: GBP18.2 million) and the deferred tax charge was GBP13.8
million ( 2019/20 : GBP15.8 million).
The benefit of capital allowances on our increased capital
programme reduced our underlying effective current tax rate (in
line with guidance) to 9.1% (2019/20: 10.3%).
Profit for the period and earnings per share
Reported profit for the period was GBP101.7 million (2019/20:
GBP146.7 million).
Basic earnings per share decreased by 30.8% to 42.7 pence
(2019/20: 61.7 pence). Underlying basic earnings per share were
51.3 pence (2019/20: 68.8 pence). For further details see note
8.
Cash flow
Six months ended 30 September
2020 2019
GBPm GBPm
Operational cashflow 492.7 496.5
Cash capex (283.5) (374.1)
Net interest paid (75.7) (72.8)
Proceeds on disposal of subsidiary undertakings 0.7 --
Payments for swap terminations -- (16.8)
Proceeds from swap terminations -- 16.5
Net tax paid (4.9) (22.4)
Free cash flow 129.3 26.9
Dividends (143.1) (133.1)
Issue of shares 10.7 8.7
Purchase of own shares -- (1.6)
Change in net debt from cash flows (3.1) (99.1)
Non-cash movements (8.6) (23.6)
--------------------------------------------------
Change in net debt (11.7) (122.7)
Opening net debt (6,231.5) (5,834.1)
Closing net debt (6,243.2) (5,956.8)
-------------------------------------------------- ---------- ----------
Net debt comprises:
30 September 31 March 30 September
2020 2020 2019
GBPm GBPm GBPm
------------------------------- ------------- ---------- -------------
Net cash and cash equivalents 22.7 48.6 23.3
Bank loans (966.3) (1,251.9) (1,196.6)
Other loans (5,351.4) (5,058.5) (4,842.7)
Lease liabilities (123.6) (122.7) (128.7)
Cross currency swaps 53.1 60.4 55.9
Loans due from joint venture 122.3 92.6 132.0
------------------------------- ------------- ---------- -------------
Net debt (6,243.2) (6,231.5) (5,956.8)
------------------------------- ------------- ---------- -------------
At 30 September 2020 we held GBP22.7 million (31 March 2020:
GBP48.6 million) in cash and cash equivalents. Average debt
maturity is 13 years. Including committed facilities, of which
GBP890 million was undrawn at the balance sheet date, the Group's
cash flow requirements are funded until July 2022.
We invest cash in deposits with highly rated banks and the Board
regularly reviews the list of counterparties.
Net debt at 30 September 2020 was GBP6,243.2 million (31 March
2020: GBP6,231.5 million). Balance sheet gearing (net debt/net debt
plus equity) at the half year was 86.0% (31 March 2020: 83.4%).
Group net debt, expressed as a percentage of estimated Regulatory
Capital Value at 30 September 2020 was 66.1% (31 March 2020:
64.9%).
The estimated fair value of debt at 30 September 2020 was
GBP1,898.8 million higher than book value (31 March 2020: GBP951.8
million higher). The increase in the difference to book value is
largely due to lower prevailing long-term market interest
rates.
Pensions
We have three defined benefit pensions arrangements, two for
Severn Trent and one for Dee Valley Water. The two Severn Trent
schemes closed to future accrual on 31 March 2015.
Formal three-yearly actuarial valuations were completed at 31
March 2019 for the Severn Trent schemes and at 31 March 2017 for
the Dee Valley Water scheme.
Under the 2019 valuation, the future funding plan for the Severn
Trent Pension Scheme ('STPS'), which is by far the largest,
includes:
-- Inflation-linked payments of GBP15.0 million per annum
through an asset-backed funding arrangement, potentially continuing
to 31 March 2031, although these contributions will cease earlier
should a subsequent valuation of the STPS show that these
contributions are no longer needed;
-- Payments under another asset-backed funding arrangement of
GBP8.2 million per annum to 31 March 2032; and
-- Deficit reduction payments totalling GBP32.4 million
increasing in line with inflation through to 31 March 2027.
On an IAS 19 basis, the estimated net position (before deferred
tax) of all of the Group's defined benefit pension schemes at 30
September 2020 was a deficit of GBP478.7 million. At the previous
year end we saw a spike in corporate credit spreads, resulting in a
higher discount rate than would have applied earlier in the year,
and a consequent reduction in our net pension deficit to GBP234.0
million. As expected, this reversed shortly after the year end,
however, we saw the benefit of our hedging investment strategy in
the returns on our pension scheme assets of GBP321.1 million in the
period, reducing the impact of the lower discount rate and higher
inflation expectations.
The movements in the net deficit during the period were as
follows:
Fair value of scheme assets Defined benefit obligations Net deficit
GBPm GBPm GBPm
-------------------------------------------- ---------------------------- ---------------------------- ------------
At start of the period 2,414.1 (2,648.1) (234.0)
Amounts credited/(charged) to income
statement 27.7 (31.6) (3.9)
Actuarial gains/(losses) taken to reserves 292.2 (544.7) (252.5)
Net contributions received and benefits
paid (42.4) 54.1 11.7
At end of the period 2,691.6 (3,170.3) (478.7)
-------------------------------------------- ---------------------------- ---------------------------- ------------
Defined benefit obligations increased due to the impact of the
lower discount rate applied at the end of the period and the higher
long-term inflation assumption. Strong asset performance partly
compensated for these and, on an IAS 19 basis, the funding level is
85% (31 March 2020: 91%).
Dividends
The Board has declared an interim ordinary dividend of 40.63p
per share (2019/20: 40.03p per share), which will be paid on 6
January 2021 to shareholders on the register at 4 December
2020.
Principal risks and uncertainties
The Board considers the principal risks and uncertainties
affecting the business activities of the Group for the remainder of
the financial year to be those detailed below. Details of how the
Group mitigates and manages these risks are set out in the Annual
Report.
Customer perception
-- We may be unable to improve or maintain our levels of
customer service sufficiently to deliver what our customers tell us
they want.
Legal
-- There is a risk that processes may fail or that our processes
may not effectively keep pace with changes in legislation, leading
to the risk of non-compliance.
Operations, assets and people
-- We may experience loss of data or interruptions to our key
business systems as a result of cyber threats.
-- We may fail to meet our regulatory targets including targets
from Ofwat in relation to operational performance of our assets
resulting in regulatory penalties.
-- Failure of certain key assets or processes may mean we are
unable to provide a continuous supply of clean water and safely
take waste water away within our area.
-- Due to the nature of our operations we could endanger the
health and safety of our people, contractors and members of the
public, as well as negatively impact our local and wider
environment.
-- We are unable to deal with the impact of extreme and
unpredictable weather events on our assets and infrastructure
and/or are unable to successfully plan for future water resource
supply and demand due to climate change.
Financial risks:
-- Lower interest rates, higher inflation or underperforming
equity markets may require us to provide more funding for our
pension schemes.
-- We may be unable to fund the business sufficiently in order
to meet our liabilities as they fall due.
COVID-19:
-- At the time of writing, the COVID-19 global pandemic
continues to dominate the focus of the world. Whilst global
pandemics have not previously been noted as a principal risk, they
do feature on our horizon scanning and many of the associated risks
are captured within our ERM framework.
-- Management continues to assess the impact of COVID-19 on the
Company's operations and finances. Internal Strategic and Tactical
Incident Teams were established, comprising Executive Committee
members, to lead the swift implementation of contingency plans and
continuously monitor plans in response to the rapidly changing
situation.
-- We have modelled plausible and extreme scenarios to determine
expected impacts and test our financial resilience. The modelled
outcomes were based on regularly updated assumptions,
including:
- The longevity of the incident (initial lockdown and recovery)
- using latest Government advice;
- The expected macroeconomic impacts of the incident (GDP,
inflation and unemployment rates) using independent economic
forecasts;
- The impact on household bad debt rates, using our experience during previous recessions;
- An estimate of incremental operating costs both during the
incident and in the recovery phase, required to ensure service
levels are maintained, using our experience of previous incidents;
and
- The impact on our revenues in 2020/21 and subsequent years,
based on the expected revenue true-up mechanisms in the regulatory
model.
-- All modelled scenarios generate outcomes consistent with, and
within the parameters used to support our Viability Statement,
published in our Annual Report and Accounts in June 2020.
-- Our modelling to date shows that, while there will be a
financial impact, neither the plausible or extreme scenarios we
have modelled would result in an impact to the Group's expected
liquidity, solvency or debt covenants that could not be addressed
by mitigating actions, and are therefore not considered threats to
the Group's financial resilience. However, there remains a risk
that the impact of COVID-19 is greater than that modelled by the
Group.
-- Our priority remains the health and safety of our people and
customers, and we are taking all possible actions to support them
whilst continuing to deliver our essential services.
-- The Board continues to receive regular updates on the Group's
COVID-19 response in order to assess, monitor and promptly respond
to the evolving impact of COVID-19 on our operations and business,
including impacts for all our stakeholders.
The UK's decision to leave the European Union (EU):
-- We continue to monitor and prepare for various scenarios
relating to the customs exit of the UK Brexit plan. Despite
uncertainty on details of agreements we remain confident that
Brexit does not give rise to new principal risk for the Group and
the risk has materially reduced since the terms of Brexit were
resolved and the UK formally left the EU on 31 January 2020.
-- Preparations are well advanced at a company and industry
level through the Water UK co-ordinated group called the Operations
Strategy Group. This reconvened and is undertaking similar
preparedness as that previously adopted during the 'No Deal'
preparations, it is not envisaged that there are any significant
risks not previously considered.
-- Progress during the Brexit transition phase and trade
negotiations will continue to be monitored and the risks and
uncertainties will be managed through our existing ERM process.
Technical Guidance 2020/21
Year-end guidance FY 20 Year-on- Year
(restated) (1)
Regulated Water and Waste Water
Turnover(1,2) GBP1.63 billion to GBP1.67 billion. Lower GBP1.71bn
year-on-year by GBP50 million to GBP85
million from
the expected impact of COVID-19
(non-household consumption down, partly
offset by increased
household usage).
Assumes latest national lockdown is in place
from 5 November to 2 December. We will
provide
an update on expected outturn at our
quarterly trading update in February. The
Ofwat regulatory
model allows us to recover this revenue in
two years.
Operating costs (incl. IRE)(1) Higher year-on-year due to increasing GBP815m
chemical usage to meet tighter effluent
consents and
expected COVID-19 related increases in
household bad debt, partially offset by our
insourcing
strategy and a reduction in our IRE
programme following completion of AMP6
programmes.
Customer ODIs(3) At least GBP25 million net reward across GBP36m
Water, Waste and Environmental measures.
------------------------------------- --------------------------------------------- ---------------- --------------
Business Services
Underlying PBIT(1) (excl. Property) Lower year-on-year driven by the impact of GBP28m
lower energy prices on renewable energy
revenue
and COVID-19.
Underlying Property PBIT Between GBP2 million and GBP5 million. We GBP8m
remain on track with commitment to deliver
GBP100
million PBIT over ten years to 2027.
------------------------------------- --------------------------------------------- ---------------- --------------
Group
Interest charge Broadly in line with prior year as increased GBP188m
total debt and lower capitalised borrowing
costs
are offset by the impact of lower inflation
on index-linked debt.
Total tax rate of c.19% and underlying
effective current tax rate between 9% and
Tax rate 11%. 10.4%
Group capex GBP500 million to GBP580 million. GBP800m
Accelerated activity on AMP7 capital
schemes, but lower
expenditure year-on-year following
completion of significant AMP6 programmes.
Annual dividend growth of CPIH. 2020/21
Dividend(4) dividend of 101.58p. 100.08p
------------------------------------- --------------------------------------------- ---------------- --------------
Footnotes to technical guidance
1. Guidance restated to reflect segmental changes.
2. Includes new presentation of deferred income released to turnover in the income statement.
3. Customer Outcome Delivery Incentives for FY21 are quoted
pre-tax in 2017/18 prices (FY20 quoted pre-tax in 2012/13
prices).
4. 2020/21 dividend growth is based on November 2019 CPIH of 1.50%.
Further Information
For further information, including the Group's interim results
presentation, see the Severn Trent website ( www.severntrent.com
).
Investor Timetable
3 December 2020 Ex-dividend date (Interim)
4 December 2020 Dividend record date (Interim)
-----------------------------------
11 December 2020 DRIP election date (Interim)
-----------------------------------
6 January 2021 Interim dividend payment
date
-----------------------------------
4 February 2021 Q3 Trading Update
-----------------------------------
31 March 2021 Financial Year End
-----------------------------------
26 May 2021 Full Year Results Announcement
2020/21
-----------------------------------
3 June 2021 Ex-dividend date (Final)
-----------------------------------
4 June 2021 Dividend record date (Final)
-----------------------------------
25 June 2021 DRIP election date (Final)
-----------------------------------
8 July 2021 AGM
-----------------------------------
16 July 2021 Final dividend payment date
-----------------------------------
For more information please visit:
https://www.severntrent.com/investors/financial-calendar
Condensed consolidated income statement
Six months ended 30 September 2020
2020 2019
-------------- --------------- ---------- ------------- --------------- --------------
Non-underlying Non-underlying
Underlying items(1) Total Underlying items(1) Total
Note GBPm GBPm GBPm GBPm GBPm GBPm
Turnover 3,4 887.6 -- 887.6 910.0 -- 910.0
Other income -- -- -- 5.9 -- 5.9
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Operating costs
before
charge for bad
and doubtful
debts (637.8) (1.0) (638.8) (610.8) (1.0) (611.8)
Charge for bad
and doubtful
debts (24.2) -- (24.2) (18.8) -- (18.8)
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Total operating
costs (662.0) (1.0) (663.0) (629.6) (1.0) (630.6)
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Profit before
interest
and tax 225.6 (1.0) 224.6 286.3 (1.0) 285.3
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Finance income 29.9 -- 29.9 31.0 -- 31.0
Finance costs (121.0) -- (121.0) (124.8) --- (124.8)
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Net finance costs (91.1) -- (91.1) (93.8) -- (93.8)
Net losses on
financial
instruments 5 (7.0) -- (7.0) 1.5) -- (1.5)
Share of net loss
of
joint venture
accounted
for using the
equity
method 11 -- -- -- (9.3) -- (9.3)
Profit on
ordinary
activities
before taxation 127.5 (1.0) 126.5 181.7 (1.0) 180.7
Current tax 6 (11.0) -- (11.0) (18.2) -- (18.2)
Deferred tax 6 (13.8) -- (13.8) (15.8) -- (15.8)
Taxation on
profit on
ordinary
activities 6 (24.8) -- (24.8) (34.0) -- (34.0)
----- -------------- --------------- ---------- ------------- --------------- --------------
Profit for the
period 102.7 (1.0) 101.7 147.7 (1.0) 146.7
------------------ ----- -------------- --------------- ---------- ------------- --------------- --------------
Earnings per share (pence)
2020 2019
--------- ----- -----
Basic 42.7 61.7
Diluted 42.5 61.5
---------- ----- -----
(1) For definition of non-underlying items see note 18.
Condensed consolidated statement of comprehensive income
Six months ended 30 September 2020
2020 2019
Note GBPm GBPm
Profit for the period 101.7 146.7
------------------------------------------------------------------- ----- -------- -------
Other comprehensive (loss)/income
Items that will not be reclassified to the income statement:
Net actuarial (losses)/gains 12 (252.5) 68.8
Current tax on pension contributions in prior periods -- 4.8
Deferred tax on pension contributions in prior periods -- (4.8)
Deferred tax on net actuarial losses/gains 48.0 (11.7)
(204.5) 57.1
------------------------------------------------------------------- ----- -------- -------
Items that may be reclassified to the income statement:
Gains/(losses) on cash flow hedges 1.2 (22.4)
Deferred tax on gains/losses on cash flow hedges (0.2) 3.9
Amounts on cash flow hedges transferred to the income statement 5 4.1 4.1
Deferred tax on transfer to the income statement (0.8) (0.7)
4.3 (15.1)
------------------------------------------------------------------- ----- -------- -------
Other comprehensive (loss)/income for the period (200.2) 42.0
------------------------------------------------------------------- ----- -------- -------
Total comprehensive (loss)/income for the period (98.5) 188.7
------------------------------------------------------------------- ----- -------- -------
Condensed consolidated statement of changes in equity
Six months ended 30 September 2020
Equity attributable to owners of the company
----------------------------------------------------------
Share Share Other Retained
capital premium reserves earnings Total
Note GBPm GBPm GBPm GBPm GBPm
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
At 1 April 2019 235.9 128.0 92.8 706.2 1,162.9
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
Profit for the period -- -- -- 146.7 146.7
Losses on cash flow hedges -- -- (22.4) -- (22.4)
Deferred tax on losses on cash flow hedges -- -- 3.9 -- 3.9
Amounts on cash flow hedges transferred to the
income statement 5 -- -- 4.1 -- 4.1
Deferred tax on transfer to the income statement -- -- (0.7) -- (0.7)
Net actuarial gains 12 -- -- -- 68.8 68.8
Current tax on pension contributions in prior
periods -- -- -- 4.8 4.8
Deferred tax on pension contributions in prior
periods -- -- -- (4.8) (4.8)
Deferred tax on net actuarial gains -- -- -- (11.7) (11.7)
Total comprehensive income for the period -- -- (15.1) 203.8 188.7
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
Share options and LTIPs
- proceeds from shares issued 0.5 8.2 -- -- 8.7
- value of employees' services -- -- -- 4.0 4.0
- own shares purchased -- -- -- (1.6) (1.6)
Current tax on share based payments -- -- -- 0.1 0.1
Deferred tax on share based payments -- -- -- 0.1 0.1
Dividends paid 7 -- -- -- (133.1) (133.1)
At 30 September 2019 236.4 136.2 77.7 779.5 1,229.8
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
At 1 April 2020 236.5 137.0 67.9 802.3 1,243.7
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
Profit for the period -- -- -- 101.7 101.7
Gains on cash flow hedges -- -- 1.2 -- 1.2
Deferred tax on gains on cash flow hedges -- -- (0.2) -- (0.2)
Amounts on cash flow hedges transferred to the
income statement 5 -- -- 4.1 -- 4.1
Deferred tax on transfer to the income statement -- -- (0.8) -- (0.8)
Net actuarial losses 12 -- -- -- (252.5) (252.5)
Deferred tax on net actuarial losses -- -- -- 48.0 48.0
Total comprehensive loss for the period -- -- 4.3 (102.8) (98.5)
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
Share options and LTIPs
- proceeds from shares issued 0.6 10.1 -- -- 10.7
- value of employees' services -- -- -- 4.5 4.5
Current tax on share based payments -- -- -- 0.4 0.4
Deferred tax on share based payments -- -- -- 0.6 0.6
Dividends paid 7 -- -- -- (143.1) (143.1)
At 30 September 2020 237.1 147.1 72.2 561.9 1,018.3
--------------------------------------------------- ----- --------- --------- ---------- ------------ --------
Condensed consolidated balance sheet
At 30 September 2020
30 September 2020 31 March
2020
(restated
see note 1)
Note GBPm GBPm
Non-current assets
Goodwill 91.4 91.4
Other intangible assets 163.8 153.8
Property, plant and equipment 9,666.7 9,580.8
Right-of-use assets 127.4 128.8
Derivative financial instruments 62.0 65.5
Trade and other receivables 136.4 117.8
Retirement benefit surplus 12 16.7 21.3
-----
10,264.4 10,159.4
---------------------------------- ----- --------------------- -------------------
Current assets
Inventory 28.4 29.2
Trade and other receivables 528.0 561.4
Current tax receivable -- 3.1
Derivative financial instruments 1.7 --
Cash and cash equivalents 22.7 48.6
580.8 642.3
---------------------------------- ----- --------------------- -------------------
Current liabilities
Borrowings 9 (440.8) (475.4)
Derivative financial instruments (0.1) (4.4)
Trade and other payables (609.4) (573.6)
Current tax payable (2.6) -
Provisions for liabilities (16.5) (18.9)
(1,069.4) (1,072.3)
---------------------------------- ----- --------------------- -------------------
Net current liabilities (488.6) (430.0)
Non-current liabilities
Borrowings 9 (6,000.5) (5,957.7)
Derivative financial instruments (169.5) (159.2)
Trade and other payables (1,199.7) (1,187.3)
Deferred tax (867.3) (901.1)
Retirement benefit obligations 12 (495.4) (255.3)
Provisions for liabilities (25.1) (25.1)
(8,757.5) (8,485.7)
---------------------------------- ----- --------------------- -------------------
Net assets 1,018.3 1,243.7
---------------------------------- ----- --------------------- -------------------
Equity
Called up share capital 13 237.1 236.5
Share premium account 147.1 137.0
Other reserves 72.2 67.9
Retained earnings 561.9 802.3
Total equity 1,018.3 1,243.7
---------------------------------- ----- --------------------- -------------------
Condensed consolidated cash flow statement
Six months ended 30 September 2020
2020 2019
Note GBPm GBPm
-------------------------------------------------------------- ----- -------- --------
Cash generated from operations(1) 14 507.3 514.6
Tax paid 14 (4.9) (22.4)
Net cash generated from operating activities 502.4 492.2
-------------------------------------------------------------- ----- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (284.3) (377.3)
Purchases of intangible assets (15.6) (21.4)
Proceeds on disposal of subsidiary 0.7 --
Proceeds on disposal of property, plant and equipment 1.8 6.5
Net loans (advanced to)/ repaid by joint venture (29.5) 10.0
Interest received 0.7 0.6
Net cash outflow from investing activities (326.2) (381.6)
-------------------------------------------------------------- ----- -------- --------
Cash flow from financing activities
Interest paid (76.2) (73.4)
Interest element of lease payments (0.2) --
Dividends paid to shareholders of the parent (143.1) (133.1)
Repayments of borrowings (286.2) (0.9)
Principal elements of lease payments (0.9) (1.2)
New loans raised 293.8 74.9
Issues of shares 10.7 8.7
Purchase of own shares -- (1.6)
Payments for swap terminations -- (16.8)
Proceeds from swap terminations -- 16.5
Net cash outflow from financing activities (202.1) (126.9)
-------------------------------------------------------------- ----- -------- --------
Net movement in cash and cash equivalents (25.9) (16.3)
Net cash and cash equivalents at the beginning of the period 48.6 39.6
Net cash and cash equivalents at end of period 22.7 23.3
-------------------------------------------------------------- ----- -------- --------
Cash at bank and in hand 18.3 7.5
Bank overdrafts -- (0.5)
Short term deposits 4.4 16.3
22.7 23.3
-------------------------------------------------------------- ----- -------- --------
(1) Contributions received have been presented as operating cash
flows in 2020/21 as these credits are released to turnover over the
useful economic life of the non-current asset to which they relate.
These were presented as investment cash flows in prior periods.
Comparatives have been restated increasing operating cash inflows
by GBP18.1 million and increasing investing cash outflows by the
same amount.
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 2020 does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006. A copy of the statutory accounts for that
year prepared under IFRS has been delivered to the Registrar of
Companies. The auditor's report on those accounts was unqualified,
did not draw attention to any matters by way of emphasis and did
not contain statements under section 498 (2) or (3) of the
Companies Act 2006.
a) Accounting policies
The interim financial information has been prepared on the going
concern basis using accounting policies consistent with
International Financial Reporting Standards and in accordance with
IAS 34 'Interim Financial Reporting' as adopted by the European
Union. The same accounting policies, presentation and methods of
computation are followed in the interim financial information as
applied in the Group's annual financial statements for the year
ended 31 March 2020.
b) Going concern
Including undrawn committed credit facilities of GBP890 million,
and based on its latest forecasts, the Group is fully funded for
its investment and cash flow needs for more than the next year.
As set out in the principal risks and uncertainties section of
this document, w e have modelled plausible and extreme scenarios to
determine expected impacts of COVID-19 and test our financial
resilience, and there is headroom under both scenarios. T here is a
risk that the impact of COVID-19 will be greater than that modelled
by the Group. However, we do not consider this risk to be a threat
to the Group's financial resilience.
After making enquiries the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future and hence the
interim financial information has been prepared on a going concern
basis.
c) Seasonality
Historically around half of the Group's PBIT has arisen in the
first half of the year.
d) Change in accounting presentation
i) Contract asset ageing
A prior period adjustment has been made to reflect a change in
presentation for the ageing of contract assets. The previous
presentation was to allocate future cash receipts relating to
contract assets on a last-in-first-out basis for ageing purposes.
Under the current presentation future cash receipts are allocated
to contract assets on a first-in-first-out basis.
The table below shows the effect of the change in accounting
policy for the balance sheet position at 31 March 2020:
Balance sheet extract
As previously reported Restatement Restated
GBPm GBPm GBPm
----------------------------------------- ----------------------- ------------ ---------
Current trade and other receivables 525.5 35.9 561.4
Non-current trade and other receivables 153.7 (35.9) 117.8
----------------------------------------- ----------------------- ------------ ---------
ii) Segmental presentation
A change in segmental presentation is set out in note 3. This
has resulted in a change to the analysis of revenue by segment,
which is shown in note 4.
iii) Deferred income
Previously deferred income released to the income statement was
credited to operating costs. Under the new presentation, the
release is recognised as turnover and in the 6 months to 30
September 2020 amounted to GBP7.8m. This presentational change has
been applied beginning in the current accounting period, however as
the impact is not material to comparative prior periods they have
not been restated. This reclassification has no impact on profits
or cash flows recorded in the period or prior periods.
2. Critical accounting judgments and key sources of estimation uncertainty
In the course of applying the Group's accounting policies, the
Group is required to make certain judgments, estimates and
assumptions that it believes are reasonable based on the
information available. Although these estimates are based on
management's best knowledge of the amount, event or actions, actual
results may ultimately differ from those estimates. Details of the
critical accounting judgments and key sources of estimation
uncertainty were set out in the Group's financial statements for
the year ended 31 March 2020. Changes to these judgments and
uncertainties are set out below.
a) Critical accounting judgments
There have been no changes to the critical accounting judgments
made at 31 March 2020, however, we now consider the application of
our accounting policy for contributions received to be a critical
accounting judgment. This is set out below.
i) Income from connections to the water and waste water networks
The Group receives income from developers and domestic customers
from new connections to the water and waste water networks either
in the form of infrastructure assets or cash. The more significant
examples of these transactions are:
-- Developers transfer to the Group infrastructure assets that
they have installed in a new development. Usually there is no
monetary consideration exchanged when the Group adopts assets in
this manner.
-- When new properties are connected to the network, the Group
is permitted, under the Water Industry Act, to obtain a
contribution from the developer towards the cost of reinforcing its
network to meet the additional demands arising from the new
connections. These are referred to as infrastructure charges and
are a standard amount per property that are not linked to specific
reinforcement expenditure.
-- When developers require properties to be connected to the
Group's network, the Group installs a meter and connection to each
property at the developer's expense but retains ownership of the
assets and responsibility for their maintenance.
Assessing whether this income is received in relation to the
provision of the connection to the Group's infrastructure networks
or is to facilitate the ongoing provision of water and waste water
services to the properties in question requires judgment about the
nature of the ongoing relationship between the Group and the
customer. During the period the Group received infrastructure
assets with a fair value of GBP11.6 million (2019/20: GBP38.4
million), infrastructure charges amounting to GBP2.6 million
(2019/20: GBP7.1 million) and other charges relating to the
provision of infrastructure amounting to GBP12.0 million (2019/20:
GBP11.0 million).
The Group considers that the purpose of these transactions is to
facilitate the ongoing provision of water and waste water services
to the properties in question and they are inextricably linked to
that ongoing service. There is a transferable right to receive an
ongoing water and waste water service that passes from customer to
customer when the property is bought and sold during the life of
the property and, without the ongoing water and waste water
service, the transactions have no value. Therefore, in line with
our accounting policies the amounts received are held on the
balance sheet and released to turnover in the income statement over
the life of the related assets.
2. Critical accounting judgments and key sources of estimation uncertainty (continued)
b) Sources of estimation uncertainty
There are no significant changes to the key sources of
estimation uncertainty described in the financial statements for
the year ended 31 March 2020. A new key source of estimation
uncertainty has arisen in the period and is described below.
i) Expected credit losses on trade receivables
Expected credit losses for trade receivables are based on the
historical credit losses experienced over the last nine years and
reasonable forecasts of the future impact of the COVID-19 outbreak
on unemployment levels and hence on the Group's collection of trade
receivables. In the current period, the peak level of unemployment
has increased and the period to return to current levels has
lengthened in consensus economic forecasts.
We based our assessment of future unemployment trends on the
Bank of England's most recent Monetary Policy Report at the balance
sheet date, for August 2020, which forecast a peak rate of
unemployment for the UK of 7.5% in the fourth quarter of calendar
year 2020, with a return to the pre- COVID-19 level of unemployment
(4%) by the third quarter of calendar year 2023.
The gross carrying amounts and expected credit loss allowances
for trade receivables and accrued income were as follows:
30 September 31 March
2020 2020
GBPm GBPm
-------------------------------------- --------------- ---------
Gross carrying amount 552.3 603.6
Provision for bad and doubtful debts (133.5) (141.7)
Net carrying amount 418.8 461.9
-------------------------------------- --------------- ---------
Movements in the expected credit loss allowance are as
follows:
2020 2019
GBPm GBPm
----------------------------------------- ------- -------
At 1 April 141.7 120.2
Charge for bad and doubtful debts which 24.2 18.8
Amounts written off during the period (32.4) (12.8)
----------------------------------------- ------- -------
At 30 September 133.5 126.2
----------------------------------------- ------- -------
On 5 November, the Bank of England published its latest Monetary
Policy Report. This revised the forecast for unemployment to show a
peak level of 6.7% in the fourth quarter of calendar year 2021 and
a more gradual recovery to the pre-COVID level in the first quarter
of calendar year 2024.
If our assessment of future unemployment trends had been based
on this forecast, the expected credit loss in the period would have
been GBP1.8 million higher.
3. Segmental analysis
The Group is organised into two main business segments:
Regulated Water and Waste Water includes the wholesale water and
waste water activities of Severn Trent Water Limited, its retail
services to domestic customers, and Hafren Dyfrdwy Cyfyngedig.
Business Services includes the Group's Operating Services
businesses, the Green Power business, the Property Development
business and our other non-regulated businesses including affinity
products and searches.
In 2019/20 the Bioresources and Developer Services businesses
were managed by, and included in, Business Services. These
activities are now managed by Regulated Water and Waste Water and
we have amended our segmental presentation to reflect the new
structure. We have provided a reconciliation of the prior year
segmental information from the old basis to the new basis
below.
The tables below show the changes from the old to the new
segmentation for turnover and PBIT for the period ended 30
September 2019:
Regulated Water and Regulated Water and Waste
Waste Water (old basis) Bioresources Developer Services Water (new basis)
GBPm GBPm GBPm GBPm
--------------------------- ------------------------- ------------- ------------------- --------------------------
Turnover 807.5 42.3 0.1 849.9
--------------------------- ------------------------- ------------- ------------------- --------------------------
Profit before interest and
tax 260.1 12.6 (0.3) 272.4
--------------------------- ------------------------- ------------- ------------------- --------------------------
Business Services Business Services
(old basis) Bioresources Developer Services (new basis)
GBPm GBPm GBPm GBPm
------------------------------------------ ------------------ ------------- ------------------- ------------------
External turnover 102.5 (42.3) (0.1) 60.1
Inter-segment turnover 9.8 (8.3) -- 1.5
Total turnover 112.3 (50.6) (0.1) 61.6
------------------------------------------
Underlying PBIT 29.9 (12.6) 0.3 17.6
Amortisation of acquired intangible
assets (1.0) -- -- (1.0)
------------------------------------------ ------------------ ------------- ------------------- ------------------
Profit before interest and tax 28.9 (12.6) 0.3 16.6
------------------------------------------ ------------------ ------------- ------------------- ------------------
The tables below show the changes from the old to the new
segmentation for capital employed at 31 March 2020:
Regulated Water Regulated Water
and Waste Water Consolidation and Waste Water
(old basis) Bioresources Developer Services adjustments (new basis)
GBPm GBPm GBPm GBPm GBPm
-------------------- ------------------ ------------- ------------------- ------------------- -------------------
Operating assets 9,883.0 293.6 12.7 (12.1) 10,177.2
Goodwill 63.5 -- -- -- 63.5
Segment assets 9,946.5 293.6 12.7 (12.1) 10,240.7
Segment operating
liabilities (1,991.8) (12.5) (4.0) 17.6 (1,990.7)
Capital employed 7,954.7 281.1 8.7 5.5 8,250.0
-------------------- ------------------ ------------- ------------------- ------------------- -------------------
Business services Consolidation Business Services
(old basis) Bioresources Developer Services adjustments (new basis)
GBPm GBPm GBPm GBPm GBPm
-------------------- ------------------ ------------- ------------------- -------------------- ------------------
Operating assets 626.3 (293.6) (12.7) 12.1 332.1
Goodwill 29.2 -- -- -- 29.2
Segment assets 655.5 (293.6) (12.7) 12.1 361.3
Segment operating
liabilities (42.4) 12.5 4.0 (17.6) (43.5)
Capital employed 613.1 (281.1) (8.7) (5.5) 317.8
-------------------- ------------------ ------------- ------------------- -------------------- ------------------
3. Segmental analysis (continued)
The Severn Trent Executive Committee ('STEC') is considered to
be the Group's chief operating decision maker. The reports provided
to STEC include segmental information prepared on the basis
described above.
Results from interests in our joint venture are not included in
the segmental reports reviewed by STEC.
Goodwill is allocated and monitored at the segment level.
Transactions between reportable segments are included within
segmental results, assets and liabilities in accordance with Group
accounting policies. These are eliminated on consolidation.
The measure of profit or loss that is reported to STEC for the
segments is underlying PBIT. A segmental analysis of turnover and
underlying PBIT is presented below.
The following table shows the segmental turnover and PBIT:
Six months ended 30 September
2019
2020 (restated)
------------------------------------------- -------------------------------------------
Regulated Water and Regulated Water and
Waste Water Business Services Waste Water Business Services
GBPm GBPm GBPm GBPm
----------------------- ----------------------- ------------------ --- ----------------------- ------------------
External turnover 829.7 57.9 849.9 60.1
Inter-segment turnover 0.2 1.2 -- 1.5
Total turnover 829.9 59.1 849.9 61.6
----------------------- ----------------------- ------------------ --- ----------------------- ------------------
Underlying PBIT 219.6 8.2 272.4 17.6
Amortisation of
acquired intangible
assets -- (1.0) -- (1.0)
Profit before interest
and tax 219.6 7.2 272.4 16.6
----------------------- ----------------------- ------------------ --- ----------------------- ------------------
The reportable segments' turnover is reconciled to Group
turnover as follows:
Six months ended 30 September
2020 2019 (restated)
GBPm GBPm
--------------------------------- ------ ----------------
Regulated Water and Waste Water 829.9 849.9
Business Services 59.1 61.6
Corporate and other 0.4 0.5
Consolidation adjustments (1.8) (2.0)
887.6 910.0
--------------------------------- ------ ----------------
3. Segmental analysis (continued)
Segmental underlying PBIT is reconciled to the Group's profit
before tax as follows:
Six months ended 30 September
2019
2020 (restated)
GBPm GBPm
-------------------------------------------------------------------------- ------- ------------
Regulated Water and Waste Water 219.6 272.4
Business Services 8.2 17.6
Corporate and other (2.2) (3.6)
Consolidation adjustments -- (0.1)
Underlying PBIT 225.6 286.3
Amortisation of acquired intangible assets:
Business Services (1.0) (1.0)
Net finance costs (91.1) (93.8)
Net losses on financial instruments (7.0) (1.5)
Share of net loss of joint venture accounted for using the equity method -- (9.3)
Profit on ordinary activities before taxation 126.5 180.7
-------------------------------------------------------------------------- ------- ------------
The following table shows segmental capital employed:
31 March 2020
30 September 2020 (restated)
------------------------------------------ -------------------------------------------
Regulated Water and Regulated Water and
Waste Water Business Services Waste Water Business Services
GBPm GBPm GBPm GBPm
------------------------ ---------------------- ------------------ --- ----------------------- ------------------
Operating assets 10,238.3 312.7 10,177.2 332.1
Goodwill 63.5 29.2 63.5 29.2
Segment assets 10,301.8 341.9 10,240.7 361.3
Segment operating
liabilities (2,269.1) (44.7) (1,990.7) (43.5)
Capital employed 8,032.7 297.2 8,250.0 317.8
------------------------ ---------------------- ------------------ --- ----------------------- ------------------
Operating assets comprise other intangible assets, property,
plant and equipment, right-of-use assets, retirement benefit
surpluses, inventory and trade and other receivables.
Operating liabilities comprise trade and other payables,
retirement benefit obligations and provisions.
4. Revenue from contracts with customers
Revenue recognised from contracts with customers is analysed by
business segment below:
Six months ended 30 September 2020
Regulated Water and Corporate Consolidation
Waste Water Business Services and other adjustments Group
GBPm GBPm GBPm GBPm GBPm
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Water and waste water
services 813.1 -- -- -- 813.1
Operating services -- 29.1 -- -- 29.1
Renewable energy 14.9 24.6 -- (1.2) 38.3
Other sales 1.9 5.4 0.4 (0.6) 7.1
829.9 59.1 0.4 (1.8) 887.6
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Six months ended 30 September 2019 (restated)
Regulated Water and Corporate Consolidation
Waste Water Business Services and other adjustments Group
GBPm GBPm GBPm GBPm GBPm
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Water and waste water
services 834.0 -- -- -- 834.0
Operating services -- 29.5 -- -- 29.5
Renewable energy 13.8 25.2 -- (1.5) 37.5
Other sales 2.1 6.9 0.5 (0.5) 9.0
849.9 61.6 0.5 (2.0) 910.0
------------------------- ------------------------ ------------------ ----------- ------------------------ ------
Following the changes in the segmental presentation as described
in note 3, the Bioresources and Developer Services businesses
previously included in Business Services and are now included
within Regulated Water and Waste Water.
Revenue classification by business segment for the six months
ended 30 September 2019 has been restated in line with the change
in the basis of segmentation as shown below:
Regulated Water Regulated Water
and Waste Water Consolidation and Waste Water
(old basis) Bioresources Developer Services adjustments (new basis)
GBPm GBPm GBPm GBPm GBPm
------------------- ------------------ ------------- ------------------- ------------------- ------------------
Water and waste
water services 805.5 28.5 -- -- 834.0
Renewable energy -- 22.1 -- (8.3) 13.8
Other sales 2.0 -- 0.1 -- 2.1
------------------- ------------------ ------------- ------------------- ------------------- ------------------
807.5 50.6 0.1 (8.3) 849.9
------------------- ------------------ ------------- ------------------- ------------------- ------------------
Business
Services Business Services
(old basis) Bioresources Developer Services (new basis)
GBPm GBPm GBPm GBPm
------------------- --------------------------------- ------------------- ------------------- ------------------
Water and waste
water services 28.5 (28.5) -- --
Operating services 29.5 -- -- 29.5
Renewable energy 47.3 (22.1) -- 25.2
Other sales 7.0 -- (0.1) 6.9
------------------- --------------------------------- ------------------- ------------------- ------------------
112.3 (50.6) (0.1) 61.6
------------------- --------------------------------- ------------------- ------------------- ------------------
Income from diversions of GBP5.0 million (2019: GBP2.3 million),
which is reimbursement of costs incurred for diversions, is
included within infrastructure maintenance expenditure within
operating costs.
5. Net losses on financial instruments
Six months ended 30 September
2020 2019
GBPm GBPm
------- ------
(Loss)/gain on swaps used as hedging instruments in fair value hedges (1.2) 5.4
Loss arising on debt in fair value hedges (0.3) (1.4)
Exchange gain/(loss) on other loans 5.9 (7.9)
Loss on cash flow hedges transferred from equity (4.1) (4.1)
Hedge ineffectiveness on cash flow hedges 2.2 2.7
(Loss)/gain arising on swaps where hedge accounting is not applied (10.0) 3.3
Amortisation of fair value adjustment on debt 0.5 0.5
(7.0) (1.5)
----------------------------------------------------------------------- ------- --------
6. Tax
Six months ended 30 September
2020 2019
GBPm GBPm
----- ------
Current tax
Current year at 19.6% (2019: 18.8%) 11.0 18.6
Prior years -- (0.4)
Total current tax 11.0 18.2
---------------------------------------------------- ----- ------
Deferred tax
Origination and reversal of temporary differences:
Current year 13.8 16.2
Prior years -- (0.4)
Total deferred tax 13.8 15.8
---------------------------------------------------- ----- ------
24.8 34.0
---------------------------------------------------- ----- ------
The tax charge in the income statement is calculated at a rate
of 19.6% (2019: 18.8%) representing the best estimate of the annual
average effective income tax rate expected for the full year
applied to the pre-tax income for the six month period.
The underlying effective current tax rate was 9.1% (2019:
10.3%). See note 18.
Current tax credits of GBP0.4 million (2019: GBP4.9 million) and
deferred tax credits of GBP47.6 million (2019: GBP13.2 million)
have been taken to reserves in the period.
7. Dividends
Amounts recognised as distributions to owners of the Company in
the period:
Six months ended 30 September
2020 2019
---------------- ------ ---------------- ------
Pence per share GBPm Pence per share GBPm
-------------------------------------------------------- ---------------- ------ ---------------- ------
Final dividend for the year ended 31 March 2020 (2019) 60.05 143.1 56.02 133.1
-------------------------------------------------------- ---------------- ------ ---------------- ------
The proposed interim dividend of 40.63p per share (2019: 40.03p
per share) was approved by the Board on 25 November 2020 and has
not been included as a liability at 30 September 2020.
8. Earnings per share
a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the period, excluding
those held in the Severn Trent Employee Share Ownership Trust which
are treated as cancelled.
For diluted earnings per share, the weighted average number of
ordinary shares in issue is adjusted to assume conversion of all
potentially dilutive ordinary shares. These represent share options
granted to employees where the exercise price is less than the
average market price of the Company's shares during the period.
The calculation of basic and diluted earnings per share is based
on the following data:
Number of shares
Six months ended 30 September
2020 2019
m m
------------------------------------------------------------------------------------------ ------ ------
Weighted average number of ordinary shares for the purpose of basic earnings per share 238.1 237.8
Effect of dilutive potential ordinary shares:
- share options and LTIPs 1.1 0.7
Weighted average number of ordinary shares for the purpose of diluted earnings per share 239.2 238.5
------------------------------------------------------------------------------------------ ------ ------
b) Underlying earnings per share
Six months ended 30 September
2020 2019
pence pence
Underlying basic earnings per share 51.3 68.8
Underlying diluted earnings per share 51.1 68.6
---------------------------------------- ------ ------
The denominators used in the calculations of underlying basic
and diluted earnings per share are the same as those used in the
unadjusted figures set out above.
The adjustments to earnings are as follows:
Six months ended 30 September
2020 2019
GBPm GBPm
Earnings for the purpose of basic and diluted earnings per share 101.7 146.7
Adjustments for:
- amortisation of acquired intangible assets 1.0 1.0
- net losses on financial instruments 7.0 1.5
- current tax on net losses on financial instruments (1.3) (1.3)
- deferred tax 13.8 15.8
------------------------------------------------------------------------------
Earnings for the purpose of underlying basic and diluted earnings per share 122.2 163.7
------------------------------------------------------------------------------ ------ ------
9. Borrowings
30 September 31 March
2020 2020
GBPm GBPm
------------------- ------------- ---------
Bank loans 966.3 1,251.9
Other loans 5,351.4 5,058.5
Lease liabilities 123.6 122.7
Borrowings 6,441.3 6,433.1
------------------- ------------- ---------
The borrowings are repayable as follows:
30 September 31 March
2020 2020
GBPm GBPm
---------------------------------------------------------------- ------------- ---------
On demand or within one year - included in current liabilities 440.8 475.4
Over one year - included in non-current liabilities 6,000.5 5,957.7
6,441.3 6,433.1
---------------------------------------------------------------- ------------- ---------
10. Fair value of financial instruments
a) Fair value measurements
The valuation techniques that the Group applies in determining
the fair values of its financial instruments on a recurring basis
are described below. The techniques are classified under the
hierarchy defined in IFRS 13 which categorises valuation techniques
into Levels 1 - 3 based on the degree to which the fair value is
observable. The Group's valuation techniques are Level 2 unless
otherwise stated below:
30 September 2020 31 March 2020
GBPm GBPm Valuation techniques and key inputs
-------------------------- ------------------ -------------- ------------------------------------------------------
Cross currency swaps Discounted cash flow.
Assets 53.1 60.4 Future cash flows are estimated based on forward
interest rates from observable yield curves
at the period end and contract interest rates
discounted at a rate that reflects the credit
risk of counterparties. The currency cash flows are
translated at spot rate.
-------------------------- ------------------ -------------- ------------------------------------------------------
Interest rate swaps Discounted cash flow.
Assets 6.5 4.9 Future cash flows are estimated based on forward
interest rates from observable yield curves
at the period end and contract interest rates
discounted at a rate that reflects the credit
risk of counterparties.
------------------------------------------------------
Liabilities (135.6) (128.7)
-------------------------- ------------------ -------------- ------------------------------------------------------
Energy swaps Discounted cash flow.
Assets 4.1 0.2 Future cash flows are estimated based on forward
electricity prices from observable indices
at the period end and contract prices discounted at a
rate that reflects the credit risk of
counterparties.
------------------------------------------------------
Liabilities (0.3) (7.2)
-------------------------- ------------------ -------------- ------------------------------------------------------
Inflation swaps Discounted cash flow.
Liabilities (33.7) (27.7) Future cash flows on the RPI leg of the instrument
are estimated based on observable forward
inflation indices.
Future cash flows on the CPI leg of the instrument
are estimated based on the future expected
differential between RPI and CPI ('the wedge').
Both legs are discounted using observable swap rates
at the period end, at a rate that reflects
the credit risk of counterparties. This is considered
to be a Level 3 valuation technique.
-------------------------- ------------------ -------------- ------------------------------------------------------
Contingent consideration (1.7) (1.7) Management estimate of the amount that is likely to
be payable. This is considered to be a
Level 3 valuation technique.
The contingent consideration arose on acquisition of
Agrivert.
-------------------------- ------------------ -------------- ------------------------------------------------------
Changes in the carrying values of instruments that are measured
using a Level 3 technique were as follows:
Inflation swaps Contingent consideration
GBPm GBPm
------------------------------------------- ---------------- -------------------------
At 1 April 2019 (6.2) (3.0)
Losses recognised in the income statement (21.5) -
Payments made - 1.3
At 31 March 2020 (27.7) (1.7)
Losses recognised in the income statement (6.0) -
At 30 September 2020 (33.7) (1.7)
------------------------------------------- ---------------- -------------------------
These Level 3 instruments are valued using unobservable inputs.
In valuing the inflation swaps, we have identified the unobservable
input as the CPI wedge. A reduction of 10bps in the CPI wedge would
result in an increase in the carrying value of GBP8.0 million and
an increase of 10bps in the CPI wedge would result in a decrease in
the carrying value of GBP8.0 million. This sensitivity is assuming
no change to any other inputs.
10. Fair value of financial instruments (continued)
b) Comparison of fair value of financial instruments with their
carrying amounts
The Directors consider that the carrying amounts of all
financial instruments, except those disclosed in the table below,
approximate to their fair values. The carrying values and estimated
fair values of other financial instruments are set out below:
30 September 31 March
2020 2020
--------------- ----------- --------------- -----------
Carrying value Fair value Carrying value Fair value
GBPm GBPm GBPm GBPm
-------------------- --------------- ----------- --------------- -----------
Floating rate debt
Bank loans 813.0 814.7 948.9 947.1
Other loans 167.7 175.1 187.2 180.9
--------------------
980.7 989.8 1,136.1 1,128.0
-------------------- --------------- ----------- --------------- -----------
Fixed rate debt
Bank loans 31.3 31.5 182.2 182.1
Other loans 3,781.4 4,424.1 3,472.8 3,903.1
Lease liabilities 123.6 134.2 122.7 129.5
--------------------
3,936.3 4,589.8 3,777.7 4,214.7
-------------------- --------------- ----------- --------------- -----------
Index-linked debt
Bank loans 122.0 154.9 120.8 138.0
Other loans 1,402.3 2,605.6 1,398.5 1,904.2
--------------------
1,524.3 2,760.5 1,519.3 2,042.2
-------------------- --------------- ----------- --------------- -----------
6,441.3 8,340.1 6,433.1 7,384.9
-------------------- --------------- ----------- --------------- -----------
The above classification does not take into account the impact
of interest rate swaps or cross currency swaps.
Fixed rate loans are valued using market prices for similar
instruments, which is a Level 2 valuation technique.
Index-linked loans are rarely traded and therefore quoted prices
are not considered to be a reliable indicator of fair value.
Therefore, these loans are valued using discounted cash flow models
with discount rates derived from observed market prices for a
sample of bonds, which is a Level 2 valuation technique.
Fair values of the other debt instruments are also calculated
using discounted cash flow models with discount rates derived from
observed market prices, which is a Level 2 valuation technique.
11. Interests in joint venture
Our principal joint venture undertaking, Water Plus, is the
largest business retailer in the non-household retail water market
in England.
In common with other participants in the non-household retail
market, Water Plus has been significantly impacted by the COVID-19
outbreak; the resulting lockdown; and its effects on business
customers are expected to result in lower economic activity and an
increase in business failures.
At the previous year end (31 March 2020) we wrote down our
investment in Water Plus to nil and we have no obligation to
contribute to further losses. As a result, there is no loss
recorded in the current period in the income statement (2019/20:
loss of GBP9.3 million).
Our share of accumulated unrecognised losses in Water Plus at
September 2020 were as below:
GBPm
------------------------------------------------------ ---------------
Accumulated unrecognised losses at 1 April 2020 4.9
Share of losses for the period 6.2
Accumulated unrecognised losses at 30 September 2020 11.1
------------------------------------------------------ ---------------
12. Retirement benefit schemes
The Group operates three defined benefit pension schemes in the
UK, two for Severn Trent and one for Dee Valley Water. The Severn
Trent schemes are closed to future accrual. The Group also has an
unfunded obligation to provide benefits to certain former employees
whose earnings were in excess of the pensions cap that operated
when the benefits were accrued. The most recent actuarial valuation
of the Severn Trent schemes was at 31 March 2019. Hafren Dyfrdwy
participates in the Dee Valley Water Limited Section of the Water
Companies Pension Scheme, which is a defined benefit sectionalised
scheme. The most recent actuarial valuation of this scheme was at
31 March 2017.
The assumptions used in calculating the defined benefit
obligations at 30 September 2020 have been updated to reflect
market conditions prevailing at the balance sheet date as
follows:
30 September 31 March
2020 2020
% %
-------------------------------- ------------- ---------
Price inflation - RPI 2.8 2.5
Price inflation - CPI 2.0 1.7
Discount rate 1.5 2.4
Pension increases in payment 2.8 2.5
Pension increases in deferment 2.8 2.5
--------------------------------- ------------- ---------
The defined benefit scheme assets have been updated to reflect
their market value at 30 September 2020. Actuarial gains and losses
on the scheme assets and defined benefit obligations have been
reported in the statement of comprehensive income. Service cost,
and the cost of administrating the scheme, are recognised in
operating costs and interest cost is recognised in net finance
costs.
The scheme assets at the balance sheet date were:
30 September 31 March
2020 2020
STPS, STMIPS, and DVWS GBPm GBPm
---------
Fair value of scheme assets
Equities 379.3 275.6
Corporate bonds 1,057.3 925.7
Liability-driven investment funds ('LDI's) 816.4 720.4
Property 263.5 261.9
High-yield bonds 28.5 28.2
Cash 146.6 202.3
--------------------------------------------- ------------- ---------
2,691.6 2,414.1
-------------------------------------------- ------------- ---------
Most of the assets have quoted prices in active markets, but
there are equities, corporate bonds and LDI investments which are
unquoted amounting to GBP543.6 million (31 March 2020: GBP414.1
million). Unquoted assets include property investments valued at
GBP38.9 million subject to greater uncertainty at the balance sheet
date than in years prior to the COVID-19 pandemic. Consequently, a
higher degree of caution should be attached to the valuation of
those assets than would normally be the case.
12. Retirement benefit schemes (continued)
Movements in the net deficit recognised in the balance sheet
were as follows:
Fair value Defined
of plan benefit
assets obligations Net deficit
GBPm GBPm GBPm
--------------------------------------------- ----------- ------------- ------------
At 1 April 2020 2,414.1 (2,648.1) (234.0)
Current service cost -- (0.1) (0.1)
Scheme administration costs (1.2) -- (1.2)
Interest income/(cost) 28.9 (31.5) (2.6)
Actuarial gains/(losses) 292.2 (544.7) (252.5)
Contributions from the sponsoring companies 11.7 -- 11.7
Employees' contributions and benefits paid (54.1) 54.1 --
----------- ------------- ------------
At 30 September 2020 2,691.6 (3,170.3) (478.7)
--------------------------------------------- ----------- ------------- ------------
The net deficit is presented on the balance sheet as
follows:
30 September 31 March
2020 2020
GBPm GBPm
-------------------------------- ------------- ---------
Retirement benefit surplus 16.7 21.3
Retirement benefit obligations (495.4) (255.3)
-------------------------------- ------------- ---------
(478.7) (234.0)
-------------------------------- ------------- ---------
13. Share capital
At 30 September 2020 the issued and fully paid share capital was
242.2 million shares of 97(17) /(19) p amounting to GBP237.1
million (31 March 2020: 241.5 million shares of 97(17) /(19) p
amounting to GBP236.5 million).
During the period the Company issued 0.7 million (2019: 0.5
million) shares as a result of the exercise of employee share
options. At 30 September 2020 the Company held 3.4 million (31
March 2020: 3.6 million) treasury shares.
14. Cash flow
a) Reconciliation of operating profit to operating cash
flows
Six months ended 30 September
2020 2019
GBPm GBPm
Profit before interest and tax 224.6 285.3
Depreciation of property, plant and equipment 178.3 166.4
Depreciation of right-of-use assets 1.2 0.9
Amortisation of intangible assets 16.1 15.5
Amortisation of acquired intangible assets 1.0 1.0
Pension service cost 0.1 0.1
Defined benefit pension scheme administration costs 1.2 1.3
Defined benefit pension scheme contributions (11.7) (0.3)
Share based payment charge 4.5 4.0
Profit on sale of property, plant and equipment and intangible assets (1.4) (5.9)
Profit on disposal of subsidiary (0.2) --
Deferred income movement (7.8) (7.7)
Contributions received(1) 14.6 18.1
Provisions charged to the income statement 1.6 5.2
Utilisation of provisions for liabilities (4.0) (11.2)
Operating cash flows before movements in working capital 418.1 472.7
Decrease/(increase) in inventory 0.8 (0.8)
Decrease/(increase) in amounts receivable 44.2 (4.3)
Increase in amounts payable 44.2 47.0
Cash generated from operations 507.3 514.6
Tax paid (4.9) (22.4)
Net cash generated from operating activities 502.4 492.2
------------------------------------------------------------------------ ------- -------
(1) Contributions received have been presented as operating cash
flows as these credits are released to turnover over the useful
economic life of the non-current asset to which they relate. These
were presented as investment cash flows in the prior period.
Comparatives have been restated increasing operating cash inflows
by GBP18.1 million and increasing investing cash outflows by the
same amount.
b) Reconciliation of movements in net debt
Net cash Loans due
and cash Bank Other Lease Cross currency from joint Net
equivalents loans loans liabilities swaps venture debt
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------------- ---------- ---------- --------------- --------------- -------------- ----------
At 1 April
2020 48.6 (1,251.9) (5,058.5) (122.7) 60.4 92.6 (6,231.5)
Cash flow (25.9) 287.2 (294.8) 0.9 -- 29.5 (3.1)
Fair value
adjustments -- -- 0.3 -- (7.3) -- (7.0)
Inflation
uplift on
index-linked
debt -- (0.9) (4.4) -- -- -- (5.3)
Foreign
exchange -- -- 5.8 -- -- -- 5.8
Other non-cash
movements -- (0.7) 0.2 (1.8) -- 0.2 (2.1)
At 30
September
2020 22.7 (966.3) (5,351.4) (123.6) 53.1 122.3 (6,243.2)
--------------- --------------- ---------- ---------- --------------- --------------- -------------- ----------
15. Post balance sheet events
On 20 November the High Court issued a judgment in relation to
the application of gender equality in Guaranteed Minimum Pension
rights as far as it relates to historical transfer values paid that
may have an impact on the Group's defined benefit pension
liabilities. We are currently assessing the impact but at this
stage we consider that it is unlikely that any impact will be
material.
16. Contingent liabilities
Details of the Group's contingent liabilities were disclosed in
the financial statements for the year ended 31 March 2020 which
were approved on 19 May 2020. Except as disclosed below there have
been no significant developments relating to the contingent
liabilities disclosed in those financial statements.
Claims under the Environmental Information Regulations 2004
regarding property searches
Since 2016, the Group has received letters of claim from a
number of groups of personal search companies (PSCs) which allege
that the information held by Severn Trent Water Limited (STW) used
to produce the CON29DW water and drainage search reports sold by
Severn Trent Property Solutions Limited (STPS), is disclosable
under the Environmental Information Regulations. In April 2020, a
group of over 100 PSCs commenced litigation against all water and
sewerage undertakers in England and Wales, including STW and STPS.
The claimants are seeking damages, on the basis that STW and STPS
charged for information which should have been made available
either free, or for a limited charge, under the Environmental
Information Regulations. STW and STPS are defending this claim.
This is an industry-wide issue and the litigation is in its early
stages.
17. Related party transactions
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
included in this note. Trading transactions between the Group and
its joint venture, Water Plus, are disclosed below.
Six months ended 30 September
2020 2019
GBPm GBPm
--------------------- ------ ------
Sale of services 104.2 156.5
Net interest income 1.2 1.6
---------------------- ------ ------
Outstanding balances between the Group and the joint venture
were as follows:
30 September 31 March
2020 2020
GBPm GBPm
------------------------------------------------------ ------------- ---------
Trade and other receivables due from related parties -- 12.1
Trade and other payables due to related parties (0.7) --
Loans due from joint venture 122.3 92.6
------------------------------------------------------- ------------- ---------
121.6 104.7
------------------------------------------------------ ------------- ---------
The retirement benefit schemes operated by the Group are
considered to be related parties. Details of transactions and
balances with the retirement benefit schemes are disclosed in note
12.
18. Alternative performance measures
Financial measures or metrics used in this report that are not
defined by IFRS are alternative performance measures (APMs). The
Group uses such measures for performance analysis because they
provide additional useful information on the performance and
position of the Group. Since the Group defines its own alternative
performance measures, these might not be directly comparable with
other companies' alternative performance measures. These measures
are not intended to be a substitute for, or superior to, IFRS
measurements.
a) Underlying PBIT
Underlying profit before interest and tax is profit before
interest and tax excluding exceptional items as recorded in the
income statement and amortisation of intangible assets recognised
on acquisition of subsidiaries. This provides a consistent measure
of operating performance excluding distortions caused by these
items and reflecting the operational performance of the acquired
subsidiaries. Following the acquisition of Agrivert, this APM was
updated to include adjustment of amortisation on acquired
intangible assets. The calculation of this APM is shown on the face
of the income statement and in note 3 for reportable segments.
b) Underlying earnings per share
Underlying earnings per share figures exclude the effects of
exceptional items, amortisation of intangible assets recognised on
acquisition of subsidiaries, net losses on financial instruments,
current tax on exceptional items and on net losses on financial
instruments, exceptional current tax and deferred tax. The
Directors consider that the underlying figures provide a useful
additional indicator of performance and remove non-performance
related distortions. See note 9.
c) Net debt
Net debt comprises borrowings including remeasurements for
changes in fair value of amounts in fair value hedging
relationships, cross currency swaps that are used to fix the
sterling liability of foreign currency borrowings (whether hedge
accounted or not), net cash and cash equivalents, and loans to our
joint venture. See note 14.
d) Effective interest cost
The effective interest cost is calculated as net finance costs,
excluding net finance costs from pensions, plus capitalised finance
costs divided by the monthly average net debt during the
period.
(net finance costs - net finance costs from pensions +
capitalised finance costs)
(monthly average net debt)
2020 2019
GBPm GBPm
-------- --------
Net finance costs 91.1 93.8
Net finance costs from pensions (2.6) (5.4)
Capitalised finance costs 14.9 21.1
103.4 109.5
--------------------------------- -------- --------
Annualised 206.8 219.0
--------------------------------- -------- --------
Average net debt 6,236.1 5,902.9
Effective interest cost* 3.3% 3.7%
--------------------------------- -------- --------
* the rate is the annualised equivalent interest rate based on
that calculated for the six-month period
This APM is used to show the average finance cost for the net
debt of the business.
18. Alternative performance measures (continued)
e) Effective cash cost of interest
The effective cash cost of interest is calculated on the same
basis as the effective interest cost except that it excludes
finance costs that are not paid in cash but are accreted to the
carrying value of the debt (principally inflation adjustments on
index-linked debt).
(net finance costs - net finance costs from pensions - inflation
adjustments + capitalised finance costs)
(monthly average net debt)
2020 2019
GBPm GBPm
---------------------------------- -------- --------
Net finance costs 91.1 93.8
Net finance costs from pensions (2.6) (5.4)
Inflation adjustments (5.3) (17.0)
Capitalised finance costs 14.9 21.1
----------------------------------
98.1 92.5
---------------------------------- -------- --------
Annualised 196.2 185.0
----------------------------------
Average net debt 6,236.1 5,902.9
---------------------------------- -------- --------
Effective cash cost of interest* 3.1% 3.1%
---------------------------------- -------- --------
* the rate is the annualised equivalent interest rate based on
that calculated for the six-month period
This APM is used to show the average cash interest rate based on
the net debt of the business.
f) Underlying PBIT interest cover
The ratio of underlying PBIT (see (a) above) to net finance
costs excluding finance costs from pensions.
Underlying PBIT
(net finance costs - net finance costs from pensions)
2020 2019
GBPm GBPm
------ ------
Underlying PBIT 225.6 286.3
------------------------------------------------------------- ------ ------
Net finance costs 91.1 93.8
Net finance costs from pensions (2.6) (5.4)
Net finance costs excluding net finance costs from pensions 88.5 88.4
------------------------------------------------------------- ------ ------
ratio ratio
Underlying PBIT interest cover ratio 2.5 3.2
------------------------------------------------------------- ------ ------
This APM is used to show how the underlying PBIT of the business
covers the financing costs associated only with net debt on a
consistent basis.
18. Alternative performance measures (continued)
g) EBITDA and EBITDA interest cover
The ratio of profit before interest, tax, exceptional items,
depreciation and amortisation to net finance costs excluding net
finance costs from pensions.
(underlying PBIT + depreciation + amortisation)
(net finance costs - net finance costs from pensions)
2020 2019
GBPm GBPm
------------------------------------------------------------------------------------------------------ ------ ------
Underlying PBIT 225.6 286.3
Depreciation (including right-of-use assets) 179.5 167.3
Amortisation (excluding amortisation of intangible assets recognised on acquisition of subsidiaries) 16.1 15.5
EBITDA 421.2 469.1
------------------------------------------------------------------------------------------------------ ------ ------
Net finance costs 91.1 93.8
Net finance costs from pensions (2.6) (5.4)
Net finance costs excluding finance costs from pensions 88.5 88.4
------------------------------------------------------------------------------------------------------ ------ ------
ratio ratio
EBITDA interest cover ratio 4.8 5.3
------------------------------------------------------------------------------------------------------ ------ ------
This APM is used to show how the EBITDA of the business covers
the financing costs associated only with net debt on a consistent
basis.
h) Underlying effective current tax rate
The current tax charge for the year, excluding prior year
charges, exceptional current tax and current tax on exceptional
items and on financial instruments, divided by profit from
continuing operations before tax, exceptional items, net losses on
financial instruments, amortisation of acquired intangible assets
and share of net loss of our joint venture accounted for using the
equity method.
(current period current tax charge in the income statement - tax
on exceptional items - tax on net gains/losses on financial
instruments - tax on amortisation of acquired intangible
assets)
(PBT - share of net profit/loss of JV - exceptional items - net
gains/losses on financial instruments - amortisation of acquired
intangible assets)
2020 2019
Current tax thereon Current tax thereon
GBPm GBPm GBPm GBPm
-------------------------------------------- ------ -------------------- ------ --------------------
Profit before tax 126.5 (11.0) 180.7 (18.6)
-------------------------------------------- ------ -------------------- ------ --------------------
Adjustments
Share of net loss of joint venture -- -- 9.3 --
Amortisation of acquired intangible assets 1.0 -- 1.0 --
Net losses on financial instruments 7.0 (1.3) 1.5 (1.3)
134.5 (12.3) 192.5 (19.9)
-------------------------------------------- ------ -------------------- ------ --------------------
Underlying effective current tax rate 9.1% 10.3%
-------------------------------------------- ------ -------------------- ------ --------------------
This APM is used to remove distortions in the tax charge and
create a metric consistent with the calculation of underlying
earnings per share in note 8. Share of net loss of joint venture is
excluded from the calculation because the loss is included after
tax and so the tax on joint venture loss is not included in the
current tax charge.
18. Alternative performance measures (continued)
i) Operational cashflow
Cash generated from operations less contributions received.
2020 2019
GBPm GBPm
-------------------------------- ------- -------
Cash generated from operations 507.3 514.6
Contributions received (14.6) (18.1)
-------------------------------- ------- -------
Operational cashflow 492.7 496.5
-------------------------------- ------- -------
This APM is used to show operational cash excluding the effect
of contributions received as part of capital programmes.
j) Cash capex
Cash paid to acquire property, plant and equipment and
intangible fixed assets less contributions received and proceeds on
disposal of property, plant and equipment and intangible fixed
assets.
2020 2019
GBPm GBPm
------------------------------------------------------- ------- -------
Purchase of property, plant and equipment 284.3 377.3
Purchase of intangible assets 15.6 21.4
Contributions received (14.6) (18.1)
Proceeds on disposal of property, plant and equipment (1.8) (6.5)
Cash capex 283.5 374.1
------------------------------------------------------- ------- -------
This APM is used to show the cash impact of the Group's capital
programmes.
Responsibility statement
We confirm to the best of our knowledge:
(a) the condensed set of financial statements has been prepared
in accordance with IAS 34 "Interim Financial Reporting"; and
(b) the interim management report includes a fair review of the
information required by Disclosure and Transparency Rules 4.2.7R
and 4.2.8R of the United Kingdom Financial Conduct Authority.
Signed on behalf of the Board who approved the half yearly
financial report on 25 November 2020.
Christine Hodgson James Bowling
Chair Chief Financial Officer
Independent review report to Severn Trent Plc
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 September 2020 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
changes in equity, the condensed consolidated balance sheet, the
condensed consolidated cash flow statement and related notes 1 to
18. 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.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2020 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the Company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
25 November 2020
Glossary
Asset Management Plan (AMP)
Price limit periods are sometimes known as AMP (Asset Management
Plan) periods. The current period is known as AMP7 (2020-2025)
because it is the seventh cycle since the water industry was
privatised in 1989.
C-MeX (Customer Measure of Experience)
C-MeX is the incentive mechanism for companies to improve the
experience of residential customers. C-MeX comprises two surveys -
the customer service survey of residential customers who have
recently contacted their water company and the customer experience
survey of random members of the public in relation to their
experience of their water company.
D-MeX (Developer Services Measure of Experience)
D-MeX is the incentive mechanism for companies to improve the
experience of developer services customers. D-MeX comprises a
qualitative element which is a survey of developer services
customers who have recently completed a transaction with their
water company and a quantitative element which measures performance
against a set of Water UK developer services level of service
metrics.
Customer ODI (Outcome Delivery Incentive)
A framework made up of outcomes, measures, targets and
incentives which provides companies with rewards for achieving
stretching performance targets and compensates customers if
performance is below performance targets. This was first introduced
at the 2014 price review (PR14) by the regulator, Ofwat.
Final Determination (FD)
The outcome of the price review process that sets price,
investment and services packages that customers receive.
Ofwat
The water industry's economic regulator in England &
Wales.
Notional Net Debt
For each price review Ofwat sets a nominal capital structure for
companies in determining prices limits. This includes a notional
(assumed) regulatory gearing level. Notional net debt is the RCV
multiplied by the notional regulatory gearing level.
PR19
The price review (PR) is a financial review process led by Ofwat
where wholesale price controls for water and sewage companies are
set every five years. PR19 (Price Review 2019) set wholesale price
controls for water and sewerage companies for 2020 to 2025.
Price limits
The price limits are set to enable water companies to deliver
the services required of them over the AMP period. These include
allowing for capital maintenance of assets, ensuring security of
supply and meeting drinking water and environmental quality
requirements.
Regulatory Capital Value (RCV)
The regulatory capital value is used to measure the capital base
of a company when setting price limits. The regulatory capital
value represents the initial market value of a company, including
debt, plus new capital expenditure.
Regulatory Gearing
Regulating gearing is calculated as net debt divided by the
RCV.
RoRE
Return on Regulated Equity (RoRE) measures the returns (after
tax and interest) that companies have earned by reference to the
notional regulated equity, where regulated equity is calculated
from the RCV and notional net debt.
Totex
Totex (shortened form of total expenditure) includes operating
expenditure (opex), infrastructure renewals expenditure (IRE) and
capital expenditure (capex).
WRFIM (Wholesale Revenue Forecasting Incentive Mechanism)
A mechanism to reduce the impact of deviations on customer bills
arising from revenue forecasting deviations by
adjusting companies' allowed revenues for each year to take
account of differences between actual and projected revenues, and
incentivising companies to avoid revenue forecasting errors through
applying a penalty to variations that fall outside a set
uncertainty band (or 'revenue flexibility threshold').
Cautionary statement regarding forward-looking statements
This document contains statements that are, or may be deemed to
be, 'forward-looking statements' with respect to Severn Trent's
financial condition, results of operations and business and certain
of Severn Trent's plans and objectives with respect to these
items.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would',
'should', 'expects', 'believes', 'intends', 'plans', 'projects',
'potential', 'reasonably possible', 'targets', 'goal', 'estimates'
or words with a similar meaning, and, in each case, their negative
or other variations or comparable terminology. Any forward-looking
statements in this document are based on Severn Trent's current
expectations and, by their very nature, forward-looking statements
are inherently unpredictable, speculative and involve risk and
uncertainty because they relate to events and depend on
circumstances that may or may not occur in the future.
Forward-looking statements are not guarantees of future
performance and no assurances can be given that the forward-looking
statements in this document will be realised. There are a number of
factors, many of which are beyond Severn Trent's control, that
could cause actual results, performance and developments to differ
materially from those expressed or implied by these forward-looking
statements. These factors include, but are not limited to: the
Principal Risks disclosed in our latest Annual Report and Accounts
(which have not been updated since the date of its publication);
changes in the economies and markets in which the Group operates;
changes in the regulatory and competition frameworks in which the
Group operates; the impact of legal or other proceedings against or
which affect the Group; and changes in interest and exchange
rates.
All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to Severn
Trent or any other member of the Group or persons acting on their
behalf are expressly qualified in their entirety by the factors
referred to above. No assurances can be given that the
forward-looking statements in this document will be realised. This
document speaks as at the date of publication. Save as required by
applicable laws and regulations, Severn Trent does not intend to
update any forward-looking statements and does not undertake any
obligation to do so. Past performance of securities of Severn Trent
Plc cannot be relied upon as a guide to the future performance of
securities of Severn Trent Plc.
Nothing in this document should be regarded as a profits
forecast.
This document is not an offer to sell, exchange or transfer any
securities of Severn Trent Plc or any of its subsidiaries and is
not soliciting an offer to purchase, exchange or transfer such
securities in any jurisdiction. Securities may not be offered, sold
or transferred in the United States absent registration or an
applicable exemption from the registration requirements of the US
Securities Act of 1933 (as amended).
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