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Thursday, 26 November 2015 11:37

Severn Trent: £372m AMP6 efficiency savings primarily come from capital programme suppliers

Severn Trent has made a good start to its AMP6 capital programme, with a full £372 million of its targeted efficiencies for AMP6 secured which “primarily come from working with capital programme suppliers to drive greater efficiencies in our contracts.”

The comments come with the publication this morning of the water company’s Interim Results for the six months to 30 September 2015.

Wholesale Totex in the first half was £467.1 million and in the Regulated Water and Waste Water business, the capital programme for AMP6 saw capital expenditure of £184 million and infrastructure maintenance expenditure of £52 million.

Turnover for the new Regulated Water and Waste Water segment during the period was £754.4 million and underlying PBIT was £270.2 million. On a like for like basis, turnover decreased by 1.5%, primarily as a result of the price reduction in the PR14 Final Determination.

Net labour costs were £1.2 million (0.8%) lower period on period. Employee costs decreased by £8.2 million –attributed to the reorganisation implemented in the previous year and the closure of the defined benefit pension schemes to future accrual.

Hired and contracted costs increased by £3.2 million due to earlier costs incurred on project design and feasibility work. The amount of own labour capitalised was £3.8 million lower reflecting marginally lower activities on the capital works programme in the first half of this year compared to the same period in 2014/15.

Infrastructure maintenance expenditure was £12.6 million lower in the period as the company mobilised its leaner, more efficient programme for AMP6. The changes implemented are expected to deliver economies of scale and shorter lead times throughout AMP6.

Commenting on progress on its most significant capital programme, the Birmingham Resilience project, the utility said enabling work is progressing well and it remains on target to complete the project by the end of 2019.

Confident of continued outperformance

Severn Trent  said it was confident of continued outperformance, with a £10 million net reward now expected from Outcome Delivery Incentive outperformance for 2015/16. The ODIs are an important focus for the water company as they are based on customer feedback on service improvements. The firm has now secured a full £372 million of its targeted efficiencies for AMP6, with up to £50 million more to be locked in by May 2016 and an opportunity for further efficiencies.

Severn Trent said the additional savings have “primarily come from working with capital programme suppliers to drive greater efficiencies in our contracts”, commenting:

“Through strategic programming and batching of our capital programme, we have improved economies of scale and shortened timescales for delivery. We have also introduced greater competition between our framework suppliers and external benchmarking for key batches of work to drive further savings.”

“We expect to lock in up to a further £50 million of efficiencies by May and continue to work on further opportunities.”

Renewables programme will now be focussed on anaerobic digestion

On energy, Severn Trent said it is continuing with the rapid roll out of its renewable energy programme -  32% of regulated water and waste water’s energy needs is now self-generated and is on target for 50% by 2020 via the £190 million AMP6 programme.

This enables the water company to both self supply electricity to our own facilities without pass-through costs, as well as to feed energy directly into the grid. Nine solar arrays are expected to be up and generating by Christmas, with a further 35 sites to be completed before the end of the financial year, generating together around 25 GWh per annum. The recent changes in incentives for solar generation mean this will complete Severn Trent’s solar programme for the time being.

The firm has also just completed its final two wind turbine sites in Nottingham and Lichfield, generating a further annual output of 5GWh. The remainder of Severn Trent’s renewables investment programme will be centered on anaerobic digestion using food waste, crops and thermal hydrolysis of sewage sludge.

Retail market – Severn Trent now serving 1000+ sites in Scotland

Commenting on Severn Trent Water's non-household retail business, which together with Operating Services businesses in the USA, UK, Ireland and Italy and the group's renewable energy business makes up the Business Services division, the firm said it was continuing to prepare for the opening of further competition in the non-household market in 2017. According to Severn Trent , its existing customer base is providing “a great platform for growth.”

Severn Trent is already participating successfully in the Scottish retail market – recent contract wins include Apex Hotels, Greggs and Mitchells & Butlers. Sainsbury’s has also renewed its existing relationship with the company for a further three years. The recent contract wins will see Severn Trent serving over 1,000 sites in Scotland.

Liv Garfield: “strong foundations enabling us to deliver on five areas of potential outperformance

Commenting on the results, Liv Garfield, Chief Executive Severn Trent Plc, said:

“The foundations we laid in preparing for AMP6 - transforming our culture, driving operational excellence, improving the business through the use of digital technology, and putting customers at the heart of what we do - have ensured a good start. This has been reflected in a good financial performance in the first half with underlying profit before interest and tax up 2.6% at £281 million.”

“Our more streamlined organisational structure is enabling us to speed up our decision making and approval processes while empowering our colleagues to make the right decisions for customers, for example when deploying our capital spend. In addition, all our teams now have new digital devices which, combined with our own apps, enables greater operational efficiency and even higher right-first-time service delivery.”

“Our strong foundations are enabling us to deliver on our five areas of potential outperformance: outcome delivery incentives (ODIs); efficiency; total expenditure (totex); energy; and financing, while continuing to improve services for customers.”

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