Severn Trent Water has reported a 10% increase in underlying profits with the publication of its Interim Results for the six months to 30 September 2014 this morning.
Group turnover was £947.6 million (£922.4 million), an increase of 2.7% over the same period last year while group Profit Before Interest and Taxes (PBIT) increased 10.1% to £281.4 million (£255.7 million). Turnover rose by 2.4% to £793.0 million.
Prices increased from 1 April 2014 by 1.5%, less than inflation, which gave rise to an increase in turnover of £11.5 million. Consumption from metered customers was slightly higher than the same period last year due to the dry summer, which increased turnover by £0.2 million.
The utility said that in a good first six months financial results were in line with expectations,with capital investment on track to deliver its AMP5 target of £2.6 billion - during the period the firm invested a further £247.9 million. Severn Trent is investing early for AMP6 with £15 million of AMP6 capex brought forward to the second half of this year.
The utility said it has delivered the lowest average combined bills in the land for 2014/15 and is committed to launching a new and enhanced social tariff scheme in April 2015 which will give discounts of up to 90% on the average bill to qualifying customers and be administered by the Citizens Advice Bureau.The firm also plans to extend the "no risk" period for customers switching to a meter to 24 months from 12 months as of April 2015.
Key operational improvements since March include further reductions in leakage, where the utility is on target to fix 50% of all leaks within 24 hours by the end of this financial year, pollution incidents and internal sewer flooding.
Looking ahead to AMP6,Severn Trent said its existing KPI culture creates new opportunities under the new incentive mechanisms. Performance on a number of measures which will become outcome delivery incentives (ODIs ) next year, such as sewer flooding and leakage, is described as encouraging although the firm said it will need to continue to improve performance in other areas.
"Disappointed" with outcome of some areas of Ofweat's draft determination
Commenting on Ofwat's draft determination, Severn Trent said it welcomed recognition that the revisions made to its AMP6 plan had many strengths. Ofwat has accepted the totex plans and almost two thirds of the utility’s proposed ODIs.
However, Severn Trent said there were also areas where it was disappointed with the outcome of the draft determination. The firm wrote to Ofwat on 19 September stating it would only focus on a small number of material issues – it then submitted representations on 3 October focusing on areas such as: the Birmingham Resilience and associated community risk schemes; the Ofwat proposed ODI related to the Elan Valley Aqueduct;and WACC and financing.
A reorganisation is currently under way at Severn Trent with a planned reduction of 500 roles in order to deliver efficiencies set out in the AMP6 plan.
Operating Review
On key performance indicators, since the end of March 2014 the company has seen a stable or improved performance in 13 of the 14 Ofwat KPIs, including internal sewer flooding which fell by 20% and pollution incidents down 4%. On SIM, Severn Trent has also halved its response time which will lead to future improvement in the score.
Severn Trent’s benchmark performance on Ofwat's KPIs for the full year 2013/14 fell slightly year on year, with 7 in the upper quartile (prior year 8), 4 where performance was median (prior year 4) and 3 in the lower quartile (prior year 2). While the firm has improved in some areas (e.g. water supply interruptions, internal sewer flooding), the previously reported marginal serviceability assessments for 2013/14 have negatively impacted overall benchmark performance.
Profits up from £1.6m to £6.4m in non-regulated business
In the group’s non-regulated Severn Trent Services division, reported turnover at £154.9 million in the period was up £6.9 million on the same period last year, while reported underlying PBIT increased by £4.8 million to £6.4 million. Revenues were higher in both parts of the business - Operating Services was up 7.4% to £104.6 million and Water Purification was up 19.5% to £50.3 million.
Operating Services continued to grow on the back of new contract wins, particularly in the US in the Northeast and Pacific regions. In Products performance improved as a result of actions taken to improve the cost base and the anticipated growth in key product lines.
In Operating Services UK, Severn Trent said it continues to be active in the business retail market in Scotland, and is taking a “disciplined approach” to opportunities – the firm won 10 new contracts in the period in the healthcare, retail and leisure sectors.
In Products restructuring and performance improvement programmes remain on track - the first phase of a restructuring is now complete, reducing the overall cost base and setting up manufacturing in China where it will be closer to future demand for some key products. Severn Trent said it is now looking at reducing the design and supply chain costs of products and improving the order conversion rate.
The firm saw a decrease in power costs due to increased renewable generation worth £1.6 million which more than offset increased prices on purchased electricity. There were also refunds received relating to overcharges in prior years.
In line with current dividend policy of RPI +3% growth per annum the Board has declared an interim ordinary dividend of 33.96p per share (32.16p per share, +5.6%), which will be paid on 9 January 2015. The total dividend for 2014/15 is expected to be 84.90 pence, representing growth of 5.6% year on year.
Liv Garfield, Chief Executive of Severn Trent Plc, said that looking forward to AMP6, the firm was progressing with the organisational changes required to deliver its plan and would bring forward additional capital investment to ensure it was in “the best place possible” to start the new regulatory period. She added that she had “every confidence that we will hit the ground running on 1st April next year."
Analysts' response was cautious as investors await the outcome of Ofwat's final decision on the price control review in December.
Fiona Cincotta, senior market analyst at www.finspreads.com took a negative view, commenting:
“Underlying pre-tax profit is either as high as £275m, up 3%, if we calculate it before tax and interest rates, or it is as low as £138.2m, down about 27% from £191.2m the same period a year ago, if we don’t look at it on an underlying basis and we include an exchange-rate and interest-rate related loss of £24.1m. Or, if we keep all rates constant and take an underlying approach, pre-tax profit would rise 10.3% to £155.8m.”
“Unfortunately these numbers are not going to do the firm any favours with the market, which in reaction to this lack of clarity, is liable to take the weakest reportable version of first half reports as the working one.”
“What we have are lacklustre numbers, a frankly unconvincing operating performance and a firmed-up dividend.”