Severn Trent is reporting strong operational improvements and financial performance in second year of AMP6, with the publication this morning of its annual results for the year to 31 March 2017.
Group turnover rose 3.7% to £1,819 million, up £66 million and reported profit (EBIT) rose 7.8% to £544 million, up £39 million. The proposed final dividend of 48.90 pence takes the 2016/17 dividend to 81.50 pence.
Group turnover from continuing operations was £1,819.2 million (2015/16: £1,753.7 million), including turnover for the regulated water and waste water business of £1,528.8 million (2015/16: £1,506.1 million). Turnover increased by 1.5%, as higher tariffs, including the impact of the annual RPI increase on prices, increased revenue by £22.6 million. Higher consumption added a further £3.1 million.
Net labour costs were £3.9 million (2.7%) lower, while gross employee costs increased by 9.2%, in part as a result of Severn Trent’s strategy to bring more work in-house, and the increased activity on capital projects, which resulted in an increase in the level of own labour capitalised, £25.5 million higher than in the previous year.
Net hired and contracted costs decreased by £4.3 million. Severn Trent said that as well the use of external consultants, net labour and hired and contracted costs this year included £7.4 million (2015/16: £4.7 million) to prepare the wholesale business for non-household retail competition.
Power costs were £2.3 million lower year on year – the firm implemented a number of actions that have successfully reduced consumption, despite higher water production driven by customer demand. The Group manages its power costs through a combination of demand management, self-generation and forward price contracts.
Infrastructure renewals expenditure was £10.2 million greater in the year reflecting the planned step up in activity, and the completion of the Bleddfa tunnel (£20.2 million in 2016/17, £4.0 million greater than 2015/16), partially offset by operating efficiencies.
Strong progress has been made during the year on several key work streams of its largest AMP6 project, the Birmingham Resilience Programme. On the Elan Valley Aqueduct element of the scheme, the first tunnel at Bleddfa in Wales has been completed, successfully diverting the flow and allowing decommissioning of the old tunnel, ahead of target date. Work has also started on the construction of the pipe from Lickhill, on the River Severn, to Frankley treatment works, which will ensure a second source of supply for residents in the Birmingham area.
Further £100m of AMP6 totex efficiencies identified
On Totex, Severn Trent said it has identified a further £100 million of AMP6 totex efficiencies, taking the total forecast efficiencies for AMP6 to £770 million. This represents a £360 million outperformance against the cost targets set out in its Final Determination.
Of the £770 million of efficiencies now announced, the company has contracted an additional £70 million during 2016/17, meaning that £610 million has now been locked in.
Severn Trent said it has also made good progress with the £120 million of reinvestment announced in May last year, with around £50 million of initiatives underway in water quality, security and assisting vulnerable customers.
The firm’s AMP6 business plan set out an ambitious target to help 50,000 vulnerable customers per year and exceeded this in 2016/17 through schemes such as WaterSure and a range of social tariffs.
Digital innovation driving strong operational performance
Severn Trent said its digital innovation agenda is helping to drive its strong operational performance. The firm is deploying new technology to help manage the network, investing in more pressure loggers and data analytics to improve decision making. It is also progressing with the use of drones to inspect assets, and piloting cutting-edge satellite technology to help locate leaks.
Other digital technology investments include a new customer management portal which provides an intuitive, single view of the customer and enables faster and easier resolution of contacts. New portable devices for field teams have improved connectivity and include a range of Severn Trent designed apps to improve productivity and help to keep customers informed.
The Group has however acknowledged that when customers do need to make contact, they do not always have a perfect experience. Severn Trent said it is working hard to improve this - in addition to the new customer management portal , the utility has also put a new team in place focused on keeping customers informed throughout their jobs, and improved escalation processes when things go wrong.
Severn Trent also acknowledged that “We are not quite where we want to be across all of our metrics” highlighting performance on water quality complaints in particular which has to improve - the Group fell 32% short of its target this year.
The water company has been investing in innovative technology and new processes to address the issue, including increasing usage of water quality analytics, using the wealth of data in systems to build analytical capabilities and help assess the network.
Renewables - on track to achieve target of generating equivalent of 50% of energy needs by 2020
Severn Trent said its renewables team is on track to achieve a target of generating the equivalent of 50% of energy needs by 2020 – the firm will shortly start generating gas at its second food waste plant at Roundhill, near Stourbridge. The renewables business has delivered a 16% growth in EBITDA, showing that investment in renewable energy is right for both the environment and the bottom line, the Group added.
On the non-household retail market, Severn Trent said its joint venture with United Utilities, Water Plus, is already active in the market and that it was encouraged by Water Plus’s early progress and customer wins.
Commenting Ofwat’s proposals for the opening of water resource and bioresource markets to competition, Severn Trent said:
“We feel our operational strengths and our central geographic location position us for success as these opportunities open up.”
During the period the Group completed the acquisition of Dee Valley Water in February 2017 integration and expects to deliver efficiencies of at least 20% on annual operating costs as a result of joining the two businesses together.
Severn Trent has now identified a number of areas of excellence in which Dee Valley operates, e.g. strong performance on water quality and plans to embed these practices into the way it works across the wider Severn Trent business.
The results also flag up the value of having a highly motivated and enthusiastic workforce – Severn Trent introduced a company-wide bonus scheme at the start of AMP6 to reward employees for delivery on profit, customer ODIs and health and safety targets.
To reflect an increased focus on improving customer experience, from this year on the utility will be including a customer service measure, with up to 8% of bonuses linked to a reduction in written customer complaints.
Key risks include cyber threats and loss of EIB finance
Commenting on key risks, Severn Trent drew attention to the fact that cyber threats could result in loss of data or interruptions to its key business systems.
On the UK’s decision to leave the European Union, the water company said it was less affected than other companies as it operates principally in the UK and its supplier base and customers are predominantly domestic. However, it could have an impact on future sources of finance - borrowing money would be affected by broader considerations and whether it would still have access to the European Investment Bank (or its equivalent) after leaving the EU.
Revenues for 2017/18 expected to be between £1.57bn to £1.60bn
For the upcoming year, revenues are expected to be in the range of £1.57 billion to £1.60 billion (2016/17: £1.53 billion). Operating costs are expected to be higher year on year (2016/17: £581.1 million) due to the inclusion of Dee Valley’s costs and upward pressure from two sector-wide changes in business rates and energy pass through costs. Wholesale Totex is expected to be £1.2 billion to £1.3 billion (2016/17: £1.064 billion). Severn Trent is expecting to earn net rewards for 2017/18 customer ODI2 outperformance of around £23 million (2016/17: £47.6 million).
Liv Garfield, Chief Executive, Severn Trent Plc, said:
“Customers are at the centre of everything we do and I am delighted that we have been able to deliver significant improvements in the things they care most about. Sewer floodings are down 21%, and we have further reduced both supply interruptions and leakages. We have done this while maintaining the lowest bills in Britain. These results are testament to the hard work of my colleagues over the past year.”
“Strong operational delivery resulted in net customer ODIs of £47.6 million, alongside which we are helping more than 50,000 vulnerable customers. New digital technology and improved processes are key building blocks in driving our ambition to be upper quartile versus our peers. We are improving our efficiency and have identified a further £100 million totex savings this regulatory period, taking total efficiencies to £770 million.”
“We are delivering both strong customer-focused and financial outperformance this regulatory period, and we feel it is now appropriate to share this with our investors. The Board is therefore pleased to announce an upgrade to our ordinary dividend policy, to growth of at least RPI +4%.”