Severn Trent PLC has reported a robust financial performance supported by strong cost control in its latest trading update for six months to end September 2022.

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 other non-regulated businesses.

According to the Half Yearly Financial Report, Severn Trent is on track to deliver one of its largest ever investment programmes, including its £566 million Green Recovery programme.

Over 70% of the company’s core £2.9 billion AMP7 capital programme has either been delivered or has prices locked in, achieved through:

• Leveraging the benefit of its 200-person in-house design team to scrutinise options and reconfigure schemes, coordinated by the company’s Chief Engineer function to deliver great value engineering outcomes.
• Locking in over £60 million of spend early through an advanced procurement programme, securing prices, materials and supplier capacity ahead of market challenges
• Welcoming an additional 50 suppliers into its programme, working directly with smaller businesses and building long term relationships
• Establishing a new delivery route through subcontractors to deliver smaller projects, worth around £45 million, more efficiently

Strong operational performance - around 85% of  water performance commitments either on or ahead of target

Severn Trent is also reporting a strong operational performance with around 85% of its water performance commitments either on or ahead of target, despite one of the driest summers since 1836. The update says the utility’s end of AMP7 ODIs are on course to contribute a further £40-50 million in the final year of AMP7.

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

"The first half of this year has shown the benefits of the sustained investment we've made over many years in our people, region and environment. We have delivered a robust financial performance leaving us well positioned to support our customers, invest for the long term, and support future growth.

“As well as delivering on our operational and environmental commitments, with around 85% of regulatory measures meeting or exceeding targets, we're also committed to making a long-lasting positive impact in the communities we serve. Today, we are proud to launch a new ten-year strategy to address some of the underlying causes of poverty in our region, helping people to secure employment and supporting customers through current cost of living pressures. This builds on the investment we're already making through our £10 million Community Fund and the support we offer to 315,000 customers through our affordability schemes, including discounts of up to 90% off their water bills."

The Chief Executive's Review says the company is on track to deliver its £8 billion investment programme, with a fast start to AMP7, insourcing of critical skills, and smart procurement helping to mitigate global supply chain constraints.

Severn Trent attributed its strong performance over the summer benefited to a multi-pronged approach, including:

1. Increasing resilience of water supplies

iInvested extensively in the resilience of the water network in recent years, both in large-scale infrastructure projects, such as the Birmingham Resilience Programme, and in smaller, targeted interventions such as bringing more boreholes into operation and recommissioning existing sites. Work to improve remote valve operations and gather more data has also provided more flexibility in managing the network.

2. Minimising loss of water across the network

Improvement in average speed of response in relation to burst mains performance by 44% in AMP7 – the utility expects this year to be its best ever for this measure, minimising loss of water from such events. This follows the installation of around 30,000 acoustic and transient pressure loggers in AMP6 and the insourcing of its Network Response and Trunk Mains Teams who can reach and repair bursts quickly. The actions form part of the plan to reduce leakage by 15% by 2025.

3. Working with customers to reduce demand

Long-term demand management plans include the installation of 282,000 meters this AMP so far, and an increase in customer education campaigns.

Other achievements highlighted in the six months report include:

• on course to deliver a best-ever pollutions performance, with year-on-year improvements in the number of serious pollutions
• reduced asset failures through a rigorous maintenance programme and improved event response times, helped by the ongoing installation of 40,000 sewer sensors and the establishment of a new in-house Waste Network Response Team
• blockages performance remains strong due to a continued focus on data, sewer cleansing and customer education.

Combined Sewer Overflows - progressing well with plans to reduce average number of CSO activations

Commenting on the use of Combined Sewer Overflows (CSOs), Severn Trent said it was progressing well with plans to reduce the average number of CSO activations and is on track to deliver both a year-on-year reduction, and its target of an average of 20 per year by 2025. Activities include development of predictive tools, trialling cameras and completing installation of Event Duration Monitors ahead of schedule.

The report states:

“Our work positions us well for AMP8 when this measure is set to become a new ODI, with the expected benchmark set at an average of 20 activations for all companies. Following one of the lowest levels of rainfall for 180 years our activation levels were particularly low for the first half of the year.”

According to the Chief Financial Officer's Review, the Group has delivered financial performance in line with expectations for the first half of the year, despite rising input cost inflation and unprecedented energy prices. Severn Trent expects to see the benefits of higher inflation in future periods in the form of higher regulatory revenues and RCV growth.

Group turnover up 10.8% at £1,061.8 million

Group turnover was £1,061.8 million (2021/22: £958.2 million), up 10.8%. Group PBIT was £261.7 million (2021/22: £255.6 million). Turnover for the regulated water and waste water segment was £984.9 million (2021/22: £893.9 million) and PBIT was £242.9 million (2021/22 £242.4 million). Capital investment, the new performance measure for the capital programme, was £269.7 million (2021/22: £254.8 million).

Increased revenue in regulated water and waste water was partially offset by higher power costs, as expected, and higher infrastructure renewals expenditure as planned, including HS2 diversions activity. Infrastructure maintenance expenditure was £22.7 million higher in the period, mostly reflecting the HS2 diversions activity, as well as a planned step up in the core renewals programme.

Power costs in regulated water and waste water segment up c.£100 million

Group net power costs are expected to be c.£50 million higher year-on-year, with power costs in the regulated water and waste water segment up c.£100 million; offset by higher revenue of around £25 million in each of Bioresources and Green Power.

According to the report, Severn Trent’s economic energy hedge effectively limits the impact of higher energy prices on shareholder returns. Power costs were £41.1 million, or 75.3%, higher than the previous period but much less than the average wholesale energy price increases of more than 121% year-on-year. The higher costs are partially offset by self-generation in Bioresources and the Green Power business within the wider Group. £11.5 million additional generation revenue in the Bioresources business was due to higher energy prices.

However, the report says Severn Trent’s industry-leading position in energy generation from its Bioresources and Green Power businesses has mitigated the impact on earnings and, after regulatory cost sharing, offset the economic impact for shareholders.

Net hired and contracted costs increased by £16.5 million (18.0%) due to an increase in logistics and tankering costs, and technology contractor and vendor management costs.

Other costs rose by £9.9 million, predominantly due to an increase in energy intensive chemical costs during the period (up £9.5 million), and higher Environment Agency abstraction charges (up £1.9 million).

The Group’s retail arm Water Plus improved its operating performance and its share of its profit in the period was £0.2 million (2021/22: loss of £1.8 million).

Board continues to recognise important role dividends play in providing income for pensioners and other investors

In line with AMP7 policy, Severn Trent is proposing to pay shareholders an interim dividend of 42.73 pence in January 2023. The Chief Financial Officer says in the report:

“The Board continues to recognise the important role dividends play in providing income for pensioners and other investors. Taking into account the Group's prospects, financial position and the interests of other stakeholders including customers, our pension scheme members, colleagues and communities; the Board has declared an interim dividend for the year ending 31 March 2023 of 42.73 pence, up 4.6% in line with our policy for AMP7 to increase the dividend by CPIH.”