Severn Trent PLC, owners of Severn Trent Water said its focus on continuous improvement had once again delivered a good financial and operational performance with the publication this morning of its preliminary Annual Results for the year to 31 March 2013. The firm’s combined average household water bill remains the lowest in England and Wales.

During the financial year Severn Trent’s capital programme grew by 17% year on year to £555.4 million ( including £11 million for private drains and sewers adoption in October 2011) invested in fixed assets and maintaining and improving its infrastructure network. Severn Trent Water said it was continuing to make good progress with the additional £150 million 3 year capital investment programme announced in May 2012. During the year the utility has invested just over a third of the total (£54 million), increasing activity on trunk mains and sewers, investing more in leakage reduction and making improvements at water treatment works.

Customer measured consumption was lower by 1.4% year on year, driven primarily by weaker commercial consumption than expected in the first half of the year. However, the lower annual consumption was compensated by the allowed price increase of 5.2%, leaving turnover up by 3.7% year on year.

Power costs up 11.4%, external labour costs down 8.9%

Operating expenditure was up 2.5%, slightly below the level allowed in the Final Determination on a like for like basis. Controllable costs (direct employee costs and hired and contracted net of own work capitalised, plus materials and other costs) were flat year on year, while non-controllable costs (quasi taxes including the CRC levy, bad debts, power) increased by 6.6%. Power costs increased by 11.4% due to higher unit price and higher energy usage, up by £6.1 million in net power costs to £57.9 million.

Overall net labour costs, including hired and contracted, were flat year on year. Direct employee costs increased by 12.1% due to the delivery of service improvements, the contracting in of some water testing activities from the now sold Severn Trent Analytical Services and increased capital programme, which was also reflected in labour costs capitalised increasing by 12.9%. Hired and contracted costs were 8.9% lower year on year, due to efficiency improvements.

Renewable power generated in the year accounted for 23.5% of gross consumption. The firm said its plans are on track to install four wind turbines later this year, contributing further towards its target of 30% of gross energy to be produced from its own renewable resources by 2015.

On operational performance, 13 out of the 14 Ofwat key performance indicators showed an improved or stable performance year on year. Leakage was reduced to 441 Ml/d, a reduction of 5% year on year and below Ofwat's target of 468 Ml/d. However, the firm saw a rise in internal sewer flooding - largely due to very high rainfall.

Severn Trent Services focuses on growth markets

In the firm’s non-regulated business, Severn Trent Services, during the year the utility sold its Metering Services business and Analytical Services as well as a small technology acquisition in Japan.

In Operating Services, revenue was flat, largely due to reductions in work volumes in Italy. In the United States Severn Trent secured 31 new projects and renewed 46 contracts. In the UK, the firm’s 25 year operation and maintenance contract with the Ministry of Defence (MoD) continued to perform well and cut leakage to an all time low, exceeding the MoD's targets.

Water Purification (Products) revenue and PBIT both grew year on year due to strong demand for disinfection and filtration products in China, while demand for offshore electrochlorination products in Brazil and Malaysia rose due to increased oil and gas exploration. The utility said that North America and European markets continued to be more challenging, due to economic conditions and limited customer investment in water and waste water projects.

£600m to £620m AMP5 spend due this year

Severn Trent Water now expects to invest around £600 million to £620 million in the coming year. Commenting on the results, Tony Wray, Chief Executive of Severn Trent Plc, said:

"Our focus on continuous improvement has once again delivered a good financial and operational performance.”

“For shareholders, we have delivered sustainable, progressive returns, with the full year dividend growing by 8.2%, in line with our policy of growth of RPI+3% until March 2015. In accordance with this policy the dividend for the current year, 2013/14, is set to be 80.40p, an increase of 6%.”

“For the remainder of AMP5 we will continue to execute on our capital programme of £2.6 billion and expect RCV to grow to £7,9971 million, representing growth of 24.6% over the AMP.”

“On the regulatory front, we are pleased to see that the framework for the next price review PR14 is aligned with much of our own thinking, and we look forward to submitting a high quality plan to Ofwat in December of this year."

However, Wray made no mention of the current approach made by a consortium of Canada’s Borealis, Kuwait Investment Office and the UK’s Universities Superannuation Scheme. To date price details of the offer have not been revealed – the consortium now has until June 11 to make a formal offer. Speculation continues about what would constitute an acceptable bid for the utility.