REG - Severn Trent PLC - Annual Results for the year ended 31 March 2023
24/05/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230524:nRSX4236Aa&default-theme=true
RNS Number : 4236A Severn Trent PLC 24 May 2023
Preliminary Announcement of Annual Results
24 May 2023
Results for the year to 31 March 2023
Environmental leadership, strong performance, investing for future growth
Setting the benchmark through environmental and social leadership
· Highly confident in achieving 4* EPA(1) status for a fourth consecutive year,
performance on all six environmental metrics expected to be on or better than
target
· Improved our performance on river quality by a third over the last year; our
share of RNAGS(2) reduced from 24% to 16%; average annual storm overflow
performance reduced from 25 to 18 activations, ahead of regulatory target
· Work underway on the world's first Net Zero waste water treatment hub, to be
delivered in 2024, providing the blueprint for reducing process emissions;
supported by Ofwat's Innovation Fund
· Financially supporting 237,000 customers in need with up to 90% off their
bill, on track to help 315,000 customers by 2025
· Progressing well with our ten-year Societal Strategy to help support 100,000
people out of poverty by 2032
· Doubling our biodiversity commitment to 10,000 hectares by 2025, two years
earlier than planned
12.2% RoRE(3) for FY23 driven by strong environmental, operational and
financial performance
· Continuing to deliver strong operational and financial outperformance, despite
extreme weather and tough macroeconomic conditions; cumulative AMP7 RoRE of
8.9% to date
· Around 80% of OD(I4) measures met or exceeded including leakage, pollutions
and water quality complaints, resulting in a net reward of £53 million; over
£200 million delivered AMP7(5) to date, already surpassing our total in
AMP6(5)
· Record energy generation of 5956 GWh, equivalent to 53% of Group consumption,
with 45 GWh of additional generation expected from planned acquisition of
Andigestion Ltd7
· Group PBIT8 of £509 million (2021/22: £506 million), up 1%, in line with
expectations
· Adjusted basic EPS9 of 58.2 pence (2021/22: 96.1 pence) reflecting the effect
of inflation on index-linked debt. Basic EPS of 52.7 pence (2021/22: loss of
35.2 pence)
· Proposed final dividend of 64.09 pence (2021/22: 61.28 pence), in line with
our policy and payable on 14 July 2023
Investment on-track, well-positioned for AMP8 growth
· Year end RCV(10) of £11.6 billion, AMP to date growth of £2.2 billion, with
investment plans on track
· RCV expected to be £12.8 billion by March 2025, reflecting AMP7 nominal
growth of 36%
· Strong balance sheet with regulatory gearing of 60.0%(11), well below the
sector average, providing capacity for future investment in water resources,
improving environmental standards and Net Zero
· Capital investment of £737 million(12) with 84% of prices agreed for our core
capital programme, £200 million of new annual supply chain capacity secured
for future investment
· Guiding to increased capital investment of between £850 million and £1
billion for 2023/24, as we ramp up delivery capability ahead of AMP8
Liv Garfield, Chief Executive, Severn Trent Plc, said:
"Creating job opportunities, continuing significant regional investment, and
financially supporting more customers than ever before is made possible by
the strong results we have delivered this year.
"At a time when unemployment rates in our region are increasing and the cost
of living crisis is still front and centre of many customers' minds, we are
proud to be able to create 1,000 jobs in our region over the next couple of
years and to further help up to 50,000 customers with financial support. This,
coupled with our long-term programme to help people into work, go towards
truly supporting the communities we serve.
"This support is being delivered whilst continuing with the
multibillion-pound investment in the region to improve water and waste
services, providing an exceptional service and investing in our people who go
above and beyond every day to make a positive impact in our region. We are
expecting the biggest investment period the sector has ever seen, with a focus
on water resources, improving environmental standards and on Net Zero, and we
feel more than ready for this exciting opportunity ahead of us."
Group results
2023 2022 Increase/ (decrease)
£m £m %
Group turnover 2,165.1 1,943.3 11.4
Group PBIT 508.8 506.2 0.5
pence/ pence/
share share
Adjusted basic EPS 58.2 96.1 (39.4)
Basic EPS 52.7 (35.2) 249.7
Total ordinary dividends 106.82 102.14 4.6
Footnotes to page 1 of this RNS
1. EPA: Environmental Performance Assessment ('EPA') status is
expected to be confirmed by the Environment Agency ('EA') in July 2023
2. RNAGS: The EA's analysis of Reasons for Not Achieving Good Status
(RNAGS) records the source, activity and sector involved in causing waters to
be at less than good status
3. RoRE: Return on Regulatory Equity (see glossary)
4. ODIs: Outcome Delivery Incentives, quoted pre-tax and in 2017/18
prices unless otherwise stated. FY23 ODIs include in year reward earnings of
£35.5 million and £17.5 million for work and milestones already delivered in
relation to end of AMP ODIs
5. AMP: Asset Management Plan (see glossary); AMP7 refers to the
period 1 April 2020 to 31 March 2025, and AMP6 refers to the period 1 April
2015 to 31 March 2020
6. Includes 548 GWh from renewable sources and 47 GWh from natural gas
7. Acquisition is subject to clearance by the Competition and Markets
Authority
8. PBIT: Profit before interest and tax
9. Adjusted basic earnings per share: Set out in note 9
10. RCV: Regulatory Capital Value (see glossary). RCV is measured
including additions from Green Recovery and real options. Nominal RCV assumes
forecast CPIH of 2.5% for 2023/24, and 1.5% for 2024/25 and forecast RPI of
4.2% for 2023/24 and 2.1% for 2024/25 as per Oxford Economics April 2023
forecast
11. Refers to shadow regulatory gearing based on shadow RCV which
includes our Green Recovery programme. Regulatory gearing on our reported RCV
is 60.7%
12. See alternative performance measures in note 16 for definition of
capital investment
Note: FY2023/24 technical guidance is included in the Chief Financial
Officer's Review in this announcement.
Enquiries
Investors & Analysts
Rachel Martin Severn Trent Plc +44 (0) 782 462 4011
Head of Investor Relations
Dominique Mowle Severn Trent Plc +44 (0) 796 776 7079
Investor Relations Manager
Media
Jonathan Sibun Teneo +44 (0) 207 353 4200
Press Office Severn Trent Plc +44 (0) 247 771 5640
Preliminary Results Presentation and Webcast
A presentation of these results hosted by Liv Garfield, CEO, James Bowling,
CFO and Helen Miles, CFO Designate, will be available on our website
(severntrent.com) from 7.00am BST today, 24 May 2023.
We will be hosting a live Q&A session with Liv, James and our wider
Executive team at 8.30am BST today via video call which you can register for
through our website.
Chief Executive's Review
With our PR24 plans due to be submitted in a matter of months, we are at a
pivotal point in the regulatory cycle. We can reflect on the progress we have
already made in AMP7 and look forward to the opportunities that AMP8 brings.
This year has brought many challenges including extreme weather, high
inflation driven by exceptional energy prices, and heightened macroeconomic
uncertainty; through it all we have continued to deliver strong environmental,
operational and financial performance, benefitting all our stakeholders.
· We are highly confident we will achieve the EA's highest possible annual 4*
rating for the fourth consecutive year and have made fast progress against our
Get River Positive pledges;
· Around 80% of our ODI measures are in reward. We have delivered consistent
improvements on a number of key measures including leakage, water quality
complaints, persistent low pressure and pollutions, but we know there are some
key focus areas for us including external sewer flooding; and
· As we strive to deliver sustainable benefits for all our stakeholders, I am
delighted to see this reflected in another set of strong results, with RoRE
performance of 12.2%, significantly outperforming the base return, and a
forecast end of AMP RCV of £12.8 billion, reflecting estimated AMP7 nominal
growth of 36%.
This was our largest year of capital spend so far this AMP, and we have made
great progress on a range of schemes including our sector-leading Green
Recovery programme. We know that our investment plans will be stepping up
again next year, as some of our projects enter a critical delivery phase, and
we have already been working closely with our supply chain to secure the
capacity we need.
This strong foundation will enable us to ramp up for what is expected to be
the most significant period of growth the sector has ever seen, including the
investment needed to meet water resourcing needs and a significant Water
Industry National Environment Programme.
We know that extensive growth plans need to be affordable for our customers,
which is why we will be financially supporting 315,000 of our most vulnerable
customers by the end of AMP7 and have plans to increase this support even
further through AMP8. We also want to go further and make a genuine positive
change to the lives of the people we serve through our employability and
skills strategy, which will help support 100,000 people out of poverty by
2032.
Leading on environmental change
Our customers expect us to be an environmental leader, and once again we are
proud to have hit 100% of our environmental performance commitments, and we
are highly confident that we will achieve the EA's highest 4* rating in its
annual assessment ('EPA') for the fourth consecutive year, which no company
has achieved before.
However, as a sector, we recognise that we should have given sewage
activations much more attention and acted faster, and we want to be a driving
force for positive change. Since the launch of our five Get River Positive
pledges last year, we have made great progress on each of them. We have
accelerated the installation of event duration monitors across our storm
overflows, providing us with 300 million data records through which we can
monitor and improve our performance.
Our 2022 annual performance of combined sewer overflow ('CSO') activations
improved by 28% to an average of 18 activations per CSO per annum. This means
we are ahead of plan to reach our target of an average of 20 activations per
annum by 2025 and a maximum of 10 activations per annum in line with the
Government's 2050 target. While some of last year's improvement can be
attributed to 2022's dry summer, the majority reflects the significant capital
and operational investments we have made. For example, by increasing our
investment in waste water treatment screens, which remove debris from flows
into our works, we have been able to expand storm tank capacity, increasing
the flow through our network.
The combined effort across our pledges means that our share of our region's
RNAGS is now down to under 16% and we remain on track to meet our commitment
to reach zero RNAGS by 2030.
Our Get River Positive activities are overseen by a panel of six independent
experts, all of whom are passionate about the health of our region's rivers.
The objective of this panel is to help oversee our progress against each
commitment and ensure we maximise the potential benefits across Get River
Positive campaigns.
Another key reason for our environmental performance is our approach to
catchment management. Programmes such as Farming for Water and Great Big
Nature Boost help to improve raw water quality, and today we are pleased to
announce that we are extending and accelerating our commitment to improve
biodiversity on 5,000 hectares of land by 2027 to 10,000 hectares by 2025.
This now means our work will account for 2% of the nation's 2042 Nature
Recovery Network target, which is about the size of 14,000 football pitches.
We are also progressing at pace with our Farming for Water scheme, having
already improved 23 catchments across our region, exceeding our full AMP
target of 16 catchments.
Eight years ago we made the decision to significantly increase our investment
in energy self-generation and committed to reaching more than 50% of the
energy we consume. Since then, we have invested around £400 million and
benefitted from growing returns, protection against energy price volatility
and progress towards our Net Zero goals. This year, Bioresources and Green
Power combined generated 595 GWh of energy, equivalent to 53% of our Group
consumption. We continue to increase our output thanks to continued investment
in our existing assets and a focus on operational excellence, increasing asset
efficiency to 96%. The planned acquisition of Andigestion Ltd (subject to
regulatory approval) by Severn Trent Green Power will deliver an additional 45
GWh of annual energy generation for the Group.
In addition to expanding our renewables capability and electric vehicle fleet,
we are also reducing our direct process emissions, of which around 80% comes
from our sewage and sludge treatment processes. We are on track to deliver the
world's first Net Zero waste water treatment hub in 2024, transforming our
Strongford works, which serves 380,000 customers each year. Together with our
own investment, we were pleased to be awarded £10 million from the Ofwat
Innovation Fund to deploy innovative new technologies developed in
collaboration with our global partners. Being a Net Zero sector leader means
we will be able to share our learnings to benefit our sector and the planet,
as well as helping us deliver further Net Zero sites in AMP8.
We know that the environment, and our role in protecting it, will form a
meaningful part of our PR24 plans. The work we are doing now sets us on the
right path to achieve our long-term goals and provides the blueprint for
success in AMP8.
Operational excellence at our core
Despite the challenging weather experienced this year, our teams have worked
hard to meet or exceed around 80% of ODI measures, and deliver a net reward of
£53 million, taking the total amount earned so far to over £200 million,
which is already more than we earned in all of AMP6.
Enhancing water resilience
This year has been a true test of water resilience for the sector, with some
of the hottest and driest months ever experienced over the summer, followed by
a sharp cold snap and rapid thaw over the winter. Despite these challenging
conditions we have kept water flowing and navigated the summer conditions with
no enforced Temporary Usage Bans ('hosepipe bans') in our region for nearly 30
years.
Over recent years we have invested extensively in our water network through
both large-scale and smaller targeted projects, to bolster our resilience and
protect our capacity. We have also made significant progress with our metering
programme, installing over 166,000 meters this year, including 65,800 smart
meters through our Green Recovery programme. We are now accelerating our AMP8
plan to deliver a further 250,000 meters early. By the end of the AMP we will
have installed over 750,000 meters over five years, taking us to 61% of
network coverage. This will provide us with much greater insight into our
network, including flow data trends, helping to identify leaks sooner, and
helping our customers save on water usage.
We have also insourced key functions such as our 'blue light' Network Response
team, giving us more resilience and flexibility in-house, while our work to
optimise our planning and scheduling function has helped improve our response
times, for example reducing the time taken to fix leaks by a third. These
teams are supported by real-time data from our investment in smart assets,
such as the 30,000 acoustic loggers that now span our network.
In total our work across water has helped us to deliver on key measures,
including:
· Hitting our leakage target for eleven out of the last twelve years, putting us
firmly on track to reduce leakage by 15% by 2025 and 50% by 2045;
· Our best ever performance on water quality complaints, hitting our reward cap
for the second consecutive year;
· Our Welsh business, Hafren Dyfrdwy ('HD') has also improved water quality
complaints by 50% so far this AMP;
· Our best ever performance on persistent low pressure, with a year-on-year
improvement of 63%; and
· Improving our year-on-year speed of response performance by 12%.
Our supply interruptions performance of nine minutes and ten seconds was our
best so far this AMP, but we know any interruption can have a significant
impact on our customers and so we must do better. Although we are disappointed
to have missed an increasingly stretching target this year, we are proud that
during this winter's "Freeze Thaw" event we were able to reduce the impact on
our customers by 93% compared to the "Beast from the East" back in 2018. We
will be taking our learnings forward to continue to make further progress on
this measure.
Working smarter in waste
We operate a multi-pronged approach to our waste operations through:
· Using smart data: We have commenced trials with innovative artificial
intelligence technology to look for ways to model and control the flow of
waste water through our network better, maximising the capacity and efficiency
of our assets;
· Enhancing asset maintenance: Since the beginning of the AMP we have increased
sewer cleansing work substantially, investing over £30 million in this
activity; and
· Educating our customers: We have quadrupled the size of our Network Protection
team who educate household customers on the use of sewers, and continue to
work in partnership with food service providers in our region to reduce the
amount of fats, oils and greases entering the network, all of which help to
prevent blockages and reduce pollutions.
These improvements mean we have hit a number of our key waste measures,
including;
· 22% reduction in total pollutions so far this AMP, along with an 8% increase
in the proportion of pollutions self-reported this year;
· Our best ever year for serious pollutions, with only one event compared to a
sector average of 6.5 in 2021;
· Our best year so far this AMP on sewer collapses with a year-on-year
improvement of 3%;
· Sustained improvement on blockages performance, which is down 20% so far this
AMP; and
· HD has also improved sewer blockages by 17% so far this AMP.
We recognise that not all our waste measures have performed to the level that
both we and our customers expect. Following our sector leading performance in
AMP6, we have an incredibly stretching target on external sewer flooding,
which we have missed this year due to a year-on-year deterioration in
performance of 18%. This resulted from concentrated heavy rainfall in the
winter months, and a disappointing performance on some key drivers of
delivery. We remain committed to getting our performance on this measure back
on track, and we are confident that the steps we have already taken, such as
the insourcing of reactive works planning and scheduling for our Waste
Networks teams, will deliver results.
As we look to AMP8 we are also focusing on the ODIs of the future, many of
which we are already succeeding in. We have started early shadow reporting on
some of these measures, to give us valuable insight into where the
opportunities lie for outperformance in AMP8.
Capital programmes advancing at pace as we ramp up for AMP8
The achievement of fast-track status at PR19 coupled with our early planning
gave us a fast start to this AMP and we remain on track with both our £2.9
billion core capital programme and our £0.6 billion Green Recovery programme.
We have delivered all of our capital regulatory commitments to date and are on
course to deliver the remainder of our programme on time.
Despite tough market conditions we have nominal prices agreed for 84% of our
core capital programme ahead of our two biggest years of delivery. Our
embedded and effective target operating model, which includes an experienced
team of in-house designers, has enabled us to value-engineer projects to
ensure the best possible outcomes for our customers. For example, on our Green
Recovery project to increase water supplies by up to 89Ml/d, we have been able
to re-design our original plans while delivering the same outcomes, halving
the number of sites where work is required, increasing the use of nature-based
treatment processes and mitigating a significant amount of spend.
In total this year we have invested £737 million across the Group, which is
over £100 million higher than 2021/22, and we expect to step up our
investment again next year as some of our Green Recovery schemes enter a key
delivery phase.
Our delivery track record and the steps we've taken to strengthen our Capital
team will set us up for success in AMP8, which we expect will be the largest
investment period in the sector's history. We are already laying the
foundations:
· Secured £200 million of additional annual supply chain capacity, and
commenced early engagement with our partners, readying them for the exciting
challenges that are on the horizon;
· Established direct relationships with manufacturers of critical components,
giving us security on our pipeline for key programmes of work; and
· Optimised our advanced procurement strategy, adopting a manufacturing mindset
in line with leading practices.
Supporting our customers, communities, and colleagues
This year we have achieved eight out of nine customer performance measures,
delivered a 16% reduction in customer complaints and made over six million
contacts with key messages across a range of media, including ways customers
can spot leaks in their own homes.
We recognise that our region is home to some of the UK's most deprived
postcodes, who are feeling more financial pressure in the current high
inflation environment. We have supported 237,000 of our most vulnerable
customers financially, including reducing their water bill by up to 90%, and
we remain on track to support 315,000 customers by the end of the AMP, with an
expansion of our Big Difference Scheme to offer more help to up to 50,000
customers in arrears. This programme has been supported by a 19% year-on-year
reduction in the number of void properties across our region, earning a £7
million ODI reward.
We want to play a role in supporting the communities we serve beyond financial
aid. In November we announced our new landmark Societal Strategy scheme, which
aims to help support 100,000 people out of poverty by 2032 by supporting them
into employment. We announced earlier this month that we will be working in
partnership with Trailblazers to provide 20 mentors each year to support young
men currently in prison, to encourage and support them into work after release
and reduce the risk of re-offending.
Our Community Fund has been running for three years and we have donated £7.6
million of our £10 million AMP7 commitment, supporting 682 organisations
across a range of projects including the creation and enhancement of community
spaces and nature projects. We know that, like our customers, lots of
organisations, such as charities, are finding day-to-day running costs hard,
so this year we have offered core funding support to temporarily help with
rising bills. To read more about the individual community projects and
businesses we have helped you can find our 2022/23 Community Fund Annual
Review on our website.
We know that our success as a business is only made possible thanks to our
dedicated workforce. We are proud to see that even with the current sector
pressures and macroeconomic climate, our teams are the most engaged they have
ever been, putting Severn Trent in the top 5% for employee engagement across
global utilities. We strive to create a great place to work, where everyone
can feel included and listened to and we are proud to be recognised in the
2023 Bloomberg Gender-Equality Index for the fourth consecutive year,
achieving our highest score ever. We earned a top 25 spot in the Stonewall
Workplace Equality Index assessment of LGBT inclusive workplaces, and we are
proud to have achieved our best ever health and safety performance, with a
lost time incidents rate of 0.11.
A final thank you
As we close the chapter on year three of the AMP, I would like to say a huge
thank you to James Bowling, who after eight years of brilliant service, will
be retiring from his position as Chief Financial Officer. James has been
instrumental to the financial resilience and success of Severn Trent and he
leaves us in a very strong position ahead of AMP8. On a personal level I will
miss working with James and I wish him the very best in his future. I am
delighted that we have been able to promote Helen Miles to replace him, and I
am really looking forward to working with Helen through the final part of AMP7
and into AMP8. I am confident that together we can lead the Company through
the next phase of its exciting journey.
Chief Financial Officer's Review
We have delivered strong financial performance this year in the face of
challenging external factors including:
· Unprecedented wholesale energy prices;
· Cost pressures on chemicals, other materials and licence fees;
and
· Additional operating costs during the exceptionally hot and dry
summer and the freeze thaw event in December.
The regulatory model set the inflationary uplift in this year's tariffs from
CPIH in November 2021. This lag meant our regulated revenue for the year
included an increase of only 4.6% while inflation on key operating costs was
significantly higher than this.
Despite these challenges we have delivered Group PBIT of £508.8 million
(2021/22 £506.2 million).
A summary of our financial performance for the year is set out below:
2023 2022 Change
£m £m £m %
Turnover 2,165.1 1,943.3 221.8 11.4
PBIT 508.8 506.2 2.6 0.5
Net finance costs (362.6) (269.4) (93.2) (34.6)
Gains/(losses) on financial instruments, share of results of joint venture and 21.7 37.3 (15.6) (41.8)
impairment of loans receivable
Profit before tax 167.9 274.1 (106.2) (38.7)
Tax (35.7) (361.3) 325.6 90.1
Profit for the year 132.2 (87.2) 219.4 251.6
Turnover in Regulated Water and Waste Water increased year on year by £191
million, which was in the middle of our expected range. Business Services
turnover increased by £34 million as a result of growth in our Operating
Services business and the benefit of higher generation and energy prices in
our Green Power business.
Net labour and hired and contracted costs increased by £21.4 million (4.9%).
Gross costs increased due to hired staff providing leakage reduction support
and other short-term labour requirements. Increased activity on our capital
programme was offset by higher capitalised labour.
Higher energy prices reduced Group PBIT by around £43 million year on year as
the higher costs of energy consumed exceeded the benefit from our energy
revenues. The impact on totex in our regulated business was around £23
million higher as this does not include the benefit of revenue from energy
generated in our Green Power business. We expect totex and RoRE to be impacted
by higher energy costs for the remainder of the AMP but this impact will be
offset to deliver a broadly neutral Group return on equity across the
five-year period. Across the Group, we generate the equivalent of around 53%
of our energy requirements. This provides an effective energy price hedge for
our group return on equity because our power costs mainly arise in parts of
our regulated business in which over or under spend is shared with customers,
whereas revenues are earned in the non-regulated business or areas where
performance variances are not shared.
We also saw a sharp increase in the cost of energy intensive products.
Chemical costs increased by £21.3 million, of which £20.5 million arose in
our Regulated Water and Waste Water business.
Net finance costs rose as higher inflation in the period increased the cost of
our index-linked debt. Our effective interest cost was 150 bps higher at
6.2% (2021/22: 4.7%); our effective cash cost of interest (which excludes the
inflation uplift on index-linked debt) was unchanged at 3.0% (2021/22: 3.0%).
We continued to benefit from the super deduction, which gives a 130% tax
allowance in the year for qualifying capital expenditure. This, together with
the higher finance costs, resulted in an adjusted effective tax rate of nil%
(unchanged from nil% in 2021/22) and, as expected, no current tax payable
relating to the year.
In his 2023 Budget, the Chancellor introduced 100% first year capital
allowances for qualifying plant and machinery for a three-year period from 1
April 2023. As a result, we expect our adjusted effective tax rate to remain
around nil while the allowance is in place.
The tax charge of £35.7 million reflects our full effective tax rate this
year of 21.3% (2021/22: 24.4% before exceptional deferred tax). In the
previous year, the increase in the corporation tax rate to 25% from FY24 was
reflected in our deferred tax provision and in an exceptional deferred tax
charge to the income statement of £294.4 million.
Group profit after tax was £132.2 million (2021/22: a loss of £87.2 million
as a result of the exceptional deferred tax charge) and our adjusted basic EPS
was 58.2 pence (2021/22: 96.1 pence) reflecting higher net finance costs from
the impact of inflation on the cost of our index-linked debt. Basic EPS was
52.7 pence (2021/22: loss of 35.2 pence due to the exceptional deferred tax
from the change of corporation tax rate).
Our balance sheet remains strong. At 31 March 2023 our net debt was £7,160.5
million (2022: £6,507.8 million) and our shadow RCV gearing, taking into
account amounts that will be included in the RCV at the end of the AMP but
which we have already incurred, is 60.0% (2022: 59.2%). Our regulatory gearing
is 60.7% (2022: 59.5%), well below the sector average and close to Ofwat's
notional capital structure for AMP7.
Our net pension deficit on an IAS 19 basis is £279.4 million (2022: £128.0
million). Gross liabilities decreased as the discount rate, which is based on
the yield observed on high quality corporate bonds, increased and inflation
expectations over the life of the liabilities decreased. Hedging assets moved
broadly in line with the fall in liabilities, with other asset values affected
by the higher yield environment in the second half of the year. The 2022
triennial actuarial valuation was agreed in November 2022, with an unchanged
future funding plan.
Operational cash flow was £713.1 million (2021/22: £848.9 million). EBITDA
increased by £18.3 million but pension contributions increased by £38.6
million as we paid two years' deficit reduction contributions in the year and
changes in working capital increased cash outflows by £100 million more than
the previous year. Cash capex was £686.6 million, up £92.3 million due to
the increasing capital programme. Net cash outflow before changes in net debt
was £440.4 million (2021/22: inflow of £76.7 million).
This year we have published in our Annual Report our first disclosure
consistent with the EU Taxonomy. We are committed to protecting and enhancing
the environment and transparent disclosures are an important part of
demonstrating that commitment. We have accelerated the enhancement of our
sustainability disclosures by making a voluntary disclosure under the EU
Taxonomy framework. We have completed an initial eligibility-only review and
are working towards a full alignment review. Our initial assessment is that
eligible activities make up 95% of our revenues, 95% of our operating costs
and 99% of our capital expenditure.
Severn Trent Water's RoRE for the year was 12.2%, 830 bps above the base
return of 3.9%. Outperformance came mainly from our customer ODI rewards of
£53 million, with around 80% of our measures in reward, and financing,
reflecting our continued low cash interest cost and the impact of higher
inflation in the year compared to Ofwat's Final Determination assumption.
Although in the current year we have seen an adverse impact from higher
inflation on our operating and finance costs, in the longer term we expect to
see the benefits through indexation of our RCV, revenue growth and lower
gearing, all of which underpin our inflation-linked AMP7 dividend policy.
Our proposed final dividend of 64.09 pence (2021/22: 61.28 pence), is in line
with our inflation-linked dividend policy and payable on 14 July 2023.
Regulated Water and Waste Water
Turnover for our Regulated Water and Waste Water ('RWWW') business was
£1,995.4 million (2021/22: £1,804.4 million) and PBIT was £468.1 million
(2021/22: £476.3 million).
2023 2022 Increase/(decrease)
£m £m £m %
Turnover 1,995.4 1,804.4 191.0 10.6
Net labour costs (158.2) (165.3) 7.1 4.3
Net hired and contracted costs (217.2) (190.0) (27.2) (14.3)
Power (204.6) (114.1) (90.5) (79.3)
Bad debts (24.5) (24.8) 0.3 1.2
Other costs (284.6) (250.7) (33.9) (13.5)
(889.1) (744.9) (144.2) (19.4)
Infrastructure renewals expenditure (238.4) (198.2) (40.2) (20.3)
Depreciation (400.4) (385.0) (15.4) (4.0)
PBIT 467.5 476.3 (8.8) (1.8)
Turnover increased by £191.0 million with the main movements being:
· An increase of £78.0 million for the annual CPIH uplift in tariffs, partially
offset by reductions of £15.1 million from the 'K' factor for the year;
· A £66.9 million increase representing the recovery, under the RFI mechanism,
of lower than allowed revenue in 2020/21;
· £35.0 million of in-year fast money allowance for the Green Recovery
programme;
· £24.4 million additional energy generation revenue in our Bioresources
business driven by higher wholesale energy prices;
· An increase of £18.7 million in diversions income largely due to the increase
in activity related to HS2 as guided. This represents a recovery of costs
incurred and is offset by an increase in infrastructure renewals expenditure;
· Lower revenue from the Voids and Gaps Incentives Scheme (£4.7 million lower);
and
· Lower revenues billed by other water companies on our behalf and other small
differences (£12.2 million).
Net labour costs of £158.2 million were 4.3% lower year on year. Gross
employee costs increased due to the annual pay award of 2.3% and an increase
in FTE from the step up in the capital programme. This was offset by higher
capitalisation of employee costs and an £8.3 million credit related to a
change in defined benefit scheme options developed with the Trustee. The new
bridging pension option allows members who retire early to bridge the gap
between their retirement date and the date when the state pension becomes
payable, by taking more of their occupational pension up front, which has a
positive effect on expected pension liabilities.
Net hired and contracted costs increased by £27.2 million (14.3%). The
increase is driven by higher tankering and jetting activity, more hired staff
to support leakage reduction and improve operational performance, third party
technology consultants and other contract management cost increases.
Our economic energy hedge effectively limits the impact of higher energy
prices on the Group's return on equity. Power costs were £90.5 million
(79.3%) higher than the previous period although our weighted wholesale
average price was about 30% less than the average market wholesale energy
price. We benefited from self-generation and favourable energy export in
Bioresources, as well as internal hedges between our regulated business (a net
consumer of energy) and our non-regulated Green Power business (a net
generator).
Bad debt charges decreased by £0.3 million and represented 1.7% of household
revenue. Our cash collection in the year was lower as households felt the
impact of cost of living increases. However, this impact was not as high as we
provided for at the previous year end, leaving the overall charge broadly
flat.
Other costs increased by £33.9 million, including £20.5 million higher
chemical costs and higher Environment Agency abstraction and discharge consent
fees of £3.7 million. The remaining increase was due to higher costs of
materials and consumables, fuel and insurance costs.
Infrastructure renewals expenditure was £40.2 million higher in the period,
reflecting the planned step up in the programme and activity related to HS2
referred to above.
Depreciation of £400.4 million was £15.4 million higher year on year due to
new assets coming into service as part of our Water Framework Directive
programme as well as a full year of depreciation on the advanced digestion and
biogas-to-grid plants at Finham and Stoke Bardolph.
Return on Regulatory Equity ('RoRE')
RoRE is a key performance indicator for the regulated business and reflects
our combined performance on totex, customer ODIs and financing compared to the
base return allowed in the Final Determination.
Severn Trent Water's RoRE for the year ended 31 March 2023 and for the three
years ended on that date is set out in the following table:
2022/23 AMP7 to date
% %( )
Base return 3.9 3.9
Enhanced RoRE reward(1) ‒ 0.2
ODI outperformance(2) 0.7 1.3
Wholesale totex performance ‒ ‒
Retail cost performance (0.1) (0.2)
Financing outperformance(3) 7.7 3.7
Return on Regulatory Equity(4) 12.2 8.9
.
1 Fast track reward taken over the first two years of AMP7.
2 ODI performance includes in-year ODI reward, PCC and forecast
C-MeX and D-MeX outturn.
3 Includes 0.7% for the variance on tax from the benefit of super
deduction capital allowances.
4 Calculated in accordance with Ofwat guidance set out in RAG 4.11,
which excludes Ofwat's AMP7 tax true-up mechanism.
We have delivered RoRE of 12.2% in the year, outperforming the base return by
8.3% as a result of:
· ODI performance of 0.7%, driven by strong performance across the majority of
measures, with c.80% meeting or exceeding regulatory targets;
· Our neutral totex position reflecting good cost control and efficient spend
over a challenging year; and
· Financing performance of 7.7%, driven by our AMP7 financing strategy that
includes a relatively low level of index-linked debt, and the tax benefit of
super deduction capital allowances.
Business Services
2023 2022 Increase/(decrease)
£m £m £m %
Turnover
Operating Services and Other 98.5 88.1 10.4 11.8
Green Power 78.6 55.5 23.1 41.6
177.1 143.6 33.5 23.3
EBITDA
Operating Services and Other 28.1 22.5 5.6 24.9
Green Power 35.7 17.5 18.2 104.0
Property Development 2.0 13.2 (11.2) (84.8)
65.8 53.2 12.6 23.7
Business Services turnover was £177.1 million (up 23.3%) and EBITDA was
£65.8 million (up 23.7%).
In our Operating Services and Other businesses, turnover increased by £10.4
million due to increased activity on the MoD and Coal Authority contracts as
well as sales growth in our water hygiene business, Aqualytix. EBITDA was
£5.6 million higher mainly due to improved margins on these contracts.
In Green Power, turnover increased by £23.1 million, largely due to
significantly higher energy prices over the last year which helped offset
increased power consumption costs in RWWW, through the Group's natural energy
hedge. EBITDA was up £18.2 million due to the higher revenue, partially
offset by increased costs of food waste, sileage and haulage as well as a
£2.2 million charge for the government energy generator levy in the final
quarter of the financial year. We do not expect to incur the levy in FY24
based on latest forecast prices.
Profits from Property Development were £11.2 million lower than the prior
year mainly due to timing of significant disposals and delays in the planning
process. However, we remain on track for our 15-year plan of £150 million
profit by 2032, having generated c.£52 million since setting the target in
2017.
Corporate and other
Corporate costs were £8.7 million (2021/22: £8.2 million) including
Directors' bonuses charged to Severn Trent Plc this year rather than Severn
Trent Water Limited. Our other businesses generated PBIT of £0.7 million
(2021/22: £1.3 million).
Net finance costs
Net finance costs for the year were £93.2 million (34.6%) higher than the
prior year at £362.6 million. During the year we issued £1,351 million of
new debt at rates consistently below the iBoxx index and our effective cash
cost of interest (excluding the RPI uplift on index-linked debt and
pensions-related charges) was unchanged at 3.0% (2021/22: 3.0%).
Average net debt was up 6.8% at £6,720.6 million (2021/22: £6,292.2
million), with higher inflation in the year increasing the cost of our
index-linked debt by £100.9 million. Our effective interest cost was 6.2%
(2021/22: 4.7%).
Capitalised interest of £56.6 million was £22.1 million higher year on year,
due to the higher effective interest cost and increased capital work in
progress compared to the previous year.
Our earnings before interest, tax, depreciation and amortisation ('EBITDA')
interest cover was 2.6 times (2021/22: 3.5 times) and PBIT interest cover was
1.4 times (2021/22: 1.9 times). See note 16 for further details.
Gains/losses on financial instruments
We use financial derivatives solely to hedge risks associated with our normal
business activities including:
· Exchange rate exposure on foreign currency borrowings;
· Interest rate exposures on floating rate borrowings;
· Exposures to increases in electricity prices; and
· Changes in the regulatory model from RPI to CPIH.
We hold interest rate swaps with a net notional principal of £448.4 million
floating to fixed, which economically act to hedge exchange rate risk on
certain foreign currency borrowings. We also hold cross currency swaps with a
sterling principal of £98.3 million, that swap foreign currency fixed
interest debt to sterling floating interest rate.
We revalue the derivatives at each balance sheet date and take the changes in
value to the income statement, unless the derivative is part of a cash flow
hedge.
Where hedge accounting is not applied, if the risk being hedged does not
impact the income statement in the same period as the change in value of the
derivative, then an accounting mismatch arises and there is a net charge or
credit to the income statement. During the year there was a gain of £35.7
million (2021/22: £51.5 million) in relation to these instruments.
Note 6 to the financial statements gives an analysis of the amounts charged to
the income statement in relation to financial instruments.
As part of our power cost management strategy, we have fixed the wholesale
price for more than 95% of our estimated wholesale energy usage for 2023/24
through physical hedges with suppliers and natural hedges from the export of
self-generated energy.
Share of loss of joint venture
Water Plus's performance continues to improve and it achieved break even in
the year. Our share of Water Plus's result for the year was therefore £ -
million (2021/22: loss of £2.2 million).
Taxation
We are committed to paying the right amount of tax at the right time. We pay a
range of taxes, including business rates, employer's national insurance and
environmental taxes such as the Climate Change Levy as well as the corporation
tax shown in our tax charge in the income statement.
2023 2022
£m £m
Tax incurred:
Corporation tax ‒ 1.2
Business rates and property taxes 84.4 83.4
Employer's National Insurance 35.3 30.5
Environmental taxes 6.6 6.1
Other taxes 6.0 5.9
132.3 127.1
Further details on the taxes and levies that we pay can be found in our report
"Explaining our Tax Contribution 2022/23", which will be made available at
www.severntrent.com/sustainability-strategy/reports-and-publications/tax/
(http://www.severntrent.com/sustainability-strategy/reports-and-publications/tax/)
when our Annual Report and Accounts is published in June.
The corporation tax charge for the year recorded in the income statement was
£35.7 million (2021/22: £66.9 million before exceptional taxes) and we made
net corporation tax payments of £4.0 million in the year (2021/22: £1.2
million). The difference between the tax charged and the tax paid is
summarised below:
2023 2022
£m £m
Tax on profit on ordinary activities 35.7 66.9
Tax effect of timing differences (28.3) (50.8)
Impact of deferred tax provided at 25% (7.7) (15.9)
Overprovisions in previous years 0.3 (0.2)
Corporation tax payable for the year - -
(Receipts from)/payments to Water Plus re consortium relief (6.1) 1.2
Payments to HMRC for consortium relief disclaimed 6.1 -
Payments in respect of prior years 4.0 -
Net tax paid in the year 4.0 1.2
No tax was paid relating to the year as the allowances available from the
super deduction resulted in a loss for tax purposes (2021/22: £1.2 million
paid to Water Plus).
Note 7 in the financial statements sets out the tax charges and credits in the
year, which are described below.
The current tax charge for the year was £0.2 million, which arose from
adjustments to tax provisions from previous years (2021/22: credit of £4.8
million). The deferred tax charge was £35.5 million (2021/22: £71.7 million
before the exceptional charge arising from the change of rate).
Our effective tax rate excluding the exceptional deferred tax charge this year
was 21.3% (2021/22: 24.4%), which is higher than the UK rate of corporation
tax in both years (19%), mainly due to deferred tax on temporary differences
arising during the year charged at 25%, partly offset by the permanent
difference that arises mainly from the additional 30% deduction included in
the super deduction.
Our adjusted effective current tax rate was nil (2021/22: nil%) (see note 16).
UK tax rules specify the rate of tax relief available on capital expenditure.
Typically this is greater in the early years than the rate of depreciation
used to write off the expenditure in our accounts. In the current and previous
years, this was enhanced by the super deduction for certain capital
expenditure, which gave a 100% tax deduction in the year of spend plus an
additional allowance of 30%.
The impact of this timing difference applied across our significant and
recurring capital programme tends to reduce our adjusted effective current tax
rate and corporation tax payments in the year. Accounting standards require
that we make a provision for the tax that we would pay in future periods, if
the depreciation charge arising on expenditure for which tax relief has
already been received is not offset by further tax allowances in those
periods. However, the nature of our business, including a significant rolling
capital programme and the long lives of our assets, means we do not expect
these timing differences to reverse for the foreseeable future, and they may
never do so. This is the most significant component of our deferred tax
position.
Profit for the year and earnings per share
Total profit for the year was £132.2 million (2021/22 loss: £87.2 million).
Basic earnings per share was 52.7 pence (2021/22: loss of 35.2 pence).
Adjusted basic earnings per share was 58.2 pence (2021/22: 96.1 pence). For
further details see note 9.
Cash flow
2023 2022
£m £m
Operational cashflow 713.1 848.9
Cash capex (686.6) (594.3)
Net interest paid (203.5) (185.0)
Purchase of subsidiary net of cash acquired (0.4) -
Net (payments)/receipts for swap terminations (11.2) 5.6
Net tax paid (4.0) (1.2)
Free cash flow (192.6) 74.0
Dividends (261.3) (254.5)
Issue of shares 15.3 257.2
Purchase of own shares (1.8) -
Change in net debt from cash flows (440.4) 76.7
Non-cash movements (212.3) (140.7)
Change in net debt (652.7) (64.0)
Opening net debt (6,507.8) (6,443.8)
Closing net debt (7,160.5) (6,507.8)
2023 2022
£m £m
Bank loans (713.0) (782.5)
Other loans (6,474.2) (5,823.5)
Lease liabilities (110.9) (117.4)
Net cash and cash equivalents 28.7 107.7
Cross currency swaps 33.6 28.3
Loans due from joint ventures 75.3 79.6
Net debt (7,160.5) (6,507.8)
Operational cash flow was £713.1 million (2021/22: £848.9 million). PBIT was
broadly flat year on year but higher depreciation and amortisation were more
than offset by increased pension contributions and working capital movements.
Net cash capex increased to £686.6 million (2021/22: £594.3 million),
reflecting our progress against our £2.9 billion core capital programme.
Our net interest payments of £203.5 million (2021/22: £185.0 million) were
higher than the previous year due to the impact of higher net debt, with the
effective cash cost of interest (which excludes the non-cash indexation charge
on index-linked debt) in line with the previous year.
The benefits of the super deduction capital allowance and the impact of higher
interest costs meant that we had no taxable profit in the year and therefore
paid no corporation tax in relation to the year. Our net tax payments of £4.4
million related to previous years. In the previous year we paid Water Plus
£1.2 million for consortium relief.
We received £13.5 million net from the exercise of options under the employee
Save As You Earn share scheme and purchase of shares for other share
schemes. In the prior year we received £11.9 million from option exercises
and raised net proceeds of £245.3 million from the May 2021 equity placing.
Our dividends paid increased in line with our policy to increase by CPIH each
year during AMP7.
These cash flows, together with accounting adjustments to the carrying value
of debt, resulted in an increase in debt of £652.7 million (2021/22: £64.0
million).
At 31 March 2023 we held £28.7 million (2022: £107.7 million) in net cash
and cash equivalents. Average debt maturity was around 14 years (2022: 13
years). Including committed facilities, our cash flow requirements are funded
until November 2024.
Net debt at 31 March 2023 was £7,160.5 million (2022: £6,507.8 million) and
balance sheet gearing (net debt/net debt plus equity) was 88.1% (2022: 83.7%).
Regulatory gearing (net debt of our regulated businesses, expressed as a
percentage of estimated RCV) was 60.7% at 31 March 2023 (2022: 59.5%). Shadow
regulatory gearing was 60.0% (2022: 59.2%).
The estimated fair value of debt at 31 March 2023 was £366.2 million lower
than book value (2022: £1,075.8 million higher). The change in the difference
between book and fair value is largely due to the impact of higher inflation
expectations on the fair value of our index-linked debt.
Our policy for the management of interest rates is that at least 40% of our
borrowings should be at fixed interest rates, or hedged through the use of
interest rate swaps or forward rate agreements. At 31 March 2023 interest
rates for 67% (2022: 66%) of our gross debt of £7,261.2 million were fixed;
5% were floating and 28% were index linked. We continue to carefully monitor
market conditions and our interest rate exposure.
Our long-term credit ratings are:
Long-term ratings Severn Trent Plc Severn Trent Water Outlook
Moody's Baa2 Baa1 Stable
Standard and Poor's BBB BBB+ Stable
Fitch BBB BBB+ Stable
We invest cash in deposits with highly rated banks and liquidity funds. We
regularly review the list of counterparties and report this to the Treasury
Committee.
Pensions
We have three defined benefit pensions arrangements, two from Severn Trent and
one from Dee Valley Water. The Severn Trent schemes ('the Schemes') are closed
to future accrual.
The most recent formal actuarial valuation for the Severn Trent Pension Scheme
('STPS'), which is by far the largest of the schemes, was completed as at 31
March 2022. The future funding plan agreed with the Trustee was unchanged
from the 2019 valuation (save for inflationary uplifts where applicable) and
includes:
· Annual deficit reduction payments to be made until the year ending 31 March
2027, with a forecast(1) payment of c. £40 million in the year ending 31
March 2024, increasing thereafter in line with November CPI;
· Payments under an asset-backed funding arrangement of £8.2 million per annum
to 31 March 2032, which will only continue beyond 31 March 2025 if the
Scheme's assets are less than the Scheme's Technical Provisions; and
· Inflation-linked payments under an asset-backed funding arrangement, with a
forecast(1) payment of c.£28 million in the year ending 31 March 2024,
potentially continuing to 31 March 2031, although these contributions will
cease earlier should a subsequent valuation of the STPS show that these
contributions are no longer needed.
1 Index-linked payment forecasts based on the Oxford Economics
forecast CPI for the twelve month period to November 2023
In June 2021 we executed a bulk annuity buy-in for the Severn Trent Mirror
Image Pension Scheme, which represents around 4% of the Group's defined
benefit liabilities. Under the buy-in, the liabilities of this scheme will be
met by an insurance policy and as a result the Group's risk is substantially
reduced.
Hafren Dyfrdwy participates in the Dee Valley Water Limited Section ('DVWS')
of the Water Companies Pension Scheme. DVWS funds are administered by trustees
and held separately from the assets of the Group. DVWS is closed to new
entrants. The most recent formal actuarial valuation of DVWS was completed as
at 31 March 2020 and no deficit reduction contributions are required. In March
2023, the DVWS also entered into a bulk annuity buy-in insurance policy that
covers the majority of the scheme obligations.
On an IAS 19 basis, the net position (before deferred tax) of all of the
Group's defined benefit pension schemes was a deficit of £279.4 million
(2022: £128.0 million). Calculation of the pension deficit for accounting
purposes uses corporate bond yields as the basis for the discount rate of our
long-term liabilities, irrespective of the nature of the scheme's assets or
their expected returns.
On an IAS 19 basis, the funding level decreased to 86% (31 March 2022: 95%).
The movements in the net deficit during the year were:
Fair value of scheme assets Defined benefit obligations Net deficit
£m £m £m
At start of the period 2,659.4 (2,787.4) (128.0)
Amounts credited/(charged) to income statement 74.3 (74.0) 0.3
Actuarial gains/(losses) taken to reserves (922.0) 669.8 (252.2)
Net contributions received and benefits paid (26.4) 126.9 100.5
At end of the period 1,785.3 (2,064.7) (279.4)
The income statement includes:
· Current service costs of £0.1 million on the DVWS, which remains open to
further accrual but is closed to new members;
· A past service credit of £8.3 million following a change in the STPS's rules
to allow members to take a higher initial pension on retirement in exchange
for a lower pension from state pension age;
· Scheme administration costs of £4.3 million; and
· Interest on scheme liabilities and expected return on the scheme assets -
together a net cost of £3.6 million.
Higher interest rate expectations increased the discount rate, which is
derived from yields on high quality corporate bonds, by 200bps. Inflation
expectations decreased by around 30bps since the previous year end. The
impacts of these changes resulted in a net decrease in the scheme liabilities
of around £745 million.
Changes to demographic assumptions to align with the 2022 funding valuation
increased scheme liabilities by around £30 million. This was partly offset by
an update to the most recent CMI data tables and also a weighting to allow for
higher mortality experienced in 2021.
The actual outturn in the year for inflation and other assumptions increased
scheme liabilities by £58.7 million.
Higher bond yields impacted the value of scheme assets, which decreased in
value by £922.0 million more than the return included in the income statement
in the year.
Contributions paid to the STPS in the year included:
· The amounts due under the asset-backed funding arrangements (£26.9 million);
and
· A deficit reduction payment of £34.7 million that was deferred from March
2022 to April 2022 and the payment due for the year ended 31 March 2023 of
£37.8 million.
There were also contributions of £0.2 million to the DVWS, a payment of £0.4
million for MIPS running costs and payments of benefits under the unfunded
scheme amounting to £0.5 million.
Dividends
In line with our policy for AMP7 to increase the dividend by at least CPIH
each year, the Board has proposed a final ordinary dividend of 64.09 pence per
share for 2022/23 (2021/22: 61.28 pence per share). This gives a total
ordinary dividend for the year of 106.82 pence (2021/22: 102.14 pence).
The final ordinary dividend is payable on 14 July 2023 to shareholders on the
register at 2 June 2023.
Principal risks and uncertainties
The Board has overall responsibility for determining the nature and extent of
the risks in which Severn Trent participates and for ensuring that risks are
managed effectively across the Group. The Board considers the principal risks
and uncertainties affecting the Group's business activities to be those
detailed below:
Health and Safety:
· Due to the nature of our operations, we could endanger the health and safety
of our people, contractors and members of the public
Infrastructure Failure and Asset Resilience:
· We do not provide a safe and secure supply of drinking water to our customers.
· We do not transport and treat waste water effectively, impacting our ability
to return clean water to the environment.
Customer Service and Experience:
· We do not meet the needs of our customers or anticipate changing societal
expectations through the level of customer service we provide.
Supply Chain and Capital Project Delivery:
· Key suppliers cannot meet contractual obligations causing disruption to
capital delivery (cost and quality) and/or critical operational services.
Cyber Security and Technology Resilience:
· Our critical technology capabilities are not maintained due to cyber threats
or system failures, impacting the services we deliver through our key
infrastructure assets or core systems.
Political, Legal and Regulatory:
· Changing societal expectations, resulting in stricter legal and environmental
obligations, commitments and/or enforcements, increase the risk of
non-compliance.
Financial Liabilities:
· We fail to fund our Severn Trent defined benefit pension scheme sustainably.
· We are unable to ensure sufficient liquidity to meet our funding requirements.
Climate Change, Environment and Biodiversity:
· Severn Trent's climate change strategy does not enable us to respond to the
shifting natural climatic environment and maintain our essential services.
· We fail to influence positively natural capital in our region.
Outlook
Earnings: We anticipate strong earnings per share growth in 2023/24 as a
result of a 15-20% reduction in interest charge. We expect a further step up
in 2024/25 as lower energy costs and inflation-linked tariff increases flow
through to operational earnings.
Returns: We expect to deliver a strong average Return on Regulatory Equity
('RoRE') for AMP7, driven by both operational and financial
outperformance.
We are confident we can continue to deliver sector-leading operational
performance, including end-of-AMP ODIs expected to contribute £40-50 million
on top of in-year net rewards for the last year of the AMP.
Over the course of AMP7 we expect higher energy costs to impact average RoRE
by around 0.7 percentage points¹, but this will be offset by higher Green
Power income to give a broadly neutral impact on the Group's Return on Equity.
RCV(2): Group RCV has grown by 23% since the beginning of AMP7 and is expected
to grow by 36% over the five-year period, benefitting from our large
investment programme, and including recent inflation forecasts.
¹ Based on performance to date, hedged position for 2023/24 and latest energy
forecasts for 2024/25
² RCV: Regulatory Capital Value. RCV is measured including additions from
Green Recovery and real options. Nominal RCV assumes forecast CPIH of 2.5% for
2023/24, and 1.5% for 2024/25 and forecast RPI of 4.2% for 2023/24 and 2.1%
for 2024/25 as per Oxford Economics April 2023 forecast
Technical Guidance 2023/24
Year-end guidance FY23 Year-on- Year
Regulated Water and Waste Water
Turnover £2.15 billion to £2.20 billion. £2.00bn ▲
Operating costs Higher year on year, reflecting an increase in power costs, pay inflation and £889m ▲
a step up in Green Recovery expenditure.
Infrastructure renewals expenditure ('IRE') Marginally higher year on year due to HS2 activity, which is broadly offset in £238m ▲
turnover.
ODIs(1) Continued outperformance on increasingly stretching targets, delivering a net £53m ↔
reward of at least £50 million.
Business Services
EBITDA (excl. Property) Lower year on year due to the impact of the lower energy prices on revenue in £64m ▼
Green Power.
Property profit £5 million to £10 million. £2m ▲
Group
Interest charge 15-20% lower year on year based on latest inflation(2) and interest rate £363m ▼
forecasts.
Adjusted effective current tax rate(3) Nil due to accelerated capital allowances on our capital investment programme. 0.0% ↔
Capital investment Continued step up in our investment programme delivering capital investment £737m ▲
between £850 million and £1 billion.
Dividend(4) 2023/24 dividend of 116.84 pence, in line with our policy of annual growth by 106.82p ▲
CPIH.
Footnotes to Technical Guidance
1. Customer Outcome Delivery Incentives are quoted pre-tax in 2017/18
prices. We assume a 25% rate of corporation tax to be in place when ODIs are
taken into revenue
2. Based on Oxford Economics April inflation forecast. Index-linked
debt comprising around a quarter of our total debt
3. Total effective tax rate is expected to be c.25%. This includes
both current and deferred tax charges
4. 2023/24 dividend growth rate based on November 2022 CPIH of 9.38%
Further Information
For further information, including the Group's full-year results presentation,
see the Severn Trent website (www.severntrent.com (http://www.severntrent.com)
).
Investor Timetable
Ex-dividend date (Final) 1 June 2023
Dividend record date (Final) 2 June 2023
DRIP election date (Final) 23 June 2023
AGM 6 July 2023
Final dividend payment date 14 July 2023
Q1 trading statement 19 July 2023
Capital Markets Day 12 October 2023
Interim results announcement 22 November 2023
For more information please visit:
https://www.severntrent.com/investors/financial-calendar-and-regulatory-news/
(https://www.severntrent.com/investors/financial-calendar-and-regulatory-news/)
Consolidated income statement
For the year ended 31 March 2023
2023 2022
Note £m £m
Turnover 3 2,165.1 1,943.3
Other income - 5.3
Operating costs before charge for bad and doubtful debts (1,631.8) (1,417.8)
Charge for bad and doubtful debts (24.5) (24.6)
Total operating costs (1,656.3) (1,442.4)
Profit before interest and tax 508.8 506.2
Finance income 4 84.1 54.7
Finance costs 5 (446.7) (324.1)
Net finance costs (362.6) (269.4)
Reduction in expected credit loss on loan receivable - 0.2
Net gains on financial instruments 6 21.7 39.3
Share of net gain/(loss) of joint ventures accounted for using the equity 10 - (2.2)
method
Profit on ordinary activities before taxation 167.9 274.1
Current tax 7 (0.2) 4.8
Deferred tax 7 (35.5) (366.1)
Taxation on profit on ordinary activities 7 (35.7) (361.3)
Profit/(loss) for the year 132.2 (87.2)
Earnings/(loss) per share (pence)
Note 2023 2022
Basic 9 52.7 (35.2)
Diluted 9 52.5 (35.2)
Consolidated statement of comprehensive income
For the year ended 31 March 2023
2023 2022
Note £m £m
Profit/(loss) for the year 132.2 (87.2)
Other comprehensive (loss)/income
Items that will not be reclassified to the income statement:
Net actuarial (losses)/gains 11 (252.2) 188.5
Deferred tax on net actuarial losses/gains 7 63.0 (47.1)
Deferred tax arising on rate change 7 ‒ 8.4
(189.2) 149.8
Items that may be reclassified to the income statement:
(Loss)/gain on cash flow hedges (2.5) 54.6
Deferred tax on losses/gains on cash flow hedges 7 0.6 (13.0)
Amounts on cash flow hedges transferred to the income statement 6 4.9 6.8
Deferred tax on transfer to the income statement 7 (1.1) (1.7)
1.9 46.7
Other comprehensive (loss)/income for the year (187.3) 196.5
Total comprehensive (loss)/income for the year (55.1) 109.3
Consolidated statement of changes in equity
For the year ended 31 March 2023
Equity attributable to owners of the company
Share capital Share premium Other reserves Retained earnings Total
Note £m £m £m £m £m
At 1 April 2021 237.2 148.1 101.7 651.7 1,138.7
Loss for the year ‒ ‒ ‒ (87.2) (87.2)
Net actuarial gains 11 ‒ ‒ ‒ 188.5 188.5
Deferred tax on net actuarial gains ‒ ‒ ‒ (47.1) (47.1)
Deferred tax arising from rate change ‒ ‒ ‒ 8.4 8.4
Gains on cash flow hedges ‒ ‒ 54.6 ‒ 54.6
Deferred tax on gains on cash flow hedges ‒ ‒ (13.0) ‒ (13.0)
Amounts on cash flow hedges transferred to the income statement 6 ‒ ‒ 6.8 ‒ 6.8
Deferred tax on transfer to the income statement ‒ ‒ (1.7) ‒ (1.7)
Total comprehensive income for the year ‒ ‒ 46.7 62.6 109.3
Proceeds from equity placing 10.2 235.1 ‒ ‒ 245.3
Share options and LTIPs
- value of employees' services 0.7 11.2 ‒ ‒ 11.9
- own shares purchased ‒ ‒ ‒ 8.3 8.3
Share buy back ‒ ‒ ‒ 4.9 4.9
Dividends paid 8 ‒ ‒ ‒ (254.5) (254.5)
At 1 April 2022 248.1 394.4 148.4 473.0 1,263.9
Profit for the year ‒ ‒ ‒ 132.2 132.2
Net actuarial losses 11 ‒ ‒ ‒ (252.2) (252.2)
Deferred tax on net actuarial losses ‒ ‒ ‒ 63.0 63.0
Loss on cash flow hedges ‒ ‒ (2.5) ‒ (2.5)
Deferred tax on losses on cash flow hedges ‒ ‒ 0.6 ‒ 0.6
Amounts on cash flow hedges transferred to the income statement 6 ‒ ‒ 4.9 ‒ 4.9
Deferred tax on transfer to the income statement ‒ ‒ (1.1) ‒ (1.1)
Total comprehensive loss for the year ‒ ‒ 1.9 (57.0) (55.1)
Share options and LTIPs
- proceeds from shares issued 1.0 14.3 ‒ ‒ 15.3
- value of employees' services ‒ ‒ ‒ 9.5 9.5
- own shares purchased ‒ ‒ ‒ (1.8) (1.8)
Deferred tax on share based payments ‒ ‒ ‒ 0.1 0.1
Dividends paid 8 ‒ ‒ ‒ (261.3) (261.3)
At 31 March 2023 249.1 408.7 150.3 162.5 970.6
Consolidated balance sheet
At 31 March 2023
31 March 31 March
2023 2022
Note £m £m
Non-current assets
Goodwill 92.7 91.4
Other intangible assets 185.9 179.6
Property, plant and equipment 10,716.9 10,208.4
Right-of-use assets 129.3 129.9
Investment in joint venture 10 16.5 16.5
Derivative financial instruments 82.3 31.2
Trade and other receivables 88.4 92.1
Retirement benefit surplus 11 5.7 17.5
11,317.7 10,766.6
Current assets
Inventory 35.4 32.0
Trade and other receivables 750.9 606.4
Current tax receivable 9.9 6.2
Derivative financial instruments 0.5 27.6
Cash and cash equivalents 34.2 115.4
830.9 787.6
Current liabilities
Borrowings (317.4) (365.2)
Trade and other payables (720.4) (655.5)
Provisions for liabilities (52.4) (38.4)
(1,090.2) (1,059.1)
Net current liabilities (259.3) (271.5)
Total assets less current liabilities 11,058.4 10,495.1
Non-current liabilities
Borrowings (6,986.2) (6,365.9)
Derivative financial instruments (11.3) (43.3)
Trade and other payables (1,479.6) (1,334.0)
Deferred tax (1,293.5) (1,320.6)
Retirement benefit obligations 11 (285.1) (145.5)
Provisions for liabilities (32.1) (21.9)
(10,087.8) (9,231.2)
Net assets 970.6 1,263.9
Equity
Called up share capital 249.1 248.1
Share premium account 408.7 394.4
Other reserves 150.3 148.4
Retained earnings 162.5 473.0
Total equity 970.6 1,263.9
Consolidated cash flow statement
For the year ended 31 March 2023
2023 2022
Note £m £m
Cash generated from operations 12 753.3 891.7
Tax received 12 6.1 ‒
Tax paid 12 (10.1) (1.2)
Net cash generated from operating activities 749.3 890.5
Cash flows from investing activities
Purchase of subsidiaries net of cash acquired (0.4) ‒
Purchases of property, plant and equipment (699.7) (610.3)
Purchases of intangible assets (40.0) (36.3)
Proceeds on disposal of property, plant and equipment 12.9 9.5
Loans repaid by joint venture 5.5 ‒
Loans advanced to joint ventures ‒ (13.0)
Interest received 5.5 1.9
Net cash outflow from investing activities (716.2) (648.2)
Interest paid (205.3) (182.9)
Interest element of lease payments (3.7) (4.0)
Dividends paid to shareholders of the parent (261.3) (254.5)
Repayments of borrowings (982.4) (488.9)
Principal elements of lease payments (13.1) (12.1)
New loans raised 1,351.4 501.0
Issues of shares net of costs 15.3 257.2
Proceeds from swap terminations ‒ 5.6
Payments from swap terminations (11.2) ‒
Purchase of own shares (1.8) ‒
Net cash outflow from financing activities (112.1) (178.6)
Net movement in cash and cash equivalents (79.0) 63.7
Net cash and cash equivalents at the beginning of the year 107.7 44.0
Net cash and cash equivalents at the end of the year 28.7 107.7
Cash at bank and in hand 34.2 40.4
Bank overdrafts (5.5) (7.7)
Short term deposits ‒ 75.0
28.7 107.7
Notes to the financial statements
1. General information
Basis of preparation
The financial statements have been prepared in accordance with international
accounting standards in conformity with the requirements of the Companies Act
2006 and United Kingdom adopted International Financial Reporting Standards
('IFRS'). The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses for the reporting period. Although
these estimates are based on management's best knowledge of the amount, event
or actions, actual results may ultimately differ from those estimates.
Including undrawn committed credit facilities, the Group is fully funded for
its investment and cash flow needs until November 2024. After making
enquiries, the directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the foreseeable
future and hence the financial statements have been prepared on the going
concern basis.
The financial statements have been prepared under the historical cost
convention as modified by the revaluation of certain financial assets and
liabilities (including derivative instruments) at fair value.
The financial information set out in this announcement does not constitute the
Company's statutory accounts, within the meaning of section 430 of the
Companies Act 2006, for the years ended 31 March 2023 or 2022, but is derived
from those accounts. While the financial information included within this
announcement has been prepared in accordance with the recognition and
measurement criteria of IFRS, it does not comply with the disclosure
requirements of IFRS. Statutory accounts for 2022 have been delivered to the
Registrar of Companies and those for 2023 will be delivered following the
Company's annual general meeting. The auditors have reported on those
accounts; their reports were unqualified and did not contain statements under
section 498(2) or (3) of the Companies Act 2006.
The auditors have consented to the publication of the Preliminary Announcement
as required by Listing Rule 9.7a having completed their procedures under APB
bulletin 2008/2.
2. Segmental analysis
a) Background
The Group is organised into two main business segments:
Regulated Water and Waste Water includes the activities of Severn Trent Water
Limited, except hydro-electric generation and property sales, and Hafren
Dyfrdwy Cyfyngedig.
Business Services includes the Group's Operating Services businesses, the
Green Power business including Severn Trent Water's hydro-electric generation,
the Property Development business and our other non-regulated businesses
including affinity products and searches.
The Severn Trent Executive Committee ('STEC') is the Group's chief operating
decision maker. The reports provided to STEC include segmental information
prepared on the basis described above.
Results from interests in our joint venture are not included in the segmental
reports reviewed by STEC.
Goodwill is allocated and monitored at the segment level.
Transactions between reportable segments are included within segmental
results, assets and liabilities in accordance with Group accounting policies.
These are eliminated on consolidation.
b) Segmental results
The following table shows the segmental turnover and PBIT:
2023 2022
Regulated Water and Waste Water Business Services Regulated Water and Waste Water Business Services
£m £m £m £m
External turnover 1,995.0 170.1 1,803.9 139.4
Inter-segment turnover 0.4 7.0 0.5 4.2
Total turnover 1,995.4 177.1 1,804.4 143.6
Profit before interest and tax 467.5 49.2 476.3 36.4
The reportable segments' turnover is reconciled to Group turnover as follows:
2023 2022
£m £m
Regulated Water and Waste Water 1,995.4 1,804.4
Business Services 177.1 143.6
Corporate and other 1.1 1.1
Consolidation adjustments (8.5) (5.8)
2,165.1 1,943.3
Segmental PBIT is reconciled to the Group's profit before tax as follows:
2023 2022
£m £m
Regulated Water and Waste Water 467.5 476.3
Business Services 49.2 36.4
Corporate and other (8.0) (6.9)
Consolidation adjustments 0.1 0.4
PBIT 508.8 506.2
Net finance costs (362.6) (269.4)
Reduction in expected credit loss on loan receivable ‒ 0.2
Net gains on financial instruments 21.7 39.3
Share of net gain/(loss) of joint ventures accounted for using the equity ‒ (2.2)
method
Profit on ordinary activities before taxation 167.9 274.1
The Group's treasury and tax affairs are managed centrally by the Group
Treasury and Tax departments. Finance costs are managed on a group basis and
hence interest income and costs are not reported at the segmental level. Tax
is not reported to STEC on a segmental basis. The Group's interest in its
joint venture is reported as a corporate asset.
c) Segmental capital employed
The following table shows the segmental capital employed:
2023 2022
Regulated Water and Waste Water Business Services Regulated Water and Waste Water Business Services
£m £m £m £m
Operating assets 11,498.4 349.5 10,869.7 337.4
Goodwill 63.5 30.5 63.5 29.2
Segment assets 11,561.9 380.0 10,933.2 366.6
Segment operating liabilities (2,507.4) (33.3) (2,158.8) (29.6)
Capital employed 9,054.5 346.7 8,774.4 337.0
Operating assets comprise other intangible assets, property, plant and
equipment, right-of-use assets, retirement benefit surpluses, inventory and
trade and other receivables.
Operating liabilities comprise trade and other payables, retirement benefit
obligations and provisions.
3. Revenue from contracts with customers
Revenue recognised from contracts with customers is analysed by business
segment below:
Year ended 31 March 2023
Regulated Water and Waste Water Business Services Corporate Consolidation adjustments Group
and other
£m £m £m £m £m
Water and waste water services 1,932.9 ‒ ‒ (0.4) 1,932.5
Operating services ‒ 84.7 ‒ ‒ 84.7
Renewable energy 57.2 78.6 ‒ (7.0) 128.8
Other sales 5.3 13.8 1.1 (1.1) 19.1
1,995.4 177.1 1.1 (8.5) 2,165.1
Year ended 31 March 2022
Regulated Water and Waste Water Business Services Corporate Consolidation adjustments Group
and other
£m £m £m £m £m
Water and waste water services 1,767.5 ‒ ‒ (0.5) 1,767.0
Operating services ‒ 74.4 ‒ ‒ 74.4
Renewable energy 32.8 55.5 ‒ (4.2) 84.1
Other sales 4.1 13.7 1.1 (1.1) 17.8
1,804.4 143.6 1.1 (5.8) 1,943.3
Revenue from water and waste water services provided to customers with meters
is recognised when the service is provided and is measured based on actual
meter readings and estimated consumption for the period between the last meter
reading and the year end. For customers who are not metered, the performance
obligation is to stand ready to provide water and waste water services
throughout the period. Such customers are charged on an annual basis,
coterminous with the financial year and revenue is recognised on a straight
line basis over the financial year.
Payments received from water and waste water customers in advance of the
service period represents a contract liability. Changes in the Group's
contract liabilities from payments received in advance were as follows:
2023 2022
£m £m
Contract liability at 1 April 144.8 132.5
Revenue recognised (1,394.9) (1,291.1)
Cash received in advance 1,396.6 1,303.4
Contract liability at 31 March 146.5 144.8
The Operating Services business includes a material 25-year contract with
multiple performance obligations. Under this contract the Group bills the
customer based on an inflation-linked volumetric tariff. The performance
obligations are:
· operating and maintaining the customer's infrastructure assets;
· upgrading the customer's infrastructure assets;
· administrating the services received from statutory water and sewerage
undertakers; and
· administrating billing services of the customer's commercial and Non Base
Dependant customers.
Revenue is allocated to each performance obligation based on the stand-alone
selling price of each performance obligation, which is based on the forecast
costs incurred and expected margin for each obligation. Changes to projected
margins are adjusted on a cumulative basis in the period that they are
identified.
Other than the provision of water and waste water services, there is no direct
correlation between the satisfaction of the performance obligations and the
timing of billing and customer payments. The estimated transaction price for
the contract is derived from estimates of the customer's consumption at the
contract tariff rate, adjusted for inflation. This estimate is updated on an
annual basis. The estimated transaction price has increased from 31 March 2022
as a result of increased inflation and consumption. At 31 March 2023 the
aggregate amount of the estimated transaction price allocated to performance
obligations that were not satisfied was £372.5 million (2022: £396.3
million). This amount is expected to be recognised as revenue as follows:
2023 2022
£m £m
In the next year 52.1 49.0
Between one and five years 212.3 197.4
After more than five years 108.1 149.9
372.5 396.3
The assumptions and other sources of estimation uncertainty in relation to
this contract do not present a significant risk of a material adjustment to
the carrying amounts of assets and liabilities in the next financial year and
are therefore not included as a source of estimation uncertainty.
Revenue recognised in excess of amounts billed is recorded as a contract asset
and amounts billed in excess of revenue recognised is recorded as a contract
liability. Changes in contract assets in the year were as follows:
2023 2022
£m £m
Contract asset at 1 April 39.9 38.2
Amounts billed (52.6) (49.9)
Revenue recognised 57.0 51.6
Contract asset at 31 March 44.3 39.9
4. Finance income
2023 2022
£m £m
Interest income earned on bank deposits 3.3 0.1
Other financial income 2.2 1.8
Total interest receivable 5.5 1.9
Interest income on defined benefit scheme assets 78.6 52.8
84.1 54.7
5. Finance costs
2023 2022
£m £m
Interest expense charged on:
Bank loans and overdrafts 30.9 14.7
Other loans 328.6 243.5
Lease liabilities 3.7 4.0
Total borrowing costs 363.2 262.2
Other financial expenses 1.3 2.4
Interest cost on defined benefit scheme liabilities 82.2 59.5
446.7 324.1
6. Net gains on financial instruments
2023 2022
£m £m
Loss on swaps used as hedging instruments in fair value hedges (1.3) (1.0)
(Loss)/gain arising on debt in fair value hedges (0.3) 1.6
Exchange loss on other loans (7.4) (6.6)
Net loss on cash flow hedges transferred from equity (4.9) (6.8)
Hedge ineffectiveness on cash flow hedges (1.3) (0.6)
Gain arising on swaps where hedge accounting is not applied 35.7 51.5
Amortisation of fair value adjustment on debt 1.2 1.2
21.7 39.3
7. Tax
2023 2022
£m £m
Current tax
Current year at 19% (2022: 19%) ‒ ‒
Prior years 0.2 (4.8)
Total current tax charge/(credit) 0.2 (4.8)
Deferred tax
Origination and reversal of temporary differences:
Current year 36.0 66.7
Prior years (0.5) 5.0
Exceptional charge on rate change ‒ 294.4
Total deferred tax charge 35.5 366.1
35.7 361.3
8. Dividends
Amounts recognised as distributions to owners of the Company in the year:
2023 2022
Pence per share £m Pence per share £m
Final dividend for the year ended 31 March 2022 (2021) 61.28 153.9 60.95 152.2
Interim dividend for the year ended 31 March 2023 (2022) 42.73 107.4 40.86 102.3
Total dividends paid 104.01 261.3 101.81 254.5
Proposed final dividend for the year ended 31 March 2023 64.09 163.1
The proposed final dividend is subject to approval by shareholders at the
Annual General Meeting and has not been included as a liability in these
financial statements.
9. Earnings/(loss) per share
a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the earnings attributable
to ordinary shareholders by the weighted average number of ordinary shares in
issue during the year, excluding those held in the Severn Trent Employee Share
Ownership Trust which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares
in issue is adjusted to assume conversion of all potentially dilutive ordinary
shares. These represent share options granted to employees where the exercise
price is less than the average market price of the Company's shares during the
period. Potential ordinary shares are not treated as dilutive if their
conversion does not decrease earnings per share or increase loss per share.
Basic and diluted earnings per share is calculated on the basis of profit
attributable to the owners of the Company.
The calculation of basic and diluted earnings per share is based on the
following:
i) Earnings for the purpose of basic and diluted earnings
per share
2023 2022
£m £m
Profit/(loss) for the period 132.2 (87.2)
ii) Number of shares
2023 2022
m m
Weighted average number of ordinary shares for the purpose of basic earnings 250.8 247.9
per share
Effect of dilutive potential ordinary shares:
- share options and LTIPs 1.1 -
Weighted average number of ordinary shares for the purpose of diluted earnings 251.9 247.9
per share
Unvested share options and LTIPs have not been treated as dilutive potential
ordinary shares in 2022 because their conversion would decrease the loss per
share.
b) Adjusted earnings per share
2023 2022
pence pence
Adjusted basic earnings per share 58.2 96.1
Adjusted diluted earnings per share 58.0 95.6
Adjusted earnings per share figures are presented for continuing operations.
These exclude the effects of net gains/losses on financial instruments,
current tax on net gains/losses on financial instruments, and deferred tax in
both 2023 and 2022. The Directors consider that the adjusted figures provide a
useful additional indicator of performance. The denominators used in the
calculations of adjusted basic and adjusted diluted earnings per share are the
same as those used in the unadjusted figures set out above except that the
number of ordinary shares for the purpose of the adjusted diluted earnings per
share for the period ended 31 March 2022 is 249.3 million as this includes 1.4
million dilutive potential ordinary shares from share options and LTIPs.
The adjustments to earnings that are made in calculating adjusted earnings per
share are as follows:
2023 2022
£m £m
Earnings for the purpose of basic and diluted earnings per share 132.2 (87.2)
Adjustments for:
- net gains on financial instruments (21.7) (39.3)
- current tax on net gains on financial instruments ‒ (1.4)
- deferred tax 35.5 366.1
Earnings for the purpose of adjusted basic and diluted earnings per share 146.0 238.2
The comparative earnings for the purpose of adjusted basic and diluted
earnings per share excluded an amount relating to amortisation of acquired
intangibles. We have restated this comparative measure to include the effect
of amortisation of acquired intangibles so that it is calculated on a
consistent basis with the current year.
10. Interest in joint venture
Our principal joint venture undertaking at 31 March 2023 is Water Plus Group
Limited, which is the largest business retailer in the non-household retail
water market in England and Scotland.
Movements in the investment were as follows:
2023 2022
£m £m
Carrying value of joint venture investment at 1 April 16.5 -
Reclassification on subscription for equity - 18.7
Group's share of result after tax and comprehensive loss - (2.2)
Carrying value of joint venture investment at 31 March 16.5 16.5
During the current year, Water Plus broke even (2022: loss of £4.4m).
On 23 April 2021, the Group extinguished the £32.5 million Revolving Credit
Facility ('RCF') previously extended to Water Plus, and replaced this with a
subscription for £32.5 million of equity shares in Water Plus Group Limited
at par. The carrying value of the loan receivable was reclassified to
investment in joint venture.
11. Retirement benefit schemes
The Group operates three defined benefit schemes in the UK, two from Severn
Trent and one from Dee Valley Water. The Severn Trent schemes are closed to
future accrual. The Group also has an unfunded obligation to provide benefits
to certain former employees whose earnings were in excess of the pensions cap
that operated when the benefits were accrued. The most recent actuarial
valuations of the Severn Trent schemes were at 31 March 2022. The Group
participates in the Dee Valley Water plc Section of the Water Companies
Pension Scheme, which is a defined benefit sectionalised scheme. The most
recent actuarial valuation of this scheme was at 31 March 2020.
On 29 June 2021, the Group completed the bulk annuity buy-in of the Severn
Trent Mirror Image Pension Scheme ('STMIPS'). As a result of the buy-in,
whilst the legal obligation to pay the employee benefits directly as they fall
due remains with the Group, the right to reimbursement of such amounts to the
Group has been obtained under the insurance policy. In March 2023, the Group
also completed a bulk annuity buy-in for the Dee Valley Water Scheme ('DVWS').
The assumptions used in calculating the defined benefit obligations as at 31
March 2023 have been updated to reflect market conditions prevailing at the
balance sheet date as follows:
2023 2022
% %
Price inflation - RPI 3.3 3.6
Price inflation - CPI Pre 2030: 2.3 2.6
Post 2030: 3.2 3.5
Discount rate 4.8 2.8
Pension increases in payment 3.3 3.6
Pension increases in deferment 3.3 3.6
Remaining life expectancy for members currently aged 60 (years)
- men 25.8 26.5
- women 28.6 28.5
Remaining life expectancy at age 60 for members currently aged 40 (years)
- men 26.9 27.6
- women 29.8 29.7
The calculation of the scheme obligations is sensitive to the actuarial
assumptions and in particular to the assumptions relating to the discount
rate, price inflation (capped, where relevant) and mortality. The following
table summarises the estimated impact on the Group's obligations from changes
to key actuarial assumptions whilst holding all other assumptions constant.
Assumption Change in assumption Impact on scheme liabilities
Discount rate Increase/decrease by 0.1% pa Decrease/increase by £26 million
Price inflation Increase/decrease by 0.1% pa Increase/decrease by £21 million
Mortality Increase in life expectancy by 1 year Increase by £72 million
In reality, interrelationships exist between the assumptions, particularly
between the discount rate and price inflation. The above analysis does not
take into account the effect of these interrelationships. Also, in practice
any movements in obligations arising from assumption changes are likely to be
accompanied by movements in asset values - and so the impact on the accounting
deficit may be lower than the impact on the obligations shown above.
The defined benefit assets have been updated to reflect their market value as
at 31 March 2023. Actuarial gains and losses on the scheme assets and defined
benefit obligations have been reported in the statement of comprehensive
income. Service cost and the cost of administrating the scheme are recognised
in operating costs; interest cost is recognised in net finance costs.
Movements in the net deficit recognised in the balance sheet were as follows:
Fair value Defined Net deficit
of plan assets benefit
obligations
£m £m £m
At 31 March 2022 2,659.4 (2,787.4) (128.0)
Current service cost - (0.1) (0.1)
Past service credit - 8.3 8.3
Scheme administration costs (4.3) - (4.3)
Interest income/(cost) 78.6 (82.2) (3.6)
Actuarial (losses)/gains recognised in the statement of comprehensive income (922.0) 669.8 252.2
Contributions from the sponsoring companies 100.5 - 100.5
Employees' contributions and benefits paid (126.9) 126.9 -
At 31 March 2023 1,785.3 (2,064.7) (279.4)
The net deficit is presented on the balance sheet as follows:
2023 2022
£m £m
Retirement benefit surplus 5.7 17.5
Retirement benefit obligations (285.1) (145.5)
(279.4) (128.0)
12. Cash flow
a) Reconciliation of operating profit to operating cash flows
2023 2022
£m £m
Profit before interest and tax 508.8 506.2
Depreciation of property, plant and equipment 379.7 361.5
Depreciation of right-of-use assets 3.9 3.8
Amortisation of intangible assets 33.7 36.3
Pension service (credit)/cost (8.2) 0.2
Defined benefit pension scheme administration costs 4.3 3.8
Defined benefit pension scheme contributions (100.5) (61.9)
Share based payment charge 9.5 8.3
Profit on sale of property, plant and equipment and intangible assets (2.2) (5.4)
Release from deferred credits (16.4) (17.5)
Contributions and grants received 40.2 42.8
Provisions charged to the income statement 7.1 14.8
Utilisation of provisions for liabilities (17.3) (12.3)
Operating cash flows before movements in working capital 842.6 880.6
Increase in inventory (3.4) (1.2)
Increase in amounts receivable (146.2) (87.6)
Increase in amounts payable 60.3 99.9
Cash generated from operations 753.3 891.7
Tax received 6.1 ‒
Tax paid (10.1) (1.2)
Net cash generated from operating activities 749.3 890.5
b) Non-cash transactions
Non-cash additions to right-of-use assets during the year were £3.0 million
(2022: £4.2 million). Assets transferred from developers at no cost were
recognised at their fair value of £105.0 million (2022: £69.0 million) and
provisions of £34.2 million (2022: £15.3 million) for works in response to
legally enforceable undertakings to regulators were recognised as additions to
property, plant and equipment. Under the LTIP 226,429 (2022: 230,003) shares
were issued to employees for no cash consideration.
c) Reconciliation of movement in cash and cash equivalents to movement in net
debt
Net cash and cash equivalents Bank loans Other loans Lease liabilities Cross currency swaps Loans due from joint venture Net debt
£m £m £m £m £m £m £m
At 1 April 2022 107.7 (782.5) (5,823.5) (117.4) 28.3 79.6 (6,507.8)
Cash flow (79.0) 83.7 (452.7) 13.1 ‒ (5.5) (440.4)
Fair value adjustments ‒ ‒ 0.9 ‒ ‒ ‒ 0.9
Inflation uplift on index-linked debt ‒ (13.5) (193.9) ‒ ‒ ‒ (207.4)
Foreign exchange ‒ ‒ (7.4) ‒ ‒ ‒ (7.4)
Other non-cash movements ‒ (0.7) 2.4 (6.6) 5.3 1.2 1.6
At 31 March 2023 28.7 (713.0) (6,474.2) (110.9) 33.6 75.3 (7,160.5)
13. Post balance sheet events
Dividends
Following the year end the Board of Directors has proposed a final dividend of
64.09 pence per share.
14. Contingent liabilities
a) Bonds and guarantees
Group undertakings have entered into bonds and guarantees in the normal course
of business. No liability (2022: nil) is expected to arise in respect of
either bonds or guarantees.
b) Claims under the Environmental Information Regulations 2004 regarding
property searches
Since 2016, the Group has received letters of claim from a number of groups of
personal search companies (PSCs) which allege that the information held by
Severn Trent Water Limited (STW) used to produce the CON29DW residential and
also the commercial water and drainage search reports sold by Severn Trent
Property Solutions Limited (STPS), is disclosable under the Environmental
Information Regulations. In April 2020, a group of over 100 PSCs commenced
litigation against all water and sewerage undertakers in England and Wales,
including STW and STPS. The claimants are seeking damages, on the basis that
STW and STPS charged for information which should have been made available
either free, or for a limited charge, under the Environmental Information
Regulations. STW and STPS are defending this claim. This is an industry-wide
issue and the litigation is in progress. A timetable for the claim has
recently been set by the court leading up to a stage 1 trial on the EIR legal
issues only (not the other issues or amount of damages) which is scheduled to
be held in November 2023.
c) Ongoing combined sewer overflow investigations
Ofwat and the Environment Agency are each conducting their own investigations
into the waste water industry, to investigate compliance with the conditions
of environmental permits. Ofwat has launched specific enforcement
investigations against six sewerage companies, but Severn Trent is not
included in those cases. The Environment Agency's investigation of all English
sewerage companies is continuing and it is not yet clear what the outcome of
those investigations will be. We have responded quickly and comprehensively to
all questions from the regulators and have had open conversations with them on
the issues under investigation.
15. Related party transactions
Transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not included in this
note. Trading transactions between the Group and its joint venture Water Plus
are disclosed below.
2023 2022
£m £m
Sale of services 259.5 259.8
Net interest income 3.9 2.5
263.4 262.3
Outstanding balances between the Group and the joint venture as at 31 March
were as follows:
2023 2022
£m £m
Amounts due to related parties - (0.2)
Trade and other receivables due from related parties 0.2 -
Loans receivable from joint ventures 75.3 79.6
75.5 79.4
The retirement benefit schemes operated by the Group are considered to be
related parties. Details of transactions and balances with the retirement
benefit schemes are disclosed in note 11.
Remuneration of key management personnel
Key management personnel comprise the members of STEC during the year, and
non-executive directors of the Company.
The remuneration of the directors is included within the amounts disclosed
below.
2023 2022
£m £m
Short term employee benefits 4.6 5.7
Short term non-executive director benefits 0.9 0.7
Share based payments 5.4 6.6
10.9 13.0
16. Alternative performance measures (APMs)
Financial measures or metrics used in this report that are not defined by IFRS
are alternative performance measures. The Group uses such measures for
performance analysis because they provide additional useful information on the
performance and position of the Group. Since the Group defines its own
alternative performance measures, these might not be directly comparable to
other companies' alternative performance measures. These measures are not
intended to be a substitute for, or superior to, IFRS measurements.
a) Exceptional items
Exceptional items are income or expenditure which individually or, in
aggregate if of a similar type, should, in the opinion of the directors, be
disclosed by virtue of their size or nature if the financial statements are to
give a true and fair view. In this context, materiality is assessed at the
segment level. There were no exceptional items in the years ended 31 March
2023 or 2022.
b) Adjusted earnings per share
Adjusted earnings per share figures exclude net gains/losses on financial
instruments, current tax on net gains/losses on financial instruments and
deferred tax. The Directors consider that the adjusted figures provide a
useful additional indicator of performance and remove non-performance related
distortions. See note 9.
c) Net debt
Net debt comprises borrowings including remeasurements for changes in fair
value of amounts in fair value hedging relationships, cross currency swaps
that are used to fix the sterling liability of foreign currency borrowings
(whether hedge accounted or not), net cash and cash equivalents, and loans to
joint ventures. See note 12.
d) Effective interest cost
The effective interest cost is calculated as net finance costs, excluding net
finance costs from pensions, plus capitalised finance costs divided by the
monthly average net debt during the year.
2023 2022
£m £m
Net finance costs 362.6 269.4
Net finance costs from pensions (3.6) (6.7)
Capitalised finance costs 56.6 34.5
415.6 297.2
Average net debt 6,720.6 6,292.2
Effective interest cost 6.2% 4.7%
This APM is used as it shows the average interest rate that is attributable to
the net debt of the business.
e) Effective cash cost of interest
The effective cash cost of interest is calculated on the same basis as the
effective interest cost except that it excludes finance costs that are not
paid in cash but are accreted to the carrying value of the debt (principally
RPI adjustments on index-linked debt).
2023 2022
£m £m
Net finance costs 362.6 269.4
Net finance costs from pensions (3.6) (6.7)
Indexation adjustments (215.7) (106.5)
Capitalised finance costs 56.6 34.5
199.9 190.7
Average net debt 6,720.6 6,292.2
Effective cash cost of interest 3.0% 3.0%
This is used as it shows the average finance cost that is paid in cash.
f) PBIT interest cover
The ratio of PBIT to net finance costs excluding net finance costs from
pensions.
2023 2022
£m £m
PBIT 508.8 506.2
Net finance costs 362.6 269.4
Net finance costs from pensions (3.6) (6.7)
Net finance costs excluding net finance costs from pensions 359.0 262.7
Ratio Ratio
PBIT interest cover ratio 1.4 1.9
This is used to show how the PBIT of the business covers the financing costs
associated only with net debt on a consistent basis. In previous years we have
reported adjusted PBIT interest cover.
g) EBITDA and EBITDA interest cover
The ratio of profit from continuing operations before interest, tax,
depreciation and amortisation to net finance costs excluding net finance costs
from pensions.
2023 2022
£m £m
PBIT 508.8 506.2
Depreciation (including right-of-use assets) 383.6 365.3
Amortisation 33.7 36.3
EBITDA 926.1 907.8
Net finance costs 362.6 269.4
Net finance costs from pensions (3.6) (6.7)
Net finance costs excluding finance costs from pensions 359.0 262.7
EBITDA interest cover ratio 2.6 3.5
This is used to show how the EBITDA of the business covers the financing costs
associated only with net debt on a consistent basis.
h) Adjusted effective current tax rate
The current tax charge for the year on continuing operations, excluding prior
year charges, and current tax on financial instruments, divided by profit from
continuing operations before tax, net losses/gains on financial instruments,
and share of net (profit)/loss of joint ventures accounted for using the
equity method.
2023 2022
Current tax thereon Current tax thereon
£m £m £m £m
Profit before tax 167.9 ‒ 274.1 ‒
Adjustments
Share of net (profit)/loss of joint venture ‒ ‒ 2.2 ‒
Net gains on financial instruments (21.7) ‒ (39.3) ‒
146.2 ‒ 237.0 ‒
Adjusted effective current tax rate 0.0% 0.0%
This APM is used to be remove distortions in the tax charge and create a
metric consistent with the calculation of adjusted earnings per share in note
9. Share of net (profit)/loss of joint ventures is excluded from the
calculation because the (profit)/loss is included after tax and so the tax on
joint venture profits is not included in the current tax charge.
i) Operational cash flow
Cash generated from operations less contributions and grants received.
2023 2022
£m £m
Cash generated from operations 753.3 891.7
Contributions and grants received (40.2) (42.8)
Operational cashflow 713.1 848.9
This APM is used to show operational cash excluding the effect of
contributions and grants received as part of capital programmes.
j) Cash capex
Cash paid to acquire property, plant and equipment and intangible fixed assets
less contributions and grants received and proceeds on disposal of property,
plant and equipment and intangible fixed assets.
2023 2022
£m £m
Purchase of property, plant and equipment 699.7 610.3
Purchase of intangible assets 40.0 36.3
Contributions and grants received (40.2) (42.8)
Proceeds on disposal of property, plant and equipment (12.9) (9.5)
Cash capex 686.6 594.3
This APM is used to show the cash impact of the Group's capital programmes.
k) Capital investment
Additions to property, plant and equipment and intangible fixed assets less
contributions and grants received, assets contributed at no cost, and
capitalised finance costs.
2023 2022
£m £m
Additions to property, plant and equipment 898.9 714.3
Additions to intangible assets 40.0 36.3
Contributions and grants received (40.2) (42.8)
Assets contributed at no cost (105.0) (69.0)
Capitalised finance costs (56.6) (34.5)
Capital investment 737.1 604.3
Includes £34.2 million (2022: £15.3 million) of provisions for future
capital expenditure arising from regulatory obligations (See note 12).
Glossary
Asset Management Plan ('AMP')
Price limit periods are sometimes known as AMP (Asset Management Plan)
periods. The period from 1 April 2020 to 31 March 2025 is known as AMP7
because it is the seventh cycle since the water industry was privatised in
1989.
C-MeX ('Customer Measure of Experience')
The Customer Measure of Experience (C-MeX) replaced the SIM as the incentive
for companies to improve the experience of residential customers from 1 April
2020 onwards.
Customer ODI ('Outcome Delivery Incentive')
A framework made up of outcomes, measures, targets and incentives which
provides companies with rewards for achieving stretching performance targets
and compensates customers if performance is below performance targets. This
was first introduced at the 2014 price review (PR14) by the regulator, Ofwat.
Final Determination ('FD')
The outcome of the price review process that sets price, investment and
services packages that customers receive.
Ofwat
The water industry's economic regulator in England & Wales.
PR19
The price review (PR) is a financial review process led by Ofwat where
wholesale price controls for water and sewage companies are set every five
years. PR19 (Price Review 2019) set wholesale price controls for water and
sewerage companies for 2020 to 2025.
Price limits
The price limits are set to enable water companies to deliver the services
required of them over the AMP period. These include allowing for capital
maintenance of assets, ensuring security of supply and meeting drinking water
and environmental quality requirements.
Regulatory Capital Value ('RCV')
The regulatory capital value is used to measure the capital base of a
company when setting price limits. The regulatory capital value represents
the initial market value of a company, including debt, plus new
capital expenditure.
RoRE
Return on Regulatory Equity (RoRE) measures the returns (after tax and
interest) that companies have earned by reference to the notional regulated
equity, where regulated equity is calculated from the RCV and notional net
debt.
Totex
Totex (shortened form of total expenditure) includes operating expenditure
(opex), infrastructure renewals expenditure (IRE) and capital expenditure
(capex).
RFI (Revenue Forecasting Incentive)
A mechanism to reduce the impact of deviations on customer bills arising from
revenue forecasting deviations by
adjusting companies' allowed revenues for each year to take account of
differences between actual and projected revenues, and incentivising companies
to avoid revenue forecasting errors through applying a penalty to variations
that fall outside a set uncertainty band (or 'revenue flexibility threshold').
Cautionary statement regarding forward-looking statements
This document contains statements that are, or may be deemed to be,
'forward-looking statements' with respect to Severn Trent's financial
condition, results of operations and business and certain of Severn Trent's
plans and objectives with respect to these items.
Forward-looking statements are sometimes, but not always, identified by their
use of a date in the future or such words as 'anticipates', 'aims', 'due',
'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends',
'plans', 'projects', 'potential', 'reasonably possible', 'targets', 'goal',
'estimates' or words with a similar meaning, and, in each case, their negative
or other variations or comparable terminology. Any forward-looking statements
in this document are based on Severn Trent's current expectations and, by
their very nature, forward-looking statements are inherently unpredictable,
speculative and involve risk and uncertainty because they relate to events and
depend on circumstances that may or may not occur in the future.
Forward-looking statements are not guarantees of future performance and no
assurances can be given that the forward-looking statements in this document
will be realised. There are a number of factors, many of which are beyond
Severn Trent's control, that could cause actual results, performance and
developments to differ materially from those expressed or implied by these
forward-looking statements. These factors include, but are not limited to: the
Principal Risks disclosed in our Annual Report and Accounts (as summarised in
this document); changes in the economies and markets in which the Group
operates; changes in the regulatory and competition frameworks in which the
Group operates; the impact of legal or other proceedings against or which
affect the Group; and changes in interest and exchange rates.
All written or verbal forward-looking statements, made in this document or
made subsequently, which are attributable to Severn Trent or any other member
of the Group or persons acting on their behalf are expressly qualified in
their entirety by the factors referred to above. No assurances can be given
that the forward-looking statements in this document will be realised. This
document speaks as at the date of publication. Save as required by
applicable laws and regulations, Severn Trent does not intend to update any
forward-looking statements and does not undertake any obligation to do so.
Past performance of securities of Severn Trent Plc cannot be relied upon as
a guide to the future performance of securities of Severn Trent Plc.
Nothing in this document should be regarded as a profits forecast.
This document is not an offer to sell, exchange or transfer any securities of
Severn Trent Plc or any of its subsidiaries and is not soliciting an offer to
purchase, exchange or transfer such securities in any jurisdiction. Securities
may not be offered, sold or transferred in the United States absent
registration or an applicable exemption from the registration requirements of
the US Securities Act of 1933 (as amended).
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR SEFESDEDSELIRecent news on Severn Trent
See all newsREG - Severn Trent PLC - Total Voting Rights
AnnouncementREG - Severn Trent PLC Severn Trent Utlties - Publication of a Supplementary Prospectus
AnnouncementREG - Severn Trent PLC - Total Voting Rights
AnnouncementREG - Severn Trent PLC - Severn Trent Plc Trading Update
AnnouncementREG - Severn Trent PLC - Director/PDMR Shareholding
Announcement