24th May 2016 13:37
LONDON (Alliance News) - Severn Trent PLC reported better-than-expected results on Tuesday after its pretax profit more than doubled and its earnings beat consensus figures as the company demonstrated it has made a good start to the current regulatory period and provided positive guidance.
However, it was not all good news for shareholders as the dividend for the year was cut by 5.0%, but that was expected and in line with guidance.
The water and wastewater firm said underlying operating profit, which excludes exceptional items, was down 3.2% in the year to GBP522.8 million from GBP540.3 million the year before but came in ahead of analyst expectations by over 2.0%.
The underlying pretax profit amounted to GBP313.6 million, 4.4% higher than the GBP300.4 million booked last year and underlying earnings per share rose 1.4% to 108.7 pence from 107.2 pence whilst reported EPS shot up to 139.8 pence from only 49.9 pence.
Once exceptional items are taken into account, Severn Trent's pretax profit before interest and tax rose by 0.4% to GBP523.8 million from GBP521.6 million, but the pretax profit soared by more than doubling in the year to GBP322.3 million from GBP148.2 million.
Those results trickled down from the revenue in the year of GBP1.78 billion, which was down 0.8% from the GBP1.80 billion generated in the previous year due to lower regulated revenues following the agreed price reduction for the current regulatory period running from 2015 to 2020.
The major difference between Severn Trent's underlying results and its reported results are driven by lower net finance costs of USD209.3 million compared to GBP240.0 million last year and a gain from its exposure to floating rates on its debt.
Those finance costs have declined after Severn Trent decided at the end of last year to increase its exposure to floating rates, lower costs achieved on new floating rate debt and lower finance costs on its index linked debt as a result of lower inflation in the year.
That resulted in the company's effective tax rate to fall to 4.5% from 5.4% and the cost of interest to drop to 4.2% from 4.9%.
Those instruments produced a GBP53.8 million gain in the year compared to a GBP183.4 million charge in the previous year.
Severn Trent cut its dividend by 5.0% to 80.66 pence from 84.90p the year before despite the positive results, but the cut was in line with company policy and expected following the 5.0% cut to the interim dividend earlier this year.
Severn Trent said the dividend for the current financial year will be 81.5p, higher than the dividend for financial 2016 but still lower than the one paid in financial 2015.
The UK water market operates within regulatory periods managed by the regulator Ofwat that last for five years each. AMP6, the sixth asset management plan, kicked in during April 2015 and will run until 2020 and Severn Trent demonstrated it has made a good start.
The AMP is a tactical plan used to manage water companies' infrastructure and other assets to deliver an agreed standard of service to ensure vital infrastructure and assets are upgraded and maintained whilst attempting to improve efficiencies and lower operating and capital costs to try to bring bills down for customers whilst improving the service they receive.
On the operational front, Severn Trent said it offered the "lowest combined average bills" of any water company in the UK during the year of GBP329 per annum, which was flat from last year. The company also managed to bring customer complaints down by 28% and double the amount of vulnerable customers that it supported.
AMP's have been focused on upgrading ageing infrastructure since being launched in 1990 but plans are now more focused on delivering better value for money for consumers and getting the most out of existing assets. Alongside AMPs, water companies also follow price controls that are set by Ofwat that run concurrently with the AMP periods.
"Putting our customers at the heart of our business has led to a promising start to the current regulatory period," said Chief Executive Liv Garfield.
"We continue to drive down costs and have the lowest combined bills in Britain, with our customers paying on average less than a pound a day for their water and waste water services. Further efficiencies are also allowing us to invest even more for the long-term benefit of our customers and shareholders," she added.
Severn Trent said it has started delivering its levers of outperformance during the year after booking a GBP23.2 million net reward from outcome delivery incentives (ODIs), way above its guidance of GBP15.0 million, which in turn was increased from an original target of only GBP10.0 million.
ODIs are put in place to encourage water companies to deliver performance improvements and dictates whether a company should be rewarded for over-delivering in this area whilst also fining companies that fail to meet minimum standards.
Severn Trent said it is also expecting GBP670.0 million of total expenditure efficiencies across the whole regulatory period running to 2020, equating to GBP260.0 million outperformance. Importantly, Severn Trent said half of that, GBP120.0 million, will be reinvested back into its assets and operations for the benefit of its customers.
Investment in renewable energy is also advancing, with Severn Trent planning to invest a total of GBP190.0 million over the course of AMP6. The company said it increased renewable energy generation by 17% in the year, using it to power the business, and the company now generates enough total power to meet a third of its overall demand.
Severn Trent plans to be generating half of its total power needs from renewable energy by the end of AMP6 in 2020.
Looking at the current financial year, Severn Trent said it expects revenue from the main regulated water and wastewater business to be in the range of GBP1.50 to GBP1.54 billion, meaning there is potential for that to rise from the GBP1.51 billion generated in the recently ended financial year.
Operating cost within that segment are also expected to be lower than the GBP581.0 million booked during the year. Net expenditure on infrastructure renewal will rise to GBP130.0 to GBP155.0 million from the GBP126.0 million spent in the 2016 financial year.
The net reward from ODIs from the unit is expected to be GBP15.0 million this year, but shareholders may mull the potential for this to be higher following Severn Trent's ODI performance.
Wholesale total expenditure within the regulated business totalled GBP1.02 billion in the year, and that will rise to a range of GBP1.11 to GBP1.13 billion this year.
The business services division reported revenue of GBP277.0 million in the year and profit before interest and tax of GBP27.0 million, and both are expected to grow this year.
Severn Trent shares were up 2.9% to 2,278.0 pence per share on Tuesday afternoon.
By Joshua Warner; [email protected]; @JoshAlliance
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