6th Jun 2006 07:00
6 June 2006Severn Trent PlcPreliminary Results for the year to 31 March 2006 ENCOURAGING GROUP RESULTS, NEW STRATEGY, DIVIDEND RAISED, INTENTION TO RETURN CAPITAL HighlightsGroup strategy - Group to focus on Water - Biffa UK to be demerged by end of October - Group to increase gearing to 60% of Regulated Capital Value - Return of capital to shareholders post demerger - New policy to grow dividends by 3% above RPI inflation to 2010 Group results 2006 2005 Increase ‚£m ‚£m % Group turnover 2,295.0 2,014.4 13.9 Group operating profit* 488.2 398.8 22.4 Net exceptional charges (see Note 4) (15.7) (2.3) Group operating profit 472.5 396.5 19.2 Net interest costs (before IAS39 fair value adjustments) 167.9 169.5 (1.0)Profit before tax 270.0 228.8 18.0 Adjusted basic EPS**(pence) 77.2 56.1 37.6 Basic EPS 63.9 45.7 39.8 Total dividends declared 51.13 48.51 5.4 Net debt 2,961.1 2,894.6 2.3 Water and sewerage - Turnover up 13.4% to ‚£1,150.9 million (‚£1,015.1 million) - PBIT* up 30.2% to ‚£400.4 million (‚£307.5 million); PBIT of ‚£395.6 million (‚£304.7 million) - Expenditure on the regulatory capital base totalled ‚£400 million (‚£396 million), comprising ‚£95 million (‚£77 million) infrastructure renewals and capital expenditure ‚£305 million (‚£319 million). Biffa - Turnover up 13.2% to ‚£712.3 million (‚£629.5 million) benefiting from a 53 week period. - Turnover from Collection up 14.8%, Landfill up 14.3%, Special Waste up 5.1% and Power Generation up 32.2% - PBIT* and PBIT up 13.1% to ‚£89.2 million (‚£78.9 million); * from continuing operations and excluding exceptional items (see Note 3)** from continuing operations and excluding exceptional items, IAS39 fair valueadjustments and deferred tax (see Note 8)Sir John Egan, Chairman Severn Trent Plc, said:"We have delivered an encouraging performance in a year of significant change,demonstrating that overall our businesses are in good shape."After the proposed demerger of Biffa by the end of October, we believe thenewly focused water business will be in a better position to deliver realgrowth in dividends. Our new policy will be to increase dividends by 3% aboveinflation up to the end of AMP4 in 2010."Colin Matthews, Group Chief Executive Severn Trent Plc, said:"We are reporting today on a year of change. We have completed the building ofthe new leadership team, a precursor for implementing the new strategy."Our operational review has been thorough and produced results. Severn TrentWater is on track to deliver good performance through the AMP4 period and Biffahas re-ignited profitable organic growth."We intend to create value through a strategy that will focus on water. Weexpect to demerge Biffa by the end of October, increase gearing and returncapital to shareholders. We firmly believe our new strategy will benefitcustomers. By concentrating our efforts on raising standards across water,customers will receive the benefits of reliable, high quality and costeffective services for clean water and sewerage."Enquiries:Colin Matthews Severn Trent Plc 020 7353 4200 (on the day) Group Chief Executive 0121 722 4947 Mike McKeon Severn Trent Plc 020 7353 4200 (on the day) Group Finance Director 0121 722 4267 Peter Gavan Severn Trent Plc 020 7353 4200 (on the day) Director of Corporate Affairs 0121 722 4310 Jonathan Davies Severn Trent Plc 020 7353 4200 (on the day) Head of Investor Relations 0121 722 4295 Andrew Grant Tulchan 020 7353 4200 David Trenchard Communications Preliminary Results Presentation and WebcastThere will be a preliminary results presentation at 9.30am on Tuesday 6 June2006. This presentation, together with the presentation slides, will beavailable as a simultaneous webcast on the Severn Trent web site(www.severntrent.com) and will remain on the web site for subsequent viewing.Group Chief Executive's ReviewNew Group StrategyThe Board has reviewed group strategy and today announces that Severn Trentwill focus on water. We believe that our new strategy will benefit customers,employees and shareholders.Focus on WaterSevern Trent is one of the country's largest Water and Sewerage companies. Thecompany has great experience and great strengths, along with important plansfor improvement. By concentrating our efforts on raising standards across theentire business, customers will receive the benefits of reliable, high qualityand cost effective services for clean water and sewerage.In addition these strategic changes, particularly the demerger of Biffa, willsupport a more efficient balance sheet allowing a return of capital toshareholders. We intend to increase group debt to 60% of regulated capitalvalue as soon as practicable after the demerger. The amount, mechanism andtiming of any returns will be communicated in due course and will depend onfuture decisions around the debt structure of the demerged Biffa, pension fundcontributions and final costs of the demerger.Moreover, these improvements should lead to strong financial returns. Webelieve the group will be able deliver enhanced growth in dividends, and ournew policy will therefore be to increase dividends by 3% above RPI inflationthrough the remainder of the current AMP4 period, that is until 2010.BiffaThe most significant transaction required to achieve this group transformationis the demerger of Biffa, which was separately announced on 4 April 2006. Biffais itself a leading business in an attractive market, and we believe thatgreater shareholder value will be realised by the creation of a separatelylisted company, focusing all its attention on developing the waste managementbusiness.In 2005/06, organic growth within Biffa has been re-ignited and we believe theprospects for the business are strong. We have recently announced Bob Davies asthe new Chairman for Biffa and we expect the demerger to be completed by theend of October 2006. We will provide further details in due course.Other BusinessesIn line with our decision to focus on water, we are also announcing today thatUS Laboratories is no longer regarded as being a core business for the future.US Laboratories is a strong, market leading company engaged in environmentaltesting. The long term prospects for market growth are good, although the last2 years have been challenging. We are confident that the firm actions alreadyin hand will lead to a recovery in margins, and when we see these results havebeen achieved we will consider the appropriate actions to realise shareholdervalue.The group announced on 12 May that Biffa Belgium has been sold to Veolia for ¢â€š¬45 million. Completion of this sale is expected by the end of June subject toBelgian competition clearance.On 2 June 2006 the group signed heads of terms to sell its interest in AquafinNV to the Flemish Government for approximately ‚£30 million. The sale isexpected to be completed in July 2006.Certain other smaller activities have either already been closed to newbusiness (Haswells), sold (Aseriti), or are being prepared for sale (SevernTrent Property).Being closely associated with water, UK Laboratories and Water Purification andOperating Services will remain part of the group. Together these businessesaccount for some 3% of group profit.Group PerformanceIn this Preliminary Results announcement: PBIT is profit from continuingoperations before interest and tax (Operating profit); PBIT* is PBIT excludingexceptional items as set out in Note 3.Overall, the Severn Trent Group has delivered an encouraging performance in2005/06, with Group profit from continuing operations before tax, IAS39 fairvalue adjustments and exceptional items at ‚£322.4m, an increase of 39.5%. Groupprofit from continuing operations before tax was ‚£270.0 million (‚£228.8million) an increase of 18.0%.Severn Trent Water's PBIT* was up 30.2% to ‚£400.4 million after providing ‚£10.6million for credits to customers arising from the Ofwat interim report onallegations made against Severn Trent Water in 2004. In the UK, Biffa producedstrong organic growth with PBIT up 13.1% to ‚£89.2 million (up 11% on a 52 weekbasis). Laboratories' PBIT was down 27.0% to ‚£11.1 million reflecting thecontinuing difficult conditions in the US although in the UK the business hascontinued to perform satisfactorily. Water Purification and Operating Services'PBIT* was up 34.8% to ‚£12.0 million benefiting from the first year of the UKMoD contract. The actions initiated in the previous year to close or dispose ofthe Haswell and Aseriti businesses continued and the costs of these actions,along with lower profits in the Property business, resulted in Other Businessesincurring a PBIT* loss of ‚£3.5 million, (profit of ‚£7.0 million).There was a net exceptional charge of ‚£15.7 million in the year (‚£2.3 million),representing net restructuring and redundancy costs of ‚£7.9 million in SevernTrent Water and Other Businesses; and demerger and related costs to date of ‚£7.8 million in Severn Trent Plc.DividendThe Board is proposing a final dividend of 31.97p (30.30p) an increase of 3.1%in real terms, payable on 2 August to shareholders on the register at 30 June.This would give a total dividend for the year of 51.13p, an increase in realterms of 3%.The Board intends that at the time of the demerger, the dividend per share forthe remaining Severn Trent group will be based on the 51.13p dividend per sharedeclared in 2005/06, less an amount equivalent to the dividend per share whichBiffa would have paid if it had been an independent company in that year.The Board is also announcing with respect to the ongoing Severn Trent groupthat it intends to adopt a new policy to increase dividends by 3% above RPIinflation through the remainder of the current AMP4 period, that is until 2010.OutlookPerformance at our principal business, Severn Trent Water, has been good in thefirst year of AMP4, with operating costs reduced to within ‚£4 million of theOfwat determination. The outlook for the coming year is for continuing progressin meeting and improving on the AMP4 contract for operating costs across mostareas of performance, with an additional ‚£5 million to ‚£10 million of savingsidentified.However, the industry faces a significant challenge with rising energy prices.At present, the outlook for energy prices in 2006/7 means that increased costsin this area are expected to impact Severn Trent Water by around ‚£25 million.The business is continuing to make every effort to improve on this situation,including reducing energy usage.In relation to capital expenditure, we have made an encouraging start to theAMP4 contract, generating around 6% efficiency over the Ofwat determination. Itis still early days, but we aim to maintain similar levels of efficiency overthe remaining AMP4 period.Operational ReviewWater and sewerageSevern Trent Water met its financial targets for 2005/06. Turnover increased by13.4% to ‚£1,150.9 million. The allowed increase in charges for 2005/06,including inflation, was 15.2%.PBIT* was up 30.2% to ‚£400.4 million. This was after a provision for ‚£10.6million, the expected cost relating to 2005/06 and prior years of the agreementmade with Ofwat to credit each customer account during 2006/07, following theregulator's interim report of 7 March 2006 into allegations of false reporting.In 2005/06 Severn Trent Water began the first year of the AMP4 contract, whichcovers the period 2005-10. Ofwat has set exacting efficiency targets for thisperiod, and during the year Severn Trent Water began to implement theorganisational changes necessary to achieve them.Progress was good. Severn Trent Water reduced employee numbers; removedmanagement layers improving information flow; reviewed and consolidated officeaccommodation enhancing overhead control; and began a programme to streamlineprocurement processes. The last of these measures involves establishinglong-term relationships with a reduced number of suppliers, incentivising themto make continuous improvements, and standardising designs where possible. As aresult of these actions Severn Trent Water's operating expenditure is now,after the first year ahead of plan, and less than ‚£4 million from the Ofwatdetermination.However, in common with the rest of the industry, Severn Trent Water faces asignificant challenge with rising energy prices. This did not impactperformance in 2005/06 as Severn Trent Water energy contracts were mostlyfixed. Severn Trent Water is on track to improve energy efficiency and thus buyless electricity this year. Nevertheless, energy price increases are likely toraise costs by approximately ‚£25 million in 2006/07. Severn Trent Water willcontinue efforts to improve efficiency and outperform the Ofwat determinationin other areas to compensate for the increase in energy cost, and hasidentified savings of some ‚£5 million to ‚£10 million to date.The Severn Trent Water AMP 4 contract for 2005-10 includes a capital investmentprogramme of approximately ‚£2.6 billion. This includes: - more than ‚£400 million on maintaining water supplies - ‚£150 million on improving drinking water quality - around ‚£850 million on maintaining and improving river quality - more than ‚£350 million improving sewers and dealing with sewer flooding. The Severn Trent Water focus in the first year was to implement the newprocurement and supply chain processes that will be used in the programme, andto mobilise the first of the 900 projects that it is due to manage. Net capitalexpenditure, excluding spending on infrastructure maintenance of ‚£95 million,was ‚£305 million for the year. Adjusting for the changes to the program, to beagreed with Ofwat through the change control process, and for timingdifferences, we have generated approximately 6% efficiencies over and above thedetermination. This was largely driven by the use of better technologies,better designs and greater efficiencies. It is still early days in AMP4, butSevern Trent Water aims to maintain similar out-performance over the rest ofAMP4.A dry summer, followed by a winter with short but severe cold periods creatingground movement, has driven higher volumes of bursts over the winter periodresulting in 2005/6 being a challenging year for leakage management. Reportedactual leakage has increased by approximately 17Mld, 3% greater than 2004/5. Arecovery plan has been in place for several months to drive down work backlogsand reduce repair times. Already a leakage reduction of around 20Mld has beenrecorded in April. Severn Trent Water is confident that these plans willdeliver the AMP 4 leakage targets.Despite the dry summer, Severn Trent Water maintained water supply to itscustomers across the whole of its region, and did not need to impose hosepipebans. Reservoirs are currently over 97% full. Severn Trent Water does notenvisage introducing any special measures for customers over this summerperiod. Severn Trent Water continued to promote water efficiency among domesticand business customers. Since evidence suggests that dry years are likely tobecome more frequent, the AMP4 programme includes measures to improve securityof water supply, and to make sure that Severn Trent Water has sufficient waterresources to meet customers' foreseeable future needs.In March 2006, the Ofwat interim report into allegations of false reportingfound that Severn Trent Water had overcharged its customers during 2004/05 andhad set prices too high for 2005-2010. Immediately following the report, weapologised unreservedly to all our customers. Severn Trent Water had alreadyvoluntarily proposed to reduce the Ofwat allowed price increases by ‚£7m, and onreceipt of the report, agreed with Ofwat a mechanism for rebating to customersall remaining amounts as quickly as possibleAt the end of February 2006, Severn Trent Water also began an investigationinto misreporting of customer relations data to Ofwat. The data concerns thehandling of customer billing queries and telephone contacts over several years.Severn Trent Water has kept Ofwat fully informed on the progress of theinvestigation.In 2005/06 Severn Trent Water made a good start to AMP4. Although it is tooearly, after just one year of the five-year period, to forecast its eventualperformance on the contract, Severn Trent Water is confident about its abilityto control operating costs, though rising energy prices present a significantchallenge today. Furthermore Severn Trent Water is confident on delivery of thefive-year capital programme. Severn Trent Water believes it is on track todeliver the AMP programme and meet its regulatory obligations.Waste managementBiffa UK achieved another good performance in 2005/06. Turnover was ‚£712.3million, an increase of 13.2%, (11% on a 52 week basis) on the previous year.PBIT was also 13.1%, (11% on a 52 week basis) higher than 2004/05, at ‚£89.2million.Biffa Belgium, the sale of which was announced on 12 May 2006, was classifiedas a discontinued operation, and incurred a loss of ‚£4.3 million (profit of ‚£0.8 million)Gross turnover in the Collection division was ‚£429.0 million, up 14.8%. PBITwas ‚£60.1 million, up 16.5%. Industrial and commercial margins remained firm,and absorbed cost increases arising from the Road Transport Directive, whichcame into force in 2005. This restricted the number of hours that drivers canwork, and led Biffa UK to renegotiate pay structures with its drivers.The industrial/commercial collection business grew strongly in 2005/06, and thedivision won a number of new national accounts with well-known high-streetnames including Sainsbury's, Dixons and Boots. Biffa UK's ability to providebespoke recycling services was instrumental in several of these contract wins.There were also new contract wins in the municipal sector. Biffa UK won arecycling contract for 56,000 properties in Bridgend, Wales; and a three-yearcontract with Vale of Glamorgan, covering the managing and processing ofrecycling materials and servicing `bring banks'. Biffa UK's contract with SouthStaffordshire was extended for a further six years.In the municipal business, Biffa UK worked with its local authority customersto help them meet their targets on value, efficiency and recycling. Forexample, in Burnley, Mole Valley, South Shropshire, South Staffordshire andWoking, this took the form of introducing alternate weekly and fortnightlycollections incorporating green waste and dry waste collection services.Gross turnover in the Landfill division was up 14.3% to ‚£302.8 million. PBITwas up 2.8% to ‚£40.8 million. Government targets on diversion from landfill arereducing the amount of waste going to landfill, and landfill volumes were down8.2% in 2005/06. However, the lower volumes were compensated by higher unitrevenues from landfill.The Landfill division continued to take advantage of new market opportunitiesin 2005/06. In 2004/05 Biffa UK formed a strategic alliance with Biogenie SiteRemediation to remove and treat contaminated soil from brownfield constructionsites. Following that alliance, Biffa opened its first soil facility at Risley,Warrington in November 2005, and it plans to open two further facilities in thesouth-east of England. Initial tonnages at Risley were encouraging. Inaddition, Biffa UK's composting sites accepted approximately 47,000 tonnes ofgreen waste.Biffa UK won its first significant landfill contract in Northern Ireland inearly 2006. The new Cottonmount II landfill site will receive over 700,000tonnes of waste over an initial 29-month period from the Arc21 partnership, agroup of 11 Northern Irish councils. It also won a four-year disposal contractwith Warwickshire County Council.Biffa UK's Special Waste division provides a range of services and technologiesfor managing hazardous and special waste. They include packaged waste services,like Backtrack and Hazpak; Integrated Waste Management (IWM) contracts; and theSecure Waste and Recycling Facility (SWaRF). Gross turnover in Special Wastewas up 5.1% in 2005/06, to ‚£49.2 million. PBIT was ‚£1.9 million, up 18.8%.One of the biggest changes affecting the Special Waste division during the yearwas the entry into force of the EU Hazardous Waste Regulations in July 2005. Asa result of the legislation, many companies had to register as hazardous wasteproducers for the first time, and Biffa UK's Special Waste division set up ahelpline and registration service to assist them.Gross turnover from the Power Generation division was up 32.2% to ‚£18.9 millionand PBIT was up 47.1% to ‚£7.5 million. The division, which uses landfill gas togenerate electricity, is a significant provider of renewable energy in the UK.Our site at Brookhurst Wood benefited from additional revenue and profitfollowing satisfactory resolutions of the discussions with Ofgem. These enabledthe company to retrospectively claim Renewable Obligation Certificates (ROC's)on past exports from this site. During 2005/06 it added new power generationcapacity at a number of sites, bringing total generation capacity up to 108MW,compared with 101MW at March 2005.LaboratoriesSevern Trent Laboratories provides environmental testing services in the US andthe UK. Turnover increased by 2.7% to ‚£167.0 million but PBIT was down 27.0% to‚£11.1 million. Around 81% of Severn Trent Laboratories turnover derives fromthe US.In the US, market conditions were again very difficult in 2005/06. Federalfunding for environmental projects was impacted by the continued rise in thefederal deficit as well as the diversion of funds to military activitiesoutside of the US. Budget deficits at the state level also reducedenvironmental spending, and there were no major legislative developments tostimulate new areas of testing. In addition, the worst hurricane season onrecord also took many environmental consulting clients away from their normalscope of work to engage in hurricane relief and repair efforts. As a result ofthese events, demand was very soft in the US and resulting pricing pressuresdrove down margins.Turnover in the US increased by 1.6% to ‚£134.7 million, but PBIT was down 43.3%to ‚£5.9 million. Severn Trent Laboratories US business is a strong marketleading organisation and has taken clear actions to improve the business toface these challenging market conditions and to support its long term growth. Aprogramme of cost reductions started in 2005/06 benefiting 2006/07 and beyond.Severn Trent Laboratories will continue to provide service excellence to itscustomers. High quality, responsive service and reliable data will increaseclient loyalty and help combat price erosion. Coupled with tight cost controlsand continued operating efficiency improvements, Severn Trent Laboratories willwork to improve margins.In the UK, market conditions were more favourable. Turnover was up by 7.7% to ‚£32.3 million and PBIT was up by 8.3% to ‚£5.2 million. The UK business isstrongly focussed on the testing of samples from UK water companies, includingSevern Trent Water.Water Purification and Operating ServicesTurnover in Water Purification and Operating Services was up by 28.7% to ‚£267.8million. Around 61% of that arose in the US. PBIT* increased to ‚£12.0 million,a rise of 34.8%. The impact of changes in exchange rates was immaterial. Bothdivisions, Water Purification and Operating Services, produced good results in2005/06, increasing turnover and profits.The Water Purification division's turnover rose by 14.6% in 2005/06 to ‚£104.1million. PBIT* was up 11.2% to ‚£8.1 million. These figures now include turnoverand profit from the Metering Services business, formerly part of the OperatingServices division. Metering Services performed well. Two trends made a majorcontribution to this: rising demand in the UK for domestic meter installation;and large contracts in Abu Dhabi and Qatar to supply SmartMeterTM domesticmeters.Performance in the other businesses within the Water Purification division wasslightly down on the previous year although they had some successes, inparticular the filtration and electro-chlorination business. Arsenic removal isa growing market for Water Purification , and its partnership with Lanxess onSORB 33‚® arsenic removal technology and Bayoxide‚® E33 arsenic removal mediagives it a strong market position. It expects to see further opportunities inarsenic removal, not just in existing markets in the US and Europe, but in newmarkets like India.Operating Services comprises the Contract Operations business, which carriesout operating and maintenance contracts in the US; the Pipeline Servicesbusiness; and Severn Trent Water International (STWI), which providesmanagement and consultancy services in Europe and the developing world.Turnover in Operating Services was up 39.7% to ‚£163.8 million. PBIT* was up67.2% to ‚£7.3 million. These figures include Coast to Coast Water (C2C), the25-year, ‚£1 billion PFI contract with the UK Ministry of Defence, whichcommenced on 30 March 2005. On 2 June 2006 the group signed heads of terms tosell its interest in Aquafin NV to the Flemish Government for approximately ‚£30million. The sale is expected to be completed in July 2006.The Contract Operations business, based in the US, saw some significantcontract wins and extensions. Contract Operations continues to benefit frommarket conditions in the US, where tight fiscal constraints mean that statesand municipalities are looking to outsourcing and public-private partnershipsolutions for improving operational performance.Other Businesses: IT Systems, Property, Engineering Consultancy and InsuranceThe group has continued to rationalise its other activities. The termination ofexternal sales out of the UK IT Systems business, which was announced in lastyear's preliminary announcement, was completed and this business is nowrefocused entirely to provide support to internal group companies. The group'sremaining Systems businesses were sold to Logica in February 2006. The group'sEngineering Consultancy business, Haswell has ceased taking on new externalbusiness but will complete existing contracts. Its expertise has beentransferred to Severn Trent Water to support that company's capital programme.Other Businesses' turnover was down 31.2% to ‚£59.7 million (‚£86.8 million).They incurred a loss before interest tax and exceptional items of ‚£3.5 million(profit of ‚£7.0 million). There were no significant profits or losses fromproperty transactions in 2005/06. After exceptional restructuring costs of ‚£3.1million (‚£3.8 million) Other Businesses incurred a loss before interest and taxof ‚£6.6 million (profit of ‚£3.2million).Financial ReviewGroup ResultsGroup turnover from continuing operations was ‚£2,295.0 million (‚£2,014.4million), an increase of 13.9% over last year. The growth in turnover wasmainly due to the price increases in Severn Trent Water; strong growth inLandfill and Collection at Biffa UK and the new Ministry of Defence contract inOperating Services, partially offset by the reduction in activity in the OtherBusinesses.Group profit from continuing operations before interest, tax, and exceptionalitems was up 22.4% to ‚£488.2 million (‚£398.8 million). There was a netexceptional charge of ‚£15.7 million (‚£2.3 million) - see below. Group profitfrom continuing operations before interest and tax was ‚£472.5 million (‚£396.5million).After net interest charges of ‚£167.9 million (‚£169.5 million) and share ofresults of associates and joint ventures of ‚£2.1 million (‚£1.8 million), Groupprofit from continuing operations before tax, exceptional items and IAS 39 fairvalue adjustments was up 39.5% to ‚£322.4 million (‚£231.1 million). Group profitfrom continuing operations before tax was ‚£270.0 million (‚£228.8 million).The total tax charge for the year was ‚£42.7 million (‚£71.5 million) of whichcurrent tax represented ‚£48.7 million (‚£37.9 million) and deferred tax was acredit of ‚£6.0 million (charge of ‚£33.6 million). Profit for the period fromcontinuing operations was ‚£227.3 million (‚£157.3 million).Basic earnings per share from continuing operations were 65.2 pence (45.4pence). Adjusted basic earnings per share (before exceptional items, IAS 39fair value adjustments and deferred tax) were 77.2 pence (56.1 pence), anincrease of 37.6%.Biffa Belgium, the sale of which was announced on 12 May 2006, was classifiedas a discontinued operation. It incurred a loss after tax of ‚£4.3 million(profit of ‚£0.8 million).Cash flow 2006 2005 ‚£m ‚£m Cash generated from operations 758.9 623.3 Net capital expenditure (395.9) (406.4)Net interest paid (180.1) (151.1)Tax paid (68.3) (36.5)Other cash flows (0.2) 2.5-------------------------------------------------------------Free cash flow 114.4 31.8Dividends (234.3) (162.0)Acquisitions and disposals 1.3 3.4 Issue of shares 11.6 1.4 -------------------------------------------------------------Change in net debt from cash flows (107.0) (125.4)-------------------------------------------------------------Cash generated from operations was ‚£758.9 million (‚£623.3 million). Capitalexpenditure net of grants and proceeds of sales of fixed assets was ‚£395.9million ‚£(406.4 million) including capital expenditure in Severn Trent Water of‚£305.3 million (‚£319.1 million). Net interest paid increased to ‚£180.1 million (‚£151.1 million) due to additional payments of interest on finance leases. Taxpayments increased as a result of the higher underlying effective rate of tax.The acceleration of dividend payments, to realign payment dates toshareholders, resulted in an additional cash payment of ‚£66.5 million during2005/06.Net debt at 31 March 2006 was ‚£2,961.1 million (‚£2,894.6 million). Year endbalance sheet gearing is 60.9% (61.0%), and the group net debt to RegulatedCapital Value (RCV) was 57.4% (57.7%). The group's net interest charge,excluding IAS 39 fair value adjustments, was covered 4.6 times (4.0 times) byprofit before interest, tax, depreciation and exceptional items, and 2.9 times(2.4 times) by PBIT before exceptional items.Exceptional itemsThere was an exceptional charge in the year of ‚£15.7 million, which comprised: - A net charge of ‚£7.9 million for restructuring costs, including ‚£4.8 million in Water and Sewerage and ‚£3.1 million in Other Businesses; and - Demerger and related costs to date of ‚£7.8 million in Corporate. In 2004/05 there was a net exceptional charge of ‚£2.3 million which comprised: - A charge of ‚£10.4 million relating to restructuring costs in Water and Sewerage; - A charge of ‚£3.8 million, resulting from the closure of Systems' US CIS business and the termination of external sales from Systems' UK IT Services business and Engineering consultancy; - A ‚£4.3 million credit from the disposal of Water Purification and Operating Services' investment in an associated company in Portugal; and - A ‚£7.6 million credit from the profit on sale of fixed assets in Water and Sewerage. TaxationThe charge for current tax on continuing operations was ‚£48.7 million (‚£37.9million). The current tax charge has benefited from a release of ‚£39.1 millioncharged in prior years following the agreement of the corporation taxcomputations for years up to and including 2002/03 (2004/05: release of ‚£11.5million).The effective rate of current tax, excluding the prior year credits, calculatedon profit before tax, exceptional items and IAS 39 fair value adjustments was28.7% (21.0%). Tax Bulletin 53, which changes the tax treatment of deferredrevenue expenditure in Severn Trent Water increased the effective rate ofcurrent tax by approximately 3.4% and permanent differences increased theeffective rate by a further 6.4%. These impacts were partially offset by lumpsum pension contributions, which reduced the effective rate of current tax inthe year by 4.5%.Going forward we would expect the effective current tax rate for 2006/7, andbased on the current group structure, to be in the range of 30% to 35%. Theplanned demerger of Biffa, along with other announced changes will impact thisexpectation and more information will be forthcoming in due course.Accounting policiesThese are the first full year results the Group has reported underInternational Financial Reporting Standards (IFRS). The impact of IFRS on theGroup's results and balance sheet were set out in a presentation on 19September 2005, which is available on the group's website(www.severntrent.com). The Group has taken advantage of the exemption availablein IAS 32 and IAS 39 not to restate comparative information for the impact ofthose standards. The opening reserves at 1 April 2005 have been restated toreflect the impact of adopting IAS 32 and IAS 39.PensionsThe group has four defined benefit pension schemes, of which the Severn TrentPension Scheme (STPS) is by far the largest. Formal actuarial valuations wereundertaken for the STPS and another scheme, the Severn Trent Senior StaffPension Scheme, as at 31 March 2004.On an IAS19 basis, the estimated net position (before deferred tax) of all ofthe group's defined benefit pension schemes and the group's unfunded pensionliabilities for senior staff was a deficit of ‚£221.9 million as at 31 March2006. This compares to a deficit of ‚£317.5 million as at 31 March 2005. Thereduction in the deficit arose because the increase in assets, from higher thanexpected investment returns and increased contributions, exceeded the increasein liabilities from a reduction in the discount rate. Total cash contributionsto the schemes in the year was ‚£105.2 million (‚£62.3 million). This included anadditional payment of ‚£44.4 million in the year.The key actuarial assumptions were: 2006 2005 Discount rate 4.9% 5.5%Inflation 2.7% 2.75%Expected return on equities 8.0% 8.25%Life expectancy at age 65* Men 18.9 years 18.9 years Women 21.8 years 21.8 years*for future pensionersNet of deferred tax, the estimated net deficit on an IAS19 basis as at 31 March2006 was approximately ‚£155 million. On an IAS19 basis, the funding level hasimproved from around 77% at 31 March 2005 to around 86% at 31 March 2006.As at 31 March 2006 the Group's defined benefit pension schemes had totalassets of approximately ‚£1,403 million, of which around 65% was invested inequities.Treasury managementThe group's policy for the management of interest rate risk requires that noless than 50% of the group's borrowings should be at fixed interest rates, orhedged through the use of interest rate swaps or forward rate agreements. At 31March 2006, interest rates for some 72% of the group's net debt of ‚£2,961million were so fixed, at a weighted average interest rate of 5.7% for aweighted average period of 14.6 years.Exchange ratesApproximately 2% of the Group's PBIT* and 4% of its net operating assets aredenominated in US Dollars Approximately 0.5% of its PBIT* and 1% of its netoperating assets are denominated in Euros. The trading results of overseassubsidiaries are translated to sterling at the average rate of exchange rulingduring the year and their net assets are translated at the closing rate on thebalance sheet date.Regulatory mattersIn May 2004 an employee of Severn Trent Water raised a number of allegationsrelating, in particular, to alleged accounting inaccuracies and regulatoryreturns in 2004 or before.On 31 October 2005, as a result of a referral by Ofwat, the Serious FraudOffice (SFO) informed the Company that it was undertaking a criminalinvestigation into alleged reporting irregularities made to Ofwat by SevernTrent Water Limited between 2000 and 2003.Ofwat had been conducting its own investigation following the allegations madeby the employee of Severn Trent Water. Ofwat began its investigation into theallegations in January 2005. The matter reported to the SFO concerned data onleakage.On 7 March 2006 Ofwat published its interim report concerning the allegationsof false reporting made against Severn Trent Water in 2004.The Company's internal investigation and Ofwat's investigation were thoroughand lengthy, requiring complex judgements. Severn Trent's judgements have notbeen identical to Ofwat's in every aspect, but in the interests of makingamends as soon as possible, the Board believed it was sensible to proceed byagreement.Having considered Ofwat's findings, the Board of Severn Trent Plc agreed thatcustomer accounts should be credited as soon as possible. In 2006/07, onaverage, this credit will be around ‚£4 per customer in addition to the ‚£2 to ‚£3already rebated. In the following three years the reduction in bills will be ‚£2to ‚£3 per customer. A provision of ‚£10.6 million, deducted from sales, has beenincluded in these financial statements in respect of amounts relating to 2005/06 and years before. The reduction in bills to be made in future years amountsto ‚£34 million before inflation.The Company also acknowledged that Ofwat may expect further amends to be madeto customers. Ofwat has stated that this penalty will be discussed with SevernTrent Water on completion of the SFO investigation into leakage.On 7 April 2006 the Company announced that, as a result of an ongoingcomprehensive review of Severn Trent Water by its managing director, Tony Wray,and his new management team, the Board of Severn Trent Plc believed there wasprima facia evidence of customer relations data being misstated by Severn TrentWater in submissions to Ofwat. The data concerned the handling of customerbilling queries and telephone contacts over several years.Ofwat is carrying out an independent verification of the internal Severn Trentinvestigation and report relating to customer relations data submitted to it,using forensic accountants who will report to both Severn Trent Water and Ofwaton their conclusions.No reliable estimate can currently be made of the amounts that might becomepayable as a result of the SFO enquiry, Ofwat's final conclusion in respect ofthe allegations of false reporting or its review of customer relations data.Consequently, except as noted above, no provision has been included in thefinancial statements in respect of these matters.Belgian environmental taxIn June 2005 The Flemish Waste Agency "OVAM" instigated an investigation by theAntwerp Examining Magistrate into Biffa Belgium's waste recycling operations inconnection with the payment of environmental taxes. A provision of ‚£4.0million, the amount currently assessed by OVAM, has been made in the financialstatements for potential additional environmental taxes, related penalties andinterest for prior periods.No provision has been made for any criminal penalties that might result fromthis investigation since no reliable estimate can be made of the amount thatmight become payable.Supplementary InformationPro forma financial information for the Biffa Plc group and the Severn TrentGroup is presented here to assist in the understanding of the impact of thedemerger of Biffa. 31 March 2006 31 March 2005 ‚£m ‚£m Biffa Plc: Turnover 712.3 629.6 PBIT 89.2 78.9 EBITD 147.5 136.1 Severn Trent Group excluding Biffa: Turnover 1,582.7 1,384.8 PBIT* 399.0 319.9 PBIT is profit from continuing operations before interest and tax (Operatingprofit); EBITD is profit before interest, tax, and depreciation of tangible andintangible assets.Advisors to Biffa demerger:Financial Sponsors: Citigroup Legal Advisors: Herbert Smith Reporting Accountants: PricewaterhouseCoopers Brokers: Credit Suisse, HSBC Brokers to the transaction: Citigroup For further information, including the group's preliminary resultspresentation, see the Severn Trent web site (www.severntrent.com).Consolidated income statementYear ended 31 March 2006 2006 2005 ----------------- Notes ‚£m ‚£m Turnover 3 2,295.0 2,014.4 -------------------------------------------------------------------Operating costs before exceptional items (1,806.8) (1,615.6)Exceptional restructuring costs and termination of operations 4 (7.9) (14.2)Exceptional demerger costs 4 (7.8) - Exceptional profit on disposal of property and inve 4 - 11.9 ------------------------------------------------------------------- Total operating costs (1,822.5) (1,617.9)------------------------------------------------------------------- -------------------------------------------------------------------Profit before interest, tax and exceptional items 3 488.2 398.8 Exceptional items 4 (15.7) (2.3)------------------------------------------------------------------- Operating profit 3 472.5 396.5 ------------------------------------------------------------------- -------------------------------------------------------------------Finance income 5 7.9 3.5 Finance costs 5 (175.8) (173.0)-------------------------------------------------------------------Net finance costs before fair value Movements in treasury instruments (167.9) (169.5)Fair value movements on treasury instruments 5 (36.7) - ------------------------------------------------------------------- Total net finance costs 5 (204.6) (169.5) Share of results of associates and joint ventures 2.1 1.8 --------------------------------------------------------------------------------------------------------------------------------------Profit before tax, fair value movements on treasury instruments and exceptional items 322.4 231.1 Exceptional items (15.7) (2.3)Fair value movements on treasury instruments (36.7) - -------------------------------------------------------------------Profit on ordinary activities before taxation 270.0 228.8 Taxation on profit on ordinary activities - current tax 6 (48.7) (37.9) - deferred tax 6 6.0 (33.6)-------------------------------------------------------------------Total taxation 6 (42.7) (71.5)------------------------------------------------------------------- Profit for the period from continuing operations 227.3 157.3 Discontinued operations (Loss)/profit for the period from Discontinued operations (4.3) 0.8 ------------------------------------------------------------------- Profit for the period 223.0 158.1 ------------------------------------------------------------------- Attributable to: Equity holders of the company 221.6 157.4 Equity minority interests 1.4 0.7 ------------------------------------------------------------------- 223.0 158.1 ------------------------------------------------------------------- Earnings per share (pence) From continuing operations Basic 8 65.2 45.4 Diluted 8 64.7 45.1 From continuing and discontinued operations Basic 8 63.9 45.7 Diluted 8 63.5 45.3 Consolidated balance sheetAt 31 March 2006 Notes 2006 2005------------------------------------------------------------------ ‚£m ‚£m Non current assets Goodwill 506.3 499.1 Other intangible assets 112.4 125.8 Property, plant and equipment 5,743.1 5,639.4 Interests in joint ventures 9.7 9.5 Interests in associates 19.6 16.3 Derivative financial instruments 3.7 - Available for sale financial assets 0.5 0.7 ------------------------------------------------------------------ 6,395.3 6,290.8 Current assets Inventory 54.4 66.0 Trade and other receivables 481.5 492.5 Derivative financial instruments 10.8 - Cash and cash equivalents 142.6 90.8 ------------------------------------------------------------------ 689.3 649.3 ------------------------------------------------------------------ Assets held for sale 41.5 - ------------------------------------------------------------------ Total assets 7,126.1 6,940.1 ------------------------------------------------------------------ Current liabilities Borrowings (808.2) (486.5)Derivative financial instruments (114.4) - Trade and other payables (540.6) (578.0)Current income tax liabilities (48.8) (69.6)Provisions for other liabilities and charges (30.1) (32.2)Liabilities directly associated with assets held for sale (28.5) - ------------------------------------------------------------------ (1,570.6) (1,166.3) Non current liabilities Borrowings (2,295.5) (2,498.9)Derivative financial instruments (30.1) - Trade and other payables (158.7) (129.2)Deferred tax liabilities (870.2) (888.1)Retirement benefit obligations 9 (221.9) (317.5)Provisions for other liabilities and charges (80.1) (90.6)------------------------------------------------------------------ (3,656.5) (3,924.3)------------------------------------------------------------------ Total liabilities (5,227.1) (5,090.6)------------------------------------------------------------------------------------------------------------------------------------Net assets 1,899.0 1,849.5 ------------------------------------------------------------------ Capital and reserves attributable to the company's equity shareholders Called up share capital 10 227.2 225.8 Share premium account 10 48.6 38.4 Other reserves 10 432.4 467.3 Retained earnings 10 1,188.2 1,116.1 ------------------------------------------------------------------Equity attributable to the company's equity shareholders 10 1,896.4 1,847.6 Minority interest 2.6 1.9 ------------------------------------------------------------------ Total equity 10 1,899.0 1,849.5 ------------------------------------------------------------------Consolidated cash flow statementYear ended 31 March 2006 2006 2005--------------------------------------------------------------------- Notes ‚£m ‚£m Cash generated from operations 11 758.9 623.3 Interest paid (139.4) (136.3)Interest element of finance lease rental payments (45.1) (16.8)Tax paid (68.3) (36.5)---------------------------------------------------------------------Net cash generated from operating activities 11 506.1 433.7 --------------------------------------------------------------------- Investing activities Interest received 4.4 2.0 Dividends received from associates and joint ventures 2.7 3.5 Net loans advanced to associates and joint ventures (2.3) (1.8)Net cash inflow from available for sale fixed asset investments 0.2 1.4 Acquisition of subsidiaries net of cash acquired (0.3) (3.1)Proceeds on disposal of subsidiary 1.6 - Proceeds on disposal of associate - 6.5 Proceeds on disposal of property, plant and equipment 8.4 15.6 Purchases of intangible assets (29.6) (34.2)Purchases of property, plant and equipment (407.5) (417.8)Grants received 32.8 30.0 ---------------------------------------------------------------------Net cash used in investing activities (389.6) (397.9)--------------------------------------------------------------------- Financing activities Dividends paid to shareholders of the parent (234.3) (162.0)Dividends paid to minority interests (0.8) (0.6)Repayments of borrowings (500.2) (442.4)Receipt from sale and leaseback transaction 170.2 - Repayment of obligations under finance leases (167.7) (8.1)New loans raised 648.8 556.6 Purchases of own shares - (4.1)Issue of shares 11.6 5.5 ---------------------------------------------------------------------Net cash used in financing activities (72.4) (55.1)---------------------------------------------------------------------Increase/(decrease) in cash and cash equivalents 44.1 (19.3) Net cash and cash equivalents at beginning of the period 64.4 83.2 Effect of foreign exchange rates 1.9 0.5 ---------------------------------------------------------------------Net cash and cash equivalents at the end of the period 110.4 64.4 --------------------------------------------------------------------- Net cash and cash equivalents comprise Cash and cash equivalents 142.6 90.8 Overdraft (32.2) (26.4)---------------------------------------------------------------------Net cash and cash equivalents at the end of the period 110.4 64.4 ---------------------------------------------------------------------Consolidated statement of recognised income and expenseYear ended 31 March 2006 2006 2005 ‚£m ‚£m Losses on cash flow hedges taken to equity 0.3 - Exchange movement on translation of overseas results and net assets 21.6 (3.6)Exchange differences on hedges of net investment (5.3) 0.8 Tax on exchange differences on foreign currency hedging 1.8 (0.2)Actuarial gains on defined benefit pension schemes 26.3 43.2 Deferred tax on actuarial gains on defined benefit pension schemes (8.0) (13.0)------------------------------------------------------------------------Net income recognised directly in equity 36.7 27.2 Transfers Transfer to income statement on cashflow hedge 4.5 - Deferred tax on transfers to income statement (1.4) - Profit for the period 223.0 158.1 ------------------------------------------------------------------------ Total recognised income and expense for the period 262.8 185.3 ------------------------------------------------------------------------ Attributable to: Equity holders of the parent 261.4 184.6 Minority interest 1.4 0.7 ------------------------------------------------------------------------ Total recognised income and expense for the period 262.8 185.3 ------------------------------------------------------------------------ Change in accounting policy on adoption of IAS32 and IAS39 (57.8) - All attributable to equity holders of the parent Notes1 Basis of preparationThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS), International Accounting Standards (IAS)and IFRIC interpretations issued and effective and ratified by the EuropeanUnion as at 31 March 2006.The financial statements have been prepared under the historical costconvention as modified by the revaluation of financial assets and liabilities(including derivative instruments) at fair value through profit and loss.The preparation of financial statements in conformity with IFRS requires theuse of estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amount ofrevenues and expenses for the reporting period. Although these estimates arebased on management's best knowledge of the amount, event or actions, actualresults may ultimately differ from those estimates.The results have been extracted from the audited financial statements of thegroup for the year ended 31 March 2006. These audited financial statementsincorporate an unqualified audit report. The results do not constitutestatutory accounts within the meaning of Section 240 of the Companies Act1985. Statutory accounts for the year ended 31 March 2005, which incorporatedan unqualified auditors' report, have been filed with the Registrar ofCompanies.2 First time adoption of IFRSThe group's date of transition to IFRS is 1 April 2004 and all comparativeinformation in the financial statements has been restated to reflect thegroup's adoption of IFRS, except where otherwise required or permitted byInternational Financial Reporting Standard 1 - 'First Time Adoption ofInternational Financial Reporting Standards' (IFRS1).IFRS1 requires an entity to comply with each IFRS effective at the reportingdate for its first IFRS financial statements. As a general principle, IFRS1requires the standards effective at the reporting date to be appliedretrospectively, however, retrospective application is prohibited in someareas. In addition, there are a number of optional exemptions from fullretrospective application of IFRSs within IFRS1.Group policy on optional IFRS1 exemptions is as follows:- Not to apply IFRS3 (Business Combinations) retrospectively to pastbusiness combinations;- To establish a deemed cost for the opening balance sheet carrying value ofthe water and wastewater infrastructure fixed assets by reference to the fairvalue of these;- To recognise all cumulative actuarial gains and losses relating to definedbenefit pension schemes at the date of transition;- To deem cumulative translation differences for all foreign operations tobe zero at the date of transition;- Not to apply the requirements of IFRS2 (Share Based Payments) to optionsgranted under the group's SAYE schemes prior to 7 November 2002. Therequirements of IFRS2 have been applied to shares conditionally awarded underthe group's LTIP schemes before 7 November 2002 but not vested or lapsed before1 April 2004 since the fair values of these awards has been publicly disclosedpreviously.3 Segmental analysisThe group is organised into four main business segments:Water and Sewerage Provides water and sewerage services to domestic and commercial customers in England and Wales Waste Management Provides collection, landfill and special waste services to industrial/commercial customers and local authorities in the UK and Belgium Laboratories Provides environmental testing services in the US and UK Water Purification Provides services and products associated with water, and Operating waste water and contaminated land principally in the US, Services UK and Europe Other businesses include IT S, Engineering Consultancy, Severn Trent Propertyand Derwent Insurance. The external IT Services and Engineering Consultancyactivities were sold or terminated during the year.The group is also organised into geographical regions, United Kingdom, UnitedStates and Europe. Geographical information is classified by the location ofthe principal operations of each business unit. United United Turnover Kingdom States Europe Total ------------------------------------------------------------ ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Continuing Operations Water and Sewerage 1,150.9 1,015.1 - - - - 1,150.9 1,015.1 Waste Management 712.3 629.5 - - - - 712.3 629.5 Laboratories 32.3 30.0 134.7 132.6 - - 167.0 162.6 Water Purification and Operating Services 71.7 34.2 163.9 148.9 32.2 25.0 267.8 208.1 Other Businesses 50.6 80.1 9.1 6.7 - - 59.7 86.8 Eliminations (60.7) (86.9) (2.0) (0.8) - - (62.7) (87.7)-------------------------------------------------------------------------------Group-continuing operations 1,957.1 1,702.0 305.7 287.4 32.2 25.0 2,295.0 2,014.4 -------------------------------------------------------------------------------Profit before interest, tax and United United exceptional items Kingdom States Europe Total ------------------------------------------------------------- ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Continuing Operations Water and Sewerage 400.4 307.5 - - - - 400.4 307.5 Waste Management 89.2 78.9 - - - - 89.2 78.9 Laboratories 5.2 4.8 5.9 10.4 - - 11.1 15.2 Water Purification and Operating Services 5.0 0.7 5.2 6.7 1.8 1.5 12.0 8.9 Other Businesses (2.7) 10.0 (0.8) (3.0) - - (3.5) 7.0 Corporate (22.2) (17.8) - - - - (22.2) (17.8)Eliminations 1.2 (0.9) - - - - 1.2 (0.9)-------------------------------------------------------------------------------Group-continuing operations 476.1 383.2 10.3 14.1 1.8 1.5 488.2 398.8 ------------------------------------------------------------------------------- United United Exceptional items Kingdom States Europe Total ------------------------------------------------------------- ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Continuing Operations Water and Sewerage (4.8) (2.8) - - - - (4.8) (2.8)Waste Management - - - - - - - - Laboratories - - - - - - - - Water Purification and Operating Services - - - - - 4.3 - 4.3 Other Businesses (5.9) (3.4) 2.8 (0.4) - - (3.1) (3.8)Corporate (7.8) - - - - - (7.8) - Eliminations - - - - - - - - -------------------------------------------------------------------------------Group-continuing operations (18.5) (6.2) 2.8 (0.4) - 4.3 (15.7) (2.3)-------------------------------------------------------------------------------Profit before United United interest and tax Kingdom States Europe Total ------------------------------------------------------------- ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Continuing Operations Water and Sewerage 395.6 304.7 - - - - 395.6 304.7 Waste Management 89.2 78.9 - - - - 89.2 78.9 Laboratories 5.2 4.8 5.9 10.4 - - 11.1 15.2 Water Purification and Operating Services 5.0 0.7 5.2 6.7 1.8 5.8 12.0 13.2 Other Businesses (8.6) 6.6 2.0 (3.4) - - (6.6) 3.2 Corporate (30.0) (17.8) - - - - (30.0) (17.8)Eliminations 1.2 (0.9) - - - - 1.2 (0.9)-------------------------------------------------------------------------------Group-continuing operations 457.6 377.0 13.1 13.7 1.8 5.8 472.5 396.5 -------------------------------------------------------------------------------Total net finance costs (204.6) (169.5)Share of post tax results of associates and joint ventures Waste Management 1.0 1.1 Water Purification and Operating Services 1.6 1.7 Other Businesses (0.5) (1.0) ---------------- 2.1 1.8 ---------------- Profit before tax 270.0 228.8 Tax (42.7) (71.5) ----------------Profit from continuing operations 227.3 157.3 (Loss)/profit from discontinued operations (4.3) 0.8 ---------------- Profit for the period 223.0 158.1 ----------------4 Exceptional itemsA net exceptional charge of ‚£15.7 million arose in 2005/06. This comprises:An exceptional restructuring charge of ‚£7.9 million arose comprising:‚£4.8 million arising in Severn Trent Water as a result of costs associated witha redundancy programme undertaken to meet AMP4 efficiency targets.‚£3.1 million arising in Systems relating to the cessation of trading withexternal customers and disposal of the Worksuite and CIS operations.‚£7.8 million of costs arose relating to the demerger of Biffa and otherstrategic reviews undertaken.In the year ended 31 March 2005, restructuring costs and termination ofoperations comprised a charge of ‚£10.4 million relating to restructuring ofSevern Trent Water and losses on termination of operations amounting to ‚£3.8million. The loss on termination of operations arose from decisions to closeone of the group's US Systems businesses and to cease trading with externalcustomers for the group's UK IT Services and Engineering Consultancybusinesses.In the year ended 31 March 2005, a profit of ‚£11.9 million on the disposal ofproperties and investments arose. This comprised ‚£6.1 million on the sale ofland and buildings by Severn Trent Water, ‚£4.3 million on the disposal of thegroup's interest in its associated undertaking, Indaqua Industria e Gestao deAguas, and ‚£1.5 million on disposal of a fixed asset investment.5 Net finance costs 2006 2005------------------------------------------------------------------------ ‚£m ‚£mInvestment income Interest receivable on bank deposits 4.1 3.5 Net finance income on defined benefit pension schemes 3.8 - ------------------------------------------------------------------------ 7.9 3.5 ------------------------------------------------------------------------ Finance costs Interest on bank loans and overdrafts (24.5) (29.4)Interest on other loans (121.0) (113.5)Interest on finance leases (26.0) (24.0)------------------------------------------------------------------------Total borrowing costs (171.5) (166.9) Interest cost on discounted provisions (2.3) (2.3)Net finance cost on defined benefit pension schemes - (1.2)Other financial expenses (2.0) (2.6)------------------------------------------------------------------------Total finance costs (175.8) (173.0) Fair value movements on treasury instruments (36.7) - ------------------------------------------------------------------------ Net finance costs (204.6) (169.5)------------------------------------------------------------------------6 Taxation 2006 2005------------------------------------------------------------------- ‚£m ‚£mCurrent tax relating to continuing operations Continuing operations Current year 87.8 49.4 Prior years (39.1) (11.5)-------------------------------------------------------------------Current tax relating to continuing operations 48.7 37.9 Current tax relating to discontinued operations 0.1 1.8 ------------------------------------------------------------------- Total current tax 48.8 39.7 ------------------------------------------------------------------- Deferred taxation Continuing operations - origination and reversal of temporary differences Current year 5.1 19.4 Prior years (11.1) 14.2 -------------------------------------------------------------------Deferred tax relating to continuing operations (6.0) 33.6 Deferred tax relating to discontinued operations 0.2 0.9 ------------------------------------------------------------------- Total deferred tax (5.8) 34.5 ------------------------------------------------------------------- Total tax charge relating to continuing operations 42.7 71.5 Total tax charge relating to discontinued operations 0.3 2.7 ------------------------------------------------------------------- Total tax charge 43.0 74.2 -------------------------------------------------------------------7 Dividends 2006 2005 ---------------- --------------- Pence Pence per share ‚£m per share ‚£m ---------------- ---------------Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 March 2005 30.30 104.8 29.27 100.9 Interim dividend for the year ended 31 March 2006 19.16 66.5 18.21 62.8-------------------------------------------------------- --------------- Total dividends recognised in the period 49.46 171.3 47.48 163.7-------------------------------------------------------- --------------- Proposed final dividend for the year ended 31 March 2006 31.97 111.3 -------------------------------------------------------- The proposed final dividend is subject to approval by shareholders at theAnnual General Meeting and has not been included as liability in thesefinancial statements.8 Earnings per shareBasic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares inissue during the year, excluding those held in the Severn Trent Employee ShareOwnership Trust, which are treated as cancelled.For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all potentially dilutive ordinaryshares. These represent share options granted to employees, where the exerciseprice is less than the average market price of the company's shares during theyear.From continuing operations 2006 2005 Weighted Weighted average Per average Per number share number share Earnings of shares amount Earnings of shares amount ‚£m m pence ‚£m m pence---------------------------------------------------- -------------------------Basic earnings per share 225.9 346.6 65.2 156.6 344.7 45.4 Effect of dilutive options - 2.3 (0.5) - 2.5 (0.3)---------------------------------------------------- ------------------------- Diluted earnings per share 225.9 348.9 64.7 156.6 347.2 45.1 ---------------------------------------------------- -------------------------From continuing and 2006 2005discontinued operations Weighted Weighted average Per average Per number share number share Earnings of shares amount Earnings of shares amount ‚£m m pence ‚£m m pence---------------------------------------------------- -------------------------Basic earnings per share 221.6 346.6 63.9 157.4 344.7 45.7 Effect of dilutive options - 2.3 (0.4) - 2.5 (0.4)---------------------------------------------------- ------------------------- Diluted earnings per share 221.6 348.9 63.5 157.4 347.2 45.3 ---------------------------------------------------- -------------------------Basic and diluted earnings per share from continuing operations are calculatedon the basis of profit from continuing operations and the weighted averagenumber of shares disclosed above.Supplementary earnings per shareSupplementary adjusted earnings per share figures are presented. These excludethe effects of deferred tax, fair value movements on treasury instruments anditems which the directors consider to be exceptional in both 2006 and 2005. The directors consider that the supplementary figures provide a usefuladditional indication of performance. 2006 2005 Weighted Weighted average Per average Per number share number share Earnings of amount Earnings of amount shares shares ‚£m m pence ‚£m m pence------------------------------------------------------ ------------------------ Basic earnings per share from continuing operations 225.9 346.6 65.2 156.6 344.7 45.4 Effect of: Exceptional restructuring costs and termination of operations 7.9 - 2.3 14.2 - 4.1 Exceptional demerger and 7.8 - 2.3 - - - related costs Exceptional profit on disposal of property and investments - - - (11.9) - (3.5)Tax related to exceptional (4.7) - (1.4) 1.0 - 0.3 items at 30% Fair value movements on treasury instruments 36.7 - 10.6 - - - Deferred tax (6.0) - (1.8) 33.6 - 9.8 ------------------------ ------------------------Adjusted earnings per share from continuing operations before exceptional items and deferred tax 267.6 346.6 77.2 193.5 344.7 56.1 ------------------------ ------------------------Diluted earnings per share from continuing operations 225.9 348.9 64.7 156.6 347.2 45.1 Effect of: Exceptional restructuring costs and termination of operations 7.9 - 2.3 14.2 - 4.1 Exceptional demerger and related costs 7.8 - 2.3 - - - Exceptional profit on disposal of property and investments - - - (11.9) - (3.4)Tax related to exceptional items at 30% (4.7) - (1.3) 1.0 - 0.3 Fair value movements on treasury instruments 36.7 - 10.5 - - - Deferred tax (6.0) - (1.8) 33.6 - 9.6 ------------------------ ------------------------Diluted earnings per share before exceptional items 267.6 348.9 76.7 193.5 347.2 55.7 ------------------------ ------------------------9 Retirement benefit obligations 2006 2005 -------- -------- ‚£m ‚£m At 1 April (317.5) (376.5)Service cost (39.7) (41.3)Loss on settlements and curtailments - (4.0)Expected return on scheme assets 79.2 69.8 Interest cost (75.4) (71.0)Contributions from sponsoring companies 105.2 62.3 Actuarial gains 26.3 43.2 --------------------------------------------------- -------- At 31 March (221.9) (317.5)--------------------------------------------------- --------10 Movement in shareholders' equity Equity attributable to the equity holders of Share Share Other Retained Severn Minority capital premium reserves earnings Trent Plc interests Total ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m At 1 April 2004 225.2 33.5 470.3 1,092.6 1,821.6 2.4 1,824.0 Exchange adjustments net of tax - - (3.0) - (3.0) - (3.0)Purchase of shares for ESOP trust - - - (4.1) (4.1) - (4.1)Share options and LTIPs - proceeds from shares issued 0.6 4.9 - - 5.5 - 5.5 - value of employees' services - - - 4.1 4.1 - 4.1 Net profit for the year - - - 157.4 157.4 0.7 158.1 Dividends - - - (163.7) (163.7) (1.2) (164.9)Actuarial gain /(loss) - - - 43.2 43.2 - 43.2 Tax on actuarial gain /(loss) - - - (13.4) (13.4) - (13.4) -----------------------------------------------------------------At 31 March 2005 225.8 38.4 467.3 1,116.1 1,847.6 1.9 1,849.5 Change of accounting policy on adoption of IAS32 and IAS39 - - (57.8) - (57.8) - (57.8) ----------------------------------------------------------------- At 1 April 2005 225.8 38.4 409.5 1,116.1 1,789.8 1.9 1,791.7 Exchange adjustments net of tax - - 18.1 - 18.1 - 18.1 Cash flow hedges - Fair value - - 0.3 - 0.3 - 0.3 gains in the period - Transfers to - - 4.5 - 4.5 - 4.5 net profit Purchase of shares for ESOP trust - - - - - - - Share options and LTIPs - proceeds from shares issued 1.4 10.2 - - 11.6 - 11.6 - value of employees' services - - - 4.1 4.1 - 4.1 Net profit for the year - - - 221.6 221.6 1.4 223.0 Dividends - - - (171.3) (171.3) (0.7) (172.0)Actuarial gain /(loss) - - - 26.3 26.3 - 26.3 Tax on actuarial gain /(loss) - - - (8.6) (8.6) - (8.6) -----------------------------------------------------------------At 31 March 2006 227.2 48.6 432.4 1,188.2 1,896.4 2.6 1,899.0 -----------------------------------------------------------------11 Reconciliation of operating profit to operating cash flows 2006 2005 ------- -------- ‚£m ‚£m Operating profit from continuing operations 472.5 396.5 Operating profit from discontinued operations (4.1) 3.3 ------- -------- 468.4 399.8 Depreciation of property, plant and equipment 267.9 260.3 Amortisation of intangible assets 29.3 22.3 Profit on sale of property, plant and equipment (4.3) (7.5)Profit on sale of investments - (4.3)Deferred income movement (3.5) (1.4)Provisions for liabilities and charges 29.8 36.6 Utilisation of provisions for liabilities and charges (34.6) (24.5)Decrease in inventory 13.4 14.0 Increase in receivables (10.8) (36.4)Increase in payables 3.3 (35.6) ------- --------Cash generated from operations 758.9 623.3 Interest paid (139.4) (136.3)Interest element of finance lease rental payments (45.1) (16.8)Tax paid (68.3) (36.5) ------- --------Net cash inflow from operating activities 506.1 433.7 ------- --------12 Annual ReportThe 2006 Annual Report will be sent to shareholders in June. Copies maybe obtained from the Company Secretary, Severn Trent Plc, 2297 Coventry Road,Birmingham B26 3PU.13 Annual General MeetingThe Annual General Meeting will be held at the International Convention Centre,Birmingham, on 26 July 2006 at 11.00am.14 Forward-Looking StatementsThis document contains certain "forward-looking statements" with respect toSevern Trent's financial condition, results of operations and business andcertain of Severn Trent's plans and objectives with respect to these items.Forward-looking statements are sometimes, but not always, identified by theiruse of a date in the future or such words as "anticipates", "aims", "due","could", "may", "should", "expects", "believes", "intends", "plans", "targets","goal" or "estimates". By their very nature forward-looking statements areinherently unpredictable, speculative and involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in thefuture.There are a number of factors that could cause actual results and developmentsto differ materially from those expressed or implied by these forward-lookingstatements. These factors include, but are not limited to, changes in theeconomies and markets in which the Group operates; changes in the regulatoryand competition frameworks in which the Group operates; the impact of legal orother proceedings against or which affect the Group; and changes in interestand exchange rates.All written or verbal forward-looking statements, made in this document or madesubsequently, which are attributable to Severn Trent or any other member of theGroup or persons acting on their behalf are expressly qualified in theirentirety by the factors referred to above. Severn Trent does not intend toupdate these forward-looking statements.This document is not an offer to sell, exchange or transfer any securities ofSevern Trent Plc or any of its subsidiaries and is not soliciting an offer topurchase, exchange or transfer such securities in any jurisdiction. Securitiesmay not be offered, sold or transferred in the United States absentregistration or an applicable exemption from the registration requirements ofthe US Securities Act of 1933 (as amended).The shares in Biffa proposed to be distributed in connection with the demerger have not been, and will not be, registered under the Securities Act nor have they been approved or disapproved by the US Securities and Exchange Commission(the "SEC") or any US state securities commission and neither the SEC nor any US state securities commission passed upon the accuracy or adequacy of thisannouncement. Any representation to the contrary is a criminal offence in theUS.ENDSEVERN TRENT PLCRelated Shares:
Severn Trent