6th Dec 2005 07:00
6 December 2005Severn Trent PlcInterim Results for the six months to 30 September 2005ENCOURAGING FIRST HALF RESULTSREAL DIVIDEND GROWTHFinancial and operating highlightsGroup¢â€" Turnover up 13.0% to ‚£1,174.1m (‚£1,038.9m)¢â€" PBIT up 26.5% to ‚£281.3m (‚£222.4m)¢â€" PBT before IAS 39 fair value adjustments* up 42.6% to ‚£198.1m (‚£138.9m)¢â€" PBT up 18.4% to ‚£164.4m (‚£138.9m)¢â€" Adjusted basic EPS** up 24.7% to 40.9p (32.8p); Basic EPS of 33.1p (25.1p)¢â€" Interim dividend increased by 5.2% to 19.16p (18.21p); 2.5% above inflation¢â€" Net debt ‚£3,017m (‚£2,895m at 31 March 2005); interest costs before IAS 39 fair value adjustments down ‚£0.3m to ‚£84.3mSevern Trent Water¢â€" Turnover up 15.4% to ‚£583.5m (‚£505.7m)¢â€" PBIT up 36.2% to ‚£240.2m (‚£176.4m)¢â€" 15.2% increase in prices from 1 April 2005¢â€" Good start made to AMP4 period operating cost control and capital programme delivery¢â€" IAS 16 Infrastructure expenditure charge ‚£36.2m (‚£32.0m) represents approximately one-third of anticipated charge for the yearBiffa¢â€" Turnover up 9.6% to ‚£386.9m (‚£353.0m)¢â€" Total Biffa PBIT down 0.9% to ‚£43.5m (‚£43.9m)¢â€" UK PBIT up 8.2% to ‚£46.1m (‚£42.6m)¢â€" Organic growth in UK¢â€" Environmental tax provisions in Belgium; PBIT loss ‚£2.6m (profit ‚£1.3m)Laboratories¢â€" Turnover down 1.2% to ‚£84.0m (‚£85.0m)¢â€" PBIT down 27.0% to ‚£7.3m (‚£10.0m)¢â€" Difficult market conditions in the US. Continuing good UK performanceWater purification and operating services¢â€" Turnover up 23.0% to ‚£126.2m (‚£102.6m)¢â€" PBIT up 61.8% to ‚£5.5m (‚£3.4m)¢â€" Margin improvement in both businessesOther businesses¢â€" Turnover down 15.6% to ‚£30.9m (‚£36.6m)¢â€" PBIT loss ‚£3.4m (loss ‚£0.9m)¢â€" Closure provision made for the Systems business In this announcement: * "IAS 39 fair value adjustments" is the fair value movement on treasury instruments of ‚£33.7m charged to the income statement in finance costs ** Adjusted basic EPS excludes the above IAS 39 fair value adjustments, and a deferred tax credit of ‚£6.6mSir John Egan, Chairman, Severn Trent Plc, said:"We have delivered an overall encouraging performance in the first half of 2005/06 with Severn Trent Water performing particularly well and making a goodstart to AMP4."We stated in June that we intend to maintain, as a minimum, dividends in realterms at least up to 2009/10. We also stated that our objective is of course todo better than that with real growth over the AMP 4 period. Today marks thestart of meeting that objective."We have decided to increase the interim dividend by 5.2% to 19.16p pershare. This is 2.5% above inflation of 2.7%."We intend today's announcement to be seen as a signal of our intention toachieve real dividend growth over the AMP4 period."Colin Matthews, Group Chief Executive, Severn Trent Plc, said:"I took over as Group Chief Executive in February this year determined in myfirst 12 to 18 months to drive operational improvements in our two biggestbusinesses. Now, ten months into that time scale, with the help of a focusedmanagement team, I am pleased to report good results in Severn Trent Water andsteady progress in Biffa, which together account for some 97 per cent of Groupprofit."In Severn Trent Water, there is a new leadership team in place thoroughlyfocused on performance, reducing costs ahead of forecast, and on track to atleast meet Ofwat's capex targets, and confidently aiming to do better."Biffa UK has had a good result, with 8% growth in an otherwise flat market. Weare implementing the strategies to orient the business for better operationalperformance in the coming year. It is disappointing to report that BiffaBelgium, while a small part of the overall picture, requires a provision forenvironmental taxes and penalties."In our smaller businesses, Severn Trent Laboratories continues to experience adifficult market in the United States while Severn Trent Services continues togrow encouragingly."Enquiries:Colin Matthews Severn Trent Plc 020 7404 5959 (on the day)Group Chief Executive 0121 722 4947Mark Wilson Severn Trent Plc 020 7404 5959 (on the day)Group Finance Director 0121 722 4267Peter Gavan Severn Trent Plc 020 7404 5959 (on the day)Director of Corporate Affairs 0121 722 4310Julian Wais Severn Trent Plc 020 7404 5959 (on the day)Head of Investor Relations 0121 722 4295Simon Holberton Brunswick 020 7404 5959or Eilis MurphyInterim Results PresentationThere will be an interim results presentation at 9.30am on Tuesday 6 December2005. This presentation, together with the presentation slides, will beavailable as a simultaneous webcast on the Severn Trent website(www.severntrent.com) and will remain on the website for subsequent viewing.Chairman's statementThe Severn Trent Group has delivered an encouraging overall performance in thefirst half of 2005/06, with Group profit before tax and IAS 39 fair valueadjustments at ‚£198.1m, an increase of 42.6%. Group profit before tax was ‚£164.4m (‚£138.9m).Severn Trent Water has made a good start to AMP4; its PBIT was up 36.2% to ‚£240.2m. Biffa's PBIT was down 0.9% to ‚£43.5m. Laboratories' PBIT was down 27.0%to ‚£7.3m. Water purification and operating services' PBIT increased by 61.8% to‚£5.5m. Exchange rates had a negligible impact on the results of Laboratoriesand Water purification and operating services. Overall, Systems, Property,Engineering consultancy and Insurance incurred a loss before interest and taxof ‚£3.4m (loss of ‚£0.9m).DividendThe Board has increased the interim dividend by 5.2% to 19.16 pence pershare (18.21 pence) to be paid on 25 January 2006. This represents a 2.5%increase over inflation. For the purposes of our dividend policy, we havedefined inflation for interim and final dividends as the change in the RPIindex for the 12 months to 30 September and 12 months to 31 March respectively.The payment date of 25 January 2006 is some 10 weeks earlier than in previousyears.Operational ReviewWater and sewerageTurnover from Water and sewerage increased by 15.4% to ‚£583.5m. Of this, ‚£576.0m arises in Severn Trent Water, an increase of 15.3%, from an allowedincrease in charges, including inflation, of 15.2%. Related businessescontributed turnover of ‚£7.5m (‚£7.4m). Severn Trent Water has made a good startto AMP4. PBIT was up 36.2% to ‚£240.2m. Direct operating costs in the first halfof 2005/06 (excluding infrastructure renewals expenditure and corporatemanagement charges) of Severn Trent Water were ‚£200.5m, an increase of ‚£6.0m.This reflected a real increase of ‚£0.7m. Whilst an increase in costs from lastyear was expected, they are being well managed ahead of plan. Management focuson costs, including lower manpower numbers, are enabling Ofwat's assumedoperating cost targets to be reached sooner than initially expected.Severn Trent Water invested ‚£36.2m (‚£32.0m) in maintaining its infrastructurenetwork in the period. Under the new accounting rules introduced by IAS 16 thisexpenditure is charged directly to the income statement. It is expanding itsinfrastructure maintenance programme and activity levels are progressivelyincreasing through the year. As a result, the first half expenditure for 2005/06 is currently programmed to contribute approximately one-third of the totalexpenditure for 2005/06.Severn Trent Water's capital programme (including the above investment in theinfrastructure network, now included as an operating cost under IAS 16) isapproximately ‚£2.6 billion for the five-year period 2005/06 to 2009/10. This isat outturn prices, net of grants and contributions. New design and procurementprocesses are already delivering benefits and will facilitate the delivery ofthe AMP4 regulatory outputs. In the first half of 2005/06, approximately ‚£159mwas invested with a forecast of approximately ‚£400m for the year compared to anOfwat assumption of circa ‚£440m. Severn Trent Water believes that thesuccessful delivery of its capital programme is part of its regulatory contractand its obligations to customers, and by the end of 2005/06 expects to meetOfwat's quality regulatory obligations for the first year of AMP4. Whilst theprogramme has started well and there is an ambition to outperform the AMP4period as a whole, it is too early to forecast capex efficiencies at thisstage.Profit from sale of non-current assets of ‚£1.8m (‚£4.7m) has been includedwithin the operating profits of Severn Trent Water.On 31 October 2005 Severn Trent Plc announced that as a result of a referral byOfwat regarding data on leakage, the Serious Fraud Office is undertaking aninvestigation into alleged reporting irregularities made to Ofwat by SevernTrent Water Limited between 2000 and 2003. Severn Trent is continuing tosupport both regulators in their respective reviews of these allegations. Thefull statement made on 31 October 2005 is available on the Severn Trent website(www.severntrent.com). The Board has taken and will continue to take suchactions as it thinks appropriate to ensure the maintenance of high ethical andprofessional standards.Severn Trent Water has continued to deliver high levels of performance in termsof customer service and drinking water and wastewater quality. Its waterresource position is normal for this time of year.Waste managementBiffa's turnover increased by 9.6% to ‚£386.9m. Turnover in the UK increased by11.2% to ‚£356.0m, while in Belgium turnover decreased by 6.1% to ‚£30.9m.Biffa's PBIT was down 0.9% to ‚£43.5m.PBIT in the UK operations increased by 8.2% to ‚£46.1m, with Belgium reporting aloss before interest of ‚£2.6m.In the first half of 2005/06, Collection turnover in the UK increased by 14.9%to ‚£225.7m. The Collection division contributed a PBIT of ‚£30.9m (‚£29.2m), up5.8%. Sales margins were lower at 13.7% (14.9%) because part of the growth inturnover arose from lower margin activities. Industrial and Commercial marginshave remained firm and absorbed cost increases from the Road TransportDirective, which restricts the number of hours that drivers are permitted towork, higher disposal costs, including Landfill Tax, and rising fuel prices.This has been achieved by higher unit revenues and actions taken to improveefficiency.Landfill turnover in the UK was up 6.3% to ‚£101.4m and PBIT from the Landfilldivision was up 3.4% to ‚£21.5m (‚£20.8m). Landfill volumes were down by around11%. There was a one-off increase in Landfill volumes in the first half 2004/05arising from the implementation of particular Landfill regulations in July2004. Unit revenues (excluding Landfill Tax) were up by around 10%. Operationallandfill void decreased from 78m cubic metres to 75m cubic metres reflectingvoid usage in the period.The Special Waste division in the UK, which includes the power generationactivity, delivered a 2.1% increase in turnover to ‚£28.9m and contributed PBITof ‚£4.3m (‚£3.0m). Biffa has interests in around 104MW of electricity generationin the UK (including from Biffa sites leased to third parties), of whichapproximately 21% qualifies for ROCs.In Belgium, turnover decreased by 6.1% to ‚£30.9m. Biffa Belgium recorded a lossbefore interest of ‚£2.6m (profit of ‚£1.3m). The Flemish Waste Agency "OVAM" hascaused an investigation by the Antwerp Examining Magistrate into BiffaBelgium's waste recycling operations in connection with the payment ofenvironmental taxes. A provision of ‚£4.0m, the amount currently assessed byOVAM, has been made for potential additional environmental taxes, relatedpenalties and interest for prior periods. Of this, ‚£3.1m was charged tooperating costs and ‚£0.9m to interest payable. This examination also disruptedthe business operations in the first half of the year.Over the last 6 months a major review has been undertaken of how the wastemarket in the UK is developing and Biffa's position within it. The workdemonstrated that in the industrial and commercial collection market Biffa hasa strong competitive advantage, a good position in landfill and that it cangrow its recycling revenues significantly. Biffa is now implementing thefindings of the work, targeting stronger organic growth in the mid-term.LaboratoriesLaboratories' turnover decreased by 1.2% to ‚£84.0m and PBIT decreased by 27.0%to ‚£7.3m. Some 81% of its turnover arose in the USA. The impact of changingexchange rates was immaterial.Laboratories continues to experience difficult market conditions in the UnitedStates mainly because lower Federal environmental spending continues to drivepricing pressures in the US environmental testing market. Measures have beenimplemented to reduce costs in the US business, which are expected to bebeneficial to the performance in the second half of the current year.Laboratories in the USA is also implementing a newly developed and advancedLaboratories Information Management System, which is designed to enable thebusiness better to exploit its scale in the US market by bringing all locationsonto a single platform.The new system has already been rolled out to one-third of the laboratories andthe remaining laboratories will be migrated onto the new system by the end of2006/07.In the UK, Laboratories continues to perform well.Water purification and operating servicesTurnover in Water purification and operating services was up 23.0% to ‚£126.2m.Turnover in the USA (in US$) was up by around 5% and turnover in the UK (in ‚£)was up by around 86%. Around 61% of Water purification and operating services'turnover arose in the USA. Water purification's turnover decreased by 6.8% to ‚£34.2m. Turnover in Operating services increased by 39.6% to ‚£92.0m. Coast toCoast Water Limited, the Group's 80% owned subsidiary which provides water andsewerage services to Ministry of Defence sites in England, contributed ‚£16.1mof the increase.Water purification and operating services' PBIT increased by 61.8% to ‚£5.5m.The improvement mainly arises from improved margins in both the Waterpurification and Operating services businesses. The impact of changing exchangerates was immaterial.Other businesses: Systems, Property, Engineering consultancy and InsuranceTotal turnover from Other businesses was ‚£30.9m (‚£36.6m) generating a PBIT lossof ‚£3.4m (loss of ‚£0.9m). The losses mainly arise from the reorganisation andclosure costs in the Systems business.Financial ReviewGroup ResultsGroup turnover was ‚£1,174.1m (‚£1,038.9m), an increase of 13.0% over last year.The growth in turnover was mainly due to the benefit of the price review forSevern Trent Water.Group profit before interest and tax was ‚£281.3m (‚£222.4m), an increase of26.5%.Group profit before tax and IAS 39 fair value adjustments was up 42.6% to ‚£198.1m (‚£138.9m) after interest charges of ‚£84.3m (‚£84.6m) and share of resultsof joint ventures and associates ‚£1.1m (‚£1.1m). Group profit before tax was ‚£164.4m (‚£138.9m).The total tax charge for the half-year was ‚£49.6m (‚£52.1m) of which current taxrepresented ‚£56.2m (‚£25.4m) and deferred tax was a credit of ‚£6.6m (charge of ‚£26.7m). Profit after tax was ‚£114.8m (‚£86.8m), of which ‚£114.5m (‚£86.4m) wasattributable to the shareholders of Severn Trent Plc.Basic earnings per share were 33.1 pence (25.1 pence). Adjusted basic earningsper share (before IAS 39 fair value adjustments and deferred tax) were40.9 pence (32.8 pence), an increase of 24.7%.Operating activities generated a net cash inflow of ‚£314.8m (‚£253.7m).Investing activities used ‚£178.2m of cash (‚£176.6m) and financing activitiesused ‚£127.3m (‚£115.9m). The movement in net debt for the six months was anincrease of ‚£122.0m (decrease of ‚£13.9m) and for the 12 months from 30 September2004 an increase of ‚£277.0m.Net debt at 30 September 2005 including ‚£105m (nil) arising from IAS 39 fairvalue adjustments, was ‚£3,017m (‚£2,740m). Gearing, reflecting the provision fordeferred tax, was 62.3% (59.6%). The Group's net interest charge excluding IAS39 fair value adjustments, was covered 5.0 times (4.3 times) by profit beforeinterest, tax and depreciation.TaxationThe charge for current tax was ‚£56.2m (‚£25.4m). The current tax charge of ‚£56.2m attributable to profit after interest but before tax, share of profits ofassociates and joint ventures and IAS 39 fair value adjustments, is aneffective rate of 28.5% (18.4%). The main reasons for the increase are areduction in capital allowances claimed in Severn Trent Water and a change inthe tax treatment of deferred revenue expenditure effective from 1 April 2005.The increase in the effective rate is in line with Board expectations.The deferred tax credit of ‚£6.6m arose as a result of the IAS 39 fair valueadjustments partially offset by movements in the other temporary differences.PensionsOn an IAS 19 basis the estimated net position of the Group's defined benefitpension schemes and Group's unfunded liabilities for senior staff as at 30September 2005, was a deficit of approximately ‚£319m (‚£373m). After deferredtax the estimated net deficit at 30 September 2005 was ‚£223m (‚£261m). Theservice cost charged against operating profits in the six months ended 30September 2005 was ‚£20.1m (‚£20.0m).For further information on the Group's pension and retirement benefits, seeSevern Trent's Annual Report and Accounts 2005.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 30September 2005 interest rates for some 70% of the Group's net debt (before theimpact of IAS 39) of ‚£2,912m were so fixed for an average period ofapproximately 16 years.International Accounting Standards (IAS)The impact of IAS on the Group's reported financial information were set out inthe Group's announcement on 19 September 2005, which is available on the SevernTrent website (www.severntrent.com).The Group has adopted IAS 32 and 39 with effect from 1 April 2005. The mainimpact of these standards is to recognise the portfolio of interest rate andcurrency swaps held by the Group at fair value on the balance sheet. Where theswap is held to hedge the movements in fair value of a specific debtinstrument, the debt instrument is also adjusted to fair value and the impactin the income statement is broadly offset. However, the Group holds a portfolioof long dated interest rate swaps that are not individually designated toparticular liabilities. Changes in the fair values of these instruments arecharged in the income statement with no compensating fair value movement from acorresponding liability. The impact of adopting IAS 39 at 1 April 2005 was todecrease net assets by ‚£56.3m.The Group intends to hold the swaps to maturity and therefore these changes infair value will not crystallise and are not cash items.The Group is satisfied with its economic hedging strategy which provides longterm stability of its cash interest expense.Supplementary InformationFor supplementary information, including the Group's interim resultspresentation, see the Severn Trent web site (www.severntrent.com).OutlookSevern Trent Water has made a good start to AMP4, and whilst it is too early inthe quinquennium to forecast outperformance, the Board is confident thatoperating costs are being well controlled and the capital programme isproceeding in accordance with plan.For Biffa, a detailed review has been undertaken of the UK waste market andwork is now focused on implementing an organic growth strategy through betteroperational performance, building on its existing strengths.Laboratories is expected to continue to face a challenging market in the UnitedStates, but management is taking action on costs and improving the businesscapability through the implementation of a new Laboratories InformationManagement System. Services is expected to continue to improve.The real increase in the interim dividend announced today demonstrates theBoard's confidence in the future performance of the Group.Sir John EganChairmanConsolidated income statementSix months ended 30 September 2005 Unaudited Unaudited Unaudited 6 months to 6 months to Year ended 30 Sept 2005 30 Sept 2004 31 Mar 2005 Notes ‚£m ‚£m ‚£m---------------------------------------------------------------------------Revenue 2 1,174.1 1,038.9 2,081.1 ---------------------------------------------------------------------------Operating costs before exceptional items (892.8) (816.5) (1,679.0)Restructuring costs and terminationof operations 3 - - (14.2)Profit on disposal of property andinvestments 3 - - 11.9 ---------------------------------------------------------------------------Total operating costs (892.8) (816.5) (1,681.3)---------------------------------------------------------------------------Profit before interest and tax (Operating profit) 2 281.3 222.4 399.8 Interest income 4.4 1.1 3.7 Interest payable (88.7) (85.7) (173.0)---------------------------------------------------------------------------Net finance costs before fair value movements in treasury instruments (84.3) (84.6) (169.3) Fair value movements in treasury (33.7) - - instruments ---------------------------------------------------------------------------Total net finance costs (118.0) (84.6) (169.3)---------------------------------------------------------------------------Share of results of associates and joint ventures 2 1.1 1.1 1.8 ---------------------------------------------------------------------------Profit on ordinary activities before taxation 164.4 138.9 232.3 ---------------------------------------------------------------------------Taxation on profit on ordinary activities - current tax 4 (56.2) (25.4) (39.7) - deferred tax 4 6.6 (26.7) (34.4)---------------------------------------------------------------------------Total taxation 4 (49.6) (52.1) (74.1)---------------------------------------------------------------------------Profit for the period 114.8 86.8 158.2 ---------------------------------------------------------------------------Attributable to: Equity shareholders of the company 114.5 86.4 157.5 Equity minority interests 0.3 0.4 0.7 --------------------------------------------------------------------------- 114.8 86.8 158.2 ---------------------------------------------------------------------------Earnings per share (pence) Basic 5 33.1 25.1 45.7 Diluted 5 32.9 25.0 45.3 Group balance sheetAt 30 September 2005 Unaudited Unaudited Unaudited 30 Sept 2005 30 Sept 2004 31 Mar 2005 Notes ‚£m ‚£m ‚£m------------------------------------------------------------------------------ASSETS Non-current assets Intangible assets - goodwill 506.4 501.9 499.1 - other intangible assets 111.0 104.9 125.8 Property, plant and equipment 5,674.4 5,533.7 5,639.4 Interests in joint ventures 9.6 10.3 9.5 Interests in associates 16.1 17.4 16.3 Derivative financial instruments 7.3 - - Available-for-sale financial assets 0.7 0.7 0.7 ------------------------------------------------------------------------------ 6,325.5 6,168.9 6,290.8 Current assets Inventory 66.1 88.8 66.0 Trade and other receivables 543.5 471.8 492.5 Derivative financial instruments 1.2 - - Cash and cash equivalents 101.1 74.9 90.8 ------------------------------------------------------------------------------ 711.9 635.5 649.3 ------------------------------------------------------------------------------Total assets 7,037.4 6,804.4 6,940.1 ------------------------------------------------------------------------------ LIABILITIES Current liabilities Borrowings (590.5) (403.6) (486.5)Derivative financial instruments (14.9) - - Trade and other payables (561.3) (652.7) (578.0)Current tax liabilities (105.3) (77.3) (69.6)Short-term provisions (34.3) (16.9) (32.2)------------------------------------------------------------------------------ (1,306.3) (1,150.5) (1,166.3) Non-current liabilities Borrowings (2,397.4) (2,410.9) (2,498.9)Derivative financial instruments (123.4) - - Trade and other payables (104.1) (36.1) (80.6)Deferred tax liabilities (875.6) (882.6) (902.6)Retirement benefit obligations 11 (319.1) (373.2) (317.5)Long-term provisions (89.8) (92.4) (90.6)------------------------------------------------------------------------------ (3,909.4) (3,795.2) (3,890.2)------------------------------------------------------------------------------Total liabilities (5,215.7) (4,945.7) (5,056.5)------------------------------------------------------------------------------Net assets 1,821.7 1,858.7 1,883.6 ------------------------------------------------------------------------------ EQUITY Capital and reserves attributable to the company's equity shareholders Called up share capital 227.0 225.7 225.8 Share premium account 46.6 37.1 38.4 Hedging reserves 6&7 (72.1) - - Capital redemption reserve 156.1 156.1 156.1 Other reserves 314.2 314.2 314.2 Retained earnings 6&7 1,147.9 1,123.2 1,147.2 ------------------------------------------------------------------------------Equity attributable to the company's equity shareholders 6 1,819.7 1,856.3 1,881.7 Minority interest 2.0 2.4 1.9 ------------------------------------------------------------------------------Total equity 1,821.7 1,858.7 1,883.6 ------------------------------------------------------------------------------Group cash flow statementSix months ended 30 September 2005 Unaudited Unaudited Unaudited 30 Sept 2005 30 Sept 2004 31 Mar 2005 Notes ‚£m ‚£m ‚£m ---------------------------------------------Operating activities Cash generated from operations 9 425.5 359.0 700.5 Interest paid (73.0) (81.2) (136.3)Interest element of finance lease rental payments (18.8) (10.9) (16.8)Tax paid (18.9) (13.2) (36.5)-----------------------------------------------------------------------------Net cash generated from operating activities 314.8 253.7 510.9 -----------------------------------------------------------------------------Investing activities Interest received 12.9 12.2 2.0 Dividends received from associates andjoint ventures 1.0 1.4 3.5 Net loans advanced to associates and joint ventures - 1.2 (1.8)Net cash inflow from available for sale fixed asset investments - - 1.4 Acquisition of subsidiaries net of cash acquired (1.4) (2.2) (3.1)Proceeds on disposal of associate - - 6.5 Proceeds on disposal of property,plant and equipment 3.4 6.9 15.6 Purchases of property, plant and equipment (210.0) (214.2) (529.2)Grants received 15.9 18.1 30.0 -----------------------------------------------------------------------------Net cash used in investing activities (178.2) (176.6) (475.1)----------------------------------------------------------------------------- Financing activities Dividends paid to shareholders of the parent (167.8) (61.1) (162.0)Dividends paid to minority interests - - (0.6)Repayment of borrowings (365.9) (415.4) (442.4)Repayment of obligations under finance (9.9) (6.6) (8.1)leases New loans raised 406.9 363.1 556.6 Purchases of own shares - - (4.1)Issue of shares 9.4 4.1 5.5 -----------------------------------------------------------------------------Net cash used in financing activities (127.3) (115.9) (55.1)-----------------------------------------------------------------------------Increase/(decrease) in cash and cash equivalents 9.3 (38.8) (19.3) Net cash and cash equivalents at beginning of the period 64.4 83.2 83.2 Effect of foreign exchange rates 1.0 (1.3) 0.5 -----------------------------------------------------------------------------Net cash and cash equivalents at the end of the period 74.7 43.1 64.4 -----------------------------------------------------------------------------Net cash and cash equivalents comprise: Cash and cash equivalents 101.1 74.9 90.8 Bank overdrafts (26.4) (31.8) (26.4)-----------------------------------------------------------------------------Net cash and cash equivalents 74.7 43.1 64.4 -----------------------------------------------------------------------------Statement of recognised income and expenseSix months ended 30 September 2005 Unaudited Unaudited Unaudited 30 Sept 30 Sept 31 March 2005 2004 2005 Notes ‚£m ‚£m ‚£m ----------------------------------------Losses on cash flow hedges taken to equity (1.4) - - Amounts on cash flow hedges transferred to the income statement in the period 2.1 - - Deferred tax on cash flow hedging (0.2) - - Exchange movement on translation of overseas results and net assets 13.7 5.0 (4.0)Exchange differences on hedges of net investment (3.9) (1.5) 0.8 Tax on exchange differences on foreign currency hedging 1.1 0.4 (0.2)Actuarial (losses)/gains on defined benefit pension schemes (37.1) 6.0 43.2 Deferred tax on actuarial (losses)/gains on defined benefit pension schemes 0.1 (1.8) (13.0)----------------------------------------------------------------------------Net income recognised directly in equity (25.6) 8.1 26.8 Profit for the period 114.8 86.8 158.2 ----------------------------------------------------------------------------Total recognised income and expense for the period 89.2 94.9 185.0 ---------------------------------------------------------------------------- Attributable to: Equity shareholders of the company 88.8 94.5 184.3 Minority interest 0.4 0.4 0.7 ----------------------------------------------------------------------------Total recognised income and expense for the period 89.2 94.9 185.0 ---------------------------------------------------------------------------- Change in accounting policy on adoption of IAS 32 and IAS 39 - all attributable to equity holders of the parent 7 (56.3) - - ----------------------------------------------------------------------------Notes1 Basis of preparationFor the year ending 31 March 2006 the Group will be required to prepareconsolidated financial statements under International Accounting Standards asadopted by the European Commission. These will be those InternationalAccounting Standards, International Financial Reporting Standards and relatedinterpretations (SIC-IFRIC interpretations), subsequent amendments to thosestandards and related interpretations, future standards and relatedinterpretations issued or adopted by the International Accounting StandardsBoard (IASB) that have been endorsed by the European Commission as at 31 March2006 and are referred to in this document as IFRS.The interim financial information has been prepared in accordance with IFRS,using the accounting policies that were set out in the Group's announcement ofthe impacts of implementing IFRS on 19 September 2005, which is available onthe Group's website: www.severntrent.com.The preliminary opening balance sheet and comparatives for 2004/05 wereprepared by management using its best knowledge of the expected standards andinterpretations of the International Accounting Standards Board, facts andcircumstances, and accounting policies that will be applied when the Groupprepares its first complete set of IFRS financial statements as at 31 March2006. Therefore, until such time, the possibility cannot be excluded that thepreliminary opening balance sheet may require adjustment before constitutingthe final opening balance sheet.The information for the year ended 31 March 2005 does not constitute statutoryaccounts as defined in Section 240 of the Companies Act 1985 but has beenextracted from the reconciliations of UK GAAP to IFRS presented in theannouncement referred to above. The UK GAAP financial information as at 31March 2005 within the announcement document had been extracted from the 2005statutory financial statements which have been filed with the Registrar ofCompanies. The auditors' report on those accounts was unqualified.Adoption of IAS 32 and IAS 39 "Financial Instruments"IFRS1, "First-time adoption of International Financial Reporting Standards"sets out procedures to be followed when IFRS is adopted for the first time.In relation to IAS 32 and IAS 39, IFRS 1 allows companies to opt to apply thesestandards from the date of the opening balance sheet of the first periodreported under IFRS without restating the comparative period. The Group haschosen this option as previously announced.The application of IAS 32 and IAS 39 affects the Group balance sheetprincipally in respect of derivative financial instruments, which arerecognised in the balance sheet at their fair value as financial assets orliabilities. The net effect of this at 1 April 2005 is to reduce equity by ‚£56.3 million due to the recognition of additional financial liabilities and acorresponding deferred tax asset. Further details are set out in note 7 to theinterim financial information.2 Segmental analysisPrimary segments Profit before interest Revenue and tax ------------------------------------------- 2005 2004 2005 2004Six months ended 30 September ‚£m ‚£m ‚£m ‚£m---------------------------------------------------------------------------Water and sewerage 583.5 505.7 240.2 176.4 Waste management 386.9 353.0 43.5 43.9 Laboratories 84.0 85.0 7.3 10.0 Water purification and operating services 126.2 102.6 5.5 3.4 Other businesses 30.9 36.6 (3.4) (0.9)Inter segment trading (37.4) (44.0) (0.6) 0.2 --------------------------------------------------------------------------- 1,174.1 1,038.9 292.5 233.0 Unallocated corporate expenses - - (11.2) (10.6)---------------------------------------------------------------------------Group 1,174.1 1,038.9 281.3 222.4 ---------------------------------------------------------------------------The share of profit of associates and joint ventures was as follows 2005 2004Six months ended 30 September ‚£m ‚£m---------------------------------------------------Water and sewerage - - Waste management 0.5 0.6 Laboratories - - Water purification and operating services 0.8 0.6 Other businesses (0.2) (0.1)---------------------------------------------------Group share of results of associates and joint ventures 1.1 1.1 --------------------------------------------------- Secondary segments Revenue ------------------- 2005 2004Six months ended 30 September ‚£m ‚£m--------------------------------------------------- United Kingdom 978.1 847.8 Rest of Europe 47.9 43.4 USA 147.4 146.0 Other 0.7 1.7 -------------------------------------------------- 1,174.1 1,038.9 ---------------------------------------------------3 Exceptional restructuring costs, termination of operations and profit ondisposal of property and investmentsIn 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.4 Taxation Six months ended Six months ended 30 Sept 2005 30 Sept 2004 ‚£m ‚£mCurrent tax UK corporation tax (58.5) (25.5)UK corporation tax prior year 4.0 2.7 Overseas tax (1.7) (2.6)------------------------------------------------------------------------ (56.2) (25.4)Deferred taxation 6.6 (26.7)------------------------------------------------------------------------ (49.6) (52.1)------------------------------------------------------------------------5 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 period, excluding those held in the Severn Trent EmployeeShare Ownership 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 theperiod and LTIP awards where the vesting conditions have been satisfied at thebalance sheet date.Supplementary, 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. The directors considerthat the adjusted figures provide a useful additional indication ofperformance. Six months ended 30 Sept 2005 ------------------------------------ Weighted average Per number share Earnings of shares amount ‚£m m pence------------------------------------------------------------------------------Basic earnings per share 114.5 346.1 33.1 Effect of dilutive options - staff share plans - 2.0 (0.2)------------------------------------------------------------------------------Diluted earnings per share 114.5 348.1 32.9 ------------------------------------------------------------------------------ Adjusted earnings per share ------------------------------------------------------------------------------Basic earnings per share 114.5 346.1 33.1 Fair value movements in treasury instruments 33.7 - 9.7 Effect of deferred tax (6.6) - (1.9)------------------------------------------------------------------------------ Adjusted basic earnings per share 141.6 346.1 40.9 ------------------------------------------------------------------------------Diluted earnings per share 114.5 348.1 32.9 Fair value movements in treasury instruments 33.7 - 9.7 Effect of deferred tax (6.6) - (1.9)------------------------------------------------------------------------------Adjusted diluted earnings per share 141.6 348.1 40.7 ------------------------------------------------------------------------------ Six months ended 30 Sept 2004 ------------------------------------ Weighted average Per number share Earnings of shares amount ‚£m m pence------------------------------------------------------------------------------Basic earnings per share 86.4 344.5 25.1 Effect of dilutive options - staff share plans - 1.7 (0.1)------------------------------------------------------------------------------Diluted earnings per share 86.4 346.2 25.0 ------------------------------------------------------------------------------ Adjusted earnings per share ------------------------------------------------------------------------------Basic earnings per share 86.4 344.5 25.1 Fair value movements in treasury instruments - - - Effect of deferred tax 26.7 - 7.7 ------------------------------------------------------------------------------ Adjusted basic earnings per share 113.1 344.5 32.8 ------------------------------------------------------------------------------Diluted earnings per share 86.4 346.2 25.0 Fair value movements in treasury instruments - - - Effect of deferred tax 26.7 - 7.7 ------------------------------------------------------------------------------Adjusted diluted earnings per share 113.1 346.2 32.7 ------------------------------------------------------------------------------6 Consolidated statement of changes in equity Six months ended 30 September 2005 30 Sept 2005 30 Sept 2004 31 Mar 2005 ‚£m ‚£m ‚£m-------------------------------------------------------------------------------At 1 April (as previously reported under UK GAAP) 2,198.1 2,213.7 2,213.7 Adjustment to opening shareholders' funds for IFRS conversion (note 7) (316.4) (358.1) (358.1)Adjustment to opening shareholders' funds for adoption of IAS 32 and IAS 39 (note 7) (56.3) - - -------------------------------------------------------------------------------At 1 April (as restated) 1,825.4 1,855.6 1,855.6 Profit for the financial period 114.5 86.4 157.5 Net income recognised directly in equity (25.7) 8.1 26.8 Shares issued 9.4 4.1 5.5 Own shares purchased - - (4.1)Credit from share based payments charge (note 10) 2.2 2.0 4.1 Deferred tax on items posted directly to reserves (1.3) 1.0 - Dividends appropriated from reserves (104.8) (100.9) (163.7)-------------------------------------------------------------------------------Net addition to/(reduction in) equity shareholders' funds (5.7) 0.7 26.1 -------------------------------------------------------------------------------Closing equity shareholders' funds 1,819.7 1,856.3 1,881.7 -------------------------------------------------------------------------------7 Prior year adjustmentReconciliations from UK GAAP to IFRS of the Group balance sheet as at 1 April2004 (the date of transition to IFRS), 30 September 2004 and 31 March 2005 (thedate of the last UK GAAP financial statements) together with the reconciliationof the consolidated income statement have been published on the Company'swebsite at www.severntrent.com.IAS 39, "Financial instruments: Recognition and Measurement" and IAS 32,"Financial Instruments: Disclosure and Presentation" have not been applied tothe six months ending 30 September 2004 or to the 12 months ending 31 March2005 because the Group has taken a transitional exemption and adopted thosestandards prospectively from 1 April 2005.The effect of the transitional adjustment on the balance sheet as at 1 April2005 is as follows: Transitional 31 Mar 2005 adjustment 1 April 2005 ‚£m ‚£m ‚£m Non-current assets Derivative financial instruments - 2.7 2.7 --------------------------------------------------------------------------- - 2.7 2.7 ---------------------------------------------------------------------------Current liabilities Trade and other payables (609.0) (7.0) (616.0)Borrowings (486.5) 7.4 (479.1)Derivative financial instruments - (7.4) (7.4)--------------------------------------------------------------------------- (1,095.5) (7.0) (1,102.5)--------------------------------------------------------------------------- Non-current liabilities Borrowings (2,498.9) 24.6 (2,474.3)Derivative financial instruments - (97.8) (97.8)Deferred tax liabilities (902.6) 21.2 (881.4)--------------------------------------------------------------------------- (3,401.5) (52.0) (3,453.5)--------------------------------------------------------------------------- ---------------------------------------------------------------------------Capital and reserves 1,883.6 (56.3) 1,827.3 ---------------------------------------------------------------------------8 Interim dividendAmounts recognised as distributions to equity shareholders in the period:Final dividend for the year ended 31 March 2005 of 30.30 pence(2004: 29.27 pence). The total cost of this dividend is ‚£104.8 million(2004: ‚£100.9 million) and was recognised as an expense in the 6 monthsending 30 September 2005.The Board has declared an interim dividend of 19.16p per ordinary share(2004: 18.21p) to be paid on 25 January 2006. The shares will be traded 'ex-dividend'with effect from 14 December 2005. This dividend has not been included as aliability as at 30 September 2005.The cost of the proposed interim dividend will be ‚£66.5 million(2004: ‚£62.8 million).9 Reconciliation of operating profit to operating cash flows Six months ended Six months ended 30 Sept 2005 30 Sept 2004 ‚£m ‚£m Operating profit 281.3 222.4 Depreciation charge 128.9 130.2 Amortisation of intangibles 12.1 10.5 Profit on sale of property, plant and equipment 0.3 (3.2)Profit on sale of investments - (1.4)Deferred income movement (1.4) (1.2)Provisions for liabilities and charges 17.2 8.5 Utilisation of provisions for liabilities and charges (17.3) (9.8)Movement in working capital, retirement benefit obligation and share-based payments 4.4 3.0 ---------------------------------Net cash inflow from operating activities 425.5 359.0 ---------------------------------10 Share based paymentsDuring the six months to 30 September 2005, the Group has granted a new seriesof Long Term Incentive Plan awards. The fair value of these awards has beencalculated as ‚£4.68 per share for awards with a Total Shareholder Returnelement and ‚£10.17 per share for awards with Economic Profit targets. The fairvalue of these awards will be charged to the income statement over the vestingperiod (3 years).During the six months to 30 September 2005, the Group has granted a new seriesof Save As You Earn awards. The fair value of these awards has been calculatedas ‚£2.318 per share for the 3 year scheme, ‚£2.268 per share for the 5 yearscheme and ‚£2.158 per share for the 7 year scheme. The fair value of theseawards will be charged to the income statement over the vesting period.The total share based payment charge recognised in the income statement to 30September 2005 is ‚£2.2 million (2004: ‚£2.0 million).11 Retirement benefit schemesThe Group operates four defined benefit schemes being the Severn Trent PensionScheme, the Severn Trent Mirror Image Scheme, the Severn Trent Senior StaffPension Scheme and the UK Waste Pension Scheme. In addition there is anunfunded scheme operating to cover senior executives whose emoluments are inexcess of the pension cap. The assets and liabilities at the balance sheetdates were as follows: 30 Sept 2005 30 Sept 2004 31 Mar 2005 ‚£m ‚£m ‚£m ---------------------------------------Severn Trent Pension Scheme Assets 1,057.4 819.8 907.6 Liabilities (1,333.2) (1,138.3) (1,177.8) ----------------------------------------------------------- Deficit (275.8) (318.5) (270.2) Severn Trent Mirror Image Scheme Assets 103.0 88.5 92.1 Liabilities (107.9) (98.5) (99.6) ----------------------------------------------------------- Deficit (4.9) (10.0) (7.5) Severn Trent Senior Staff Pension Scheme Assets 53.2 40.2 46.4 Liabilities (62.6) (55.6) (58.4) ----------------------------------------------------------- Deficit (9.4) (15.4) (12.0) UK Waste Pension Scheme Assets 38.4 27.7 30.8 Liabilities (56.1) (48.0) (49.1) ----------------------------------------------------------- Deficit (17.7) (20.3) (18.3) Unfunded scheme Liabilities and deficit (11.3) (9.0) (9.5)--------------------------------------------------------------------------- Total deficit recognised on balance sheet (319.1) (373.2) (317.5)---------------------------------------------------------------------------The amounts recognised in the income statement are as follows: Six months to Six months Year ended 30 Sept 2005 30 Sept 2004 31 Mar 2005 ‚£m ‚£m ‚£m ----------------------------------------Severn Trent Pension Scheme Current service cost (18.1) (17.7) (36.6) Settlements and curtailments - - (2.8) ---------------------------------------------------------------- Operating cost (18.1) (17.7) (39.4) Financing income/(cost) 2.0 (0.3) (0.6) Severn Trent Mirror Image Scheme Current service cost (0.4) (0.4) (0.9) Settlements and curtailments - - (1.2) ---------------------------------------------------------------- Operating cost (0.4) (0.4) (2.1) Financing income 0.2 0.2 0.4 Severn Trent Senior Staff Pension Scheme Current service cost (0.5) (0.6) (1.2) Financing income/(cost) 0.1 (0.1) - UK Waste Pension Scheme Current service cost (0.7) (0.7) (1.4) Financing cost (0.1) (0.3) (0.6) Unfunded scheme Current service cost (0.4) (0.6) (1.2) Financing cost (0.3) (0.2) (0.4)---------------------------------------------------------------------------Total operating cost (20.1) (20.0) (45.3) Total financing income/(cost) 1.9 (0.7) (1.2)--------------------------------------------------------------------------- Six months to Six months to Year ended 30 Sept 2005 30 Sept 2004 31 Mar 2005 ‚£m ‚£m ‚£m -----------------------------------------Deficit in the schemes at the beginning of the period (317.5) (376.5) (376.5)Contributions 53.7 18.0 62.3 Current service cost (20.1) (20.0) (41.3)Loss on settlements and - - (4.0)curtailments Other financial income 1.9 (0.7) (1.2)Actuarial (loss)/gain (37.1) 6.0 43.2 ---------------------------------------------------------------------------Deficit in the schemes at the end of the period (319.1) (373.2) (317.5)---------------------------------------------------------------------------12 Interim statementThe interim report and accounts were approved by a committee of the Board ofDirectors on 5 December 2005.Further copies of this interim statement may be obtained from the CompanySecretary, Severn Trent Plc, 2297 Coventry Road, Birmingham B26 3PU.13 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.14 Cautionary statementThis 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).15 Other informationThe interim report for the six months to 30 September 2005, including extractsfrom this announcement and the independent review report by the auditors, willbe advertised in The Financial Times on 7 December 2005. Copies will beavailable to the public at Severn Trent's registered office and on its website www.severntrent.comINDEPENDENT REVIEW REPORT TO SEVERN TRENT PlcIntroductionWe have been instructed by the company to review the financial information forthe six months ended 30 September 2005 which comprises the income statement,the balance sheet, the cash flow statement, the statement of recognised incomeand expense and related notes. We have read the other information contained inthe interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information.This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed.International Financial Reporting StandardsAs disclosed in note 1, the next annual financial statements of the group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules.Review work performedWe conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management andapplying analytical procedures to the financial information and underlyingfinancial data and, based thereon, assessing whether the accounting policiesand presentation have been consistently applied unless otherwise disclosed. Areview excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit performed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information.Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005.Deloitte & Touche LLPChartered AccountantsLondon5 December 2005ENDSEVERN TRENT PLCRelated Shares:
Severn Trent