Preliminary Announcement of Annual Results

19 May 2021

Results for the year to 31 March 2021

 

Record reward for customer ODIs, and generating long-term RCV growth through investment to support the Green Recovery

 

Strong operational performance resulting in best ever ODIs for customers

·     Sector-leading delivery on customer ODIs¹ leading to c.80% of measures in positive territory and a net outperformance reward of £79 million across all operational areas

·     Strong year on water measures, with improvements in water quality metrics, resulting in net positive financial reward

·     Best ever pollutions performance and consistent top performer in waste, including strong performance on blockages and sewer flooding

·     Focused on our customers with top five position for utilities on UK Customer Satisfaction Index, and year-on-year progress in customer complaints and experience measures

·     Fast start to AMP7² regulatory period seen through accelerated capital programme, with more than £590 million investment in year

 

Resilient financial performance in line with expectations 

·     Group turnover³ of £1,827 million, down 0.9%, with c.£50 million net impact of lower consumption due to COVID-19 lockdowns, the regulatory model allows us to recover this later in the AMP

·     Adjusted PBIT⁴ of £473 million, in line with expectations, down 17.1% as a result of PR19 rebasing of tariffs, the net impact of COVID-19 on consumption and additional investment to drive our customer ODI performance. Reported PBIT of £471 million (2020: £568 million)

·     Strong household cash collection, up £61 million (5.2%) year-on-year, helping reduce bad debt charge to 3.0% of household revenue

·     Effective interest cost reduced 30 bps to 3.4%; RCF refinanced through our Sustainable Finance Framework; sufficient liquidity through to December 2022

·     Adjusted basic EPS⁵ at 105.4 pence and basic EPS at 89.1 pence, in line with expectations

·     Proposed final dividend of 60.95 pence, bringing full year dividend to 101.58 pence

 

Supporting our environment, our communities, our colleagues

·     On track to deliver our Triple Carbon Pledge, with Scope 2 emissions already near zero and gross greenhouse gas emissions reduced by more than 50% since last year⁶ 

·     £6.9 million awarded to charities and communities in our region, including our response to COVID-19

·     Leader in diversity, strong positions in Hampton-Alexander Review, Social Mobility Index, Equileap's 2021 Gender Equality Global Report and Ranking, Tortoise Responsibility100 and Stonewall Index

 

Creating jobs and helping the region bounce back through the Green Recovery

·     Awarded £565 million⁷ of new investment from Ofwat's Green Recovery programme; increasing RCV real growth this AMP from 3.8% to 10.4%

·     Innovative environmental schemes will help create c.2,500 jobs, support customers and improve the environment

·     Projects include plans to promote wild swimming in two rivers in our region, and using natural solutions to protect customers in Mansfield from flooding

·     We have separately announced today our intention to conduct an equity placing through the issue of new ordinary shares to raise approximately £250 million of gross proceeds that will be used to fund the Green Recovery projects 

 

  

Liv Garfield, Chief Executive, said:

"The last year has thrown up multiple challenges for us but it's clear everyone at Severn Trent has responded superbly to the new normal we find ourselves in. Our industry-leading customer ODI performance shows just how much we've been able to improve our services, often while working in very difficult circumstances.

 

At the same time, we've increased the support we give to our customers and the communities we serve, from  schemes for the most vulnerable to the extra funding we've made available to help charities and not-for-profits get through the pandemic.

 

We took a very early decision to be at the forefront of efforts to help our region bounce back. That is why it was such good news that we'd been successful with our Green Economic Recovery proposal, meaning we can invest even more in sustainable projects and help create thousands of jobs. Add in our ambitious Kickstart programme, the launch of the Great Big Nature Boost, and our sustainability support for the Birmingham Commonwealth Games and it's clear, both operationally and environmentally, that it's been a strong year for Severn Trent."

 

Group results

 

	2021	2020	Increase/ (decrease)
	£m	£m	%
Group turnover	1,827.2	1,843.5	(0.9)
Adjusted Group PBIT4	472.8	570.3	(17.1)
Group PBIT	470.7	568.2	(17.2)

 

	pence/	pence/
	share	share
Adjusted basic EPS5	105.4	146.0	(27.8)
Basic earnings per share	89.1	66.7	33.6
Total ordinary dividends	101.58	100.08	1.5

 

Footnotes to pages 1 and 2 of this RNS

1.     ODIs = Customer Outcome Delivery Incentives, quoted pre-tax and in 2017/18 prices unless otherwise stated. Our ODI outturn and percentage meeting or ahead of regulatory target (or within penalty deadband for compliance measures) reflects our in-period performance commitments - excluding per capita consumption (now an end of period commitment). ODI values for C-MeX and D-MeX (forecast) are calculated based on latest published industry data. A definitive value will be published by Ofwat later in the year.

2.     Asset Management Plan (see glossary).

3.     Shown after including diversions income of £17.5 million and deferred income of £15.5 million, which were deducted from operating costs and infrastructure renewals expenditure in previous years.

4.     Adjusted profit before interest and tax (PBIT) excludes exceptional operating items and amortisation of acquired intangible assets.

5.     Adjusted basic EPS is set out in note 10.

6.     On a Market-Based Method basis, as defined in the GHG Protocol Scope 2 Guidance.

7.     Quoted in 2017/18 prices, equivalent to c.£624 million in nominal prices.

 

Note: FY2021/22 technical guidance is included in the Chief Financial Officer's section of this announcement.

 

 

Enquiries
Investors & Analysts
Stuart Howell	Severn Trent Plc	+44 (0) 770 371 8361
Head of Investor Relations
Selina Soma	Severn Trent Plc	+44 (0) 797 693 8604
Investor Relations Manager
Media
Jonathan Sibun	Tulchan Communications	+44 (0) 207 353 4200
Press Office	Severn Trent Plc	+44 (0) 247 771 5640

 

 

Preliminary Results Presentation and Webcast

 

 

A presentation of these results hosted by Liv Garfield, CEO, and James Bowling, CFO, will be available on our website (severntrent.com) from 7.00am BST today, 19 May 2021.

 

We will be hosting a live Q&A session with Liv, James and our wider Executive team at 8.00am BST today via video call.

 

 

 

Chief Executive's Review

For a lot of us this has been a year like no other, with challenges but also opportunities for the business, which have placed us firmly at the heart of the communities in which we live and work.

Like many other companies, the pandemic has impacted our financial performance, although our regulatory model will allow us to recover much of the lost revenue in later years. But the last year has also reinforced the performance culture we've built in Severn Trent, leading to net customer ODI rewards of £79 million - the highest seen in the water industry since ODIs were introduced.

Our sector-leading performance is a result of our teams' hard work in the most trying of circumstances. Whether working on the streets, in our treatment works or at home in support of our operational teams, we remained committed to doing the best job we could for all our customers.

What's been particularly heartening is that, through increasingly using data-led insight, we have improved resilience and service for our customers across all our areas - waste, water, environment and customers - with around 80% of our measures in positive territory.

This success puts us in a great place for our ambitious Green Economic Recovery proposals. Following Ofwat's announcement on 17 May, we've been awarded £565 million, which represents a significant incremental investment opportunity over the next four years and importantly will supplement the work we do now in our communities, providing employment, resilience and improved natural surroundings. It will create jobs on projects ranging from bathing standard river quality to protecting Mansfield from flooding while also providing long-term asset growth for Severn Trent.

We're proposing a final dividend of 60.95 pence bringing our full year dividend to 101.58 pence, in line with our AMP7 policy. As a company that hasn't required government support this year, and knowing the importance many of our shareholders place on receiving a dividend, we decided to continue with our stated policy.

Improvements in water tempered by challenges

Our overall water performance has improved markedly, with 85% of ODIs in positive territory resulting in a £9 million net reward, making this our best year to date. We continue to focus on those measures which matter to our customers, including a strong year on our Compliance Risk Index scores, a measure designed to show the risk from treated water compliance failures, and a notable reduction in water quality complaints performance, improving over 60% and 10% respectively.

We also saw how we can move from reward to penalty on some measures through unexpected events. The various lockdowns saw an increase in personal water consumption, and there were occasional issues for customers due to unexpected events such as pipe bursts.

In Hafren Dyfrdwy, we've seen a step change in service for our customers in north and mid Wales, with the majority of our ODI measures moving into reward, compared to less than half last year. We've been at the forefront of supporting the lead-free Wales ambition, exceeding our pipe replacement target by four times.

Working smarter in waste

Our performance on waste continues to be strong, as it has been since the introduction of ODIs, and this year our strategy of working smarter and then targeting problem areas and assets has paid off.

While there has undoubtedly been a lockdown effect, with fewer restaurants open for example, our own work in reducing blockages by 30% had a beneficial effect on public sewer flooding, which was down 31%, and both have helped our pollutions figure, for which we had our best ever year, beating our target by 20%.

To achieve that, we've not only targeted assets where there were clearly improvements to be made, we've also made our network smarter by fitting 1,500 sensors to our sewers. The insight we gained into our network provided more resilience and is helping us to spot and fix issues before they affect customers. We aim to roll out 40,000 of the sensors by 2025 to give us a far better, smarter view of what's happening in our sewer pipes.

Despite schools being closed or locked down to external visitors, our Education team managed to beat its target to educate the region's children through 750 online lessons on how to protect our sewers, helping create a generation with a greater appreciation about what to, and what not to flush down the toilet and pour down the drain.

Environment - ambitious plans

We've had a fast start to our AMP7 environmental programme, delivering twice over on our full AMP biodiversity target in the first year and launching our Great Big Nature Boost, through which we aim to plant 1.3 million trees, revive 12,000 acres, and restore more than 2,000 kilometres of rivers throughout the region, together with schemes helping the release of beavers into the wild in Nottinghamshire and Derbyshire later this year.

We are on track with our Triple Carbon Pledge, and now only use fully renewable-backed electricity from our energy suppliers. Our electric vehicle (EV) fleet continues to increase in size, and we're aiming to be all-electric by 2030. We've also offered our employees access to an EV scheme to encourage them to reduce their own impact. Our ongoing commitment to self-generate our own energy from renewable sources continues to deliver, as we produced the equivalent of 53% of the electricity we used during the year, helping cut our emissions further. Finally, we submitted our proposed Scope 1, 2 and 3 emissions targets to the Science Based Targets Initiative, committing us to deliver significant reductions in our greenhouse gas emissions by 2030 in line with our journey to Net Zero, and we'll be putting our climate action plans to a non-binding vote at our AGM later this year.

Our customers

Our customers remain at the heart of our business, and we aim to make their lives a little easier in everything we do. Our efforts were reflected in a top five utility company position in the UKCSI, reducing customer complaints, and a net positive reward position for our combined C-MeX and D-MeX scores.

We've recognised just how difficult the pandemic has been for many of our customers, which is why we launched our Back on Track tariff to support those affected through the pandemic, as well as promoting our pre-existing support schemes - WaterSure, the Big Difference Scheme, and the Severn Trent Trust Fund. As a result, we've more than doubled the number of customers we've helped to more than 150,000 and increased the number of people signed up to our Priority Services Register, to 107,000, meaning, on the rare occasions we have an issue, we can target support to our most vulnerable customers.

Our bills are among the lowest in the land and, in the case of our Welsh business, Hafren Dyfrdwy, they were the lowest average combined bills for the second year in a row. This affordability meant that, despite the ongoing issues for many of our customers, household cash collection for the Group improved 5.2% compared to last year, which also had a positive effect on our bad debt costs.

Investment increased

We've continued our accelerated capital programme by spending over £590 million in the year, taking advantage of quieter conditions to bring forward £90 million of activity. This has given us a head start on our AMP7 investment, increasing our capacity for future years, helping us outperform our operational targets, and bringing forward carbon and cost benefits from our bioresources business.

Even more excitingly, we were delighted to gain regulatory approval for our innovative plans for six projects that will help the Midlands bounce back after the pandemic by investing £565 million from the Green Recovery scheme, creating c.2,500 jobs, and improving the environment in which we operate. We believe our success in the scheme was down to our desire to put forward projects that not only created jobs through new investment but that were also truly innovative in the sector and that would leave a lasting legacy for generations to come. All six projects have something new and creative about them and it's truly inspiring to be part of these initiatives, whether that's improving river quality, turning Mansfield into a flood-resilient community by installing a range of nature-based solutions such as drainage ponds, or installing more than 150,000 smart water meters across Coventry and Warwickshire to help customers manage their own usage.

Our people

We believe investment in our own people is money well spent, helping build and develop a skills base that will serve us for many years to come. Our new £10 million Academy was opened earlier this month, offering colleagues classroom training and experiential learning. Even before its official opening, we've completed 7,000 days of training for 2,400 people over 1,600 in-house events.

At the half-year we spoke of our plans to offer 500 placements under the Government's Kickstart scheme and I'm delighted that not only have the first 170 or so started work with us, we've also been able to offer permanent roles to some of them. Despite the pandemic, we will provide a fantastic workplace and developmental experience for all 500 by the end of the year. Looking forward, we've made one of the largest commitments to the #10000BlackInterns programme by committing to host 100 work placements across our business next year.

As well as building skills internally, we continue to be an employer of choice for new talent. A big part of that is our commitment to diversity and social inclusion. It's the right thing to do and we believe makes us a more attractive employer. While we don't make our commitments to win awards, it's still heartening to be recognised for the hard work we've carried out, which has led to strong standing in the Hampton Alexander Review, Social Mobility Index, Equileap Gender Equality Global Rankings, Tortoise Responsibility100, and Stonewall Index.

Supporting our communities

Next year the Commonwealth Games is coming to our region and we're delighted to be the official Nature & Carbon Neutral Supporter of Birmingham 2022. We'll be supporting the organisers' ambitions to create the first carbon-neutral games, and as part of that, we'll be planting 2,022 acres of forest and creating 72 mini-forests, one for each of the competing nations, delivering a lasting social and environmental legacy. The Games will give us the chance to not only further our environmental goals but also to engage our own people in a major international sporting event taking place right in the heart of our region.

By awarding over £3 million to over 400 charities and not-for-profits in our region we've helped make a real difference to the communities in which we live and work, especially given the challenges many such organisations have had this year in raising funds. I've visited several groups supporting our customers through the pandemic to see what a fantastic job they've been doing for the past year.

We've also supported our SME suppliers by moving to immediate payment through the pandemic, providing valuable extra cashflow during a difficult time.

The placing

Our Directors believe the equity placing will position the business to best deliver our Green Recovery growth plans and improved financial performance in the future. That means we are confident it will benefit all our stakeholders, from investors to the communities we serve.

The placing has been structured as a non-pre-emptive offer to maximise the efficiency of the process. However, we recognise the importance of pre-emption rights to our smaller shareholders and to that end we have made available a separate retail offer to give retail investors the opportunity to participate in the equity fundraising alongside the institutional placing.

 

Conclusion

Despite a tough year, we've made the most of achieving fast-track status and have taken a number of great steps forward. Our sector-leading ODI performance is proof of our commitment to working smarter - whether by finding simple, cost-effective solutions or by introducing industry-leading innovations - across our key performance areas. We've supported our customers and our communities during the pandemic and will continue to do so. Combined with our environmental commitments, we believe we're leaving a real lasting legacy for generations to come.

 

 

Chief Financial Officer's Review

 

At the end of a challenging year I'm pleased to report a resilient financial performance in line with our expectations. A summary for the year is set out below:

 

 

		2021	2020	Change
		£m	£m	£m	%
Turnover		1,827.2	1,843.5	(16.3)	(0.9)
Adjusted PBIT		472.8	570.3	(97.5)	(17.1)
Adjusting items		(2.1)	(2.1)	‒	‒
PBIT		470.7	568.2	(97.5)	(17.2)
Net finance costs		(187.1)	(188.4)	1.3	0.7
Gains/losses on financial instruments, share of results of joint venture and impairment of loans receivable		(16.4)	(69.1)	52.7	76.3
Profit before tax		267.2	310.7	(43.5)	(14.0)
Tax		(55.0)	(151.9)	96.9	63.8
Profit for the year		212.2	158.8	53.4	33.6

 

 

      As expected, our turnover this year reflected the rebasing of tariffs under the price review, and the significant impact of the COVID-19 lockdowns. This time last year we guided to a £50 million to £85 million reduction in revenue, and we have seen the impact at the low end of this range, as higher domestic usage helped mitigate the significant decline in non-household consumption. Under the regulatory model we will be able to recover the shortfall in this year's allowed wholesale revenue in 2022/23. This decline in revenue was offset on a reported basis by a £33 million reclassification of deferred income and diversions income now released to revenue (previously credited to operating costs).

 

      Adjusted PBIT was down 17.1% to £472.8 million. In addition to the impact of lower revenue, we spent more through our net labour, hired and contracted and other cost lines to support our strong customer ODI performance, and saw anticipated increases in power and chemical costs and depreciation. Our bad debt costs were down year-on-year, as strong household customer cash collections helped reduce our underlying bad debt charge, only partly offset by the additional provision we have made to account for forecasted COVID-19 related rises in unemployment. Business Services PBIT was also lower, in part due to lower energy prices and also the timing of property transactions during an unsettled year.

 

      Reported Group PBIT was down 17.2% to £470.7 million (2019/20: £568.2 million).

 

We continue to benefit from both low inflation on our index-linked debt and fixed debt issued at low interest rates in recent years. Our effective interest cost was 30 bps lower at 3.4% (2019/20: 3.7%) and our effective cash cost of interest was flat at 3.1% (2019/20: 3.1%).

 

We have recognised our £8.9 million share of Water Plus's loss for this year and the £4.9 million of exceptional losses that were disclosed but not recognised in the previous year. Last year we recorded losses of £46.8 million in relation to Water Plus, mainly arising from impairment losses due to the expected impacts of COVID-19. After obtaining £70 million of external finance during the year the business is now well placed to benefit from increased economic activity after lockdown.

 

Our full effective tax rate was 20.6% and our adjusted effective tax rate was 11.4%, up from 10.4% in 2019/20 largely due to lower pension contributions in the year.

 

Reported Group profit after tax increased to £212.2 million (2020: £158.8 million). Basic earnings per share increased to 89.1 pence, (2019/20: 66.7 pence) and adjusted basic earnings per share were down 27.8% to 105.4 pence per share, in line with expectations.

 

Operational cash flow was £860.3 million, a reduction of £28.2 million as a result of lower PBIT partially offset by higher depreciation and amortisation and improved cash collection from household customers. Cash capex was £206.3 million lower than the previous year, when we completed major end of AMP6 projects. Net cash outflow before changes in net debt was £170.2 million (2019/20: £348.2 million).

 

Our net debt was £6,443.8 million (2020: £6,231.5 million) and regulated gearing was 64.5% (2020: 64.4%) reflecting strong capital management despite the impact of low inflation on our RCV. In April 2021 we renewed our £1.0 billion revolving credit facility, extending its maturity to 2026. Our cash flow requirements are now funded to December 2022.

 

Our RoRE for the year was 5.8%, 190 bps above the base return of 3.9%. This outperformance came from our customer ODIs, following continued outperformance on our Waste measures and improvements in Water, and financing, as the continued reduction in our effective interest cost exceeded the drag of lower inflation in the year compared to Ofwat's Final Determination assumption. This outperformance was partly offset by higher totex reflecting early investment to enhance our resilience and support ODI performance and the COVID-19 related bad debt charge.

 

Changes to segmental presentation

 

Last year the Bioresources and Developer Services businesses were managed by, and included in, Business Services. Both of these businesses form part of the appointed businesses of Severn Trent Water and Hafren Dyfrdwy, are included in the regulatory settlement determined by Ofwat and are now managed by our Regulated Water and Waste Water team. We have therefore amended our segmental presentation to include Bioresources and Developer Services within our Regulated Water and Waste Water business.

 

We have restated the prior year segmental analysis to present both years on a consistent basis. Details of the adjustments made are set out in note 2 to the financial statements.

 

Regulated Water and Waste Water

 

 

	2021	2020  (restated)	Change
	£m	£m	£m	%
Turnover	1,693.9	1,708.1	(14.2)	(0.8)
Net labour costs	(156.0)	(151.8)	(4.2)	(2.8)
Net hired and contracted costs	(187.5)	(174.6)	(12.9)	(7.4)
Power	(100.0)	(94.2)	(5.8)	(6.2)
Raw materials and consumables	(61.3)	(54.9)	(6.4)	(11.7)
Bad debts	(40.5)	(42.5)	2.0	4.7
Other costs	(181.5)	(147.3)	(34.2)	(23.2)
	(726.8)	(665.3)	(61.5)	(9.2)
Infrastructure renewals expenditure	(151.0)	(149.6)	(1.4)	(0.9)
Depreciation	(364.0)	(352.8)	(11.2)	(3.2)
Adjusted PBIT	452.1	540.4	(88.3)	(16.3)

 

 

Turnover for our Regulated Water and Waste Water business was £1,693.9 million (2019/20: £1,708.1 million) and adjusted PBIT was £452.1 million (2019/20: £540.4 million).

 

The key components of the £14.2 million decline in revenue were:

 

·    A below-inflation annual increase in regulated revenue, largely as a result of the price review rebasing of tariffs at the start of AMP7 (£15 million)

·    An increase of £33 million from the reclassification of deferred income releases and diversions income (previously credited to operating costs and infrastructure renewals expenditure - see note 1)

·    A net decrease of £50 million due to lower consumption by commercial customers, partially offset by increases in domestic usage during the national lockdowns and the dry summer period

·    Other net decreases as a result of legacy refunds to non-household retailers and other adjustments (£12 million)

 

We carried forward ODI rewards from AMP6 of approximately £191 million in nominal prices. Our turnover in the year ended 31 March 2021 includes £38.2 million from these rewards.

 

Net labour costs of £156.0 million were up 2.8% compared to the prior year. Gross employee costs increased due to the annual pay award of 2.3% and insourcing of design activity in our Capital Delivery team. This was partially offset by higher capitalisation of employee costs, largely related to this insourcing activity.

 

Net hired and contracted costs were £12.9 million (7.4%) higher. Investment in activities to reduce blockages and enhance biodiversity and in new technology licences increased costs. We also brought in additional temporary resources to respond to the hot weather in early summer.

 

Power costs were up £5.8 million due to the expected rise in pass-through costs and additional consumption to meet higher household demand for water, with some offset from an increase in self-generation and lower variable tariffs in the first half of the year.

 

Raw materials and consumables increased by £6.4 million due to chemical costs on new Water Framework Directive schemes, and COVID-19 related consumables.

 

Household cash collection was 5.2% higher year-on-year - 3.5% from higher tariffs and consumption and 1.5% from improved targeting of older debt. As a result, the element of our bad debt charge relating to historical collections reduced by £9.4 million to £30.9 million. Despite this strong performance, and the range of social tariffs we have made available for struggling customers, our expectation is that the rise in unemployment forecast by the Bank of England for next year will result in more customers falling into arrears. In anticipation of this, and based on the forecast available at the year end, we recorded an additional bad debt charge this year of £9.6 million (2019/20: £2.2 million) against amounts already billed but not yet collected at the year end. Taken together, our bad debt charge as a percentage of household revenue was 3.0% (2019/20: 3.2%).

 

Reported other costs rose by £34.2 million. Before the £15.5 million reclassification of deferred income releases to turnover, other costs were up £18.7 million. This increase was primarily due to:

 

·    A £6.0 million subscription cost for the new Ofwat Innovation fund for AMP7, which is offset within our household tariffs in turnover

·    Increased insurance charges of £3.9 million

·    A £3.6 million increase in Community Support during the pandemic, and

·    A number of smaller items including £2.2 million higher business rates (due to inflationary increases this year and significant rebates in the prior year).

 

Reported Infrastructure renewals expenditure was £1.4 million higher in the year. Before the reclassification of £17.5 million of diversions income to turnover, expenditure was £16.1 million lower due to the completion of significant AMP6 projects last year, including our Trunk Mains Renewal Programme.

 

Depreciation of £364.0 million was £11.2 million higher than the prior year. Major AMP6 projects that were brought into service and other additions increased the depreciable asset base by around 7%; the effect of this was partly offset by a £9.8 million reduction in the depreciation charge following a review of useful lives for significant mechanical and electrical assets.

 

Return on Regulated Equity (RoRE)

 

RoRE is a key performance indicator for the regulated business and reflects our combined performance on totex, customer ODIs and financing against the base return allowed in the Final Determination.

 

Severn Trent Water's RoRE for the year ended 31 March 2021 is set out in the following table:

 

		2020/21 %
Base return		3.9
Enhanced RoRE returns		0.3
ODI outperformance1		1.7
Totex performance		(0.7)
Financing outperformance		0.6
Regulatory return for the year2		5.8

 

1.     ODI performance includes PCC and forecast D-MeX outturn.

2.     Calculated in accordance with Ofwat guidance set out in RAG 4.07.

 

We have delivered RoRE of 5.8% in the year, outperforming the base return by 1.9% as a result of:

·    ODI performance of 1.7%, driven by continued strong performance on waste measures, including blockages and sewer flooding, and improvements in water measures, including water quality, CRI and low pressure.

·    Our totex position of (0.7)% reflects early investment to enhance our resilience and support ODI performance, as well as the higher COVID-19 related bad debt charge.

·    Financing performance of 0.6%, from the continued reduction in our effective interest rate, offset by the drag of lower inflation in the year compared to Ofwat's FD assumption.

 

Business Services

 

 

	2021	2020  (restated)	Increase/(decrease)
	£m	£m	£m	%
Turnover
Operating Services and Other	82.8	84.4	(1.6)	(1.9)
Green Power	51.9	53.5	(1.6)	(3.1)
	134.7	137.9	(3.2)	(2.3)
Adjusted PBIT
Operating Services and Other	20.9	21.7	(0.8)	(3.7)
Green Power	2.6	6.6	(4.0)	(60.6)
Property Development	2.3	7.7	(5.4)	(70.1)
	25.8	36.0	(10.2)	(28.3)

 

 

Business Services turnover was £134.7 million (2019/20: £137.9 million) and adjusted PBIT was £25.8 million (2019/20: £36.0 million).

 

In our Operating Services business, turnover and adjusted PBIT decreased by £1.6 million and £0.8 million respectively, largely driven by lower volumes in the Property Searches business during the national lockdown in the first half of the year.

 

In Green Power, turnover decreased by £1.6 million and adjusted PBIT decreased by £4.0 million. Adjusted PBIT was impacted by lower wholesale energy prices in the first half of the year and the higher cost of purchasing alternative feedstocks to compensate for less hospitality industry food waste during lockdowns.

 

Profits from Property Development were £5.4 million lower as there were no individually significant disposals in the current year, as guided. We remain on track to deliver £100 million of PBIT from property sales by 2027.

 

Corporate and other

 

Corporate costs were £5.9 million (2019/20: £8.6 million), with the reduction largely due to releases of provisions relating to prior year corporate transactions that are no longer required. Our other businesses generated PBIT of £0.7 million (2019/20: £3.0 million).

                                                

Exceptional items before tax

 

We recorded no exceptional operating costs (2019/20: nil).

 

In 2019/20 we recorded exceptional losses before tax of £51.7 million from the impact of COVID-19 on our joint venture Water Plus, including £46.8 million from our share of its losses and an exceptional impairment charge of £4.9 million on our loans due from Water Plus. In view of the materiality of these impacts and the unprecedented nature of the impact of COVID-19 on Water Plus we considered these items to be exceptional.

 

Net finance costs

 

Net finance costs for the year were £1.3 million lower than the prior year at £187.1 million. Average net debt increased to £6,263.6 million (2019/20: £5,972.2 million) and our effective cash cost of interest (excluding indexation adjustment on index-linked debt and pensions-related charges) was 3.1% (2019/20: 3.1%). Interest cost on index-linked debt decreased by £14.8 million due to lower inflation, and as a result our effective interest cost fell to 3.4% (2019/20: 3.7%).

 

Capitalised interest of £30.4 million was £13.8 million lower year-on-year due to the lower level of capital activity compared to last year.

 

Our earnings before interest, tax depreciation and amortisation (EBITDA) interest cover was 4.7 times (2019/20: 5.3 times) and adjusted PBIT interest cover was 2.6 times (2019/20: 3.2 times). See note 17 for further details.

 

Gains/losses on financial instruments

 

We use financial derivatives solely to hedge risks associated with our normal business activities including:

 

·    Exchange rate exposure on foreign currency borrowings;

·    Interest rate exposures on floating rate borrowings;

·    Exposures to increases in electricity prices; and

·    Changes in the regulatory model from RPI to CPIH.

 

We hold interest rate swaps with a net notional principal of £653 million floating to fixed, and cross currency swaps with a sterling principal of £141 million, which economically act to hedge exchange rate risk on certain foreign currency borrowings.

 

We revalue the derivatives at each balance sheet date and take the changes in value to the income statement, unless the derivative is part of a cash flow hedge.

 

Where hedge accounting is not applied, if the risk that is being hedged does not impact the income statement in the same period as the change in value of the derivative, then an accounting mismatch arises and there is a net charge or credit to the income statement. During the year there was a loss of £8.2 million (2019/20: loss of £9.8 million) in relation to these instruments.

 

Note 7 to the financial statements gives an analysis of the amounts charged to the income statement in relation to financial instruments.

 

As part of our power cost management strategy, we have fixed around 82% of our estimated wholesale energy usage for 2021/22.

 

Share of loss of joint venture

 

In common with other participants in the non-household retail market, Water Plus has been significantly impacted by the COVID-19 outbreak, the resulting lockdowns and the effects on commercial customers. Water Plus's revenue was around £150 million lower than the previous year and in these difficult trading conditions it incurred a loss after tax of £17.7 million. During the year Water Plus obtained £70 million of external debt facilities and, since the year end, along with our joint venture partner, we have each converted £32.5 million of the revolving credit facilities advanced to Water Plus to equity and consider this to form part of our long-term investment in Water Plus at the year end. The business is now well placed to benefit from the recovery as economic activity increases after lockdown.

 

We have recognised our share of Water Plus's loss after tax for the year (£8.9 million) and the £4.9 million of exceptional losses not recognised in the prior year.

 

We have updated our assessment of expected credit losses on our loans to Water Plus and reduced the provision recorded by £3.6 million.

 

Taxation

 

We are committed to paying the right amount of tax at the right time. We pay a range of taxes, including business rates, employers' national insurance and environmental taxes such as the Climate Change Levy as well as the corporation tax shown in our tax charge in the income statement. Our corporation tax charge for the year was higher than the statutory rate, reflecting non-deductible items charged to our income statement such as depreciation charged on assets which are not eligible for capital allowances and on which no deferred tax is provided, partially offset by tax credits arising from overpayments in the previous year. Cash tax payments were reduced by the benefit of tax allowances on our capital programme and contributions to our pension schemes.

 

		2021	2020
		£m	£m
Tax incurred:
Corporation tax		30.0	26.7
Business rates and property taxes		83.6	81.6
Employer's National Insurance		28.0	28.9
Environmental taxes		6.7	6.6
Other taxes		5.5	4.9
		153.8	148.7

 

Further details on the taxes and levies that we pay can be found in our report, "Explaining our Tax Contribution 2020/21", which will be made available at www.severntrent.com/sustainability-strategy/reports-and-publications/tax/ when our Annual Report and Accounts is published in June.

 

The corporation tax charge for the year recorded in the income statement, before exceptional taxes, was £55.0 million (2019/20: £59.2 million) and we made net corporation tax payments of £23.2 million in the year (2019/20: £33.9 million). The difference between the tax charged and the tax paid is summarised below:

 

		2021	2020
		£m	£m
Tax on profit on ordinary activities before exceptional taxes		55.0	59.2
Tax on exceptional items		‒	0.9
Exceptional deferred tax charge arising from rate change		‒	91.8
Tax effect of timing differences		(28.2)	(120.9)
Current tax credits recorded in Other Comprehensive Income or equity		(0.4)	(9.5)
Overprovisions in previous years		3.6	5.2
Corporation tax payable for the year		30.0	26.7
Repayments received		‒	(0.4)
Payments relating to prior years		‒	4.5
Overpayments in the year		‒	3.1
Overpayments in prior years offset in the current year		(6.8)	‒
Net tax paid in the year		23.2	33.9

 

Net tax paid in the year of £23.2 million (2019/20: £33.9 million) includes £4.9 million paid to Water Plus for consortium relief (2019/20: nil).

 

Note 8 in the financial statements sets out the tax charges and credits in the year, which are described below.

 

The current tax charge for the year was £26.8 million (2019/20: £31.0 million) and the deferred tax charge was £28.2 million (2019/20, before the exceptional deferred tax charge arising from the change of rate: £29.1 million).

 

Our full effective tax rate this year was 20.6% (2019/20: 48.9%), which is higher than the UK rate of corporation tax (19%), due to items of expenditure that are not deductible for tax (2019/20: higher mainly due to the exceptional deferred tax charge).

 

Our adjusted effective current tax rate was 11.4% (2019/20: 10.4%) (see note 17).

 

UK tax rules specify the rate of tax relief available on capital expenditure. Typically, this is greater in the early years than the rate of depreciation used to write off the expenditure in our accounts. The impact of this timing difference applied across our significant and recurring capital programme tends to reduce our adjusted effective current tax rate and corporation tax payments in the year. By the same token we make a provision for the tax that we will pay in future periods when the tax relief on the capital expenditure has been received and we receive no allowance for the depreciation charge arising on that expenditure. This is the most significant component of our deferred tax position.

 

In March 2021 the UK Government announced its intention to increase the rate of corporation tax to 25% with effect from 1 April 2023. If this rate had applied at the balance sheet date the deferred tax liability would have been £286 million higher.

 

Profit for the year and earnings per share

 

Total profit for the year was £212.2 million (2019/20: £158.8 million).

 

Basic earnings per share from continuing operations increased by 33.6% to 89.1 pence (2019/20: 66.7 pence). Adjusted basic earnings per share was 105.4 pence (2019/20: 146.0 pence). For further details see note 10.

 

Cash flow

 

 

		2021	2020
		£m	£m
Operational cash flow		860.3		888.5
Cash capex		(593.2)		(799.5)
Net interest paid		(186.2)		(184.2)
Proceeds on sale of subsidiary		0.7		‒
Net payments for swap terminations		(0.2)		(0.3)
Net tax paid		(23.2)		(33.9)
Free cash flow		58.2		(129.4)
Dividends		(240.2)		(228.4)
Issue of shares		11.8		9.6
Change in net debt from cash flows		(170.2)		(348.2)
Non-cash movements		(42.1)		(49.2)
Change in net debt		(212.3)		(397.4)
Opening net debt		(6,231.5)		(5,834.1)
Closing net debt		(6,443.8)		(6,231.5)

 

 

 

		2021	2020
		£m	£m
Bank loans		(1,011.1)	(1,251.9)
Other loans		(5,471.3)	(5,058.5)
Lease liabilities		(121.3)	(122.7)
Net cash and cash equivalents		44.0	48.6
Cross currency swaps		31.9	60.4
Loans due from joint venture		84.0	92.6
Net debt		(6,443.8)	(6,231.5)

 

Operational cash flow was £860.3 million (2019/20: £888.5 million). The impact of lower PBIT was partially offset by higher depreciation and amortisation and improved collection from household customers.

 

Net cash capex of £593.2 million (2019/20: £799.5 million) was above our expectation of £580 million as we made a fast start to our AMP7 programme.

 

Our net interest payments of £186.2 million (2019/20: £184.2 million) were broadly in line with the previous year as the impact of higher net debt was largely offset by lower finance costs. Our net tax payments were £23.2 million, a decrease of £10.7 million, mainly due to quarterly instalment payments higher than the corporation tax payable in the prior year.

 

We received £11.8 million (2019/20: £9.6 million) from the exercise of options under the employee Save As You Earn share scheme and our dividends paid increased in line with our policy.

 

These cash flows, together with accounting adjustments to the carrying value of debt, resulted in an increase of £212.3 million in net debt (2019/20: £397.4 million).

  

On 31 March 2021 we held £44.0 million (2020: £48.6 million) in net cash and cash equivalents. Average debt maturity was around 13 years (2020: 13 years). Including committed facilities, our cash flow requirements are funded until December 2022.

 

Net debt at 31 March 2021 was £6,443.8 million (2020: £6,231.5 million) and balance sheet gearing (net debt/net debt plus equity) was 84.9% (2020: 83.2%). Severn Trent Water Group net debt, expressed as a percentage of estimated RCV at 31 March 2021 was 64.5% (2020: 64.4%).

 

The estimated fair value of debt at 31 March 2021 was £1,449.5 million higher than book value (2020: £951.8 million higher). The increase in the difference to book value is largely due to the impact of higher inflation expectations on the fair value of our index-linked debt.

 

In December 2020 we issued £100 million 35-year CPIH linked debt at a premium of around £22 million. The notes carry a coupon of 0.01%.

 

Our policy for the management of interest rates is that at least 40% of our borrowings should be at fixed interest rates, or hedged through the use of interest rate swaps or forward rate agreements. At 31 March 2021 interest rates for 67% (2020: 64%) of our gross debt of £6,603.7 million were fixed; 8% were floating and 25% were index-linked. We continue to carefully monitor market conditions and our interest rate exposure.

 

Our long-term credit ratings are:

 

Long-term ratings	Severn Trent Plc	Seven Trent Water	Outlook
Moody's	Baa2	Baa1	Stable
Standard and Poor's	BBB	BBB+	Stable

 

We invest cash in deposits with highly rated banks and liquidity funds. We regularly review the list of counterparties and report to the Treasury Committee.

 

Pensions

 

We have three defined benefit pensions arrangements, two from Severn Trent and one from Dee Valley Water. The Severn Trent schemes ('the Schemes') are closed to future accrual.

 

The most recent formal actuarial valuations for the Schemes were completed as at 31 March 2019. The agreement reached with the Trustee for the STPS, which is by far the largest of the Schemes, included:

 

·    Inflation-linked payments of £15.0 million per annum through an asset-backed funding arrangement, potentially continuing to 31 March 2031, although these contributions will cease earlier should a subsequent valuation of the STPS show that these contributions are no longer needed;

·    Payments under another asset-backed funding arrangement of £8.2 million per annum to 31 March 2032; and

·    Annual deficit reduction payments of £32.4 million increasing in line with inflation through to 31 March 2027.

 

In addition to these payments, the Company will directly pay the annual PPF levy incurred by the STPS (£2.7 million in 2020/21).

 

The Schemes have entered into additional hedging arrangements to reduce the impact of fluctuations in interest rates and inflation on the Schemes' liabilities without adversely impacting the expected return from the Schemes' assets.

 

Hafren Dyfrdwy participates in the Dee Valley Water Limited Section of the Water Companies Pension Scheme ("the Section"). The Section funds are administered by trustees and are held separately from the assets of the Group. The Section is closed to new entrants. The most recent formal actuarial valuation of the Section was completed as at 31 March 2020 and no deficit reduction contributions to the Section are required.

 

On an IAS 19 basis, the net position (before deferred tax) of all of the Group's defined benefit pension schemes was a deficit of £367.7 million (2020: £234.0 million). To calculate the pension deficit for accounting purposes, we are required to use corporate bond yields as the basis for the discount rate of our long-term liabilities, irrespective of the nature of the scheme's assets or their expected returns.

 

On an IAS 19 basis, the funding level reduced to 88% (31 March 2020: 91%).

 

The movements in the net deficit during the year were:

 

 

	Fair value of scheme assets	Defined benefit obligations	Net deficit
	£m	£m	£m
At start of the year	2,414.1	(2,648.1)	(234.0)
Amounts credited/(charged) to income statement	53.4	(63.2)	(9.8)
Actuarial gains/(losses) taken to reserves	212.7	(374.7)	(162.0)
Net contributions received and benefits paid	(79.8)	117.9	38.1
At end of the year	2,600.4	(2,968.1)	(367.7)

 

The income statement includes:

·    Current service costs on the Dee Valley Water Scheme, which remains open to further accrual but is closed to new members, and past service costs relating to GMP equalisation. Together these amounts were £0.5 million;

·    Scheme administration costs of around £3.9 million; and

·    Net interest on scheme liabilities and expected return on the scheme assets - together a cost of £5.4 million. 

 

At the previous year end there was a short-lived increase in corporate bond spreads that increased the discount rate applied in calculating the scheme liabilities. Corporate bond spreads were around 100 bps lower at 31 March 2021 but the impact of this on the discount rate applied was mitigated by a 50 bps increase in gilt yields. The net reduction in the discount rate increased the scheme liabilities by around £150 million.

 

Inflation expectations have increased by around 70 bps since the previous year end and this increased scheme liabilities by around £290 million.

 

Changes to demographic assumptions reduced scheme liabilities by around £34 million. This included an update to the most recent CMI data tables and also a weighting to allow for the high mortality experienced in 2020.

 

The actual outturn in the year for inflation and other assumptions was better than expected and this reduced scheme liabilities by £31 million.

 

The scheme assets increased in value by around £213 million more than the return included in the income statement in the year.

 

Contributions paid to the STPS in the year included:

·    The amounts due under the asset-backed funding arrangements £24.8 million;

·    A payment of £11.4 million that was deferred from the March 2020 deficit reduction payment to April 2020; and

·    A one-off supplementary payment of £1.3 million.

 

There were also normal contributions of £0.2 million to the Dee Valley Water Scheme and payments of benefits under the unfunded scheme amounting to £0.4 million.

 

Dividends

 

In line with our policy for AMP7 to increase the dividend by at least CPIH each year, the Board has proposed a final ordinary dividend of 60.95 pence per share for 2020/21 (2019/20: 60.05 pence per share). This gives a total ordinary dividend for the year of 101.58 pence (2018/19: 100.08 pence).

 

The final ordinary dividend is payable on 16 July 2021 to shareholders on the register at 28 May 2021.

 

 

Principal risks and uncertainties

 

The Board has overall responsibility for determining the nature and extent of the risks in which Severn Trent participates and for ensuring that risks are managed effectively across the Group. The Board considers the principal risks and uncertainties affecting the Group's business activities to be those detailed below:

 

Cyber Security and Technology Resilience:

·    Cyber threats cause damage to key infrastructure assets, interruptions to core systems or data loss resulting in a negative impact on our reputation, operations, regulatory (including GDPR) compliance or finances.

 

Service Failure and Asset Resilience:

·   Failure to provide a safe and secure supply of drinking water to our customers and the potential for reduced public confidence in water supply.

·    Failure to effectively transport and treat waste water and the potential for reduced public confidence in our waste water system.

 

Financial Liabilities:

·    Failure to fund the Severn Trent defined benefit ('DB') pension scheme sustainably.

·    We are unable to ensure sufficient liquidity to meet our funding requirements.

 

Capital Project Delivery and Scheme Resilience:

·   Failure to design or deliver to time and cost capital projects that ensure the resilience of our operations and safety of our assets.

 

Political, Legal and Regulatory:

·    Accelerating changes in the political, legal environment and environmental obligations increases the risk of non-compliance.

 

Climate Change, Environment and Biodiversity:

·   Severn Trent's climate change strategy does not enable us to respond to the shifting natural climatic environment and maintain our essential services.

·    We fail to positively influence natural capital in our region.

 

Health and Safety:

·   Due to the nature of our operations, we could endanger the health and safety of our people, contractors and members of the public.

 

COVID-19:

·   Whilst global pandemics have not previously been noted as a principal risk, they do feature on our horizon scanning and many of the associated risks are captured within our ERM framework. We have a well-rehearsed approach to incident management and while COVID-19 presented many unique challenges, the governance structure we implemented in response to the COVID-19 pandemic provided a stable foundation from which we could respond to the changing situation.

·    COVID-19 assumptions are built into our budget and business plan process. Our priority remains the health and safety of our people and customers, and we are taking all possible actions to support them whilst continuing to deliver our essential services. The Board continues to receive regular updates on the Group's COVID-19 response in order to assess, monitor and respond to the evolving impact of COVID-19 on our operations and business, including impacts for all of our stakeholders.

 

 

Technical Guidance 2021/22

 

Year-end guidance		FY 21	Year-on- Year
Regulated Water and Waste Water
Turnover1	£1.78 billion to £1.81 billion. Includes c.£50 million of diversions income related to HS2.	£1.69bn	▲
Operating costs (incl. IRE)	Higher year-on-year primarily driven by a planned step up in our IRE programme and continued upward sector-wide pressure on energy and chemicals costs.	£878m	▲
ODIs2	Continued outperformance across Water, Waste, Environmental and Customer measures delivering a net reward of at least £40 million.	£79m	▼
Business Services
Adjusted PBIT	Double digit percentage growth, driven by increased property sales.	£26m	▲
Group
Interest charge	Increase year-on-year from higher forecast inflation and greater total net debt.	£187m	▲
Tax rate3	We expect the impact of the acceleration of capital allowances and the "super deduction" on our increased capital programme to be greater than our taxable profit before these items.	11.4%	▼
Group capex	£550 million to £650 million including Green Recovery.	£593m	↔
Dividend4	Annual dividend growth of CPIH. 2021/22 dividend 102.14p.	101.58p	▲

 

Footnotes to Technical Guidance

1. Includes new presentation of deferred income and diversions income released to turnover in the income statement.

2. Outcome Delivery Incentives are quoted pre-tax in 2017/18 prices.

3. Total effective tax rate is expected to be c.19%.

4. 2021/22 dividend growth is based on November 2020 CPIH of 0.55%.

 

Further Information

For further information, including the Group's full-year results presentation, see the Severn Trent website (www.severntrent.com).

 

 

 

  

Investor Timetable

 

 

Ex-dividend date (Final)	27 May 2021
Dividend record date (Final)	28 May 2021
DRIP election date (Final)	25 June 2021
AGM	8 July 2021
Q1 Trading Update	15 July 2021
Final dividend payment date	16 July 2021
Capital Markets Day	24 September 2021
Half year results announcement 2021/22	23 November 2021
Ex-dividend date (Interim)	2 December 2021
Dividend record date (Interim)	3 December 2021
DRIP election date (Interim)	14 December 2021
Interim dividend payment date	7 January 2022

 

For more information please visit:

https://www.severntrent.com/investors/financial-calendar-and-regulatory-news/

 

 

 

 

 

Consolidated income statement

For the year ended 31 March 2021

 

				2021			2020
		Adjusted	Adjusting items	Total	Adjusted	Adjusting items	Total
	Note	£m	£m	£m	£m	£m	£m
Turnover	2,3	1,827.2	‒	1,827.2	1,843.5	‒	1,843.5
Other income		‒	‒	‒	6.9	‒	6.9
Operating costs before charge for bad and doubtful debts		(1,314.4)	(2.1)	(1,316.5)	(1,237.2)	(2.1)	(1,239.3)
Charge for bad and doubtful debts		(40.0)	‒	(40.0)	(42.9)	‒	(42.9)
Total operating costs		(1,354.4)	(2.1)	(1,356.5)	(1,280.1)	(2.1)	(1,282.2)
Profit before interest and tax		472.8	(2.1)	470.7	570.3	(2.1)	568.2
Finance income	5	59.8	‒	59.8	59.9	‒	59.9
Finance costs	6	(246.9)	‒	(246.9)	(248.3)	‒	(248.3)
Net finance costs		(187.1)	‒	(187.1)	(188.4)	‒	(188.4)
Gain/(loss) on impairment of loans receivable		3.6	‒	3.6	‒	(4.9)	(4.9)
Net losses on financial instruments	7	(6.2)	‒	(6.2)	(17.4)	‒	(17.4)
Share of net loss of joint venture accounted for using the equity method	4	(8.9)	(4.9)	(13.8)	‒	(46.8)	(46.8)
Profit on ordinary activities before taxation		274.2	(7.0)	267.2	364.5	(53.8)	310.7
Current tax	8	(26.8)	‒	(26.8)	(30.1)	(0.9)	(31.0)
Deferred tax	8	(28.2)	‒	(28.2)	(29.1)	(91.8)	(120.9)
Taxation on profit on ordinary activities	8	(55.0)	‒	(55.0)	(59.2)	(92.7)	(151.9)
Profit for the year		219.2	(7.0)	212.2	305.3	(146.5)	158.8

 

               

Earnings per share (pence)

 

		2021	2020
Basic		89.1	66.7
Diluted		88.6	66.3