Half Yearly Financial Report

22 November 2022

Interim results for the six months to 30 September 2022

Investing in people, performance and environment for the long-term

Robust financial performance, supported by strong cost control

·   Guiding to double-digit real Return on Regulated Equity ('RoRE') for FY23, with ODIs¹ of at least £50 million, totex in line with allowance, and strong financing outperformance.

·   First half Group PBIT² of £261.7 million up 2.4% year-on-year, reflecting increase in Group turnover (£1,061.8 million, up £103.6 million) and strong cost control.

·   Increasing property PBIT guidance by a further £50 million, with planned PBIT from sales of surplus land now £150 million between 2017 and 2032.

·   Adjusted basic EPS³ of 29.9 pence (2021/22: 54.0 pence) reflecting PBIT growth offset by impact of inflation on index-linked debt. Basic EPS of 31.4 pence (2021/22: loss of 73.0 pence).

·   2022 pension valuation agreed, with contributions unchanged. IAS19 deficit of £142.6 million.

·   Interim dividend of 42.73 pence, in line with AMP7⁴ policy, to be paid on 11 January 2023.

Delivering on our environmental commitments through investment and operational excellence

·   On track to deliver one of our largest ever investment programmes, including our innovative Green Recovery schemes, driving real RCV⁵ growth of 10.8%.

·   Over 70% of our £2.9 billion core capital programme either delivered or with prices locked in.

·   Nominal RCV growth now expected to be 36%, making this our highest growth AMP to date.

·   Strong operational performance with c.85% of Severn Trent Water performance commitments on or ahead of target, despite one of the driest summers since 1836.

·   On track to achieve 4* Environmental Performance Assessment ('EPA') status from the Environment Agency for a fourth consecutive year, including our best-ever pollutions performance.

·   Fast start to our Get River Positive pledges: advisory panel established including NGO representatives to help oversee progress; our share of regional RNAGS⁶ reduced from 24% to 17%; ahead on our plan to reduce CSO activations to an average of 20 by 2025.

·   End of AMP ODIs on course to contribute a further £40-50 million in the final year of AMP7.

Supporting our customers, communities, and colleagues now and into the future

·   New ten-year plan to help support 100,000 people out of poverty by 2032, through delivering skills and employability training in communities, a work experience programme and partnership working.

·   Offering financial support to up to 315,000 customers, including 90% discounts off their water bill.

·   Welcomed 742 young people so far this AMP through graduate, apprentice and intern schemes.

·   Colleague engagement at an all-time high, scoring in the top 5% of global utilities.

Liv Garfield, Chief Executive, Severn Trent Plc, said:

"The first half of this year has shown the benefits of the sustained investment we've made over many years in our people, region and environment. We have delivered a robust financial performance leaving us well positioned to support our customers, invest for the long term, and support future growth.

As well as delivering on our operational and environmental commitments, with around 85% of regulatory measures meeting or exceeding targets, we're also committed to making a long-lasting positive impact in the communities we serve. Today, we are proud to launch a new ten-year strategy to address some of the underlying causes of poverty in our region, helping people to secure employment and supporting customers through current cost of living pressures. This builds on the investment we're already making through our £10 million Community Fund and the support we offer to 315,000 customers through our affordability schemes, including discounts of up to 90% off their water bills."

Group results

Footnotes to page 1 of this RNS

1.     ODIs: Outcome Delivery Incentives, quoted pre-tax and in 2017/18 prices unless otherwise stated.

2.     PBIT: Profit Before Interest and Tax.

3.     EPS: Earnings Per Share; Adjusted basic EPS is set out in note 8.

4.     AMP: Asset Management Plan (see glossary); AMP7 refers to the period 1 April 2020 to 31 March 2025.

5.    RCV: Regulatory Capital Value (see glossary). RCV is measured including the impact of Green Recovery and real options. Nominal RCV assumes forecast CPIH of 8.2% for 2022/23, 2.4% for 2023/24, and 1.9% for 2024/25 and forecast RPI of 12.5% for 2022/23, 3.4% for 2023/24 and 3.0% for 2024/25 as per Oxford Economics October 2022 forecast.

6.    The Environment Agency's analysis of Reasons for Not Achieving Good Status (RNAGS) records the source, activity and sector involved in causing waters to be at less than good status.

Interim 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 GMT today, 22 November 2022.

We will be hosting a live Q&A session with Liv, James and our wider Executive team at 9:00am GMT today via video call which you can register for through our website.

Chief Executive's Review

Our resilience as a business has really shone through over the last six months, as we continue to deliver strong operational and financial performance, against a challenging backdrop of record-breaking weather, rising prices, and macroeconomic uncertainty. This resilience provides a stable platform to do more for the communities we serve and the environment we depend on, and I'm incredibly proud of the work we're doing in both of these spaces.

The summer of 2022 included some of the hottest and driest months ever experienced in our region but we were able to minimise disruption for our customers as we benefited from the time, resource and totex we have invested in our water performance over the past few years. We've continued to demonstrate operational excellence, and we are on track to meet or exceed around 85% of our performance commitments this year, supporting ODI guidance of at least £50 million.

While we continue to meet the challenges of a fast-changing environment, we are not complacent and the need for greater investment across the sector is clear. We are on track to deliver our £8 billion investment programme, with our fast start to the AMP, insourcing of critical skills, and smart procurement helping to mitigate global supply chain constraints.

Since launching our Get River Positive programme we have made a fast start on all five of our pledges. Most significantly, we have reduced our share of Reasons for Not Achieving Good Status ('RNAGS') from 24% to 17% over the last 18 months, progressing towards our goal of zero by 2030. We are also on track to achieve the highest possible 4* EPA status for the fourth year in a row, despite tougher targets.

Recognising the pressure on our customers' cost of living, in May we extended our affordability schemes to offer up to 315,000 customers help with their water bill. But we want to go further and make a genuine positive change to the lives of the people we serve. I am proud to launch today our new ten-year employability and skills strategy, which aims to help 100,000 people out of poverty by 2032.

At the halfway point of AMP7, I'm really pleased with the progress we have made, whether improving service for our customers, driving our investment programme forward, or delivering strong returns for shareholders. As we look ahead to the rest of this AMP and into the long-term, I am confident that we will continue to perform for the benefit of all our stakeholders.

Investing and innovating for the long term

This AMP we will deliver one of our largest ever investment programmes, including our £566 million Green Recovery programme awarded just last year. We started the AMP strongly, benefiting from our fast-track status, the insourcing of critical technical skills to work alongside our business experts, and our decisions to bolster supply chain capacity and drive forward with delivery plans during the pandemic.

We are not immune to global pricing and supply chain pressures, but are working hard to build on this fast start and adapt our programme to deliver our commitments on time, and remain within our totex allowance, protecting customers from future bill increases.

We have now delivered or locked in prices on over 70% of our core £2.9 billion AMP7 capital programme, achieved through:

·   Relentless focus on spending every pound of customers' money wisely at every level of the organisation, from Exec-led steering groups to company-wide innovation challenges.

·   Leveraging the benefit of our 200-person in-house design team to scrutinise options and reconfigure schemes, coordinated by our Chief Engineer function to deliver great value engineering outcomes.

·   Locking in over £60 million of spend early through our advanced procurement programme, securing prices, materials and supplier capacity ahead of market challenges.

·   Welcoming an additional 50 suppliers into our programme, working directly with smaller businesses and building long term relationships.

·   Establishing a new delivery route through subcontractors to deliver smaller projects, worth around £45 million, more efficiently.

From a standing start just 18 months ago, our Green Recovery team is making good progress against all projects. For example, a pilot scheme of our catchment-scale flooding resilience project at Mansfield is due to complete this month and we have now begun work on the town centre. This scheme aims to store surface water in natural infrastructure, protecting around 90,000 customers' homes from flooding, and reducing the burden on our waste network.

We continue to drive innovation and in September we announced a new global partnership with Aarhus Vand in Denmark and Melbourne Water in Australia to support our journey to Net Zero by 2030. We will be transforming one of our sewage treatment facilities into a Net Zero hub, dedicated to researching and testing the latest co-developed technologies and innovations.

Innovation has also enabled us to reduce our operational footprint, freeing up land that we no longer need for new homes and businesses in our region. In 2017 we announced a ten-year £100 million property PBIT target, and following our strong performance to date, we are increasing our target to deliver a further £50 million between 2027 and 2032.

Water performance benefiting from multi-year investment

Despite challenging summer conditions, we continued our strong performance in Water, minimising disruption to our customers with no Temporary Use Bans and minimal supply interruptions. We expect our performance on supply interruptions to be better year-on-year, though still short of our stretching target.

Our strong performance over the summer benefited from a multi-pronged approach:

1.   Increasing resilience of water supplies

We have invested extensively in the resilience of our water network in recent years, both in large-scale infrastructure projects, such as the Birmingham Resilience Programme, and in smaller, targeted interventions such as bringing more boreholes into operation and recommissioning existing sites. Our work to improve remote valve operations and gather more data has also given us more flexibility in managing our network.

2.   Minimising loss of water across our network

During extreme weather, ground movement increases the propensity for pipes to burst and this will be reflected in our burst mains performance commitment this year. However, we have improved our average speed of response by 44% this AMP and expect this year to be our best ever for this measure, minimising loss of water from such events. This follows the installation of around 30,000 acoustic and transient pressure loggers in AMP6 and the insourcing of our Network Response and Trunk Mains Teams who can reach and repair bursts quickly. These actions form part of our plan to reduce leakage by 15% by 2025.

3.   Working with customers to reduce demand

Our long-term demand management plans include the installation of 282,000 meters this AMP so far, and an increase in our customer education campaigns. Over the course of the summer we launched a region-wide TV and radio campaign, contacted millions of customers highlighting water usage, and recruited 45 people to visit customers and carry out water efficiency checks in priority areas.

As well as delivering a strong in-year performance, our teams have continued to work hard towards our end-of-AMP performance commitments, for which we are expecting to earn an additional £40-50 million in the final year of AMP7. One of our biggest schemes, Farming for Water, aims to transform water quality in a number of catchments by working with, and providing funding to, the agriculture sector.

Creating a better environment through waste operational excellence

We continue to be leaders in Waste and were proud to have our 4* EPA status for 2021 confirmed earlier this year. We remain on track to maintain our 4* status for 2022, which would make us the first company to achieve the highest possible rating for four consecutive years. This performance is delivered against targets which require us to improve our performance every year.

We are also on course to deliver our best-ever pollutions performance, with year-on-year improvements in the number of serious pollutions. We have reduced asset failures through a rigorous maintenance programme and improved event response times, helped by the ongoing installation of 40,000 sewer sensors and the establishment of our new in-house Waste Network Response Team, inspired by learnings in our Water business.

Our blockages performance remains strong thanks to our continued focus on data, sewer cleansing and customer education. We are on track to reduce the number of internal sewer floodings year-on-year and we are working hard to turn around our performance on external sewer floodings, though will miss a stretching target that reflects our historical sector-leading performance.

We recognise that there is more we can do as a sector to protect rivers in England and Wales. In March we announced our five Get River Positive pledges and have made a fast start on them. We have submitted evidence to the Environment Agency for the next wave of RNAGS attributed to our activities to be formally resolved, putting us well on track to reduce harm from our operations to zero by 2030. 

We are progressing well with our plans to reduce the average number of Combined Sewer Overflow ('CSO') activations. We are on track to deliver both a year-on-year reduction, and our target of an average of 20 per year by 2025. Activities include development of predictive tools, trialling cameras and completing installation of Event Duration Monitors ahead of schedule. Our work positions us well for AMP8 when this measure is set to become a new ODI, with the expected benchmark set at an average of 20 activations for all companies. Following one of the lowest levels of rainfall for 180 years our activation levels were particularly low for the first half of the year.

We recognise that transparency on river quality is critical and have therefore established a new Get River Positive Advisory Panel, including representatives from wildlife and river trusts, the NFU, and Swim England to help oversee our progress against each commitment. We have also established a new Get River Positive newsletter, available to all through our website.

Supporting our customers, communities, and colleagues

With households facing the most acute cost of living pressures in decades and the Midlands home to a large number of high deprivation postcodes in the UK, we are not just helping customers that need financial support now, but want to help tackle the underlying causes of poverty for the long term.

We've set up financial support for 315,000 of our most vulnerable customers, with some of those reducing their water bill by up to 90%. We've also changed the threshold for accessing the support to make it available to even more customers.

We want to go further and intervene earlier to genuinely change the life chances of people in our region. Today we are proud to announce our new landmark scheme which aims to help 100,000 people out of poverty by 2032 by supporting them into employment.

We'll do this by offering work experience placements for 300 young people by the end of summer 2023, increasing to 500 by 2030, and delivering 10,000 hours of free employability training directly in our communities, as well as creating 'pop-up' centres in the community offering a range of support. 

Right now, our annual engagement survey tells us that our colleagues are the most engaged they have ever been, and we also know they are motivated by this programme of work which will make a positive impact in the communities that we serve and live in. 

This ten-year plan is a huge undertaking and we are working with like-minded organisations that share our values and social objectives, starting with councils in trial areas to ensure we are reaching the right people.

Chief Financial Officer's Review

We are pleased to have delivered financial performance in line with expectations for the first half of the year, despite rising input cost inflation and unprecedented energy prices. Our Regulated Water and Waste Water business performed ahead of last year and Business Services' PBIT was up 38.4% reflecting higher renewable energy generation profits.

Pumping water and waste water treatment are energy intensive activities and, in common with other large users of energy, we have seen significant increases in energy prices. However, our industry-leading position in energy generation from our Bioresources and Green Power businesses has mitigated the impact on our earnings and, after regulatory cost sharing, offset the economic impact for shareholders.

We will see the benefits of higher inflation in future periods in the form of higher regulatory revenues and RCV growth. However, the in-year impact of inflation on (non-cash) index-linked debt accretion has been the main driver of net finance costs rising by £66.1 million over last year.

We have continued to raise new debt, £400 million in the period, at rates below the iBoxx index and allowance for new debt. Interest rates for 68% of our existing debt are fixed, and just 25% are index-linked, mitigating the impact of rising interest rates and higher inflation on our finance costs.

Our balance sheet remains strong with regulatory gearing of 58.1% at the half year, providing a robust platform to fund the forecast 36% nominal RCV growth over this AMP, and significant investment across future AMPs.

We have agreed the triennial valuation of our main defined benefit pension scheme with the trustee, with deficit contributions unchanged from the previous valuation. We have also agreed new arrangements to refund contributions, should the scheme enter surplus. Our net pension deficit at the half year was £142.6 million.

We are confident of delivering double digit RoRE this year, driven by continued strong ODI performance, actively managed financing and controlled totex.

A summary of our financial performance in the period is set out below:

Group turnover was £1,061.8 million (2021/22: £958.2 million), up 10.8%.

Group PBIT was £261.7 million (2021/22: £255.6 million). In Regulated Water and Waste Water increased revenue was partially offset by higher power costs, as expected, and higher infrastructure renewals expenditure as planned, including HS2 diversions activity.

Net finance costs increased to £186.9 million (2021/22: £120.8 million) as the impact of higher inflation in the period increased our effective interest cost to 6.4% (2021/22: 4.2%) and average net debt by 5% over the same period in the previous year. Excluding the impact of inflation on our index-linked debt, our effective cash cost of interest was 3.1% (2021/22: 3.1%).

Water Plus improved its operating performance and our share of its profit in the period was £0.2 million (2021/22: loss of £1.8 million).

Our effective tax rate was 24.7% (2021/22: 22.3% before the exceptional deferred tax charge following the impact of the change in the corporation tax rate). Our adjusted effective tax rate was nil% (2021/22: nil%) as the benefit of 'Super Deductions' on our significant capital programme expenditure and higher interest costs reduced our profit chargeable to tax.

Basic earnings per share were 31.4 pence (2021/22: loss of 73.0 pence).

Our adjusted basic earnings per share fell to 29.9 pence (2021/22: 54.0 pence) as a result of higher finance costs due to the impact of inflation on our index-linked debt.

Our cash flows and liquidity remain strong. We have £1,200 million of committed facilities, and cash flow requirements are funded to early 2024.

Capital investment, the new performance measure for our capital programme, was £269.7 million (2021/22: £254.8 million).

Our net pension deficit at 30 September increased slightly to £142.6 million. The rapid increase in gilt yields at the end of September reduced the values of both the Schemes' assets and obligations by almost £870 million, reflecting the effectiveness of our hedging strategy in the period. The overall deficit increased as inflation in the period was higher than the long-term assumption and the effect of this exceeded the contributions paid in the period. The overall funding level across all of our defined benefit schemes was 93% (31 March 2022: 95%).

The Board continues to recognise the important role dividends play in providing income for pensioners and other investors. Taking into account the Group's prospects, financial position and the interests of other stakeholders including customers, our pension scheme members, colleagues and communities; the Board has declared an interim dividend for the year ending 31 March 2023 of 42.73 pence, up 4.6% in line with our policy for AMP7 to increase the dividend by CPIH.

Regulated Water and Waste Water

Turnover for the Regulated Water and Waste Water segment was £984.9 million (2021/22: £893.9 million) and PBIT was £242.9 million (2021/22 £242.4 million).

Turnover increased by £91.0 million with the main movements being:

·   An increase of £38.8 million for the annual CPIH uplift in tariffs, partially offset by reductions of £7.6 million from the 'K' factor for the year and £6.3 million phasing of anticipated revenues from bringing formerly void properties into charge;

·   A £33.5 million increase representing the recovery, under the RFI mechanism, of lower than allowed revenue in 2020/21;

·   £17.0 million for the in-AMP fast money allowance for the Green Recovery programme;

·   Lower consumption from commercial customers, which reduced revenue by £4.1 million, and less revenue from the Voids and Gaps Incentives Scheme (£2.0 million lower);

·   Lower revenues billed by other water companies on our behalf and other small differences (£7.0 million);

·   £11.5 million additional generation revenue in our Bioresources business due to higher energy prices; and

·   An increase of £17.1 million in diversions income largely due to the guided increase in activity related to HS2. This represents a recovery of costs incurred and is offset by an increase in infrastructure renewals expenditure.

Net labour costs were £4.6 million (5.5%) lower period-on-period. Gross employee costs increased following the annual pay award of 2.3% and an increase in employee numbers due to mobilisation of the Green Recovery programme. This was offset by higher capitalisation of employee costs and a £6.6 million credit related to a change in defined benefit scheme options developed with the Trustee. The new bridging pension option allows members who retire early to bridge the gap between their retirement date and the date when a state pension becomes payable, by taking more of their occupational pension up front, which has a positive effect on expected pension liabilities.

Net hired and contracted costs increased by £16.5 million (18.0%) due to an increase in logistics and tankering costs, and technology contractor and vendor management costs.

Our economic energy hedge effectively limits the impact of higher energy prices on shareholder returns. Power costs were £41.1 million, or 75.3%, higher than the previous period, much less than the average wholesale energy price increases of more than 121% year-on-year. These higher costs are partially offset by self-generation in Bioresources and our Green Power business within the wider Group.

Bad debt charges were £1.6 million lower than the previous period and represent 1.9% of household revenue (2021/22 full year: 2.1%). Cash collection in the period from household customers has held up well and we've set up financial support for 315,000 of our most vulnerable customers. However, expected pressure on household budgets from cost of living increases has led us to retain the forward-looking provision of £8.5 million.

Other costs rose by £9.9 million, predominantly due to an increase in energy intensive chemical costs during the period (up £9.5 million), and higher Environment Agency abstraction charges (up £1.9 million). These were partly offset by lower voids and gaps incentive payments year-on-year.

Infrastructure maintenance expenditure was £22.7 million higher in the period, mostly reflecting the diversions activity related to HS2 referred to above, as well as a planned step up in the core renewals programme.

Depreciation was £6.5 million higher period-on-period due to Water Framework Directive (WFD) schemes and other key projects, including advanced digestion and biogas-to-grid assets at Finham, coming into service.

Business Services

Business Services turnover was £81.4 million (up 23.1%) and EBITDA was £30.7 million (up 28.5%). PBIT was £22.7 million (up 38.4%).

In our Operating Services and Other businesses, turnover and EBITDA increased by £4.8 million and £3.4 million respectively due to increased activity on the Coal Authority and MoD contracts, and strong Water Hygiene sales growth. PBIT increased by £3.1 million.

In Green Power, turnover increased by £10.5 million and EBITDA increased by £11.0 million. Significantly higher energy prices over the last six months are the key driver of the year-on-year increase and partially offset the increased power consumption costs in RWWW, as part of our natural energy hedge within the Group. PBIT increased by £10.8 million.

Profits from Property Development were £7.6 million lower as there were no large sales in the period, as guided. We are pleased to extend our property development PBIT target to £150 million for the fifteen year period to 2032, having already generated £50.9 million since 2017.

Corporate and other

Corporate overheads were marginally higher at £4.5 million (2021/22: £3.7 million). Our other businesses generated PBIT of £0.6 million (2021/22: £0.5 million).

Net finance costs

The Group's net finance costs for the six months were £186.9 million (2021/22: £120.8 million). Average net debt of £6,556.0 million was higher than the previous year (2021/22: £6,251.5 million) and inflation in the period increased the non-cash interest accretion on index-linked debt by £71.0 million. As a result, our effective interest cost for the period increased to 6.4% (2021/22: 4.2%). Our effective cash cost of interest (which excludes inflation accretion on index-linked debt) was 3.1% (2021/22: 3.1%). Interest capitalised of £23.5 million (2021/22: £15.2 million) increased due to the higher effective rate and higher capital work in progress during the period.

The Group's EBITDA interest cover was 2.5 times (2021/22 3.9 times) and PBIT interest cover was 1.4 times (2021/22 2.2 times). See note 18 for further details which includes reconciliations to IFRS metrics.

Net gains on financial instruments

The Group uses financial derivatives solely to hedge risks associated with its normal business activities including:

·   Exchange rate exposure on borrowings denominated in foreign currencies;

·   Interest rate exposures on floating rate borrowings;

·   Exposures to wholesale electricity price volatility; and

·   Changes in the regulatory model from RPI to CPIH.

The Group's derivative instruments include:

·   Interest rate swaps with a net notional principal of £648 million to balance our interest rate mix in line with our strategy;

·   Cross currency swaps with a sterling principal of £141 million, which economically act to hedge exchange rate risk on certain foreign currency borrowings; and

·   Inflation swaps with a notional principal of £350 million, which swap RPI linked cash flows for CPI linked cash flows.

Where hedge accounting is not applied, if the risk being hedged does not impact the income statement in the same period as the change in value of the derivative, then an accounting mismatch arises and there is a net charge or credit to the income statement. During the period there was a gain of £53.6 million (2021/22: gain of £19.5 million) in relation to such instruments.

An analysis of the amounts charged to the income statement in the period is presented in note 5 to the financial statements.

Taxation

We are committed to paying the right amount of tax at the right time, and were pleased to have our Fair Tax Mark accreditation renewed for the fourth year.

As well as corporation tax on profits, which is included in the tax charge in our accounts, we pay a range of other taxes, charges and levies imposed by government agencies including business rates; employer's National Insurance; the Climate Change Levy; and Insurance Premium Tax. Our 2021/22 Annual Report sets out an analysis of the taxes incurred in that year and we will set out this year's amounts in our Annual Report to be published in June 2023.

The tax charge reported in the income statement is calculated at a rate of 24.7% (2021/22: 22.3%, excluding the exceptional deferred tax charge arising from the change in the corporation tax rate), representing the best estimate of the annual average tax rate expected for the full year, applied to the profit for the six month period.

There was no current tax charge in this period or the prior year. The deferred tax charge was £25.9 million (2021/22: £326.9 million, including an exceptional deferred tax charge of £294.2 million).

The tax allowances generated by our significant capital programme, including the 'Super Deduction' and higher finance costs reduced our adjusted effective current tax rate (in line with guidance and with the prior year) to nil%.

Profit for the period and earnings per share

Reported profit for the period was £78.8 million (2021/22: loss after the exceptional deferred tax charge described above of £180.0 million).

Basic earnings per share were 31.4 pence (2021/22: loss of 73.0 pence). Adjusted basic earnings per share were 29.9 pence (2021/2: 54.0 pence).

Cash flow

Six months ended 30 September

* please see note 18 for alternative performance measures

Net debt comprises:

At 30 September 2022 we held £366.0 million (31 March 2022: £107.7 million) in net cash and cash equivalents. Our average debt maturity is thirteen years. Including committed facilities, of which £1,050 million was undrawn at the balance sheet date, the Group's cash flow requirements are funded until early 2024.

We invest cash in deposits with highly rated banks and the Board regularly reviews the list of counterparties.

Net debt at 30 September 2022 was £6,627.6 million (31 March 2022: £6,507.8 million).  Balance sheet gearing (net debt/net debt plus equity) at the half year was 84.6% (31 March 2022: 84.9%). Regulated gearing (net debt of our regulated businesses expressed as a percentage of estimated Regulatory Capital Value) is 58.1% as at 30 September 2022 (31 March 2022: 59.5%).

The estimated fair value of debt at 30 September 2022 was £610.1 million lower than book value (31 March 2022: £1,075.8 million higher).

Pensions

We have three defined benefit pensions arrangements, two for Severn Trent and one for Dee Valley Water. The two Severn Trent schemes closed to future accrual on 31 March 2015.

The 2022 actuarial valuation for the main Severn Trent Pension Scheme (STPS) has been completed and agreed with the Trustee. The future funding plan is unchanged from the 2019 valuation, and includes:

·   Annual contributions will be paid each year until 31 March 2027. These will commence at £34.2 million, increased in line with the annual increase in CPI to November 2022, for the year ending 31 March 2023. Thereafter, future contributions will also increase each year in line with CPI (based on increases in the inflation measure covering the twelve-month period to the previous November).

·   Payments under an asset-backed funding arrangement of £8.2 million per annum to 31 March 2032 which will only continue beyond 31 March 2025 if the Scheme's assets are less than the Scheme's Technical Provisions; and

·   Inflation-linked payments of £15.0 million per annum (which started on 1 March 2018) 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.

The Group's other two defined benefit schemes are in surplus.

On an IAS 19 basis, the estimated combined net position (before deferred tax) of all of the Group's defined benefit pension schemes at 30 September 2022 was a deficit of £142.6 million. The increase in gilt yields at the balance sheet date reduced the value of defined benefit obligations but this was offset by a similar decline in asset values. Inflation in the period higher than the assumption for long-term inflation increased obligations, partially offset by the employer's contribution of £34.7 million in the period.

The net pension finance cost was £1.6 million and administration costs were £2.8 million. These were offset by a past service credit of £6.6 million following a change in the STPS's rules to allow members to take a higher initial pension on retirement in exchange for a lower pension from state pension age. 

The movements in the net deficit during the period were as follows:

On an IAS 19 basis, the funding level is 93% (31 March 2022: 95%).

Dividends

The Board has declared an interim ordinary dividend of 42.73p per share (2021/22: 40.86p per share), which will be paid on 11 January 2023 to shareholders on the register at 2 December 2022.

Principal risks and uncertainties

The Board considers the principal risks and uncertainties affecting the business activities of the Group for the remainder of the financial year to be those detailed below. Details of how the Group mitigates and manages these risks are set out in the Annual Report.

Health and Safety

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

Infrastructure Failure and Asset Resilience

·   We do not provide a safe and secure supply of drinking water to our customers.

·   We do not transport and treat waste water effectively, impacting our ability to return clean water to the environment.

Supply Chain and Capital Project Delivery

·   Key suppliers cannot meet contractual obligations causing disruption to capital delivery (cost and quality) and/or critical operational services.

Cyber Security and Technology Resilience

·   Our critical technology capabilities are not maintained due to cyber threats or system failures, impacting the services we deliver through our key infrastructure assets or core systems.

Political, Legal and Regulatory

·   Changing societal expectations, resulting in stricter legal and environmental obligations, commitments and/or enforcements, increase the risk of non-compliance.

·   Rapidly changing political, fiscal and monetary policy directions increasing uncertainty in planning and forecasting investment outcomes.

Financial Liabilities

·   We fail to fund our Severn Trent defined benefit pension scheme sustainably.

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

Climate Change, Environment and Biodiversity

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

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

Technical Guidance 2022/23

Footnotes to Technical Guidance

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

2.     For 2021/22, diversions income and costs related to HS2 were £27 million.

3.     Customer Outcome Delivery Incentives are quoted pre-tax in 2017/18 prices. We assume a 25% rate of corporation tax to be in place when ODIs are taken into revenue.

4.     Based on Oxford Economics October inflation forecast. Index-linked debt comprising c.25% of our total debt.

5.     2021/22 reported performance in line with Severn Trent Water Annual Performance Report 2022.

6.     Total effective tax rate is expected to be c.25%. This includes both current and deferred tax charges.

7.     Guidance now set on an accruals basis; previously we have used a cash figure. 2021/22 cash capex was £594m. A full reconciliation on both the old and new basis can be found in our alternative performance measures in note 18 of our results announcement.

8.     2022/23 dividend growth rate based on November 2021 CPIH of 4.6%.

Further Information

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

Investor Timetable

Condensed consolidated income statement

Six months ended 30 September 2022

Earnings/(loss) per share (pence)

Six months ended 30 September 2022

Condensed consolidated statement of changes in equity

Six months ended 30 September 2022

Condensed consolidated balance sheet

At 30 September 2022