Annual Results for the year ended 31 March 2020

 

Note: FY2020/21 technical guidance is included in the Chief Financial Officer's section of this announcement.

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Preliminary Results presentation and conference call

 

A presentation of these results hosted by Liv Garfield, CEO, and James Bowling, CFO, will be available on our website (severntrent.com) from 8.30am BST today, 20 May 2020. We will be hosting a live Q&A session with Liv, James and our wider Executive team at 9.30am BST today via conference call.

 

You can access the conference call via:

 

UK Freefone: 0800 012 1327

International direct: +44 1296 480 180

Participant passcode: 335 619# 

                                   

For a complete list of dial-in numbers available by country, please visit:     http://www.btconferencing.com/globalaccess/?bid=54_automated
 

Managing the impact of COVID-19 on our business and our stakeholders

 

The COVID-19 pandemic continues to have a profound impact across the globe, our country and our region.  As a provider of essential services, we have rapidly deployed our well-practised incident management processes to reorganise our activities and minimise disruption to customers, while keeping our people safe and well. Beyond the operational challenges, we have carefully considered how we can make a positive impact for the good of all our stakeholders and the communities we serve and live in. The sections below outline the impact on our business, and the actions we have taken to help our stakeholders, in more detail.

 

Supporting our colleagues

The health, safety and wellbeing of our people remains our first priority. In line with this, we have:

•    Revised working practices, with virtual remote technicians and at-home network monitoring, to ensure we keep people as safe as possible while delivering essential services;

•    Maintained regular two-way communication and collaboration with our trade unions;

•    Committed to not make anyone redundant or furlough any employees as a result of COVID-19;

•    Maintained our all-employee bonus in recognition of our colleagues' hard work over the last year;

•    Agreed a headline annual pay increase of 2.3% for our colleagues for the next three years;

•    Continued to provide full pay to our colleagues who are unable to work, in line with our existing policy; and

•    Launched a 'Caring for our Colleagues' campaign, providing mental and physical wellbeing support, and agreed individual care plans for our colleagues living in a vulnerable situation.

 

Helping customers through this difficult time

Our teams are working hard to continue providing essential services for our customers with minimal disruption, despite the new ways of working.

We know many of our customers will be facing difficult situations, so we are offering support through:

•    Initiatives for those struggling to pay their bills, including the WaterSure scheme for those on low incomes and our Big Difference Scheme, which offers bill discounts of 10%-90% for eligible customers;

•    Making £3.5 million available as part of our Severn Trent Trust Fund for those who may be unable to pay their household bills at this time; and

•    Making sure our vulnerable customers know we are there for them with targeted communications and support through our Priority Services Register.

 

Playing our part in the communities where we live and work

We recognise that as a large, local company, we can offer further support to our communities, through:

•    Our £1 million emergency fund¹, which has already donated over £500k to around 200 organisations, including foodbanks, regional Age UK branches and charities supporting the most vulnerable in society;

•    Working closely with organisations such as Business in the Community and local resilience forums to ensure local communities are receiving the support they need;

•    Helping our SME suppliers by moving to immediate processing of payments for three months - in April we paid £38 million to our smaller suppliers early;

•    Recognising the value to our suppliers of committing to future work, we have accelerated the promotion of activity and are progressing capital construction projects where it is safe to do so; and

•    Our Chair, CEO, and CFO have each asked the Company to donate 25% of their salaries for three months to local charities.

¹ Comprising £500,000 re-directed from our newly established Community Fund and £500,000 of historical share forfeiture proceeds.

 

An agile approach to a challenging situation

Multi-skilled teams, agile ways of working and a 'can-do' culture mean we can adapt quickly and flex parts of our AMP7 plan, to compensate for disruption elsewhere. For example:

•    We have been able to adopt remote working quickly and strengthen our IT capability to provide enhanced monitoring of our network and some treatment sites, and improve fault diagnostics;

•    Our operations teams have been able to complete work ahead of schedule, reducing work in progress thanks to the significant reduction in road traffic;

•    We have brought forward projects scheduled for later in the year to minimise public disruption - for example, renewing parts of our network in Derby, providing additional resilience for customers, several months early;

•    Home-working employees have been volunteering to use their daily exercise to take care of the network in their neighbourhood, carrying out centrally co-ordinated checks for issues such as leakage; and

•    Our customer education team has developed an online lesson for children, supporting families at home while delivering key messages on water scarcity and sewer misuse.

 

Maintaining financial resilience

As a responsible business, we place great emphasis on maintaining financial resilience and are well-positioned to manage the current situation, with a strong balance sheet, appropriate gearing levels and healthy liquidity. This reflects:

•    £755 million of undrawn credit facilities, from a total £1.1 billion committed facilities, as at 31 March 2020;

•    £200 million of funds raised on the US Private Placement market in early March 2020; and

•    Less than 2.5% of our debt maturing in the year ending 31 March 2021.

We are experiencing a financial impact from the COVID-19 pandemic in three primary areas:

Household bad debt - while our priority will be to help those customers who struggle to pay, we do expect to see an increase in related bad debt from higher unemployment and stressed household finances. In the year ended 31 March 2020 we recorded a bad debt charge of £42.5 million, including £2.2 million for direct COVID-19 risks, and expect to see further COVID-19 related increases to our bad debt in future periods, based on the latest economic forecasts.

Non-household wholesale revenue - due to the nationwide restrictions on non-essential business activity, we expect to see a reduction in volumes billed in the year ending 31 March 2021, only partially offset by increased household consumption. The Ofwat regulatory model allows us to recover this revenue in two years.

Water Plus joint venture - as a retailer in the non-household market, Water Plus has been significantly impacted by the COVID-19 outbreak, the resulting lockdown and its effects on commercial customers, and it expects to see lower economic activity leading to increases in business customer failures. Taking account of an impairment of its long-term assets, an additional bad debt charge, and trading losses recorded before the impact of COVID-19, we have recorded an exceptional loss of £46.8 million in the year ended 31 March 2020, reducing the value of our investment to nil, and also provided £4.9 million against a loan receivable from Water Plus.

On 30 April 2020, Ofwat published the outcome of its consultation on proposals to address the liquidity and bad debt challenges in the non-household retail market. We view these measures to strengthen the non-household retail market positively for both Severn Trent Water and Water Plus. Further detail can be found here:

https://www.ofwat.gov.uk/wp-content/uploads/2020/04/Proposals-to-address-liquidity-challenges-and-increases-in-bad-debt---decision-document.pdf 

 

Further information on the financial impact of COVID-19 can be found in the Chief Financial Officer's review.

 

 

 

 

Chief Executive's Review

I'm immensely proud of the way the organisation has adapted to the turbulent and unprecedented challenges we are faced with. Never has it been more evident that our people live the values we created together of 'having courage', 'taking pride' and most importantly 'showing care'. As an organisation it has been essential we demonstrate those same values in the way we treat our stakeholders. Having courage to make the right choices in the face of an unprecedented situation, taking pride in doing the best possible job we can for those that need our services the most and making sure we show care for all those affected have all been top of our agenda at the end of a very busy year.

It has been a strong final year of the AMP, most notably on the water side of our business where our targeted investment and catchment approach has delivered improvements across a number of key measures. The average number of minutes our customers were off supply reduced by over 60% year-on-year to 7 minutes and 18 seconds. We reduced leakage by 19 ML/d, hitting our target for the eighth time in nine years, delivering an 8% reduction over the AMP, and achieved our lowest number of water quality complaints in a decade.

On the waste side of the business, in this final year we completed a number of environmental programmes including those under the Water Framework Directive, which helped deliver 1,600km of river quality improvements. We anticipate achieving 4* EPA status from the Environment Agency, reflecting our strong performance across the range of measures it uses to assess the impact we have on the environment. But we have also incurred penalties on some of our flooding measures, as we faced substantially more stretching targets that were agreed to lift the waste customer ODI cap, combined with persistent wet weather over the second half of the year. 

We have delivered net customer ODI outperformance payments of £36 million for the year, made possible by the lifting of the waste customer ODI cap. This takes the total amount earned in AMP6 to £174 million, providing us with £191 million (in nominal prices) of additional revenue in AMP7.

During the year we generated a Return on Regulated Equity of 6.7% as outperformance on customer ODIs (+1.0%) and financing (+2.2%) was partly offset by totex (-2.0%). This totex performance reflects our reinvestment of efficiencies from earlier in the AMP, enhancing our resilience and supporting customer ODI performance, as well as increased spend on maintenance schemes, and a higher bad debt charge. Over the AMP we have generated a cumulative Return on Regulated Equity of 8.5%.

Across AMP6 we have made a number of achievements which put us in a strong position as we enter AMP7:

•    Our customers have benefitted from improved service performance, with reductions in leakage (8%), external sewer flooding (48%), water quality complaints (28%) and category 3 pollutions (21%) over the AMP.

•    We have maintained the lowest bills in England and Wales and increased the number of customers we help with their bills to around 70,000 a year, while donating over £17 million to the Severn Trent Trust Fund.

•    We have positively improved our environment, reducing pollutions, sewer flooding and leakage; improving river water quality and influencing customers' and farmers' behaviour to protect the water cycle.

•    We have increased our renewable energy production to 491GWh, meaning we now generate the equivalent of 51% of our energy needs, with our remaining electricity now supplied from 100% renewable sources.

•    Our resilience has been strengthened with the completion of the £300 million Birmingham Resilience Programme, taking the total invested in our capital programme over the AMP to £3 billion.

•    We have delivered sustained and balanced outperformance to the benefit of both customers and shareholders, culminating in a Return on Regulated Equity among the best in the sector.

We are now almost two months into the new AMP and, despite the ongoing challenges of COVID-19, we are pleased with how the business is performing. Operationally, we remain on track to deliver improvements across a range of measures, and expect to outperform on customer ODIs this year. The work we have done over AMP6 in tightening our cost base means we are confident we can deliver improved services within our allowed AMP7 totex. Our capital programme is on track, with 80% of year one work contracted, while noting that capex will reduce from the end of one AMP into the first year of the next.

The Severn Trent culture underpins our response to COVID-19 and our continued performance. At our Capital Markets Day in March, we showed how doing the right thing, whether for our customers, colleagues, communities, or the environment, can deliver a multitude of benefits and ultimately ensure the long-term success of our business.

We look forward to delivering our sustainability ambitions, including our Triple Carbon Pledge, the improvement of 5,000 hectares for biodiversity, and our newly launched Community Fund, for the benefit of all stakeholders over the next five years and beyond. We will be reporting against these commitments in our first Sustainability Report, to be released on our website on 12 June.

 

 

2019/20 performance

Operationally, we have had a good year in water, as our reinvestment of totex efficiencies, accelerated rollout of new technology and targeted insourcing have driven significant improvements across a range of measures.

•    Supply interruptions - our 'Prevent, Restore, Repair' strategy, including the insourcing of Network Response and Trunk Main Repair teams, and investment in new tankers and equipment, has made a significant difference to our performance. This year our customers were off supply for an average of 7 minutes and 18 seconds, our best ever performance, down from 20 minutes last year, and 34 minutes the year before.

•    Leakage - last year we accelerated our AMP7 leakage plan, rolling out new technology and new ways of working at speed. This has helped deliver a 4% reduction year-on-year, hitting our target for the eighth time in nine years and taking the total reduction over the AMP to 8%.

•    Water quality complaints - after a challenging start to the AMP we have delivered consistent improvements in this measure over the past four years, helped by learnings from Dee Valley's expertise. While we missed our target marginally, we have delivered a 14% improvement year-on-year, taking our total AMP6 improvement to 28%.

In waste, we have delivered a number of key environmental programmes and performance commitments, but have had a challenging year on our flooding measures.

•    Internal and external sewer flooding - our targeting of 'hot spots' and identifying and managing root causes of sewer flooding continues to yield results. However we saw an increase year-on-year as the persistent wet weather we experienced in the second half led to increased run-off from highly saturated ground into our waste water network. Over the AMP our sewer flooding performance has improved significantly, but due to the tougher targets agreed as part of uncapping, we incurred a penalty of £19.5 million across the two measures. In order to drive the necessary improvements for AMP7, we are educating customers on sewer misuse, and stepping up our training and investment in 'right first time' and repeat flooding prevention activities.

•    Category 3 pollutions - we achieved our best category 3 pollutions performance in a decade this year, taking our AMP6 reduction to 21%. Our ambition is to reduce pollutions by 50% over the next five years, going further than our regulatory commitment.

•    4* EPA status - we anticipate achieving 4* EPA status from the Environment Agency this year, for the third time in the AMP. This assessment covers a range of environmental measures and truly reflects our strong track record on protecting and enhancing the local environment we rely on.

•    Water Framework Directive - we set ourselves an ambitious target at the beginning of the AMP to deliver meaningful improvements in the quality of our region's rivers. Over the last five years, this programme has also generated customer ODI outperformance payments of £42.6 million. In AMP7, we have an even more ambitious plan to improve the quality of a further 2,100km of rivers and have already started work on delivering this programme.

We have invested £800 million in our capital programme this year, taking our total capital investment over AMP6 to £3 billion, with an additional £689 million in infrastructure renewals over five years, driving real RCV growth of around 9%. The Birmingham Resilience Programme was a significant part of this and we are pleased to have seen our largest ever capital scheme completed on time, to budget and delivering more resilience than initially planned.

This year also saw the creation of our in-house design team, who have been designing assets for our AMP7 programme for several months. In particular, they are exploring low carbon, low cost solutions, such as wetlands, as alternatives to building new assets, supporting both our totex efficiency and Triple Carbon Pledge.

We have enhanced the digital experience we offer our customers. We have made it easier to pay bills online, taking 850,000 payments through self-service in the past year, and introduced a virtual assistant that can offer a third of customers an end-to-end service, giving our service agents more time to deal with complex and sensitive issues. As well as improving accessibility and enhancing the service we offer customers, this technology drives down our cost to serve, helping keep bills low.

The new measure of customer experience, C-MeX, takes into account customer perception, making the work we do in our local communities even more important. Shadow reporting of C-MeX places us ninth in the sector for the year. While this is an improvement from our position under the previous SIM measure, we are determined to progress further over the next five years.

In April our new Community Fund, consisting of 1% of Severn Trent Water's profits, issued its first payments to local causes, having already awarded over £400k in funding. In addition, we have also paid over £500k from our £1 million COVID-19 emergency fund to around 200 organisations, including many foodbanks, community groups and charities that look after the most vulnerable in society.

It was an important year for Hafren Dyfrdwy, being its first full year of operation under the new Welsh Licence. We recently completed the £14 million Service Reservoir Programme - a significant capital scheme for a business of this size - replacing a number of ageing distribution service reservoirs in Wrexham and securing water quality in the area for years to come. There is still work to be done on some key measures, but we were pleased to see notable year-on-year improvements in supply interruptions (down 66%) and leakage (down 13%), and continued low levels of external sewer flooding and category 3 pollutions.

In our non-regulated business, the successful integration of Agrivert has increased our food waste capacity, adding five anaerobic digestion plants to our asset base. These plants contributed to overall energy generation of 491GWh, equivalent to 51% of our energy needs. Our remaining electricity is now purchased solely from renewable sources, achieving the first of our three carbon pledges ten years early.

Elsewhere in the non-regulated business, we have continued to see excellent customer service and strong margin improvement in Operating Services, and our property development team remain on track with our commitment to deliver £100 million PBIT over the ten years to 2027.

 

Reflections on AMP6

Over the course of AMP6 we have worked hard to deliver for all of our stakeholders, keeping bills low, improving service standards, investing for the long term and generating a cumulative RoRE of 8.5%. While we are proud of what we have achieved, we have had to learn and adapt to tougher regulatory commitments, more weather extremes and the evolving expectations of society. The lessons we have learned informed our AMP7 plan and will be essential to its execution in the next five years.

A key strength of Severn Trent is our ability to take successes and quickly scale these up across the wider business. We have broken down some of the silos between our water and waste processes, taking the best from both and adapting them where needed. This shared success is equally evident in how we have invested over the AMP. In the earlier years of AMP6 we delivered substantial totex and customer ODI outperformance on the waste side of the business and reinvested some of this outperformance into water, increasing the resilience of our network and improving service performance in key measures.

We have brought core skills in-house and used our culture and broader view of the network to drive performance. For example, in 2016 we took the decision to insource our mains flushing team, directly contributing to a customer ODI benefit of around £5 million. As we head into AMP7, we have taken some bold decisions on further activities to insource, with our newly established design teams set to change the way we deliver our capital programme, taking a much more holistic view of the impact on our business, the environment, and local communities.

A thorough understanding of our operational end-to-end processes and interdependencies enables us to deliver multiple benefits through targeted interventions. Essential to this understanding is timely, accurate data and network modelling. For example, the installation of 40,000 acoustic and pressure loggers across our network has played a crucial role in finding and fixing leaks much quicker. We have designed our AMP7 customer ODIs with this insight in mind.

The environment is an essential part of our supply chain. By embracing a catchment approach and nature-based solutions we can improve performance and reduce operating costs, while making a positive impact on our local environment. This approach forms a key part of our AMP7 strategy, with several initiatives already underway, including the improvement of 5,000 hectares for biodiversity, strategically planting 1.3 million trees and working with 9,000 farmers to improve 44 catchments with innovative methods such as phosphate socks.

We know that culture is our key strength, especially in challenging moments. Over the AMP we have had periods of extreme weather but we have always focused on the best interests of our customers while delivering efficiencies and customer ODIs in line with expectations. While smart investment is important, it is our people who step up and deliver when we need it. This culture isn't something that just happens and we will continue to work hard to ensure our people can deliver their best performance every day.

 

Looking ahead to AMP7

The head start we gained through the 'fast tracking' of our AMP7 plan in January 2019 has helped us to deliver our commitments despite the ongoing challenges related to COVID-19. The work we have done in the past year means that:

•    We are already on the right run-rates to deliver our commitments within our allowed totex, having made the necessary savings across the business. This includes a 23% real reduction in head office costs over the past two years through process improvement, re-skilling colleagues, and close monitoring of attrition levels;

•    The reinvestment made over the past year in asset health, innovative technology and new equipment has increased the resilience of our network and helped prepare the business for a number of key commitments;

•    Our capital programme is on track with the certainty from fast-track enabling us to start work with our supply chain and new design team early; and

•    We have robust plans in place for the delivery of customer ODIs and understand how we can best re-deploy resource. While some customer ODIs, such as Per Capita Consumption, will be more difficult to deliver in the current situation, we can pull forward work on others to support a net positive outcome.

We are pleased with our start to the AMP on our key performance commitments. Strong performance in the last year on common measures such as leakage and category 3 pollutions put us on the right run-rate for our year one targets. We also have a range of new customer ODIs, such as public sewer flooding and risk of low pressure, which we have been shadow reporting for many months, and are pleased with our progress so far.

Despite these challenging times, we remain confident we can deliver positive net outperformance payments this year, and across the AMP. Due to the nature of some of our customer ODIs, including those that require capital investment, we expect the level of outperformance payments to grow over the AMP.

Our AMP7 capital programme remains on track with 80% of year one spend contracted. Due to the essential nature of our work, following the implementation of appropriate safeguards, design and construction activity has continued apace since the outbreak of COVID-19, with limited impact on our planned capital activity for year one.

We expect the amount of capital expenditure in the first year of the AMP to be the lowest of the five years, as projects to meet our AMP7 targets are planned and designed before we take them through to delivery. Group capital expenditure is expected to be between £430 million and £510 million this year, across a broad range of projects including new Thermal Hydrolysis Plants, increasing our energy generation capabilities, and work to enhance the resilience of our waste network in Stroud.

Innovation will play a key role in AMP7, as we find new ways of achieving more stringent targets, more efficiently and with a positive impact on the environment. In 2019 we established our new Resource Recovery and Innovation Centre where we are now trialling large scale innovative technology, supported by a range of global research partners, including members of the World Water Innovation Fund. The Centre is currently trialling a range of exciting new projects, including the use of mainstream anaerobic treatment which could substantially reduce both the cost and carbon associated with waste water treatment.

 

Our people

We have one of the most engaged workforces in the sector, with our latest engagement survey placing us in the top 5% of utilities globally, and our colleagues are invested in the long-term future of our organisation, with 72% participating in our Sharesave scheme.

We strive to provide a fair, inclusive and safe place to work for our people. In line with this priority, in the past year we have committed to:

•    paying the real living wage to everyone who works both for and with Severn Trent, becoming an accredited member of the Living Wage Foundation in March 2020; and

•    adopting the recommendations of the Parker Review on ethnic diversity of Boards, recognising the need for us to represent the communities we serve in every way.

We have worked hard this year to embed sustainable thinking throughout our organisation. We recently dedicated a day to our commitments in this area for our top 300 business leaders, and we are now holding events to ensure every one of our 6,800 colleagues hears the same, key messages about why sustainability is important to Severn Trent, and what they can do to support our ambitions.

This year our Board and Executive teams have continued to evolve, demonstrating the attractiveness of Severn Trent to external talent, and our strong internal talent pipeline. We were pleased to welcome Christine Hodgson as our Chair, following the retirement of Andrew Duff, after nine successful years on the Board. Christine has had an extensive induction into the business, spending time with many colleagues across the front-line, customer service and support functions, and understanding what our Purpose and Values mean to us as an organisation.

Most recently we supplemented the Board with the appointment of Sharmila Nebhrajani as a Non-Executive Director. Shar brings a wealth of experience from regulated sectors including medicine, bioethics, financial services and the media that will complement the broader skill-set of the Board and provide fresh thinking as the Company continues to develop.

 

Continuing to provide a fair return to shareholders

The Board carefully considered the unprecedented circumstances in relation to this year's dividend and took into account the Group's prospects and financial position; stakeholder interests including customers, shareholders, colleagues and our communities; and the Board's decision not to use any of the Government's business support measures.

Recognising the critical role that dividends play in providing necessary income for pensioners and savers, and the significant number of employee and former employee investors, the Board determined that, based on the strong performance in 2019/20 and the underlying financial position of the Company, it remains appropriate to recommend to shareholders that the final dividend for year ended 31 March 2020 of 60.05 pence be paid in line with policy.

 

 

Chief Financial Officer's Review

 

These are unprecedented economic circumstances. The extent of the impact of the COVID-19 outbreak on the UK economy is uncertain. We are not immune to the impacts on the wider economy and we expect to see a continued reduction in consumption from non-household customers, an increase in bad debt costs from household customers, even after allowing for an increase in the use of our range of social tariffs, and a severe impact on our non-household joint venture, Water Plus. We have reflected these on our balance sheet at 31 March 2020, where appropriate, and further details are set out below.

 

Our funding position continues to be strong and we are carefully monitoring our liquidity and working capital. Our balance sheet at 31 March 2020 showed net cash of £48.6 million and we had undrawn facilities amounting to £755 million. All of our projected investment and other cash flow needs are covered by cash or committed facilities through to January 2022. At the year end the Group's regulatory gearing was 64.9%.

 

This strong financial position was a factor in our decision to declare a final dividend of 60.05 pence in line with our AMP6 dividend policy of growth of RPI plus at least 4% per annum. Other matters, over and above our strong financial position, that the Board took into account in reaching this decision are noted in the Chief Executive's review above.

 

At the half year we flagged the market data issues that were impacting our non-household retail joint venture, Water Plus. In the second half of the year we have seen some performance improvement as the monthly losses relating to these issues have reduced and cash collection improved. However, Water Plus expects the economic impact of COVID-19 on non-household customers to be severe and this has resulted in the joint venture recording losses from the impairment of its trade debtors, goodwill and certain intangible assets. Before taking account of these COVID-19 related write-downs, our share of Water Plus's loss for the year was £14.3 million, of which £9.3 million arose in the first half of the year. We also recorded a provision of £4.9 million against our loans to Water Plus.

 

Our total share of the Water Plus losses, £51.7 million, was greater than the value of our long-term investment of £46.8 million and as a result we did not record £4.9 million of these losses in the income statement. We have shown the amount of our share of the losses from Water Plus recorded in the income statement as an exceptional item.

 

Turning now to our core business, we have built on good financial performance in the first half of the year to deliver another good set of results for 2019/20. Although underlying PBIT in our Regulated Water and Waste Water business was slightly lower than the previous year, this was expected as we chose to defer customer ODI rewards worth £78 million into AMP7, taking £22 million less in revenue than in the previous year, and increased our planned IRE programme to deliver remaining AMP6 commitments, offsetting the £22 million comparative benefit of hot weather costs in the previous year. In Business Services, stronger performance in the second half of the year in Operating Services and Bioresources produced growth in both revenues and PBIT for the full year. There were no individually significant land sales in 2019/20 but the £6.9 million earned this year means we remain on track to deliver £100 million of PBIT from property sales over the ten years to 2027.

 

Our underlying basic earnings per share was up 0.1% to 146.0 pence per share. Basic earnings per share were 66.7 pence.

 

We have delivered good performance on RoRE, which was 6.7% for the year ended 31 March 2020. The delivery of substantial environmental programmes meant another strong year on customer ODIs, and we continued to outperform on financing. This was partly offset by the impact of our reinvestment of totex efficiencies delivered earlier in the AMP. On a cumulative basis, we outperformed across all three levers over AMP6 and achieved a RoRE of 8.5%, sustaining our position amongst the very best in the sector.  

 

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. This year we will again publish a Tax Report that sets out details of all of the taxes we incur at www.severntrent.com/sustainability-strategy/reports-and-publications/tax/. Our corporation tax charge for the year, excluding the exceptional deferred tax charge, was higher than the statutory rate reflecting non-deductible items charged to our income statement. Cash tax payments were reduced by the benefit of tax allowances on our capital programme and contributions to our pension schemes, partly offset by the timing of instalment payments to HMRC under the current rules.

 

A brief overview of our financial performance for the year is as follows:

 

·   Group turnover was £1,843.5 million (2018/19: £1,767.4 million), an increase of 4.3% as Regulated Water and Waste Water revenue increased by 2.4%, mainly due to the RPI-linked tariff increases and Business Services' turnover increased by 19.7%, (including £21.8 million from a full year contribution from the Agrivert business acquired in the previous year).

 

·   Underlying PBIT (see note 18) was down 0.6% to £570.3 million (2018/19: £573.6 million). Underlying PBIT in our Regulated Water and Waste Water business was £15.5 million lower, Business Services grew by £0.8 million and Corporate and other results improved by £2.6 million.

 

·   We recorded no exceptional operating costs (2018/19: £9.6 million arising from the High Court judgment in the Lloyds Bank case relating to Guaranteed Minimum Pension rights).

 

·   Reported Group PBIT was up by 0.9% to £568.2 million (2018/19: £563.3 million).

 

·   Net finance costs were £188.4 million (2018/19: £194.2 million). Our effective interest cost of 3.7% (see note 18) was down from 2018/19 (3.9%) due to the continued benefit of replacing expensive fixed rate debt with new low cost fixed rate debt, low variable interest rates and reduced RPI inflation on our index-linked debt.

 

·   Our full effective tax rate was 48.9%, including the exceptional deferred tax charge arising from the change in corporation tax rate for 2020/21. Our underlying effective tax rate (see note 18) was 10.4%, down from 11.6% in 2018/19 largely due to higher capital allowances from the larger capital programme in the year.

 

·   Reported Group profit after tax was £158.8 million (2019: £315.3 million).

 

 

Regulated Water and Waste Water

 

Turnover for our Regulated Water and Waste Water business was £1,620.7 million (2018/19: £1,583.1 million) and underlying PBIT was £511.5 million (2018/19: £527.0 million).

 

 

	2020	2019	Increase/(decrease)
	£m	£m	£m	%
Turnover	1,620.7	1,583.1	37.6	2.4
Net labour costs	(135.8)	(124.0)	(11.8)	(9.5)
Net hired and contracted costs	(155.9)	(161.9)	6.0	3.7
Power	(105.8)	(102.1)	(3.7)	(3.6)
Bad debts	(42.5)	(25.5)	(17.0)	(66.7)
Other costs	(192.6)	(186.2)	(6.4)	(3.4)
	(632.6)	(599.7)	(32.9)	(5.5)
Infrastructure renewals expenditure	(149.6)	(141.4)	(8.2)	(5.8)
Depreciation	(327.0)	(315.0)	(12.0)	(3.8)
Underlying PBIT	511.5	527.0	(15.5)	(2.9)

 

Turnover increased by £37.6 million. The components of this were:

·   Higher tariffs, including the impact of the annual RPI increase on prices, which increased revenue by £48.2 million;

·   A net increase of £8.1 million to revenue as a result of a lower year-on-year adjustment for wholesale revenue in prior periods billed in excess of the wholesale revenue allowance; offset by

·   A reduction year-on-year of £21.7 million on the outperformance payments earned from customer ODIs taken into revenue this year;

·   A number of other smaller variances resulted in an additional net increase of £3.0 million.

 

Net labour costs were £11.8 million (9.5%) higher. Gross employee costs increased by 10.8% due to the annual pay award and the continuation of our strategy to bring more work in-house. The significant step up in activity on capital projects this year increased the level of own labour capitalised, up £16.7 million on the previous year.

 

Net hired and contracted costs were down £6.0 million (3.7%). Increases in job volumes and some outsourced debt collection activity offset the benefit from the in-sourced capital design team and the costs incurred in the hot, dry summer in the previous year.

 

Power costs were up £3.7 million driven by the anticipated rise in pass-through costs. Energy consumption was flat year-on-year as increased efficiency across the business offset the impact of new capital schemes and increased pumping required in the wetter winter. The Group manages its power costs through a combination of demand management, self-generation and forward price contracts.

 

Our bad debt charge increased by £17.0 million this year and represented 3.2% of household revenue (2018/19: 2.0%). We continued to perform well in collecting recent debt and our new targeted approach to older debt is showing some promising results, although the uncollected balance falling into older age categories this year increased the provision. The impact of COVID-19 has directly led to £2.2 million of the increase in the provision to take account of the expected impact of the forecast economic downturn next year on collection of our year end receivables.

 

Other costs rose by £6.4 million. The increase was predominantly driven by higher chemical prices and usage due to the completion of new capital schemes.

 

Infrastructure renewals expenditure was £8.2 million higher in the year reflecting the completion of AMP6 projects, including our Trunk Mains Renewal Programme, enhancing the resilience of our network as we enter AMP7.

 

Depreciation of £327.0 million was £12.0 million higher than the prior year, following the capitalisation of new assets and increased investment in data technology assets with shorter lives creating operational efficiencies in our network.

 

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 2020 and for the five year period ended on that date is set out in the following table:

 

		2019/20 %		AMP6 %
Base return		5.5		5.6
Totex performance		(2.0)		0.5
ODI performance1		1.0		0.9
Financing performance		2.2		1.5
Regulatory return for the year2		6.7		8.5

 

1    For years 2015/16 to 2018/19, customer ODI performance has been restated by 0.1% p.a. to recognise the impact of the PR14 SIM penalty over the years when the penalty was earned.

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

 

We have delivered RoRE of 6.7% in the year, outperforming the base return by 1.2% as a result of:

·   Continued outperformance on financing, reflecting our effective interest cost of 3.7%;

·   Customer ODI performance of 1.0%, primarily following successful delivery of our Water Framework Directive and Sustainable Sewage Treatment programmes, both the culmination of five years of investment; and

·   Our totex position of negative 2.0%, reflecting our reinvestment of efficiencies from earlier in the AMP, enhancing our resilience and supporting customer ODI performance, as well as increased spend on maintenance schemes, and a higher bad debt charge.

 

Our cumulative AMP6 RoRE of 8.5% highlights a strong AMP performance where we have outperformed the final determination on all components of RoRE. Over the five year period we have delivered a sector-leading customer ODI performance, overall net totex efficiencies, and strong upper quartile performance on financing. 

 

Business Services

 

	2020	2019	Increase/(decrease)
	£m	£m	£m	%
Turnover
Operating Services	70.7	60.2	10.5	17.4
Green Power	53.5	29.7	23.8	80.1
Bioresources	102.4	97.5	4.9	5.0
Other	13.8	13.5	0.3	2.2
	240.4	200.9	39.5	19.7
Underlying PBIT
Operating Services	14.8	7.0	7.8	111.4
Green Power	6.6	0.6	6.0	1,000.0
Bioresources	29.3	29.5	(0.2)	(0.7)
Property Development	7.7	19.9	(12.2)	(61.3)
Other	6.5	7.1	(0.6)	(8.5)
	64.9	64.1	0.8	1.2

 

 

 

Business Services turnover was £240.4 million (up 19.7%) and underlying PBIT was £64.9 million (up 1.2%).

 

In our Operating Services business, turnover and underlying PBIT increased by £10.5 million and £7.8 million respectively. Improved performance across all areas within the business, as well as an increase in the expected whole life revenues and profits on the contract with the Ministry Of Defence, have driven the increase.

 

In Green Power, turnover increased by £23.8 million and underlying PBIT increased by £6.0 million. Strong energy generation complemented by the first full year of Agrivert, the food waste company acquired in November 2018, (increasing turnover by £21.8 million and underlying PBIT by £7.2 million in the current year) have generated the increase.

 

Turnover from Bioresources increased by £4.9 million, but underlying PBIT decreased by £0.2 million due to lower wholesale energy prices.

 

Turnover and underlying PBIT in our other businesses (principally Affinity Products and Developer Services) was broadly flat year-on-year. Profits from Property Development were £12.2 million lower as there were no individually significant disposals in the current year. We remain on track to deliver £100 million of PBIT from property sales by 2027 although we expect market conditions to be less favourable in the next year following the COVID-19 pandemic, resulting in a rephasing of our planned disposals.

 

 

Corporate and other

 

Corporate overheads were £8.6 million (2018/19: £8.6 million) and our other businesses generated PBIT of £3.0 million (2018/19: £0.4 million). 

 

Exceptional items before tax

 

We recorded no exceptional operating costs (2018/19: £9.6 million from a High Court judgment in the Lloyds Bank case in relation to gender equality in Guaranteed Minimum Pension rights).

 

In 2019/20 we recorded exceptional losses before tax of £51.7 million arising 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 in relation to our loans receivable from Water Plus (see below). In view of the materiality of these impacts and the unprecedented nature of the impact of COVID-19 on Water Plus, we consider these items to be exceptional.

 

Net finance costs

 

Despite higher net debt, our net finance costs for the year were £188.4 million, £5.8 million lower than the prior year due to a combination of lower interest rates, and effective management of our debt portfolio.  Capitalised interest of £44.2 million increased by £11.0 million year-on-year due to the higher level of capital activity in the year.

 

Our effective interest cost was 3.7% (2018/19: 3.9%) and our effective cash cost of interest (excluding the RPI uplift on index-linked debt and pensions-related charges) was 3.1% (2018/19: 3.1%). Net pension finance costs were broadly in line with the previous year.

 

Our earnings before interest, tax, depreciation and amortisation (EBITDA) interest cover was 5.3 times (2018/19: 5.1 times) and underlying PBIT interest cover was 3.2 times (2018/19: 3.2 times). See note 18 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

·   Forthcoming changes in the regulatory model from RPI to CPIH.

 

We hold interest rate swaps with a net notional principal of £50 million, fixed to floating, £423 million floating to fixed, £250 million of forward starting interest rate swaps, 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 £9.8 million (2018/19: gain of £28.5 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 62.4% of our estimated wholesale energy usage for 2020/21.

 

Share of loss of joint venture

 

Our joint venture, Water Plus, had a difficult year. Billing and revenue assurance issues identified early in the year impacted trading results in the first half and the recovery that was starting to bear fruit in the second half was stopped in its tracks by the COVID-19 outbreak.

 

In common with other participants in the non-household retail market, Water Plus has been significantly impacted by the COVID-19 outbreak, the resulting lockdown and its effects on commercial customers, and expects to see lower economic activity leading to increases in business customer failures. Water Plus reworked its business plan to take account of the expected impacts of the COVID-19 outbreak on its customer base and recorded impairments of its goodwill, intangible assets and trade receivables as a result.

 

Water Plus has updated its impairment assessment for its long-term assets, in particular goodwill and customer relationships recognised under the acquisition accounting rules of IFRS 3. The updated impairment tests identified an impairment of £51.1 million against these assets. In addition, Water Plus has already seen a significant reduction in cash collected from its non-household customers and, using prospective economic data to estimate the likely impact of future economic circumstances on its debt book at 31 March 2020, has recognised an additional £29.3 million bad debt provision.

 

Before taking account of these COVID-19 related write-downs, our share of Water Plus's loss for the year was £14.3 million, of which £9.3 million arose in the first half of the year.

 

We have recognised £46.8 million, our share of these losses capped at the level of our long-term investment, as an exceptional loss from our joint venture. We have not recognised £4.9 million of losses in excess of our investment.

 

We have also recorded an exceptional impairment of £4.9 million in our loans receivable from Water Plus (see above). 

 

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, excluding the exceptional deferred tax charge, was higher than the statutory rate reflecting non-deductible items charged to our income statement, such as losses from the joint venture which are reported after tax, partially offset against tax credits arising from overpayments in the previous year. Cash tax payments were reduced by the benefit of tax allowances on our capital programme, contributions to our pension schemes partly offset by the timing of instalment payments to HMRC under the current rules. 

 

		2020	2019
		£m	£m
Tax incurred:
Corporation tax		26.7	31.5
Business rates and property taxes		81.6	80.7
Employer's National Insurance		28.9	25.5
Environmental taxes		6.6	9.6
Other taxes		4.9	3.5
		148.7	150.8

 

Further details on the taxes and levies that we pay can be found in our report, "Explaining our Tax Contribution 2019/20", 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 £59.2 million (2018/19: £67.6 million) and we made net corporation tax payments of £33.9 million in the year (2018/19: £21.3 million). The difference between the tax charged and the tax paid is summarised below: 

 

		2020	2019
		£m	£m
Tax on profit on ordinary activities		59.2	69.4
Tax on exceptional items		0.9	-
Exceptional deferred tax charge arising from rate change		91.8	-
Tax effect of timing differences		(120.9)	(37.6)
Current tax credits recorded in Other Comprehensive Income or equity		(9.5)	(9.7)
Overprovisions in previous years		5.2	9.4
Corporation tax payable for the year		26.7	31.5
Payable by instalments next year		-	(15.9)
Instalments due in the year		26.7	15.6
Repayments received		(0.4)	-
Payments relating to prior years		4.5	5.7
Overpayments		3.1	-
Net tax paid in the year		33.9	21.3

 

The overpayments arose from prudent estimates of the tax charge for the year when calculating quarterly instalment payments.

 

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 £31.0 million (2018/19: £31.8 million) and the deferred tax charge, before the exceptional deferred tax charge arising from the change of rate, was £29.1 million (2018/19: £37.6 million).

 

In March 2020 the UK Government announced that it would reverse the previously planned reduction in the corporation tax rate that was due to take effect from 1 April 2020. This change was substantively enacted in March 2020 and we have therefore remeasured our deferred tax assets and liabilities at 31 March 2020 at the new rate of 19%. This resulted in an exceptional deferred tax charge in the income statement of £91.8 million and a credit to reserves amounting to £2.7 million.

 

Our full effective tax rate this year was 48.9% (2018/19: 18.0%), which is higher than the UK rate of corporation tax (19%), due to the exceptional deferred tax charge.

 

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 underlying 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.

 

Our underlying effective current tax rate was 10.4% (2018/19: 11.6%) (see note 18).

 

The exceptional losses recorded in relation to our joint venture, Water Plus, are recorded after tax and therefore there is no impact on our tax charge from these losses.

 

Profit for the year and earnings per share

 

Total profit for the year was £158.8 million (2018/19: £315.3 million).

 

Basic earnings per share decreased by 50.0% to 66.7 pence (2018/19: 133.4 pence). Underlying basic earnings per share was 146.0 pence (2018/19: 145.8 pence). For further details see note 11. 

 

Cash flow

 

 

		2020	2019
		£m	£m
Operational cash flow		888.5		826.3
Cash capex		(799.5)		(769.3)
Net interest paid		(184.2)		(161.6)
Purchase of subsidiaries net of cash acquired		‒		(50.9)
Payments for swap terminations		(16.8)		‒
Proceeds from swap terminations		16.5		‒
Net tax paid		(33.9)		(21.3)
Free cash flow		(129.4)		(176.8)
Dividends		(228.4)		(211.9)
Issue of shares		9.6		11.1
Purchase of own shares		‒		(1.1)
Change in net debt from cash flows		(348.2)		(378.7)
Debt acquired in subsidiaries		‒		(63.0)
Non-cash movements		(49.2)		(35.8)
Change in net debt		(397.4)		(477.5)
Opening net debt		(5,834.1)		(5,356.6)
Closing net debt		(6,231.5)		(5,834.1)

 

 

		2020	2019
		£m	£m
Bank loans		(1,251.9)	(1,120.1)
Other loans		(5,058.5)	(4,820.5)
Lease liabilities		(122.7)	(112.2)
Net cash and cash equivalents		48.6	39.6
Cross currency swaps		60.4	37.1
Loans due from joint ventures		92.6	142.0
Net debt		(6,231.5)	(5,834.1)

 

Operational cashflow (see note 18) was £888.5 million (2018/19: £826.3 million) mainly due to higher PBIT, depreciation and amortisation and our increase in working capital was lower than the previous year.

 

Our biggest year of capital investment in more than a decade led to cash capex (see note 18) of £799.5 million (2018/19: £769.3 million). In 2018/19 the acquisition of Agrivert resulted in a net cash outflow of £50.9 million and we also repaid £63.0 million of debt that was acquired with the business.

 

Our net interest payments were higher at £184.2 million (2018/19: £161.6 million). Our net tax payments were £33.9 million, an increase of £12.6 million, largely due to the acceleration of quarterly instalment payments introduced by the government this year.

 

We received £9.6 million (2018/19: £11.1 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 £397.4 million in net debt (2018/19: £477.5 million). 

 

At 31 March 2020 we held £48.6 million (2019: £39.6 million) in net cash and cash equivalents. Average debt maturity was around 13 years (2019: 14 years). Including committed facilities, our cash flow requirements are funded until January 2022.

 

Net debt at 31 March 2020 was £6,231.5 million (2019: £5,834.1 million) and balance sheet gearing (net debt/net debt plus equity) was 83.4% (2019: 83.3%). Group net debt, expressed as a percentage of estimated Regulatory Capital Value at 31 March 2020 was 64.9% (2019: 63.0%) and Severn Trent Water Group RCV gearing was 64.4% (2019: 62.3%).

 

The estimated fair value of debt at 31 March 2020 was £951.8 million higher than book value (2019: £1,219.6 million higher). The decrease in the difference to book value is largely due to higher credit spreads at the balance sheet date.

 

Our policy for the management of interest rates is that at least 40% of our borrowings in AMP6 should be at fixed interest rates, or hedged through the use of interest rate swaps or forward rate agreements. We continue to carefully monitor market conditions and our interest rate exposure. Given the flatness of the yield curve we believe it is appropriate to reduce our exposure to floating rates of interest. At 31 March 2020, 64% of our gross debt of £6,433.1 million was at fixed rate, 12% was in floating and 24% was index-linked. In March 2020 we raised £200 million at fixed rates of interest through a US Private Placement.

 

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 are closed to future accrual.

 

The most recent formal actuarial valuations for the Severn Trent schemes ('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

·   Deficit reduction payments totalling £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 (£1.4 million in 2019/20).

 

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 2017 and as a result deficit reduction contributions to the Section ceased.

 

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 £234.0 million (2019: £452.9 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 has improved to 91% (31 March 2019: 84%). 

 

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	2,418.9	(2,871.8)	(452.9)
Amounts credited/(charged) to income statement	54.8	(69.5)	(14.7)
Actuarial (losses)/gains taken to reserves	(0.4)	187.8	187.4
Net contributions received and benefits paid	(59.2)	105.4	46.2
At end of the year	2,414.1	(2,648.1)	(234.0)

 

During the year lower inflation expectations had been largely offset by lower discount rates. However, at the year end we saw an increase in corporate bond yields resulting in a higher discount rate than would have applied earlier in the year, which in turn led to a reduction in the net deficit. 

 

Dividends

 

In line with our AMP6 policy to increase the dividend by at least RPI+4% each year, the Board has proposed a final ordinary dividend of 60.05 pence per share for 2019/20 (2018/19: 56.02 pence per share). This gives a total ordinary dividend for the year of 100.08 pence (2018/19: 93.37 pence). In January we announced that our dividend policy for AMP7 will be growth of at least CPIH.

 

The final ordinary dividend is payable on 17 July 2020 to shareholders on the register at 12 June 2020.

 

 

 

 

Principal risks and uncertainties

 

The Board considers the principal risks and uncertainties affecting the Group's business activities to be those detailed below:

 

Customer Perception:

·       We may be unable to improve and maintain our levels of customer service sufficiently to deliver what our customers tell us they want.

 

Legal, Political and Regulatory Environment:

·       We may be unable to effectively anticipate and/or influence future developments in the UK water industry resulting in our business plans becoming unsustainable.

·       The regulatory landscape is complex and subject to ongoing change. There is a risk that processes may fail or that our processes may not effectively keep pace with changes in legislation, leading to the risk of non-compliance. We specifically continue to engage with the Government, MPs, the Welsh Government, regulators and other stakeholders about the future shape and direction of the water sector.

 

Operations, assets and people:

·       We may experience loss of data or interruptions to our key business systems as a result of cyber threats.

·       We may fail to meet our regulatory targets including targets from Ofwat in relation to operational performance of our assets resulting in regulatory penalties.

·       Failure of certain key assets or processes may result in inability to provide a continuous supply of clean water and safely take waste-water away within our area.

·       Due to the nature of our operations, we could endanger the health and safety of our people, contractors and members of the public as well as negatively impact our local and wider environment.

·       We may be unable to deal with the impact of extreme and unpredictable weather events on our assets and infrastructure and/or be unable to successfully plan for future water resource supply and demand due to climate change.

 

Financial risks:

·       Lower interest rates, higher inflation or underperforming equity markets may require us to provide more funding for our pension schemes.

·       We may be unable to fund the business sufficiently in order to meet our liabilities as they fall due.

 

COVID-19:

·       At the time of writing, the COVID-19 global pandemic continues to dominate the focus of the world. 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.

·       Management continues to assess the impact of COVID-19 on the Company's operations and finances. Internal Strategic and Tactical Incident Teams were established, comprising Executive Committee members, to lead the swift implementation of contingency plans and continuously monitor plans in response to the rapidly changing situation.

·       We have modelled plausible and extreme scenarios to determine expected impacts and test our financial resilience. The modelled outcomes are based on regularly updated assumptions, including:

-     The longevity of the incident (initial lockdown and recovery) - using latest Government advice;

-     The expected macroeconomic impacts of the incident (GDP, inflation and unemployment rates) using independent economic forecasts;

-     The impact on household bad debt rates, using our experience during previous recessions;

-     An estimate of incremental operating costs both during the incident and in the recovery phase, required to ensure service levels are maintained, using our experience of previous incidents; and

-     The impact on our revenues in 2020/21 and subsequent years, based on the expected revenue true-up mechanisms in the regulatory model. 

·       All modelled scenarios generate outcomes consistent with, and within the parameters used to support our Viability Statement, to be published with our Annual Report and Accounts in June 2020.

·       Our modelling to date shows that, while there will be a financial impact, neither the plausible or extreme scenarios we have modelled would result in an impact to the Group's expected liquidity, solvency or debt covenants that could not be addressed by mitigating actions, and are therefore not considered threats to the Group's financial resilience. However, there remains a risk that the impact of COVID-19 is greater than that modelled by the Group.

·       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 weekly updates on the Group's COVID-19 response in order to assess, monitor and promptly respond to the evolving impact of COVID-19 on our operations and business, including impacts for all our stakeholders.

 

The UK's decision to leave the European Union (EU):

·       We continue to monitor and prepare for various scenarios relating to the customs exit of the UK Brexit plan. Despite uncertainty on timescales and details of agreements we remain confident that Brexit does not give rise to new principal risk for the Group and the risk has materially reduced since the terms of Brexit were resolved and the UK formally left the EU on 31 January 2020.

·       Preparations are well advanced at a company and industry level but it has been agreed to pause industry plans through the Water UK co-ordinated group called the Operations Strategy Group, this will reconvene subject to Government timelines but it is not envisaged that there are likely to be any significant risks not previously considered as part of the 'No Deal' preparations.

·       Progress during the Brexit transition phase and trade negotiations will continue to be monitored and the risks and uncertainties will be managed through our existing ERM process.

 

 

Technical Guidance 2020/21

 

Year-end guidance		2019/20	Year-on- Year
Regulated Water and Waste Water
Turnover	£1.51 billion to £1.55 billion. Lower year-on-year as a result of:   -     £50 million to £85 million from the expected impact of COVID-19 (non-household consumption down, partly offset by increased household usage).   Assumes government's published path out of lockdown, with a gradual recovery in economic activity over the year.  We will provide an update on expected outturn at our quarterly trading update in July. The Ofwat regulatory model allows us to recover this revenue in two years.   -     £24 million of regulated revenue now allocated to Bioresources (reported in the Business Services segment) in line with the FD.	£1.62bn	▼
Operating costs (incl. IRE)	Higher year-on-year due to increasing chemical usage to meet tighter effluent consents and expected COVID-19 related increases in household bad debt, partially offset by our insourcing strategy and a reduction in our IRE programme following completion of AMP6 programmes.	£782m	▲
Customer ODIs	We expect to be in positive territory and earn a net reward across Water and Waste measures.	£36m	▼
Business Services
Underlying PBIT (excl. Property)	Higher year-on-year. Corresponding £24 million increase in Bioresources revenue allocated from Regulated Water and Waste Water, partially offset by the impact of lower energy prices on renewable energy revenue and COVID-19.	£57m	▲
Underlying Property PBIT	Between £1 million and £5 million, based on an expected pause in property market activity. We remain on track with commitment to deliver £100 million PBIT over ten years to 2027.	£8m	▼
Group
Interest charge	Higher year-on-year due to increased total debt and lower capitalised borrowing costs.	£188m	▲
Tax rate	Total tax rate of c.19% and underlying effective current tax rate between 9% and 11%.	10.4%	↔
Group capex	£430 million to £510 million. Lower capital expenditure year-on-year following completion of significant AMP6 programmes.	£800m	▼
Dividend1	Annual dividend growth of CPIH. 2020/21 dividend 101.58p.	100.08p	▲

 

Footnotes to Technical Guidance

1.     2020/21 dividend growth is based on November 2019 CPIH of 1.50%.

 

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)	11 June 2020
Dividend record date (Final)	12 June 2020
DRIP election date (Final)	26 June 2020
AGM Q1 Trading Update	15 July 2020
Final dividend payment date	17 July 2020
Half year results announcement 2020/21	26 November 2020
Ex-dividend date (Interim)	3 December 2020
Dividend record date (Interim)	4 December 2020
DRIP election date (Interim)	11 December 2020
Interim dividend payment date	6 January 2021

 

For more information please visit:

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

 

 

 

 

 

 

 

Consolidated income statement

For the year ended 31 March 2020

 

				2020			2019
		Underlying	Non-underlying items1	Total	Underlying	Non-underlying items1	Total
	Note	£m	£m	£m	£m	£m	£m
Turnover	2,3	1,843.5	‒	1,843.5	1,767.4	‒	1,767.4
Other income		6.9	‒	6.9	19.9	‒	19.9
Operating costs before charge for bad and doubtful debts		(1,237.2)	(2.1)	(1,239.3)	(1,188.1)	(10.3)	(1,198.4)
Charge for bad and doubtful debts		(42.9)	‒	(42.9)	(25.6)	‒	(25.6)
Total operating costs		(1,280.1)	(2.1)	(1,282.2)	(1,213.7)	(10.3)	(1,224.0)
Profit before interest and tax		570.3	(2.1)	568.2	573.6	(10.3)	563.3
Finance income	5	59.9	‒	59.9	68.9	‒	68.9
Finance costs	6	(248.3)	‒	(248.3)	(263.1)	‒	(263.1)
Net finance costs		(188.4)	‒	(188.4)	(194.2)	‒	(194.2)
Impairment of loans receivable	4	‒	(4.9)	(4.9)	‒	‒	‒
Net (losses)/gains on financial instruments	7	(17.4)	‒	(17.4)	16.0	‒	16.0
Share of net loss of joint ventures accounted for using the equity method		‒	(46.8)	(46.8)	(0.4)	‒	(0.4)
Profit on ordinary activities before taxation		364.5	(53.8)	310.7	395.0	(10.3)	384.7
Current tax	8	(30.1)	(0.9)	(31.0)	(31.8)	‒	(31.8)
Deferred tax	8	(29.1)	(91.8)	(120.9)	(39.4)	1.8	(37.6)
Taxation on profit on ordinary activities	8	(59.2)	(92.7)	(151.9)	(71.2)	1.8	(69.4)
Profit for the year		305.3	(146.5)	158.8	323.8	(8.5)	315.3

 

               

Earnings per share (pence)

 

                               

		2020	2019
Basic		66.7	133.4
Diluted		66.3	133.2

 

 

1              For definition of non-underlying items see note 18.

 

Consolidated statement of comprehensive income

For the year ended 31 March 2020

 

 

		2020	2019
	Note	£m	£m
Profit for the year		158.8	315.3
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:
Net actuarial gains	13	187.4	57.9
Current tax on pension contributions in prior periods		9.5	9.5
Deferred tax on pension contributions in prior periods		(9.5)	(9.5)
Deferred tax on net actuarial gains		(32.9)	(12.2)
Deferred tax arising on rate change		2.7	‒
		157.2	45.7
Items that may be reclassified to the income statement:
Losses on cash flow hedges		(38.9)	(8.6)
Deferred tax on losses on cash flow hedges		7.4	1.5
Amounts on cash flow hedges transferred to the income statement	7	8.2	8.2
Deferred tax on transfer to the income statement		(1.6)	(1.3)
		(24.9)	(0.2)
Other comprehensive income for the year		132.3	45.5
Total comprehensive income for the year		291.1	360.8

 

 

 

Consolidated statement of changes in equity

For the year ended 31 March 2020

 

		Equity attributable to owners of the Company
		Share capital	Share premium	Other reserves	Retained earnings	Total
	Note	£m	£m	£m	£m	£m
As at 1 April 2018		235.1	117.7	93.0	551.1	996.9
Profit for the year		‒	‒	‒	315.3	315.3
Losses on cash flow hedges		‒	‒	(8.6)	‒	(8.6)
Deferred tax on losses on cash flow hedges		‒	‒	1.5	‒	1.5
Amounts on cash flow hedges transferred to the income statement	7	‒	‒	8.2	‒	8.2
Deferred tax on transfer to the income statement		‒	‒	(1.3)	‒	(1.3)
Net actuarial gains	13	‒	‒	‒	57.9	57.9
Current tax on pension contributions in prior periods		‒	‒	‒	9.5	9.5
Deferred tax on pension contributions in prior periods		‒	‒	‒	(9.5)	(9.5)
Deferred tax on net actuarial gains		‒	‒	‒	(12.2)	(12.2)
Total comprehensive income for the year		‒	‒	(0.2)	361.0	360.8
Share options and LTIPs
- proceeds from shares issued		0.8	10.3	‒	‒	11.1
- value of employees' services		‒	‒	‒	8.1	8.1
- own shares purchased		‒	‒	‒	(1.1)	(1.1)
Current tax on share based payments		‒	‒	‒	0.2	0.2
Dividends paid	10	‒	‒	‒	(211.9)	(211.9)
As at 31 March 2019		235.9	128.0	92.8	707.4	1,164.1
Adjustment on adoption of IFRS 16	1	‒	‒	‒	(1.6)	(1.6)
As at 1 April 2019		235.9	128.0	92.8	705.8	1,162.5
Profit for the year		‒	‒	‒	158.8	158.8
Losses on cash flow hedges		‒	‒	(38.9)	‒	(38.9)
Deferred tax on losses on cash flow hedges		‒	‒	7.4	‒	7.4
Amounts on cash flow hedges transferred to the income statement	7	‒	‒	8.2	‒	8.2
Deferred tax on transfer to the income statement		‒	‒	(1.6)	‒	(1.6)
Net actuarial gains	13	‒	‒	‒	187.4	187.4
Current tax on pension contributions in prior periods		‒	‒	‒	9.5	9.5
Deferred tax on pension contributions in prior periods		‒	‒	‒	(9.5)	(9.5)
Deferred tax on net actuarial gains		‒	‒	‒	(32.9)	(32.9)
Deferred tax arising from rate change		‒	‒	‒	2.7	2.7
Total comprehensive income for the year		‒	‒	(24.9)	316.0	291.1
Share options and LTIPs
- proceeds from shares issued		0.6	9.0	‒	‒	9.6
- value of employees' services		‒	‒	‒	8.1	8.1
Deferred tax on share based payments		‒	‒	‒	0.8	0.8
Dividends paid	10	‒	‒	‒	(228.4)	(228.4)
As at 31 March 2020		236.5	137.0	67.9	802.3	1,243.7

 

 
 

 

Consolidated balance sheet

At 31 March 2020

 

 

		31 March 2020	31 March 2019
	Note	£m	£m
Non-current assets
Goodwill		91.4	90.9
Other intangible assets		153.8	124.2
Property, plant and equipment		9,580.8	9,085.6
Right-of-use assets		128.8	‒
Investments in joint ventures	12	‒	37.0
Derivative financial instruments		65.5	68.4
Trade and other receivables		153.7	204.0
Retirement benefit surplus	13	21.3	18.6
		10,195.3	9,628.7
Current assets
Inventory		29.2	20.8
Trade and other receivables		525.5	513.5
Current tax receivable		3.1	‒
Derivative financial instruments		‒	0.1
Cash and cash equivalents		48.6	41.0
		606.4	575.4
Current liabilities
Borrowings		(475.4)	(197.0)
Derivative financial instruments		(4.4)	‒
Trade and other payables		(573.6)	(496.7)
Current tax payable		‒	(9.3)
Provisions for liabilities		(18.9)	(32.2)
		(1,072.3)	(735.2)
Net current liabilities		(465.9)	(159.8)
Non-current liabilities
Borrowings		(5,957.7)	(5,857.2)
Derivative financial instruments		(159.2)	(126.5)
Trade and other payables		(1,187.3)	(1,082.9)
Deferred tax		(901.1)	(747.5)
Retirement benefit obligations	13	(255.3)	(471.5)
Provisions for liabilities		(25.1)	(19.2)
		(8,485.7)	(8,304.8)
Net assets		1,243.7	1,164.1
Equity
Called up share capital		236.5	235.9
Share premium account		137.0	128.0
Other reserves		67.9	92.8
Retained earnings		802.3	707.4
Total equity		1,243.7	1,164.1

 

 

Consolidated cash flow statement

For the year ended 31 March 2020

 

 

		2020	2019
	Note	£m	£m
Cash generated from operations1	14	928.1	872.8
Tax received	14	0.4	‒
Tax paid	14	(34.3)	(21.3)
Net cash generated from operating activities		894.2	851.5
Cash flows from investing activities
Purchase of subsidiaries net of cash acquired		‒	(50.9)
Investments in associates and joint ventures		‒	(6.2)
Purchases of property, plant and equipment		(777.2)	(782.1)
Purchases of intangible assets and goodwill		(74.8)	(35.1)
Proceeds on disposal of property, plant and equipment		12.9	1.4
Net loans repaid by joint ventures		35.6	‒
Interest received		2.0	0.8
Net cash outflow from investing activities		(801.5)	(872.1)
Cash flow from financing activities
Interest paid		(181.9)	(158.0)
Interest element of lease payments		(4.3)	(4.4)
Dividends paid to shareholders of the parent		(228.4)	(211.9)
Repayments of borrowings		(3.0)	(166.5)
Principal elements of lease payments		(5.5)	(1.7)
New loans raised		330.1	554.2
Issues of shares		9.6	11.1
Payments for swap terminations		(16.8)	‒
Proceeds from swap terminations		16.5	‒
Purchase of own shares		‒	(1.1)
Net cash (outflow)/inflow from financing activities		(83.7)	21.7
Net movement in cash and cash equivalents		9.0	1.1
Net cash and cash equivalents at the beginning of the period		39.6	38.5
Net cash and cash equivalents at end of period		48.6	39.6
Cash at bank and in hand		37.3	41.0
Bank overdrafts		‒	(1.4)
Short term deposits		11.3	‒
		48.6	39.6

 

 

1              Contributions and grants received have been presented as operating cash flows in 2019/20 as these credits are released to operating costs over the useful economic life of the non-current asset to which they relate. These were presented as investment cash flows in prior periods. Comparatives have been restated increasing operating cash inflows by £46.5 million and increasing investing cash outflows by the same amount.