Interim results for the six months to 30 Sept 2024

Half Yearly Financial Report

20 November 2024

Interim results for the six months to 30 September 2024

Successful AMP7, in a strong position for AMP8

Successfully completing AMP7

Strong interim financial results for year five

Ready for a fast start to AMP8

Liv Garfield, Chief Executive, said:

"I am proud of what we have delivered for customers, hitting our targets on leakage and blockages while also achieving the highest 4* status from the Environment Agency in each of the last five years. We have continued to lead the industry on sustainability, pioneering carbon neutral technology and progressing our Green Recovery programme at pace, while committing to support 100,000 people out of poverty by 2033.

"But we know there is more to do. The Outstanding rating we received for our plan gives us visibility and confidence to make a fast start on the biggest investment programme in our history. We are implementing the sector's most ambitious storm overflow improvement plan at pace, while also creating 7,000 jobs across our region, including a new 440-strong team of experts dedicated to our water pipe replacement programme. We are going further and faster than ever before and have a great platform to deliver huge benefits for our region in the years ahead." 

Footnotes to page 1 of this RNS

Interim Results Presentation and Webcast

A presentation of these results hosted by Liv Garfield, CEO, and Helen Miles, CFO, will be available on our website (severntrent.com) from 7.00am GMT today, 20 November 2024.

We will be hosting a live Q&A session with Liv, Helen 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

As we head into the final few months of the AMP7 regulatory period, the business is stronger than ever and we are looking forward to a successful AMP8.

The Draft Determination we received in July provided significant clarity to AMP8, confirming at least 28% real RCV growth, base costs broadly in line with our business plan, and new protection mechanisms on energy costs and business rates. The Outstanding rating we received, which reflects the high quality and ambition of our PR24 business plan, provides certainty on the WACC, base costs, and customer-sharing, as well as a £93 million reward for meeting three additional commitments which we are confident of achieving. In August we submitted a response to the Draft Determination in order to secure the right plan for all stakeholders, and we expect to receive the Final Determination on Thursday, 19 December 2024.

That said, we've had more than enough clarity already to make a fast start to AMP8. We're making great progress on our capital programme with work underway on £3.5 billion of projects. Meanwhile, we've been shadow reporting our new suite of ODIs to ensure we maintain our high standards into AMP8.

Beyond AMP8, the Draft Determination has laid the foundations for long-term growth. Ofwat approved the need for all 13 of our enhancement cases to improve customer outcomes, mostly related to long-term drivers of totex spend such as climate change, which unlocks investment not just in AMP8, but for decades to come. And where we haven't been given costs we've asked for, we have provided additional evidence to Ofwat to justify the investment.

Reducing spills from storm overflows continues to be our number one priority, and we have been going further and faster to address the issue. Our implementation of the biggest storm overflow improvement plan in the sector, supported by last year's equity raise, is a big step to resolving the problem as we aim to halve storm overflow spills by 2030. There are over 500 people working on our programme who have already delivered 900 interventions this year to improve our highest priority sites. As these interventions come into effect, we expect to reduce our average spills to below 18 for the year 2025.

We're finishing AMP7 in really good shape. This year more than 80% of ODIs are green, and we are set to deliver our largest ever year of capital investment, giving us a smooth capital glide path into AMP8, while we have had another year of four star EPA status confirmed for 2023.

Completing a strong AMP7

As we close out AMP7, it's worth reflecting on the major steps we've taken as an organisation over these five years:

These successes put us in a strong position operationally, financially, and culturally to continue leading the sector into AMP8 and beyond.

Sustaining operational excellence as we complete AMP7

Our water performance has remained strong across the broad suite of ODIs for the first six months of year five. We remain on track to deliver our lowest ever leakage levels this year, driven by a c. 85% increase in activity to reduce leakage compared to the end of AMP6. This will be a seventh consecutive year of hitting our leakage target, and across AMP7 we will have reduced leakage by 15%.

We expect to meet our targets on water quality complaints and low pressure this year, which means they will have been green for every year of AMP7. Meanwhile, we've just experienced our best ever six months on supply interruptions as our in-house network response team continues to drive improved performance.

We are on course to outperform our metering target again for the fifth consecutive year. Our smart metering rollout continues to accelerate, we expect to have fitted 400,000 smart meters by the end of AMP7, which will take our total metered customer base to 55%.

Additionally, as we prepare to deliver a further 16% reduction in leakage in AMP8 as well as continued improvement to supply interruptions, we have created 440 jobs to form a new mains renewals team. This will allow us to double the renewal rate in our network, helping to prevent bursts. We are also investing £31 million on alternative supplies, including a new fleet of water tankers to keep customers on supply following bursts.

Whilst our performance is green on the vast majority of water ODIs, one exception is CRI, which we're expecting to be in penalty this year. This is mainly caused by our Strensham site, where we expect the introduction of our biggest ever ultraviolet disinfection scheme to deliver significant improvement. The enhancement project is well underway and is forecast for delivery early in AMP8.

The waste infrastructure team we insourced last year has driven significant improvements. In the past six months, during comparably wet periods our response times have been three times faster, with 45% fewer complaints. This has contributed to our best ever blockages performance, where we will have met our target every year in AMP7.

As we look ahead to AMP8, we take confidence from our relative performance on measures which will become common ODIs. We continue to be the frontier performer in the industry on external sewer flooding despite missing our increasingly stretching targets, and whilst we remain in penalty on pollutions, Severn Trent Water and Hafren Dyfrdwy are the two best performers in the sector. To further improve, we have opened our new Waste Operational Control Centre with 40 new roles, applying learnings from the approach which has had success in our water business to speed up decision making during incidents and adopt a more proactive approach to our network.

Overall, we remain on course for our largest ever year of outperformance on ODIs, and expect to deliver over £100 million in net ODI rewards pre-sharing. We expect to hit all of our end-of-AMP ODIs, including Farming for Water and Water Framework Directive improvements. We remain strong on D-MeX again this year, having been in the top three in the sector every year in AMP7, with the potential incentives set to increase by a factor of five in AMP8, although we still have further to go on C-MeX.

Improving our environment through ambitious levels of investment

Storm overflow spills remain a significant focus for our industry, and we are investing this year to reduce spills as quickly as possible. Across our patch there are 2,472 fully-monitored storm overflows that collect over 300 million data points each year, which provided us with the critical information to identify 923 priority sites and determine the best interventions for each site. With over 500 people working on the programme, we have delivered 900 interventions this year, and our preliminary analysis suggests that this work has prevented 24,000 spills.

But we won't stop there. We will be delivering a further 600 interventions next year, helping to reduce our average spills to below 18. And our £1.2 billion storm overflow improvement plan for AMP8 is the most ambitious in the sector, as we aim to halve average spills per storm overflow by 2030.

We have been awarded four star status in the Environment Agency's annual Environmental Performance Assessment for an industry-record fifth consecutive year for 2023. To ensure we maintain environmental leadership, we are expanding our waste Incident Response team to provide an enhanced and ringfenced reactive tanker resource. This will speed up response time during an incident, preventing pollutions before they happen.

As part of our Get River Positive pledges, we have improved the biodiversity of over 11,500 hectares, with an aim to improve 15,000 hectares by 2025, meaning our work on biodiversity would account for 3% of the Government's 2042 target for the entire country. Additionally, we are on course for our target of planting 1.3 million trees by 2027, and we have supported around 5,000 farmers to deliver environmental solutions on their land. We believe we are currently responsible for 14% of RNAGS in our region, with a target to be below 2% by 2030.

We remain committed to achieving net zero carbon emissions by 2030. In the Draft Determination, we were awarded £250 million for net zero, 79% of sector enhancement spend in this area, supporting us to implement technologies from our Strongford Net Zero Hub across other wastewater treatment works. We are on track for all elements of our Triple Carbon Pledge and by 2030 we expect to achieve net zero carbon emissions, 100% of our energy will come from renewable sources, and our vehicle fleet will be 100% electric, subject to the availability of specialist vehicles. Since 2019, we have reduced our operational scope 1 and 2 emissions by 21%, and 58% of our supply chain by emissions have now committed to science-based targets.

Gearing up for AMP8 with highest ever year of investment

This year marks our largest ever year of investment with total capital expenditure forecasted in the upper end of our £1.3 billion to £1.5 billion guidance range, including our Green Recovery programme and accelerated spend from AMP8. This will take our total capital investment in AMP7 to well over £4 billion, strengthening resilience in our network and enhancing our performance. This also means that we are uniquely placed to end AMP7 at the required capital run rate for AMP8.

Our upgrades to seven major treatment works are into the final stages of commissioning. When complete, these upgrades will increase our treatment capacity, improve process efficacy and efficiency, and improve the quality of final effluent. Meanwhile, we are into the final stages of a £25 million sewer upgrade in Stroud, to provide an additional 7,400 cubic metres of storm water storage - our largest ever storm overflow storage tank. We are also on track with our £32 million scheme to build 16 kilometres of new pipeline between Derwent Valley and Strelley Reservoir, reducing our dependency on boreholes and future-proofing the water supply for customers in north Nottinghamshire.

As planned, we are stepping up our Green Recovery programme this year, with each of the seven projects on track. In September, we started the construction of the UK's first operational ozone wastewater treatment plant, using ozone gas as an additional disinfectant to improve the quality of treated water returning to the local river. And as part of the Bathing Rivers programme, two further plants in Warwickshire will be operational by the end of this financial year.

Our non-regulated business continues to grow and add value to the Group. Between Severn Trent Green Power and Bioresources we currently generate 360GWh, which equates to 66% of our overall consumption, with further growth expected in the near future. Earlier this year we announced our plan to build three large-scale solar farms in Leicestershire, Warwickshire and North Yorkshire, and we have now also completed on a fourth site in Shropshire. All four projects have now progressed into the delivery phase, and have the opportunity to increase our energy generation by around 185GWh.

As we approach AMP8, we are fully confident in our ability to deliver our largest capital programme ever. We have already formally launched AMP8 with over 70 incumbent suppliers who are briefed on our key projects and working with us to ensure maximum innovation and efficient delivery. Work is underway on £3.5 billion of our AMP8 capital programme with supply chain resource secured on over £2 billion worth of contracts and over £1 billion of AMP8 capital costs locked in. 

Delivering for our colleagues, customers, and community

As we enter a period of unprecedented investment, we are committed to growing our offering to customers and the wider region, and our efforts on customer service are continuing to show signs of progress. We are on track to reduce complaints by over 40% over the course of AMP7, and our Trustpilot score is now 4.8 out of 5 - the joint highest in the FTSE100.

However, our C-MeX scores have not been as high as we would like, and we are making further investments in this area. For example, our new Kraken customer information system will help to improve customer service, automising call transcripts and documenting any follow-up actions to allow our call centre agents to focus on high quality customer conversations.

We also want to ensure that as new investment comes in, no customers are left unable to afford their bills. So far this year we've provided over £40 million of support for customers, and across AMP8 our total support will be £575 million. And we're also committed to tackling the wider causes of poverty: we have already supported nearly 20,000 customers as part of our ten-year Societal Strategy to improve the prospects of 100,000 people in our region. Recently we have partnered with Leicester Employment Hub and Leicester Job Centre Plus to create pathways for people with barriers to work into roles at our new contact centre in Leicester.

To improve employment rates across marginalised groups further, we're providing 12-week placements to 50 people as part of the West Midlands Combined Authority's job rotation pilot. And in conjunction with ReGenerate, we've recently formed the Midlands Employer Alliance, comprising many of the largest employers in our region, to target recruitment towards underprivileged groups.

Over the course of AMP7 we have grown our business by nearly 3,000 employees across customer, operational, and back office teams. In totality we expect our AMP8 plans to be responsible for creating approximately 7,000 new jobs, on top of our continued programme of insourcing which ensures high quality jobs for more people while bringing critical skills in house.

We firmly believe that investing in a more insourced organisation will drive even better outcomes for our customers, as we promote the culture that has brought us success in AMP7. Our £10 million Academy has welcomed over 13,000 learners through its doors this financial year, and currently offers over 600 training courses across operational, engineering, professional, leadership, and customer learning streams. The investments we make in our people are reflected in our Glassdoor score of 4.5 out of five, which is the highest score across UK water and sewerage companies, and our consistently-strong colleague engagement scores - our latest score of 8.6 is once again within the top 5% of utilities globally.

Chief Financial Officer's Review

Looking back over the AMP, much has been delivered. We are growing our RCV by 40% in nominal terms. We have one of the strongest balance sheets in the sector, having raised £1.25 billion of equity in the AMP, and one of the lowest costs of debt.

All this in a period that included a global pandemic, unprecedented energy prices, inflation at levels not seen for decades previously and a significant uplift in work volumes. While also facing into significant challenges from extreme weather and the changing climate we have managed our costs around 1% of RoRE.

Despite this challenging backdrop, we have continued to invest for the long term including: insourcing critical operations, developing the net zero blueprint, improving customer service and supporting more customers who can't pay and of course, in enhancing the environment.

We approach AMP8 with a fully equity funded PR24 plan, and with our cash requirements covered to July 2026.

Our financial performance for the first half of the year was in line with expectations. We expect our PBIT to return to being more weighted to the first half this year. As expected, lower inflation during the year has reduced our finance costs and our highest-ever capital investment has led to an increase in the amount of interest capitalised in the period.

After our adjusted effective current tax rate of 0.1% our adjusted earnings in the first half of the year increased by 132% to £173.6 million (2023/24: £74.8 million).

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

Group turnover was £1,217.7 million (2023/24: £1,165.3 million), up £52.4 million (4.5%), driven by higher revenues in our Regulated Water and Wastewater business (up £50.6 million).

Group PBIT was £297.8 million (2023/24: £255.1 million). In our Regulated Water and Wastewater business PBIT increased by 21.4% as revenue increased mainly due to tariff increases and higher operating costs were partly offset by lower energy prices and reductions in infrastructure renewals. In Business Services EBITDA was broadly in line with prior year as higher operating costs offset the increased revenue.

Our effective interest cost reduced to 4.4% (2023/24: 5.6%) due to lower inflation uplift on index linked debt, as expected. Although average net debt increased by 3.2% over the same period in the previous year, net finance costs decreased to £124.6 million (2023/24: £179.2 million), down 30.5%. Excluding the impact of inflation on our index-linked debt, our effective cash cost of interest was 3.3% (2023/24: 3.4%), as we saw the impact of lower interest rates on new debt issues compared to maturing debt.

Our adjusted effective current tax rate was 0.1% (2023/24: nil%) as the benefit of full expensing for tax purposes of our significant expenditure on qualifying plant and machinery reduced our profit chargeable to tax. Our effective tax rate was 26.5% (2023/24: 27.0%) including deferred tax.

Group profit after tax was £141.4 million (2023/24: £51.6 million). Our adjusted basic earnings per share were 58.0 pence (2023/24: 29.7 pence). Basic earnings per share were 47.2 pence (2023/24: 20.5 pence).

Our balance sheet remains strong. At 30 September 2024 our adjusted net debt was £7,665.4 million (31 March 2024: 7,187.9 million), our economic regulated gearing was 58.6% (31 March 2024: 58.7%) and our shadow regulated gearing was 60.6% (31 March 2024: 59.7%). We have £1,100 million of committed facilities, and our cash flow requirements are funded to July 2026.

Our net pension deficit at 30 September 2024 decreased to £185.1 million (31 March 2024: £213.0 million). The overall funding level for our defined benefit schemes was 90.5% (31 March 2024: 89.4%).

Capital investment was £665.9 million (2023/24: £476.9 million) as we deliver our AMP7 commitments, Green Recovery and accelerated investment to prepare for the significant investment levels in AMP8.

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 and 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 2025 of 48.68 pence, up 4.2% in line with our policy for AMP7 to increase the dividend by CPIH.

Regulated Water and Wastewater

Turnover for our Regulated Water and Wastewater business was £1,130.9 million (2023/24: £1,080.3 million) and PBIT was £294.5 million (2023/24: £242.6 million).

Turnover increased by £50.6 million mainly due to an increase of £42.1 million from the annual CPIH + K increase in prices. The RFI mechanism reduced turnover less this year resulting in a £12.9 million period-on-period increase. The previous year reflected the over-recovery in 2021/22 post Covid-19 as revenue recovered more quickly than expected.

IRE diversions income was £9.8 million lower, mainly due to lower HS2 activity, which offsets in expenditure, and the remaining increase of £5.4 million is due to other small variances.

Net labour costs of £115.5 million were 31.5% higher period-on-period. We have increased headcount to drive operational improvements by insourcing critical operations and to deliver the step up in our capital programme. This has increased labour costs by £18.3 million, including £6.0 million from insourcing our Waste Networks gangs from Customer Solutions Plus completed in September last year. Annual pay increases, which take effect from 1 July each year, increased costs by £14.6 million period-on-period. The increases in gross labour costs were partly offset by a £10.7 million step up in capitalised salaries.

Net hired and contracted costs increased by £8.8 million (7.1%), £5.6 million of which relates to a planned step up in the Green Recovery programme. Additional tankering to manage the impacts of prolonged periods of wet weather contributed an additional £4.2 million and higher technology third-party costs and back-office support contracts resulted in £3.3 million of additional costs. These increases were partly offset by a reduction in our third party waste reactive gangs following the insource in September last year.

Power costs were £42.2 million or 32.1% lower period-on-period, driven by the lower wholesale weighted average price of electricity on imports (over £100/Mwh lower). We have managed electricity consumption to the same level as half year 2023/24 despite new assets coming online and additional treatment of waste flows driven by wet weather.

Bad debt charges increased by £0.9 million but remained flat as a proportion of household revenue at 2.0% (2023/24: 2.0%).

Other costs were up by £19.8 million. Business rates increased by £4.6 million compared to half year 2023/24, costs in relation to damage to third party property, mainly from burst mains, were £4.3 million higher and regulatory fees were £3.5 million higher. There were a number of other small increases across different areas.

Infrastructure renewals expenditure was £24.8 million lower in the period, due to lower HS2 activity compared to last year as well as a higher proportion of proactive leakage jobs (which are capitalised) compared to this time last year.

Depreciation of £216.1 million was £8.5 million higher period-on-period due to the increasing asset base as we approach the end of the AMP.

Business Services

Business Services turnover was £90.0 million (up 2.2%) and EBITDA was £24.4 million (down 1.2%).

In our Operating Services and Other businesses, turnover decreased by £3.5 million due to timing of project work in MOD and other contracts. EBITDA was £13.0 million, £0.4 million higher year-on-year due to legal costs recovered following the successful close of the EIR case.

In Green Power, turnover was £5.4 million higher year-on-year. Our Andigestion acquisition, that was completed in September 2023, contributed an additional £6.1 million to revenue in the period, partly offset by lower energy prices which reduced revenue by £4.1 million. Excluding the impact of Andigestion, higher generation in the period increased revenue by £1.1 million, boosted by the re-commissioning of the Derby food waste plant. The additional generation also increased incentive income revenue by £2.8 million compared to half year 2023/24. Other movements including higher gate fees and lower Green certificates reduced revenue by a net £0.5 million.

Green Power EBITDA was £0.2 million lower period-on-period. Above-inflation cost increases on employment costs, food waste and haulage, as well as additional maintenance costs resulted in a year-on-year increase of operational costs of £5.6 million.  

Profits from Property Development were £0.9 million, £0.5 million lower year-on-year due to timing of property sales expected to ramp up in the second half. Our long-term plans to deliver £150 million profit by 2032 remain.

Corporate and other

Corporate overheads were £10.6 million (2023/24: £4.4 million), which includes costs in relation to Executive Directors variable pay (annual bonus and long-term incentive plans) that are now charged in the holding company to ensure these costs are not borne by customers. The remaining increase relates to higher legal costs and pay increase on corporate overheads. Other businesses generated a loss before interest and tax of £0.3 million (2023/24: PBIT £0.4 million).   

Net finance costs

The Group's net finance costs for the six month period were £124.6 million, (2023/24: £179.2 million). Average net debt of £7,469.1 million was higher than the previous year (2023/24: £7,235.5 million) but lower inflation in the period reduced the interest cost on index-linked debt by £42.6 million. As a result, our effective interest cost for the period reduced to 4.4% (2023/24: 5.6%). Our effective cash cost of interest (which excludes the inflation uplift on index-linked debt) was 3.3% (2023/24: 3.4%) due to lower interest rates on recent issues. Interest capitalised of £43.0 million (2023/24: £31.1 million) increased due to the higher capital work in progress during the period.

The Group's EBITDA interest cover was 4.4 times (2023/24: 2.7 times) and PBIT interest cover was 2.5 times (2023/24: 1.5 times). See note 18 for further details.

Net gains/losses on financial instruments

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

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

The Group has fixed around 90% of the estimated wholesale energy usage for the remainder of 2024/25 through a combination of forward price contracts and financial derivatives

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 sixth 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 2023/24 Annual Report and Accounts 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 2025.

The tax charge reported in the income statement is calculated at a rate of 26.5% (2023/24: 27.0%), representing the best estimate of the annual average tax rate expected for the full year, applied to the profit for the six month period.

The current tax charge for the period was £0.2 million (2023/24: nil). The deferred tax charge was £50.7 million (2023/24: £19.1 million).

The tax allowances generated by our significant capital programme, reduced our adjusted effective current tax rate (in line with guidance) to 0.1% (2023/24: nil%).

Profit for the period and earnings per share

Reported profit for the period was £141.4 million (2023/24: £51.6 million).

Basic earnings per share were 47.2 pence (2023/24: 20.5 pence). Adjusted basic earnings per share were 58.0 pence (2023/24: 29.7 pence).

Cash flow

Six months ended 30 September

Adjusted net debt comprises:

At 30 September 2024 we held £1,046.0 million (31 March 2024: £951.4 million) in net cash and cash equivalents. Our average debt maturity is 13 years. Including £1.1 billion undrawn committed facilities, the Group's cash flow requirements are funded until July 2026.

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

Adjusted net debt at 30 September 2024 was £7,665.4 million (31 March 2024: £7,187.9 million). Regulated gearing (adjusted net debt of our regulated businesses, expressed as a percentage of estimated Regulatory Capital Value) was 62.8% (31 March 2024: 61.3%). Shadow regulated gearing was 60.6% (31 March 2024: 59.7%).

The estimated fair value of debt at 30 September 2024 was £882.7 million lower than book value (31 March 2024: £465.3 million lower).

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 and the Dee Valley Water scheme closed to future accrual on 31 March 2024.

The future funding plan agreed under the 2022 actuarial valuation for the main Severn Trent Pension Scheme ('STPS') includes:

1.     Index-linked payment forecasts based on the Oxford Economics forecast CPI for the twelve month period to November 2024.

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 2024 was a deficit of £185.1 million. Calculation of the pension deficit for accounting purposes uses 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. The net finance cost was £5.0 million and administration costs were £1.9 million.

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

On an IAS 19 basis, the funding level is 90.5% (31 March 2024: 89.4%).

Dividends

The Board has declared an interim ordinary dividend of 48.68p per share (2023/24: 46.74p per share), which will be paid on 10 January 2025 to shareholders on the register on 29 November 2024.

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. These principal risks are unchanged

since our year end disclosures. Details of how the Group mitigates and manages these risks are set out in the Annual Report.

Health and Safety:

Infrastructure Failure and Asset Resilience:

Customer Service and Experience:

Supply Chain and Capital Project Delivery:

Security and Resilience:

Political, Legal and Regulatory:

Financial Liabilities:

Strategy:

Climate Change, Environment and Biodiversity:

People and Culture:

Technical Guidance 2024/25

Footnotes to Technical Guidance

1.     Including Green Recovery allowance.

2.     Including AMP8 preparation expenditure, Transitional expenditure and Green Recovery related opex.

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. A net reward of £100 million (pre-sharing) would deliver a net reward of £60 million +/-10% (post-sharing), dependent on the mix of ODI net rewards earned.

4.     Based on Oxford Economics April inflation forecast. Index-linked debt comprising around a quarter of our total debt.

5.     2024/25 dividend growth rate based on November 2023 CPIH of 4.17%.

6.     Based on inflation of the year in which ODI rewards are taken into revenue, post-sharing and assuming 2023/24 ODI rewards are taken into revenue in 2025/26 and 2024/25 ODI rewards are taken into revenue in 2026/27. ODIs are quoted gross of tax.

7.     AMP7 nominal Regulatory Capital Value ('RCV') is measured including expected additions from Green Recovery, real options and transitional expenditure, as well as other estimated midnight adjustments. Expected Nominal RCV at 1 April 2025 assumes forecasted CPIH of 2% for 2024/25 and RPI of 2.9% for 2024/25 as per Oxford Economics April 2024 forecast.

8.     Compared to guidance issued on 22 May 2024.

Investor Timetable

A Dividend Reinvestment Plan ('DRIP') is provided by Equiniti Financial Services Limited. The DRIP enables the Company's shareholders to elect to have their cash dividend payments used to purchase the Company's shares. More information can be found at www.shareview.co.uk/info/drip.

Condensed consolidated income statement

Six months ended 30 September 2024

Earnings per share (pence)

Condensed consolidated statement of comprehensive income

Six months ended 30 September 2024

Condensed consolidated statement of changes in equity

Six months ended 30 September 2024

Condensed consolidated balance sheet

At 30 September 2024

Condensed consolidated cash flow statement

Six months ended 30 September 2024

Notes to the condensed interim financial information

1.   General information

The interim report has been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the Listing Rules.

The information for the period ended 30 September 2024 does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. A copy of the statutory accounts for that year prepared under IFRS has been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

a)    Accounting policies

The interim financial information has been prepared on the going concern basis using accounting policies consistent with United Kingdom adopted International Accounting Standard 34 'Interim Financial Reporting'. The same accounting policies, presentation and methods of computation are followed in the interim financial information as applied in the Group's annual financial statements for the year ended 31 March 2024.

b)    Going concern

Including undrawn committed credit facilities of £1,100 million, and based on its latest forecasts, the Group is fully funded for its investment and cash flow needs for more than the next year.

After making enquiries the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and hence the interim financial information has been prepared on a going concern basis.

c)    Seasonality

Historically, just over half of the Group's profit before interest and tax ('PBIT') has arisen in the first half of the year.

2.   Critical accounting judgments and key sources of estimation uncertainty

In the course of applying the Group's accounting policies, the Group is required to make certain judgments, estimates and assumptions that it believes are reasonable based on the information available. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. Details of the critical accounting judgments and key sources of estimation uncertainty were set out in the Group's financial statements for the year ended 31 March 2024. Changes to these judgments and uncertainties are set out below.

a)   Critical accounting judgments

There have been no changes to the critical accounting judgments made at 31 March 2024.

b)   Sources of estimation uncertainty

There have been no significant changes to the estimates relating to depreciation and carrying amounts of property, plant and equipment, retirement benefit obligations or to expected credit losses on trade receivables since 31 March 2024.

3.   Segmental analysis

The Group is organised into two main business segments:

Regulated Water and Wastewater includes the wholesale water and wastewater activities of Severn Trent Water Limited ('STW'), its retail services to domestic customers, and Hafren Dyfrdwy Cyfyngedig ('HD').

Business Services includes the Group's Operating Services businesses, the Green Power business including Severn Trent Water's hydro-electric generation, the Property Development business and our other non-regulated businesses including affinity products and searches.

The Severn Trent Executive Committee ('STEC') is considered to be the Group's chief operating decision maker. The reports provided to STEC include segmental information prepared on the basis described above.

Results from interests in our joint venture are not included in the segmental reports reviewed by STEC.

Goodwill is allocated and monitored at the segment level.

Transactions between reportable segments are included within segmental results, assets and liabilities in accordance with Group accounting policies. These are eliminated on consolidation.

A segmental analysis of turnover and PBIT is presented below.

Six months ended 30 September

The reportable segments' turnover is reconciled to Group turnover as follows:

Six months ended 30 September

Segmental PBIT is reconciled to the Group's profit before tax as follows:

Six months ended 30 September

The following table shows segmental capital employed:

Operating assets comprise other intangible assets, property, plant and equipment, biological assets, right-of-use assets, retirement benefit surpluses, inventory and trade and other receivables.

Operating liabilities comprise trade and other payables, retirement benefit obligations and provisions.

4.   Revenue from contracts with customers

Revenue recognised from contracts with customers is analysed by business segment below:

Six months ended 30 September 2024

Six months ended 30 September 2023

5.   Net gains/(losses) on financial instruments

Six months ended 30 September

6.   Tax

Six months ended 30 September

The tax charge in the income statement is calculated at a rate of 26.5% (2023: 27.0%) representing the best estimate of the annual average effective income tax rate expected for the full year applied to the pre-tax income for the six month period.

The adjusted effective current tax rate was 0.1% (2023: nil%). See note 18.

Current tax of nil (2023: nil) and a net deferred tax charge of £10.1 million (2023: a net deferred tax credit of £1.2 million) has been taken to reserves in the period.

Deferred tax is provided at 25%, the rate that is expected to apply when the asset or liability is expected to be settled.

On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting periods starting on or after 31 December 2023.

The Group is within the scope of these OECD Pillar Two model rules and has performed an initial assessment to the impact of Pillar Two income taxes. The Group does not expect a potential exposure.

The Group has applied the exception under IAS 12 to recognising and disclosing information about deferred tax assets and liabilities related to top-up income taxes.

7.   Dividends

Amounts recognised as distributions to owners of the Company in the period:

Six months ended 30 September

The proposed interim dividend of 48.68p per share (2023: 46.74p per share) was approved by the Board on 19 November 2024 and has not been included as a liability at 30 September 2024.

8.   Earnings per share

a)            Basic and diluted earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding those held in the Severn Trent Employee Share Ownership Trust and treasury shares which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's shares during the period.

The calculation of basic and diluted earnings per share is based on the following data:

i)    Earnings for the purpose of basic and diluted earnings per share

ii)   Number of shares

Six months ended 30 September

b)            Adjusted earnings per share

Six months ended 30 September

Adjusted earnings per share figures are presented for continuing operations. These exclude the effects of net gains/losses on financial instruments and deferred tax in both 2024 and 2023. The Directors consider that the adjusted figures provide a useful additional indicator of performance. The denominators used in the calculations of adjusted basic and diluted earnings per share are the same as those used in the unadjusted figures set out above.

The adjustments to earnings are as follows:

Six months ended 30 September

9.   Fair value of financial instruments

a)          Fair value measurements

The valuation techniques that the Group applies in determining the fair values of its financial instruments on a recurring basis are described below. The techniques are classified under the hierarchy defined in IFRS 13 which categorises valuation techniques into Levels 1 - 3 based on the degree to which the fair value is observable. The Group's valuation techniques are Level 2 unless otherwise stated below:

Changes in the carrying values of instruments that are measured using a Level 3 technique were as follows:

These Level 3 instruments are valued using unobservable inputs. In valuing the inflation swaps, we have identified the unobservable input as the CPI wedge. A change of 10bps in the CPI wedge would result in a change in the carrying value of £3.2 million.

b)  Comparison of fair value of financial instruments with their carrying amounts

The Directors consider that the carrying amounts of all financial instruments, except those disclosed in the table below, approximate to their fair values. The carrying values and estimated fair values of other financial instruments are set out below: