Severn Trent Regulatory News (SVT)

Half Yearly Financial Report

26 November 2013

Interim Results for the six months to 30 September 2013

Highlights

1. September 2013 vs. March 2013

2. FY 2012/13

3. Regulatory Capital Value

Group results

1 before exceptional items (see note 3)

2 before exceptional items and net gain/(loss) on financial instruments

3 before exceptional items, net gain/(loss) on financial instruments, current tax on exceptional items and on financial instruments and deferred tax (see note 7)

4 restated due to adoption of IAS19 Revised (see note 1)

Tony Wray, Chief Executive Severn Trent Plc, said:

"We have delivered again on our commitments to our stakeholders, with below inflation rises in customer bills, further investment to deliver operational improvements, higher levels of service to customers and sustainable, progressive returns for shareholders with the interim dividend growing in line with our policy.

Many customers are facing serious cost of living pressures and we aim to keep bills to the minimum with below inflation rises across the current regulatory period and help for customers through our range of social tariffs. We remain committed to keeping customers' bills down and to sharing the benefits of success with them.

In the first six months Severn Trent Water invested £269 million in capital projects, an increase of 12.5%, resulting in improved performance in serious pollution incidents, supply interruptions and sewer flooding, a key priority for this year while customer satisfaction, as measured by the SIM (Service Incentive Mechanism), continues to rise.

We are close to finalising our Business Plan for AMP6, after a comprehensive, 18 month stakeholder engagement programme, which involved around 15,000 customers in research and 25 meetings of the Severn Trent Water Forum, our customer challenge panel.

Our Business Plan, to be submitted by 2 December, will reflect our customers' priorities and strike the right balance between affordability, investment to maintain and improve our service and environmental standards, and appropriate returns for shareholders.

Finally, I am delighted that Liv Garfield will be joining us next year as the new Chief Executive and I am looking forward to a seamless transfer of responsibilities and maintenance of Severn Trent's continuous improvement."

Enquiries:

Interim Results Presentation and Webcast

There will be a presentation of these results at 9:30am on Tuesday 26 November 2013 at BAFTA, 195 Piccadilly, London W1J 9LN. This presentation will be available as a simultaneous webcast on the Severn Trent website (www.severntrent.com) and will remain on the website for subsequent viewing. There will also be a video of our Chief Executive Tony Wray commenting on the results.

Interim Management Report

Operating Review

Regulated - Severn Trent Water

Severn Trent Water has made a good start to the 2013/14 financial year. Bills have increased by less than inflation, and Severn Trent Water's customers continue to benefit from the lowest average combined water and sewerage bills in England and Wales.

We announced in September that we would not be applying to Ofwat for an Interim Determination of K, (IDoK) to recover costs resulting from the adoption of private drains and sewers (PDaS) in October 2011. Costs for maintaining these assets were not included in the price controls for the current 5 year regulatory period. Severn Trent Water will, over the current regulatory period, invest approximately £41 million to £47million additional capital expenditure and absorb operating costs of between £35 million and £41 million.

We have continued to manage our bad debt effectively, maintaining our bad debt charge at 2.2% of turnover, one of the lowest levels in the industry. We support this performance by helping customers with a wide range of social tariff options. Examples include: the WaterSure tariff which caps bills for those customers who have particular difficulty in paying; the Severn Trent Trust Fund, a registered charity that helps those customers unable to meet the cost of water charges; bill reductions for single occupiers; and the Big Difference Fund, a partnership with Coventry Citizens Advice Bureau.

Our additional £150 million capital investment programme continues on track, and we have invested £91 million to date cleaning our sewers, improving our sewage treatment works and reducing leakage. In the first 6 months of the year we have delivered improvements in sewer flooding, serious pollution incidents and supply interruptions. Overall our capital programme grew to £269.1 million (UK GAAP, net of grants and contributions), compared to £239.2 million in the prior period. We remain on track to reach a Regulatory Capital Value (RCV) of £8 billion by March 2015.

As a result of our continued investment and operational improvements, our benchmark performance on Ofwat's KPIs for 2012/13 improved year on year, with 8 in the upper quartile (prior year 4), 4 where our performance was median (prior year 8) and 2 in the lower quartile (prior year 3). In 2012/13 the number of KPIs reduced to 14 from 15, with the elimination of the water pollutions KPI.

Since the end of March 2013 we have made good progress on a number of Ofwat's KPIs, including sewer flooding with a reduction of 31%, supply interruptions reducing by 41% and serious pollution incidents down 33%. We have also seen an improvement in customer satisfaction, as measured by the SIM (Service Incentive Mechanism) score and a reducing number of complaints. Our next area of focus is on 2 metrics which impact serviceability, namely sewer blockages and water quality at our water treatment works. Our sewer blockage performance is in line with the industry average but we have undertaken significant investigative work to cleanse and survey sewers in problem areas. This is beginning to drive blockages down and we expect this to continue. At our water treatment works we have conducted a thorough end to end review of our treatment processes to improve performance.

Non-regulated - Severn Trent Services

Revenues and underlying PBIT were lower period on period due to lower volumes in the Products business, resulting from customer project and delivery delays. However, the order book has continued to grow to £62 million ($100 million) at the end of September, an increase of 28% compared to March, supporting the anticipated rise in future deliveries. In Operating Services, UK & Ireland and the US delivered revenue growth, on the back of new contract wins and a good performance on the MoD contract.

Financial Review

Group Financial Performance

In this Interim Results Announcement PBIT is profit before interest and tax; underlying PBIT is PBIT excluding exceptional items as set out in note 3. Prior period comparative figures have been restated, where indicated, for the changes in accounting policy set out in note 1. The impact is to decrease profit previously reported by £5.7 million, with an equal and opposite movement in reserves.

Group turnover was £922.4 million (£917.7 million), an increase of 0.5% over the same period last year. Underlying group PBIT was 0.4% higher than last period. The primary factors affecting turnover and underlying PBIT are described in the commentary below.

There was a net exceptional charge of £11.2 million (credit of £1.1 million). Group PBIT decreased 4.2% to £255.7 million (£267.0 million).

Regulated - Severn Trent Water

Turnover rose by 1.8% to £774.6 million. Customer measured consumption was higher than the same period last year, due to a dry summer compared to an unusually wet period last year. Prices increased from 1 April 2013 by 2%, less than inflation.

Underlying PBIT increased by 0.6% to £269.5 million.

Operating costs increased by 3.0% to £296.6 million in line with expectations.

Directly managed costs increased below the level of inflation at 2.0% period on period, reflecting our effective cost management, while indirectly managed costs, over which we have less control, increased by 5.0%.

Employee costs increased due to the delivery of service improvements and the increased capital programme, which also resulted in higher labour costs capitalised. Overall net labour costs, including hired and contracted and after costs capitalised, were 3.0% higher period on period. Raw materials and consumables were lower than the same period in the prior year primarily due to savings within waste water.

Bad debts remained stable at 2.2% of turnover due to our continuing proactive approach and range of social tariffs to help customers pay their bill. The increase in power costs arose due to higher strike prices on our energy swaps. We also generated slightly less renewable power in the period (22.8% of our gross consumption compared to 23.8% in the prior period).

Depreciation was £3.8 million higher period on period due to the impact of capital expenditure increasing the size of the asset base and there was a decrease in infrastructure renewals expenditure of £0.6 million.

During the period, Severn Trent Water invested £269.1 million (£239.2 million) (UK GAAP, net of contributions) in fixed assets and maintaining and improving its infrastructure network. Included in this total was net infrastructure maintenance expenditure of £62.8 million (£63.4 million), charged to the income statement under IFRS.

Non-regulated - Severn Trent Services

Reported turnover in Severn Trent Services at £148.0 million in the period was down £14.1 million on the same period last year and reported underlying PBIT decreased by £2.5 million to £1.6 million.

After adjusting for the impact of exchange rate fluctuations and structural changes, turnover on a constant currency basis was down £5.9 million and underlying PBIT measured on the same basis was down £3.7 million.

Corporate and Other

Corporate and Other incurred a net charge before interest, tax and exceptional items of £5.5 million (£7.2 million). This segment includes the activities of the group's captive insurance company which insures Severn Trent group risks only and does not write any external business.

Exceptional items before tax

There was an exceptional charge (see note 3) in the six months to 30 September 2013 of £11.2 million (credit of £1.1 million) comprising;

The exceptional credit in the prior period resulted from the profit on disposal of the group's meter installation, repair and replacement business.

Net finance costs

The group's net finance costs were £125.6 million, compared to £116.0 million in the prior period. Higher inflation has led to higher finance costs on index linked debt coupled with an increase due to higher borrowings. Changes to the Accounting Standard IAS19 have resulted in an increase of £8.3 million in net pension finance cost (prior year figures have been restated by £6.2 million to reflect these changes).

The effective interest rate, including index linked debt, for the period to September 2013 was 5.8% (5.6%). The effective cash cost of interest excluding the RPI uplift on index linked debt was 5.0% (4.9%).

Net gain/(loss) on financial instruments

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

Accounting rules require that these derivatives are revalued at each balance sheet date and, unless the strict criteria for cash flow hedge accounting are met, the changes in value are taken to the income statement. 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.

Where the derivatives are held for their full term, these mismatches are expected to net out. Furthermore, the changes in value that are recorded during the lives of the derivatives, unless crystallised, do not represent cash flows.

An analysis of the amounts charged to the income statement in the period is presented in note 4 to the financial statements.

Profit before tax

Underlying group profit before tax decreased by 5.8% to £141.3million (£150.0 million). Group profit before tax was £191.2 million (£113.4 million).

Taxation

Note 5 in the financial statements sets out the tax charges and credits in the period, which are described in more detail below.

The current tax charge for the period before exceptional tax was £31.2 million (£40.3 million).

Our underlying effective current tax rate was 21.5% (27.7%). This is calculated as current tax, excluding prior year charges and exceptional tax, current tax on exceptional items and on financial instruments, divided by profit before tax, exceptional items and net gain/(loss) on financial instruments.

There was an exceptional current tax credit in the period of £44.0 million, reflecting the anticipated refund of overpayment of tax in prior periods. This arose from the resolution of a long standing industry wide discussion with HMRC over the tax treatment of certain capital expenditure within our water and waste water treatment works. Previously, these assets qualified for industrial building allowances (IBAs). The IBA regime began to be phased out in 2008 and by 2011 these allowances were eliminated. However, HMRC has now agreed that this expenditure is eligible for capital allowances as plant and machinery. We have therefore re-examined expenditure back to 2002/03 and will resubmit our tax computations for the years 2002/03 to 2012/13 inclusive to claim these allowances.

The current tax charge of £31.2 million and exceptional credit of £44.0 million above led to a total current tax credit of £12.8 million (charge of £40.3 million).

The deferred tax charge for the period before exceptional tax was £15.1 million (£10.8 million).

Back in 2008/09, the removal of IBAs also resulted in a deferred tax charge of approximately £186 million. As allowances on expenditure since 2002/03 can now be claimed, as detailed above, there is a partial reversal of this loss, resulting in an exceptional deferred tax credit of £41.1 million.

There was a further exceptional deferred tax credit of £114.8 million arising from the reduction in corporation tax rate from 23% to 20% (£34.2 million arising from reduction from 24% to 23%).

Therefore there was a total deferred tax credit for the period of £140.8 million (credit of £45.0 million).

Including both current and deferred tax, there was a total tax credit for the period of £153.6 million (credit of £4.7 million).

Profit for the period and earnings per share

Profit for the period was £344.8 million (£118.1 million).

Basic earnings per share were 145.0 pence (49.2 pence). Adjusted basic earnings per share (before exceptional items, net gain/(loss) on financial instruments, current tax on exceptional items and on financial instruments and deferred tax) were 46.7 pence (45.8 pence), see note 7.

Cash flow

Cash generated from operations was £432million (£451.3 million). Capital expenditure net of contributions and proceeds of sales of fixed assets was £203.6 million (£184.4 million). Tax paid was £1.1 million (£18.5 million). Net interest paid increased to £74.3 million (£73.2 million).

Net debt at 30 September 2013 was £4,259.2 million (31 March 2013 £4,297.3 million). Balance sheet gearing (net debt/net debt plus equity) at the half year was 79.5% (31 March 2013 83.6%). Net debt, expressed as a percentage of estimated Regulatory Capital Value at 30 September 2013 was 56.7% (58.4%).

The group's net interest charge, excluding net gain/(loss) on financial instruments and net finance costs from pensions, was covered 3.5 times (3.8 times) by profit before interest, tax, depreciation and exceptional items, and 2.3 times (2.5 times) by underlying PBIT.

Pensions

The group operates two defined benefit pension schemes, of which the Severn Trent Pension Scheme (STPS) is by far the largest. Formal triennial actuarial valuations and funding agreements were last undertaken for the STPS as at 31 March 2010 and the valuation as at 31 March 2013 is currently underway.

On an IAS 19 basis, the estimated net position (before deferred tax) of all of the group's defined benefit pension schemes was a deficit of £370.2 million as at 30 September 2013. This compares to a deficit of £383.7 million as at 31 March 2013.

The movements in the net deficit during the period were:

The group has adopted the provisions of IAS19 'Employee Benefits' (revised) (IAS19R) from 1 April 2013. Under the revised standard the discount rate used to discount the scheme's liabilities is also used to calculate the expected return on the scheme's assets. This has led to a net finance charge which is £8.3 million higher than would previously have been reported. As the difference between finance income and the actual return on scheme assets is reported as actuarial gain/loss in other comprehensive income, the changes do not impact the pension deficit on the balance sheet. The standard must be applied retrospectively and hence comparatives have been restated. The full impact of IAS19R is disclosed in note 1.

On an IAS 19 basis, the funding level has stayed stable at 82%.

Treasury management

At 30 September 2013 the group had £278.3 million (31 March 2012 £403.6 million) in cash and cash equivalents. Average debt maturity is around 16 years. The group's cash flow requirements are funded until 2015.

Cash is invested in deposits with highly rated banks and liquidity funds and the list of counterparties is regularly reviewed and reported to the Board.

The group's current policy for the management of interest rate risk requires that not less than 45% of the group's borrowings should be at fixed interest rates, or hedged through the use of interest rate swaps or forward rate agreements. At 30 September 2013, interest rates for 80% of the group's net debt of £4,259.2 million were fixed.

The group manages its power costs through a combination of forward price contracts and financial derivatives. All of our power requirements for the first four years of AMP5 and almost all of the remaining year have been hedged in this way, at prices below those allowed in the Final Determination.

The group continues to target a strong, flexible and sustainable balance sheet structure, which is reviewed on a regular basis, and believes that the planned investment programme and current dividend policy for AMP5 are commensurate with an investment grade credit rating.

Following the introduction of the new accounting standard, IFRS 13 'Fair Value Measurement', the group is required to amend its approach to estimating the fair value of its debt instruments to comply with the new standard which now places more emphasis on quoted prices in active markets rather than expected cash flows discounted using rates derived from market data. The estimated fair value of net debt at 30 September 2013 was £391 million higher than book value (31 March 2013 £584 million higher on a consistent basis).

Exchange rates

The trading results of overseas subsidiaries are translated to sterling at the average rate of exchange ruling during the period and their net assets are translated at the closing rate on the balance sheet date. The impact of changing exchange rates on the subsidiaries trading results was immaterial.

Dividends

We remain committed to our dividend policy of RPI +3% growth per annum for the remainder of AMP5. Therefore the board has declared an interim ordinary dividend of 32.16p per share (30.34p per share, +6.0%), which will be paid on 10 January 2014 to shareholders on the register at 6 December 2013.

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:

Customer Perception:

Legal and Regulatory Environment:

Operations, assets and people:

Financial risks:

For longer term risks please refer to the Severn Trent Plc Annual Report and Accounts 2013.

Regulatory Update

We are broadly supportive of the new regulatory framework, as outlined in the final methodology for the upcoming price review, PR14, published in July. Many of the changes are in line with our own recommendations published in our "Changing Course" series of reports over the last 3 years.

The Water Bill has also begun its passage through Parliament, which will mean that all commercial and public sector entities can choose their supplier by 2017. At Severn Trent we have already anticipated this change and have won our first national customer. Wholesale competition will be introduced for raw water and sludge, which we support.

We have also recently published the latest in our Changing Course series, focusing on implementation of the Water Framework Directive (WFD). The central message of the report is while the cost of living is rising there are environmental improvements we need to make to achieve healthier rivers. A balance needs to be struck between these two competing needs, and by implementing the WFD in a sustainable way, we believe it is possible to keep bills affordable and make a significant environmental progress. The report is available at www.severntrent.com/future/policy-regulation/

PR14 preparation

We have continued our work with our Customer Challenge Panel, the Severn Trent Water Forum. We completed in June our final large scale customer consultation "Your Water Your Choices". This identified that water quality and security of supply remain priorities for customers, as well as support for environmental improvements.

We are on target to submit our Business Plan for AMP6 to Ofwat by the 2 December deadline, which will reflect our customers' priorities and strike the right balance between affordability, investment to maintain and improve our service and the environment, and appropriate returns for shareholders.

Severn Trent will be holding a webinar to discuss its PR14 business plan submission at 12:30pm GMT on 3 December 2013. Further details are available at www.severntrent.com.

Outlook

The group is on track to deliver its expectations for the full year.

Regulated business

Consumption across our measured income base is now expected to be slightly higher year on year, given the volumes seen in the first half.

We aim to maintain our bad debt level at around 2.2% of turnover for the full year, though we continue to monitor developments such as unemployment levels and changes to the UK benefits system closely.

Operating expenditure continues to be in line with the Board's expectations for the year and, on a like for like basis, in line with the level of the Final Determination. Operating costs are expected to rise year on year due to the impact of inflation and power costs partially offset by efficiency improvements.

Expectations for net capital expenditure (UK GAAP after deducting grants and contributions) remain in the range £600 million to £620 million, including an estimated £15 million related to private drains and sewers. The level of net infrastructure renewals expenditure included in this range is anticipated to be £135 million to £145 million.

Looking to 2014/15, customer bills will rise by less than inflation, continuing the below inflation trend for the whole of AMP5.

Non-regulated business

In Severn Trent Services we expect growth in both revenues and PBIT.

Group

The group interest charge is expected to be higher year on year due to higher net debt and with the adoption of revisions to IAS19 increasing the pension accounting interest charge. The year on year impact of this revision to IAS19 is estimated at £13 million.

The effective current tax rate for the group for 2013/14 is expected to be between 21% and 23%.

Under our dividend policy of RPI+3% growth the dividend for 2013/14 is set to be 80.40 pence, representing growth of 6% year on year.

Severn Trent Plc will announce its Preliminary results for the financial year ending 31 March 2014 on 29 May 2014.

Further information

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

Condensed consolidated statement of changes in equity

Six months ended 30 September 2013

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 year ended 31 March 2013 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 a statements under section 498 (2) or (3) of the Companies Act 2006.

Accounting policies

The interim financial information has been prepared on the going concern basis using accounting policies consistent with International Financial Reporting Standards and in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union. 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 2013 except as outlined below.

The group has adopted the provisions of IAS 19 'Employee benefits' (revised). As well as requiring additional disclosures in the group's financial statements for the year ending 31 March 2014, the revised standard changes the method of calculating the net finance cost on defined benefit pension schemes. Previously the discount rate used to calculate the scheme's liabilities was applied to the liabilities and the expected return on the scheme's assets was applied to the assets. Under the revised standard the discount rate is applied to the net deficit. The net impact of this change is as follows:

The group has adopted IFRS 13 'Fair value measurement'. This standard sets out the approach to determining fair values in financial statements. The standard requires the group to take account of its own credit risk in determining the fair value of financial liabilities in its financial statements. The standard is applied prospectively and hence has no impact on amounts previously recognised. In the current period the fair value of derivative financial liabilities and the gain on financial instruments was £9.8 million higher as a result of the adoption of the standard. Following adoption of the standard the group has reviewed and amended its methodology for calculating the fair value of debt. If this methodology had been adopted at the previous year end the fair value of debt disclosed would have been £190 million lower.

The impacts of these changes on basic and diluted earnings per share are shown in note 7.

Going concern

The group is funded for its investment and cash flow needs for the next two years. 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.

Seasonality

The group's businesses are not seasonal in nature.

2 Segmental analysis

The group is organised into two main business segments:

Severn Trent Water: Provides water and waste water services to domestic and commercial customers in England and Wales.

Severn Trent Services: Provides services and products associated with water, waste water and contaminated land principally in the US, UK and Europe.  

The reportable segments' external turnover is reconciled to group turnover as follows:

Segmental underlying PBIT is reconciled to the group's profit before tax and discontinued operations as follows:

The segmental analysis of capital employed was as follows:

Operating assets comprise other intangible assets, property, plant and equipment, inventory, trade and other receivables and assets held for sale.

Operating liabilities comprise trade and other payables, retirement benefit obligations, provisions and liabilities associated with assets held for sale.

3 Exceptional items before tax

The group classifies items of income or expenditure as exceptional if individually or, if of a similar type, in aggregate they should, in the opinion of the directors, be disclosed by virtue of their size or nature if the financial statements are to give a true and fair view. In this context materiality is assessed at the segment level.

4 Net gain/(loss) on financial instruments

5 Tax

Before the exceptional tax credit, income tax for the period is charged in the income statement at 24.2% (six months ended 30 September 2012: charged at 26.0%), representing the best estimate of the average annual effective income tax rate expected for the full year applied to the pre tax income of the six month period.

The effective rate of current tax, excluding prior year charges and current tax on exceptional items and on financial instruments, calculated on profit before tax, exceptional items and net loss on financial instruments was 21.4% (2012: 29.1%).

There was an exceptional current tax credit in the period of £44.0 million, reflecting the anticipated refund of overpayment of tax in prior periods as HMRC has now agreed that certain capital expenditure within our water and waste water treatment works is eligible for capital allowances as plant and machinery.

This also resulted in an exceptional deferred tax credit of £41.1 million.

Current tax credits of £0.9 million and deferred tax charges of £8.2 million have been taken to reserves in the period.

The Finance Act 2013 was enacted in the period and implemented a reduction in the corporation tax rate from 23% to 21% with effect from 1 April 2014 and then to 20% with effect from 1 April 2015. The impact of these rate reductions on the deferred tax provision have been reflected in these financial statements and have resulted in a deferred tax credit of £114.8 million in the income statement and a deferred tax charge of £12.3 million in reserves.

6 Dividends

Amounts recognised as distributions to equity holders in the period:

The proposed interim dividend of 32.16p per share (2012: 30.34p per share) was approved by the board on 25 November 2013 and has not been included as a liability as at 30 September 2013.

7 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 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 and LTIP awards to the extent that the vesting conditions have been satisfied at the balance sheet date. Potential ordinary shares which would reduce a loss per share are not considered to be dilutive and hence in these circumstances diluted loss per share is equal to basic loss per share.

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

Earnings

Number of shares

b) Adjusted earnings per share

Adjusted earnings per share figures exclude the effects of exceptional items, net gain/(loss) on financial instruments, current tax on exceptional items and on financial instruments and deferred tax in both 2013 and 2012. 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:

Adjustments to earnings

c) Impact of changes in accounting policy

Basic earnings per share

8 Borrowings

9 Retirement benefit schemes

The group operates two defined benefit schemes being the Severn Trent Pension Scheme and the Severn Trent Mirror Image Scheme. The group also has an unfunded obligation to provide benefits to certain former employees whose earnings were in excess of the pensions cap that operated when the benefits were accrued.

The retirement benefit obligation as at 30 September 2013 has been calculated on a year to date basis, using the actuarial valuation update as at 31 March 2013. There have not been any significant fluctuations or one time events since that date that would require adjustment to the actuarial assumptions made at 31 March 2013. However, the market based assumptions have been updated for conditions prevailing at the balance sheet date as follows:

The defined benefit assets have been updated to reflect their market value as at 30 September 2013. Actuarial gains and losses on the scheme assets and defined benefit obligations have been reported in the statement of comprehensive income.

Service cost is recognised in operating costs and interest cost is recognised in net finance costs. Amounts recognised in the income statement in respect of these defined benefit schemes are as follows:

The amount included in the balance sheet arising from the group's obligations under defined benefit schemes were as follows:

Movements in the liability recognised in the balance sheet were as follows:

10 Share capital

At 30 September 2013 the issued and fully paid share capital was 238.9million shares of 9717/19p amounting to

£233.9 million (31 March 2013: 238.3 million shares of 9717/19p amounting to £233.3 million).

During the period the company issued 554,070 shares (2012: 717,207 shares) as a result of the exercise of employee share options.

11 Cash flow

a) Reconciliation of operating profit to operating cash flows

b) Non-cash transactions

No additions to property, plant and equipment during the six months to September 2013 were financed by new finance leases (2012: nil).