Severn Trent Regulatory News (SVT)

Delivering now, very well placed for the future

Continuing to deliver a strong performance for all stakeholders

Interim financial results in line with expectations

Ambitious plans for upcoming scale investment in our region

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

 "Our team has delivered for customers with a sector-leading performance over the last six months, driven by a £500 million investment in the Midlands. We're doing more than ever, whether it's protecting the environment where we're on track to achieve the highest 4* status from the Environment Agency for a record fifth consecutive year, operationally - delivering our best ever performance reducing leakage and blockages, and in our community where 100,000 people are being supported out of poverty.

We're delivering for customers today, and also preparing for the future. We have set out plans to invest £12.9bn from 2025, the equivalent of £2,400 per household. These plans will bring huge benefits to nature including healthier rivers, 7,000 jobs to our region through new roles, insourcing and in the supply chain, as well as a financial support package to help around one in six families navigate cost-of-living pressures. We're hugely excited about the economic, environmental and societal benefits this will bring to the Midlands for decades to come."

Footnotes to page 1 of this RNS

Interim Results Presentation and Q&A

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, 22 November 2023.

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 18 months of this regulatory cycle, we're fully focused on finishing AMP7 strongly and maintaining our position as sector leaders. We have managed some extraordinary pressures already in AMP7, including extreme weather, unprecedented energy prices and broader macroeconomic uncertainty, while maintaining a cumulative RoRE performance of 8.9% in the first three years. We are well placed to exit the AMP strongly, delivering our remaining commitments while preparing ourselves for the biggest investment programme in our history.

We remain on track with 80% of our performance commitments so far this year, and are showing year-on-year improvement on the measures that matter most to our customers, including leakage, serious pollution incidents, and water quality contacts. And on top of that we're continuing to lead the sector on the environment, whether that's our record on EPA 4* status, our focus on reducing RNAGS, or our commitment to Biodiversity improvements, ensuring we protect our region for the long term.

The business plan we submitted at the beginning of October for the next regulatory period marks an evolution of the industry, delivering a further step change in service for our customers and our impact on the environment, and we're confident in the robustness of our plan across the three areas most important to Ofwat:

But we're not waiting for AMP8 to make a difference. We're making the right investments now, with at least £400 million of expenditure accelerated into AMP7 to get a head start on our targets and enhance our current performance. That includes stepping up investment into CSOs to get spill numbers down as soon as possible, as well as transitioning over to Kraken - a global leading Customer Relationship Management system which will support our water resources plans and transform our customer service.

Six months into year four, I'm pleased with our performance levels as we continue to improve service on the measures that matter most to customers. We're committed to finishing this AMP strongly, continuing to build our track record as a sector leader on operational outperformance, and preparing for an exciting period of growth for our company over the next AMP.

Demonstrating operational and environmental leadership

We currently have 80% of performance commitments on track, and through delivering for our customers on these metrics we continue to expect to unlock at least £50 million of ODI rewards this year. At the same time, we're also focused on improving the measures that are behind target, as well as exploring ways of delivering even greater outperformance on the commitments that we're performing well on. Forecasts included in our business plan for the end of AMP8 put us around upper quartile on 72% of measures.

In water, our investments are continuing to pay off, as we're on track to deliver a seventh consecutive year of improvements in Water Quality Contacts, as well as our best ever performance on leakage and low pressure. We've also had our best six-month period on supply interruptions, as we continue to work hard to reduce the gap to our target.

In waste, we're maintaining our sector-leading position, we're forecasting our best ever performance on blockages and are ahead of target when it comes to reducing storm overflow spills. We've insourced 368 colleagues into our Waste Networks team to give us more agility to recover our external sewer flooding performance over the next 18 months and protect our frontier position on the measure as we enter AMP8, when the metric will be rebased around industry performance.

We're continuing to build our track record of leadership on environmental measures, having been awarded 4* EPA status for a record fourth consecutive year. As we enter the last few weeks of the assessment period, we remain on track to maintain our 4* status for a fifth consecutive year, including zero serious pollution incidents, despite 60% more rain since April than the same period last year.

Our Green Power business has continued to expand, with our recent acquisition of Andigestion further increasing our energy generation. Including our Bioresources business, so far this year we've generated 299 GWh, which is the equivalent of 57% of our ongoing energy needs. In October lightning struck one of our sites; nobody was hurt as a result of the incident, operations have been diverted without any disruption to performance, and the site is expected to be back online by April.

Highest ever capital investment to enhance our network

We're on course for our largest year of capital investment, spending around £1 billion to improve service for our customers, enhance our network, and prepare for the scale of delivery needed in AMP8.

We've completed 13 of this year's regulatory commitments early, including a new drawdown facility at Draycote reservoir and four storm capacity commitments, and are confident of delivering all 44 commitments for this year. We're also progressing with major works at Hinckley and Hartshill to increase sewage treatment capacity in an area of high population growth.

Work on our Green Recovery programme is progressing at pace. We're already ahead of our plan on smart metering, and in the next six months will accelerate the rollout to get ahead of our AMP8 targets. At Mansfield, 49 sites for our Sustainable Urban Drainage Scheme are complete with a further 11 currently under construction, as we work to reduce flood risk for 90,000 customers in the area. And at Witches Oak, construction work to unlock 89Ml/d of additional water supply is well progressed.

To further prepare ourselves for the next regulatory period of substantially higher investment, we expect to be accelerating at least £400 million of additional capital expenditure into the end of AMP7, in order to get ahead of our AMP8 targets early, while also stepping up delivery to create a smooth glide path into AMP8.

Set up strongly for unprecedented AMP8 investment programme

Between our AMP7 capex programme, additional Green Recovery spend, and accelerated transitional expenditure, we are uniquely positioned to end AMP7 at the required capital run rate for AMP8.

To help us deliver the programme even more efficiently, our innovative new 'Plug and Play' platform will introduce greater standardisation to traditionally bespoke design projects, allowing us to deliver far more than we ever have before, and to do so earlier to allow us to meet our targets quicker. And our in-house design function uniquely enables us to fully utilise the technology, giving us a competitive edge as we move into a period of expansion.

Following on from the recent insource of 368 colleagues into our Waste Networks team, we are exploring wider insourcing options to give more direct influence over our operations, meaning faster interventions on performance and greater agility to improve service levels.

We're investing early to drive environmental benefits sooner. That means bringing forward investments in WINEP, and moving quickly to reduce our usage of storm overflows, accelerating investment to bring down average spill volumes to a sector-leading level of 14 spills by 2030. Long term we're adopting a 'zero spills' mentality, and we already have a team of people established at our Zero Spills Hub at Stoke Bardolph to foster innovation to improve our performance.

We've developed a track record as the best-performing company on ODIs, delivering high-quality service for customers, and we are taking steps to maintain that position as ODIs become even more valuable in AMP8. But we also recognise there's more we can do, and our new ODI Centre of Excellence will help us to take an even more data-led approach to driving performance improvements for our customers and the environment.

And not only are we committing to these improvements to service, but we're also keeping bills at an affordable level for our customers. Our business plan proposes that bills will rise from 1.2% of disposable income to 1.3% over the course of AMP8, although we are still projected to end AMP8 with the second lowest bill in the sector. On top of that, we're expanding our affordability offering, with a total package worth £550 million - enough to support every customer in water poverty in our region - with interventions ranging from bill support of up to 90%, payment matching, payment breaks, debt advice, white goods, and more.

Overall we've submitted an ambitious plan which seeks to deliver unprecedented levels of growth in a deliverable and financially sustainable way, investing £2,400 per household to give customers better service than ever before while supporting everyone who needs help to pay their bills.

Supporting our people and our region

Our societal strategy continues to develop, as we seek to help to support 100,000 people out of poverty by 2032. We're working with 14 partner schools in our focus areas of East Birmingham, Derby, and now Coventry, to offer free training sessions in these social mobility cold spots, and we're pleased to be recognised once again in the Social Mobility Index, where we've ranked in the top ten employers for a fifth year in a row. We've met our annual target of 300 work experience placements over the past 12 months, in which time we've also exceeded our target of delivering 10,000 hours of skills and employability training to people looking for work.

Working with the wider community, we've held 25 free employability training and support sessions, and partnered with other organisations to hold job fairs for people looking to get into work, offering CV support, interview practice and employability workshops.

As we head into the next regulatory period, our people and culture will play a bigger role than ever before. We've invested in skills to foster a strong talent pipeline, with over 70 internal promotions to senior management level in the past two years, and over 1,000 colleagues in total promoted or progressed to a broader role in the business in the past year. And we've ensured engagement scores remain high - our most recent Quest survey score of 8.6/10 is our best ever result, with every directorate scoring at least 8.5, and puts us in the top 3% of utilities globally.

Chief Financial Officer's Review

Our robust financial performance for the first half of the year was in line with expectations. Our adjusted earnings in the first half of the year were in line with the previous year and we expect our PBIT to be more evenly spread than the prior year, as energy costs increased significantly in the second half of last year. Reductions in inflation rates during the year have reduced our finance costs and we expect this impact to be greater in the second half based on independent forecasts of inflation.

We have increased our capital programme and are on track to deliver around £1 billion in this financial year, and this, combined with our successful £1 billion equity raise completed in October, establishes a solid platform for AMP8.

We expect to end AMP7 with nominal RCV growth of 43% (based on independent inflation forecasts).

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

Group turnover was £1,165.3 million (2022/23: £1,061.8 million), up £103.5 million (9.7%), driven by higher revenues in our Regulated Water and Waste Water business (up £95.4 million).

Group PBIT was £255.1 million (2022/23: £261.7 million). In our Regulated Water and Waste Water business PBIT was in line with the previous year as increased operating costs from higher energy, chemical and labour costs, and a greater level of investment impacting infrastructure renewals expenditure and depreciation, offset the increase in revenue. In Business Services EBITDA was £6 million lower, impacted by one-off costs (£3.7 million) in Green Power relating to the Andigestion acquisition, which will increase our generating capacity by 45GWh per annum to around 60% of our energy needs by the end of the financial year and higher operating costs.

Our effective interest cost reduced to 5.6% (2022/23: 6.4%) due to lower inflation uplift on index-linked debt, as expected, and although average net debt increased by 10% compared to the same period in the previous year, net finance costs decreased to £179.2 million (2022/23: £186.9 million), down 4.1%. Our effective cash cost of interest was 3.4% (2022/23: 3.1%) as we saw the impact of higher interest rates on recent debt issues, although still outperforming the iBoxx index over the AMP to date.

Our adjusted effective tax rate was nil% (2022/23: 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 27.0% (2022/23: 24.7%). In the previous year the benefit of the 'super deduction' more than offset the impact of expenditure not qualifying for a tax deduction on the effective rate.

Group profit after tax was £51.6 million (2022/23: £78.8 million). Our adjusted basic earnings per share were 29.7 pence (2022/23: 29.9 pence). Basic earnings per share were 20.5 pence (2022/23: 31.4 pence).

Our balance sheet remains strong. At 30 September 2023 our net debt was £7,520.4 million (31 March 2023: £7,160.5 million) and our shadow RCV gearing was 60.6% (31 March 2023: 60.0%).

Our net pension deficit at 30 September 2023 increased to £329.9 million (31 March 2023: £279.4 million). The overall funding level across all our defined benefit schemes was 82.7% (31 March 2023: 86.5%). Higher bond yields reduced the value of the liabilities by around £189 million but this was broadly offset by a reduction of £193 million in the Scheme's assets in line with our hedging strategy. Inflation in the period, which was higher than our long-term assumption, increased liabilities by around £38 million. The net Scheme costs were approximately £9 million in the period. We remain ahead of our journey plan agreed with the Trustees at the 2019 funding valuation.

At 30 September 2023, we had £1,200 million of undrawn committed facilities, and at 30 September 2023 our cash flow requirements were funded to early 2025. Following our successful equity placing, which raised £1 billion (gross) on 3 October 2023, our cash flow requirements are now funded to early 2026.

We ramped up our capital investment in the first half of the year to £476.9 million (2022/23: £269.7 million) and we are on track to exit AMP7 at the run rate required to deliver the commitments in our AMP8 plan.

Following our assessment of eligible activities under the EU taxonomy at the year end, we are today publishing our first EU Taxonomy Disclosure in which we disclose that 62% of our capital expenditure and 53% of our revenues and operating costs are from activities aligned to the Taxonomy. We've identified areas where we can strengthen our position against the framework, ensuring the work we do brings maximum benefit to the environment.

The Group's AMP7 dividend policy is to increase the dividend in line with November CPIH each year. In line with its usual practice, the Board carefully considered the impact of the policy for all our stakeholders in the light of the relatively high inflation in the last year. 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 2024 of 46.74 pence (2022/23: 42.73 pence), in line with our policy for AMP7.

Regulated Water and Waste Water

Turnover for our Regulated Water and Waste Water business was £1,080.3 million (2022/23: £984.9 million) and PBIT was £242.6 million (2022/23: £242.9 million).

Turnover increased by £95.4 million with the main movements being:

Increased activity on our Green Recovery programme impacted operating costs by around £9 million year on year which is included in the analysis below.

Net labour costs of £87.8 million were 11.6% higher period on period. Gross employee costs increased, driven by the annual pay award and a planned increase in employee numbers to support delivery of our capital programme and to drive operational improvements, including the insourcing of 368 colleagues into Waste Networks in September. This was partly offset by higher capitalisation of employee costs as we progress to deliver our biggest ever investment programme.

Net hired and contracted costs increased by £15.5 million (14.3%) due to a planned step up in the supply pipe programme in Green Recovery as well as increased ground maintenance and technology contracts spend.

Power costs were £35.8 million or 37.4% higher period on period, mainly driven by the higher wholesale weighted average price of electricity on imports which was hedged over the course of 2022 and so was affected by the significant increase in wholesale market energy prices at this time. Power consumption on our pumping stations was higher due to the abnormally wet weather in the first half of the year. Over the course of AMP7 we expect the higher energy costs to impact average RoRE by around 0.7 percentage points. Higher power prices are partially offset by self-generation and incentive income in both our Bioresources and Green Power businesses.

Bad debt charges increased by £1.8 million but remained broadly flat as a proportion of household revenue at 2.0% (2022/23: 1.9%).

Other costs were up by £15.6 million, predominantly due to higher chemical costs, Ofwat fees, insurance costs and business rates following rate revaluation that took effect this year.

Infrastructure renewals expenditure was £9.7 million higher in the period, reflecting the planned programme step up mainly driven by mains renewal.

Depreciation of £207.6 million was £8.2 million higher period-on-period due to completion of Strongford THP, as well as various Water Framework Directive ('WFD') schemes such as Newport and Ray Hall.

Business Services

Business Services turnover was £88.1 million (up 8.2%) and adjusted EBITDA was £24.7 million (down 19.5%).

In our Operating Services and Other businesses, turnover increased by £6.7 million due to increased activity on the MoD and other contracts, as well as increased revenue from our water hygiene business, Aqualitix. EBITDA was £0.4 million higher impacted by a higher proportion of lower margin MoD contract revenue, inflation, and investment in insourcing activities.

In Green Power, turnover was in line with the prior year due to higher green energy incentive income offset by the expected lower energy prices on exports. Over the last two years Green Power EBITDA has grown by 73% but reduced by £6.5 million in the period due to the impact of £3.7 million of one-off acquisition costs for the purchase of Andigestion which completed in September, the annual pay increase and feedstock cost increases above inflation. We expect Andigestion to increase our energy generation by around 45GWh annually and we do not expect a significant impact from the incident at Cassington (see note 16).

Profits from Property Development were £1.4 million and slightly higher compared to last year. We remain on track to achieve our in-year guidance and long-term plans to deliver £150 million profit by 2032 having achieved c. £53 million since 2017.

Corporate and other

Corporate overheads were £4.4 million (2022/23: £4.5 million). The reduction is driven by lower professional fees. Our other businesses generated PBIT of £0.4 million (2022/23: £0.6 million).

Net finance costs

The Group's net finance costs for the six-month period were £179.2 million (2022/23: £186.9 million). Average net debt of £7,235.5 million was higher than the previous year (2022/23: £6,556.0 million) but lower inflation in the period reduced the interest cost on index-linked debt by £25.1 million. As a result, our effective interest cost for the period reduced to 5.6% (2022/23: 6.4%). Our effective cash cost of interest (which excludes the inflation uplift on index-linked debt) was 3.4% (2022/23: 3.1%) due to higher interest rates on recent debt issues. Interest capitalised of £31.1 million (2022/23: £23.5 million) increased due to the higher capital work in progress during the period.

The Group's EBITDA interest cover was 2.7 times (2022/23: 2.5 times) and PBIT interest cover was 1.5 times (2022/23: 1.4 times). See note 19 for further details.

Net losses on financial instruments

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

The Group holds:

Where hedge accounting is not applied, if the risk being hedged does not impact the income statement in the same period as the change in value of the derivative, then an accounting mismatch arises and there is a net charge or credit to the income statement. During the period there was a gain of £5.4 million (2022/23: gain of £53.6 million) in relation to such instruments.

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

The Group has fixed around 98% of the estimated wholesale energy usage for 2023/24 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 fifth 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 2022/23 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 2024.

The tax charge reported in the income statement is calculated at a rate of 27.0% (2022/23: 24.7%), representing the best estimate of the annual average tax rate expected for the full year, applied to the profit for the six-month period.

There was no current tax charge for the period (2022/23: nil). The deferred tax charge was £19.1 million (2022/23: £25.9 million).

The tax allowances generated by our significant capital programme, reduced our adjusted effective current tax rate (in line with guidance) to nil% (2022/23: nil%).

Profit for the period and earnings per share

Profit for the period was £51.6 million (2022/23: £78.8 million).

Basic earnings per share were 20.5 pence (2022/23: 31.4 pence). Adjusted basic earnings per share were 29.7 pence (2022/23: 29.9 pence).

Cash flow

Six months ended 30 September

Net debt comprises:

At 30 September 2023 we held £216.7 million (31 March 2023: £28.7 million) in net cash and cash equivalents. Our weighted average debt maturity is 14 years. Including committed facilities, of which £1,200 million was undrawn at the balance sheet date, the Group's cash flow requirements at 30 September 2023 were funded until early 2025 and after our successful equity placing, which raised proceeds of £1 billion on 3 October 2023, our cash flow requirements are now funded to early 2026.

We invest cash in deposits with highly rated banks and AAA rated money market funds. The Board regularly reviews the list of counterparties.

Regulatory gearing (net debt of our regulated businesses, expressed as a percentage of estimated RCV) at 30 September 2023 was 61.8% (31 March 2023: 60.7%). Shadow regulatory gearing was 60.6% (31 March 2023: 60.0%).

The estimated fair value of debt at 30 September 2023 was £771.2 million lower than book value (31 March 2023: £366.2 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.

The future funding plan for the main Severn Trent Pension Scheme ('STPS') includes:

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 2023 was a deficit of £329.9 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 £6.6 million and administration costs were £2.0 million.

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

On an IAS 19 basis, the funding level is 82.7% (31 March 2023: 86.5%).

Dividends

The Board has declared an interim ordinary dividend of 46.74 pence per share (2022/23: 42.73 pence per share), which will be paid on 10 January 2024 to shareholders on the register at 1 December 2023.

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:

Cyber Security and Technology Resilience:

Political, Legal and Regulatory:

Financial Liabilities:

Climate Change, Environment and Biodiversity:

Technical Guidance 2023/24

Outlook

Earnings: We anticipate adjusted earnings per share growth in 2023/24, after adjusting for the new share issue, as a result of a reduction in interest charge. We expect a further step up in 2024/25, as lower energy costs and inflation-linked tariff increases flow through to operational earnings.

Returns: We expect to deliver a strong average Return on Regulatory Equity ('RoRE') for AMP7, driven by both operational and financial outperformance. We are confident we can continue to deliver sector-leading operational performance, including end-of-AMP ODIs expected to contribute £40-50 million on top of in-year net rewards for the last year of the AMP. Over the course of AMP7 we expect higher energy costs to impact average RoRE by around 0.7 percentage points¹, but this is expected to be offset by higher Green Power income to give a broadly neutral impact on earnings over time.

RCV²: Group RCV expected to grow by 43% over AMP7, benefitting from our large investment programme, and including recent inflation forecasts.?That equates to a nominal CAGR³ of over 7% in AMP7.

Footnotes to Technical Guidance

Further Information

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

Investor Timetable

Earnings per share (pence)

Condensed consolidated statement of changes in equity

Six months ended 30 September 2023

Condensed consolidated balance sheet

At 30 September 2023

Condensed consolidated cash flow statement

Six months ended 30 September 2023

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 2023 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 2023.

b) Going concern

Including undrawn committed credit facilities of £1,200 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 around half of the Group's 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 2023. 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 2023.

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 2023.

3. Segmental analysis

The Group is organised into two main business segments:

Regulated Water and Waste Water includes the wholesale water and waste water activities of Severn Trent Water Limited, its retail services to domestic customers, and Hafren Dyfrdwy Cyfyngedig.

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 profit before interest and tax is presented below.

Six months ended 30 September

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

Six months ended 30 September

3. Segmental analysis (continued)

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, 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 2023

Six months ended 30 September 2022

5. Net (losses)/gains 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 27.0% (2022: 24.7%) 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 nil% (2022: nil%). See note 19.

Current tax of nil (2022: nil) and a net deferred tax credit of £1.2 million (2022: charge of £9.2 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 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 46.74p per share (2022: 42.73p per share) was approved by the Board on 21 November 2023 and has not been included as a liability at 30 September 2023.

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 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 2023 and 2022. 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. Borrowings

The borrowings are repayable as follows:

10. 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 £3.8 million.

10. Fair value of financial instruments (continued)

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:

The above classification does not take into account the impact of interest rate swaps or cross currency swaps.

Fixed rate loans are valued using market prices for similar instruments, which is a Level 2 valuation technique.

Index-linked loans are rarely traded and therefore quoted prices are not considered to be a reliable indicator of fair value. Therefore, these loans are valued using discounted cash flow models with discount rates derived from observed market prices for a sample of bonds, which is a Level 2 valuation technique.

Fair values of the other debt instruments are also calculated using discounted cash flow models with discount rates derived from observed market prices, which is a Level 2 valuation technique.

11. Interests in joint ventures

Our joint venture undertaking, Water Plus, is the largest business retailer in the non-household retail water market in England.

During the current period, the Group has recognised its share of Water Plus's losses of £1.1 million against the value of the investment.

Movements in the investment in joint venture balances during the period were:

12. Retirement benefit schemes

The Group operates three defined benefit schemes in the UK, two from Severn Trent and one from Dee Valley Water. The Severn Trent schemes are closed to future accrual. 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 Group participates in the Dee Valley Water plc Section of the Water Companies Pension Scheme, which is a defined benefit sectionalised scheme (the 'DVWS'). The most recent completed formal triennial actuarial valuations and funding agreements were carried out as at 31 March 2022 for the Severn Trent schemes and 31 March 2020 for DVWS.

In June 2021, the Severn Trent Mirror Image Pension Scheme ('STMIPS') Trustees completed the purchase of a bulk annuity contract with JUST, an insurance company, to secure the benefits of all members of the STMIPS. The Trustees continue to pay benefits to members as before the transaction, but these cashflows are now matched exactly by income from JUST. In March 2023, the DVWS also entered into a bulk annuity buy-in investment policy with JUST that covers the majority of the scheme obligations.

The assumptions used in calculating the defined benefit obligations have been updated to reflect market conditions prevailing at the balance sheet date as follows:

The defined benefit scheme assets have been updated to reflect their market value at 30 September 2023. Actuarial gains and losses on the scheme assets and defined benefit obligations have been reported in the statement of comprehensive income. Service cost, and the cost of administrating the scheme, are recognised in operating costs and interest cost is recognised in net finance costs.

The scheme assets at the balance sheet date were:

There are equities, LDI investments and other assets which are unquoted amounting to £1,039.0 million (31 March 2023: £419.0 million). The remaining assets have quoted prices in active markets.

12. Retirement benefit schemes (continued)

Movements in the net deficit recognised in the balance sheet were as follows:

The net deficit is presented on the balance sheet as follows:

13. Acquisitions

On 1 September 2023, Severn Trent Green Power Limited acquired 100% of the issued shares in Andigestion Limited for a consideration of £40.5 million. The acquisition is expected to increase the Group's market share and reduce cost through economies of scale.

Details of the purchase consideration, the net assets acquired and goodwill are as follows:

The assets and liabilities recognised as a result of the acquisition are as follows:

Goodwill of £17.0 million has been capitalised attributable to the anticipated future opportunities and outperformance arising as a result of the acquisition. It has been allocated to the Business Services segment. None of the goodwill is expected to be deductible for tax purposes.

The fair value of the acquired intangible assets of £5.0 million and fair value uplift on property, plant and equipment of £3.2 million are provisional, pending receipt of the final valuations for those assets. Deferred tax of £2.1 million has been provided in relation to these fair value adjustments.

Acquisition-related costs of £3.7 million are recognised as an expense in the income statement.

14. Share capital

At 30 September 2023 the issued and fully paid share capital was 255.2 million shares of 9717/19p amounting to £249.8 million (31 March 2023: 254.4 million shares of 9717/19p amounting to £249.1 million).

During the period the Company issued 0.8 million (2022/23: 1.0 million) shares as a result of the exercise of employee share options. At 30 September 2023 the Company held 2.6 million (31 March 2023: 2.9 million) treasury shares.

15. Cash flow

a) Reconciliation of operating profit to operating cash flows

Six months ended 30 September