Severn Trent Regulatory News (SVT)

Half Yearly Financial Report

22 November 2018

Interim results for the six months to 30 September 2018 

Continued strong performance while investing for the future

· Ongoing delivery for customers  

− Upper quartile position in the UK Customer Service Index for utility companies

− ODIs in line with expectations maintaining sector leading AMP6 ODI performance of £150 million to date1

− Maintained leading waste performance by employing greater use of data and technology to optimise our network

− Continued progress on water performance. Delivering on catchment management customer ODI and forecasting a further 6% reduction in the number of water quality complaints

− Increased water production during hot, dry summer to meet a 22% increase in customer demand

· Planning and investing for the long term: 

− Submitted high quality AMP72 business plan delivering 13% Totex efficiency, upper quartile financing and ambitious performance targets while maintaining lowest bills in England and Wales for another five years

− Excellent progress on our capital programme, with capex of £340 million in the first six months of the year and on track for over £650 million by the end of the year

− Locked in c.95% of £870 million totex efficiencies, £100 million reinvestment on track setting ourselves up for a fast start in AMP7

− Investing in renewable energy with our acquisition of Agrivert food waste plants adding an additional 106GWh per annum to our existing portfolio

· Good Group financial results for the half year: 

− Group turnover of £881.5 million, up £30.5 million (3.6%)

− Group underlying PBIT3 of £299.1 million, up £12.4 million (4.3%)

− Group reported PBIT £299.1 million, up £4.1 million (1.4%)

− Reduction in effective interest rate by 70 basis points, driving underlying basic EPS4 of 76.2 pence (up 16.3%), basic EPS from continuing operations of 69.8 pence (up 12.2%)

− Interim dividend of 37.35p (up 7.9%)

Footnotes: see definitions on page 2 of this RNS

Liv Garfield, Chief Executive Severn Trent Plc, said:

"Our job is to deliver for all of our stakeholders - our customers, colleagues and investors - and by that we don't just mean delivering high quality waste and water services. We want to make a fundamental difference in society and in the communities we serve. As such, we're delighted to be one of a handful of companies, and the only utility, to be acknowledged as a Pathfinder Company by the Purposeful Company organisation and we look forward to developing our approach to this further in the future.

I'm pleased to be sharing a good set of financial and operational results in what has been a very busy first half of the year. The performance culture we have embedded into the organisation continues to deliver strong performance for our customers, also providing a great platform as we head into AMP7. As we plan and invest for the future, we are on track for our biggest year of capital spend in a decade, with more than £300 million invested in the first six months to improve performance for our customers today and for generations to come.

Building a lasting legacy is a key priority for us and we believe our PR19 plans will deliver what our customers have asked for, while maintaining the right balance of affordability and future investment"

Group results from continuing operations

Underlying results

Reported results

Footnotes to pages 1 & 2 of this RNS

1. Pre-tax in 2012/13 prices. Subject to outcome of Ofwat consultation.

2. AMP7: the 2020-2025 regulatory period

3. Underlying Profit before interest and tax (PBIT) excludes exceptional operating items - see note 4 to the financial statements

4. Underlying Earnings per Share (EPS) - see note 9 to the financial statements

5. Restated for adoption of IFRS 15 - see note 1 to the financial statements

Note: Technical guidance is included in the Chief Financial Officer's section of this announcement

Interim Results Presentation and Webcast

There will be a presentation of these results at 9:30am GMT on Thursday 22 November 2018 at the Rothschild Sky Pavilion, New Court, St Swithin's Lane, London EC4N 8AL. 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.

Chief Executive's Review

Having engaged with thousands of customers while developing our business plans for 2020 to 2025, we have a very strong sense of what they want to see from our company in the future and where we are on that journey. It is our ambition to be a company that truly listens to customers and delivers what they want. In doing so, we believe we will earn the trust of not just customers but also a broad set of stakeholders who can share in the success we deliver. We are proud of what we have achieved through operational performance, customer ODI delivery and totex efficiency to date and will continue to explore further opportunities to improve.

June and July of this year were operationally challenging. The prolonged hot, dry weather over this period placed a significant strain on our assets and our people. While not perfect, I am hugely proud of our response to this event, demonstrating resilience and flexibility in our network to respond to a 22% increase in demand for water from our customers. The activity to support our performance has cost in the region of £10 million in the first half of the year. We expect to absorb a similar amount of cost in the second half of the year to support the operational recovery required from such an event.

In Business Services, we completed a key milestone in our ambition to deliver £100 million of property profits by 2027 with the sale of land near Nottingham, generating a profit of £18 million and enabling 830 new homes to be built in our area. We also announced the acquisition of Agrivert Holdings Limited, a leading energy from food waste business, for a total consideration of £120 million, and are on track to complete the transaction in the next month. Both transactions reflect our strategic focus on Operating Services in the UK, Renewable Energy and Property Development, delivering sustainable returns for investors outside of the regulated business.

A great deal of thought and effort has gone into creating ambitious, but deliverable business plans for Severn Trent Water and Hafren Dyfrdwy for 2020 to 2025. The two plans respond to the unique customer expectations in each region, but have the same sense of societal purpose at their core. In each plan we have carefully considered how to balance affordability with the right levels of investment needed to meet stretching performance commitments, while ensuring we go far beyond the base requirements of what a business is expected to deliver for the communities it serves. Both plans have the lowest bills in England and Wales and we plan to keep it that way for the years to come.

Reflecting on the engagement we have with our stakeholders, it is clear that the relationship between business and communities is evolving. The work we have done to date and our plans for the future show the first steps of how businesses with strong social purpose can deliver better outcomes for all stakeholders. As such, we are delighted to be one of only seven UK companies, and the only utility, to be acknowledged as a Pathfinder company by the Purposeful Company Task Force. We look forward to working with other like-minded companies to continue to develop our approach in the future.

Our strategic priorities remain consistent with this approach:

− Embedding customers at the heart of all we do

− Driving operational excellence and continuous innovation

− Investing responsibly for sustainable growth

− Changing the market for the better

− Creating an awesome place to work

Embedding customers at the heart of all we do

In the period where we have submitted our business plans for 2020 to 2025, the expectations of our customers have never been fresher in our minds. Our plans are based on the most extensive, in-depth and diverse customer engagement we have ever had. We continue to build our business around how we can better serve our customers and communities every day, in the innovations we bring, and in the long-term investment decisions we take.

We are proud to have the lowest average combined bills in England and Wales, which is set to continue until at least 2025, and we remain committed to ensuring our bills are affordable for all, which means helping those customers who struggle to pay their bill, temporarily or otherwise. Bad debt as a percentage of regulated revenue is currently 2.1% which, while down on the previous year-end, is higher than levels seen earlier in the AMP, reflecting the tougher financial climate some of our customers find themselves in. This year we are again on track to exceed our target for the number of customers we support, with bigger and bolder ambitions heading into AMP7.

We continue to be in the top quartile of utility companies in the UK Consumer Service Index, which we believe is a good barometer for what our performance might look like when the new customer service measure (C-MeX) is introduced in AMP7. We have a number of new initiatives underway to continue our improvement journey on SIM, the current customer service measure, including offering a video calling service that allows our customers to speak face-to-face with an engineer when they report an issue, enabling faster and more accurate diagnosis of the problem.

We have also launched our new customer campaign - Wonderful on Tap - with the aim of embedding behavioural change around water consumption, and celebrating the role that water plays in everyday life and the work Severn Trent does behind the scenes to provide it. We embarked on our first TV campaign in over a decade this summer, and launched our new schools education roadshow to inspire the next generation of water users to use water wisely, reduce blockages, and protect the environment. We hope to roll it out across every primary school in our region over the next few years.

Our performance on services for developers places us in an upper quartile position for the fifth consecutive quarter, putting us in a strong position for the new developer service measure (D-MeX) which comes into effect in AMP7.

Driving operational excellence and continuous innovation

We are now in the fourth year of delivering against the set of ambitious targets we set ourselves at the beginning of AMP6, and are on track for another year of encouraging operational results, with our performance culture now truly embedded.

Our research consistently tells us that our customers value waste water measures the most, and that is why we are thrilled to have improved our customer service and environmental performance in this area so substantially in AMP6, earning £180 million in waste customer ODIs. Despite forecasting to reach the cap, we continue to outperform our targets across a broad range of metrics that will continue to be important in AMP7.

A substantial part of our success comes from combining advanced data analytics, industry-leading models and targeted investment to create an holistic catchment approach to optimising our network and to improving the wider environment. We are increasingly able to identify the key interventions that can improve a number of service measures and reduce cost at the same time. For example, by enriching traditional analytics on 'hot spot' areas of blockages, with historic flooding performance, forecasted weather behaviour and telemetry on pump performance in an area, we can pin point our efforts to a potential area of weakness in our network to prevent failure before it occurs.

Looking ahead to AMP7, our drive to deliver an excellent waste water service for our customers is reflected in our proposed suite of customer ODIs. We have also opted to enhance two of the three common customer ODIs - internal sewer flooding and pollutions - giving us the best platform for outperformance in AMP7. Not only does this focus our business on what matters most to our customers, it also pushes the waste frontier forward, to the benefit of the sector and all customers.

In our water business, we are really pleased to have reduced water quality complaints again and are on track for a 6% reduction by the end of the year, giving us increased confidence that our interventions are the right ones for a positive outcome by the end of the AMP. As we look forward to AMP7, the water quality focus will shift to the DWI's Compliance Risk Index, on which we expect to make significant progress in the rest of the AMP, with the ambition of halving our score by 2020.

Leakage is one of our most important measures, and one that we, and our customers, care passionately about. As we enter the second half of the year we are significantly increasing our 'find and fix' activity. We've recruited more people and accelerated the installation of more fixed acoustic loggers in areas of highest risk within our distribution network. To date, we have rolled out 10,000 of our planned 35,000 data loggers, giving us valuable information about our network. In addition, we have extended satellite imaging coverage following successful trials across Birmingham, Worcestershire and Warwickshire, and are focusing much of our innovation energy to find and deploy new technologies in this space.

We have been making excellent progress on our catchment management performance measure 'Farming for Water'. In particular, we have had great success with our Farm to Tap scheme, the only one of its kind in the sector, which, to date has signed up more than 800 farmers to improve drinking water quality on their land, resulting in a 57% reduction in peak metaldehyde concentrations. This benefits customers by reducing treatment costs and by increasing the quality of their drinking water, it helps the environment and wildlife by reducing chemical loading, and it rewards investors with up to £11 million in customer ODI outperformance payments - a great example of how success can be shared across all of our stakeholders.

Investing responsibly for sustainable growth

At the end of last year we committed to investing a further £100 million of additional totex efficiencies back into our business, strengthening our resilience and setting ourselves up for a fast start in AMP7. We have now fully allocated the investment and approved individual projects in key areas such as water treatment and networks, energy efficiency and process automation. These projects will deliver a better service as well as greater totex efficiency for our customers in the next AMP.

Our AMP6 capital programme is also progressing well, with expenditure of £340 million in the first half of this year. Our second service reservoir at Ambergate was completed ahead of schedule, providing valuable additional capacity over the prolonged hot weather. We commissioned our first Thermal Hydrolysis plant at Minworth, one of our largest waste water treatment works, two months ahead of plan, enabling us to increase capacity and to import more sludge from neighbouring companies. The Birmingham Resilience Programme is also advancing well, with 23km, over three quarters of the total pipeline, already installed, and great progress being made on the new pumping station by the River Severn.

In August 2018, we announced that we were acquiring Agrivert Holdings Limited and its UK operating subsidiaries for a total consideration of £120 million to complement our current estate of energy from food waste plants. The acquisition is on track for completion next month and will add 106GWh per annum of energy generation to reflect our commitment to become a sector leader in sustainable resource efficiency, while also driving down carbon emissions.

Changing the market for the better

In July, having realised both operational and financial synergies from the integration of Dee Valley Water, we officially launched our Welsh business Hafren Dyfrdwy. Now aligned along national boundaries, all of our customers in Wales will be served by this business, allowing for clearer lines of accountability for both Severn Trent and Hafren Dyfrdwy.

We have always believed that business done in the right way, with a clear sense of purpose, is the best way to create value for all stakeholders. Businesses can, and do, successfully run essential services for the good of their customers. This is right at the heart of our company purpose, and we believe our latest business plan makes our intentions even clearer. We are here to provide high quality water and waste water services for our customers, but also to provide a broader societal contribution for the communities we serve. We earn customer trust when these two things work together.

Our AMP7 business plan commits 1% of future profits to community schemes, outlines plans to educate and inspire a generation of schoolchildren to value water as a precious resource, and contains our most ambitious programme of work to improve the environment and ecology in which we operate.

As a result of the efforts we have made to date, and our intentions for the future, we are delighted to have been recently acknowledged as one of seven pathfinder companies in the UK by the Purposeful Company Task Force led by Will Hutton and Clare Chapman. We believe that working to strengthen the connections between our purpose and the outcomes we deliver for our stakeholders will set us apart as an attractive long-term investment proposition for the future.

Creating an awesome place to work

While the needs of our customers are always front of mind, we recognise it is our brilliant people who actually deliver for our customers. Our people want to work for a company that provides them with enriching careers and allows them to contribute to society more broadly.

It means a lot to our employees that we have been named a top employer in the social mobility index for a second consecutive year, being commended in particular for the work we have done in social mobility 'coldspots', of which over 30% are in our region. We will go further in AMP7, using open employee recruitment practices, structured work experience for people from disadvantaged backgrounds, and partnerships with schools and colleges to provide coaching and careers advice that we believe will make a real difference.

We've campaigned to remove the stigma associated with mental health issues, with over 67% of our employees feeling their mental health is supported, compared to just 37% five years ago. We've done this by educating more than 70% of our line managers in mental health awareness and by training 400 mental health first aiders who are there for our people should they need them. We are proud to have been recognised in Mind's Workplace Wellbeing Index 2017/18 with a Silver award for Achieving Impact.

We are equally proud to have been ranked in the top four across all companies and first among utilities in the recently published Hampton Alexander report, recognising the number of women we have in senior leadership roles. This followed an invitation in the summer to attend the Women and Equalities select committee to discuss some of our best practice in promoting opportunities for women to reach senior levels.

Finally, our people are excited to rise to the challenges that AMP7 will bring. In September, we shared our business plans with our 900 people managers across a series of interactive sessions focussing on water, waste water, our customers and society, ensuring that our whole business is geared up and ready to hit the ground running come April 2020.

Chief Financial Officer's Review

We have delivered good financial performance in the first six months of 2018/19. Our Regulated Water and Waste Water business increased PBIT even after an additional £10 million of operating costs over the hot dry summer. In Business Services we held revenue broadly flat, with lower activity on the MOD contract, and commissioning costs and lower gate fees in our energy business slightly reducing profitability. In May we announced the sale of surplus land near Nottingham, realising a profit for the Group of £18 million to get our new Property Development business off to a good start, although we do not expect any similar sized transactions in the remainder of this AMP. Historically just over half of the Group's PBIT has arisen in the first half of the year and we expect that trend to continue in the current year.

With growth in underlying PBIT and lower finance costs, our underlying basic earnings per share were up 16.3% to 76.2 pence (2017/18: 65.5 pence). Basic earnings per share from continuing operations were 69.8 pence (2017/18: 62.2 pence).

The proposed interim dividend has increased by 7.9% in line with our policy for the remainder of AMP6 to increase the dividend by RPI plus 4%.

Our funding position is strong. Capital investment and other cash flow needs through to January 2021 are covered by committed facilities. We continue to monitor and manage our interest rate exposure, holding 25% of our debt at floating rates. In preparation for the introduction of CPIH indexation in AMP7 we entered into a further £100 million forward starting CPI/RPI swap in April taking the total amount of such swaps to £250 million. In August, we raised £323 million in our second issue to the US private placement market receiving these funds this month.

A brief overview of our financial performance for the six month period is as follows:

· Group turnover from continuing operations was £881.5 million (2017/18: £851.0 million), an increase of 3.6%, mainly due to allowed price increases in our Severn Trent Regulated Water and Waste Water business.

· Underlying PBIT increased by 4.3% to £299.1 million (2017/18: £286.7 million) benefiting from an excellent start in our Property Development business and good operating cost control despite difficult operating conditions over the summer in our Regulated Water and Waste Water business.

· Reported Group PBIT was £299.1 million (2017/18: £295.0 million). There were no exceptional items in the period. In 2017/18 we recorded an exceptional gain of £8.3 million arising from a pension increase exchange arrangement for the Severn Trent Pension Scheme.

· Net finance costs fell to £93.1 million (2017/18: £110.5 million) reflecting the impact of lower RPI on our index-linked debt and an effective cash cost of interest around 50 basis points lower than the same period last year as we benefited from lower interest rates on new and refinanced debt. 

· The current tax charge of £23.7 million (2017/18: £21.7 million) benefited from capital allowances on our increased investment programme. The deferred tax charge was £14.8 million (2017/18: £12.6 million) giving a total tax charge of £38.5 million (2017/18: £34.3 million) and a full effective tax rate of 19.1% (2017/18: 19.0%).

· Net cash capital expenditure was £340.1 million (2017/18: £270.4 million).

Changes to segmental presentation

In 2017/18 and prior years the sludge treatment activities of the Bioresources business were managed by, and included in, Regulated Water and Waste Water. The renewable energy generating activities of the Bioresources business were managed by, and included in, Business Services. These activities are now managed as a single Bioresources business within Business Services.

Implementing innovative treatment techniques and finding ways to use our resources more effectively enables us to free up land for development. The profits of this activity are shared between the regulated and non-regulated businesses through the initial transfer price and overage agreements relating to the development potential. In 2017/18 and prior years the gains from the property development activity attributable to the regulated business were reported in Regulated Water and Waste Water and those relating to the non-regulated business were reported in Corporate and Other. All of these activities are now managed and reported as a single business within Business Services.

The segmental analysis that follows and in the financial statements shows:

· current period performance on the new and old basis; and

· comparative information on the old basis.

Comparative information for the new segments is not available and the cost to develop it would be excessive.

Regulated Water and Waste Water

The commentary that follows compares current period and prior period performance on the old basis.

Turnover for the Regulated Water and Waste Water segment was £822.5 million (2017/18: £789.9 million) and underlying PBIT was £279.2 million (2017/18: £278.3 million).

Turnover increased by 4.1%. Higher tariffs, including the impact of the annual RPI increase on prices, increased revenue by £27.9 million. The benefit of customer ODI outperformance payments earned in 2016/17 (£8.2 million) was partially offset by an adjustment of £5.4 million for wholesale revenue in 2016/17 billed in excess of the wholesale revenue allowance. New connections, higher consumption and other impacts together resulted in a net increase of £1.9 million, leading to the £32.6 million reported total increase.

In the current period we incurred £10.1 million additional costs from the hot, dry summer including £7.2 million of hired and contracted costs. These increases are included in the analysis presented below. We anticipate a similar amount of additional costs in the second half of the year to support the operational recovery from this event.

Net labour costs were £1.6 million (2.2%) higher period-on-period. Annual pay awards and increased headcount increased gross pay by 2.5% and 3.5% respectively, which were offset by an increase of 9.8% in capitalised labour, as we spent more time on our growing capital programme this period.

Net hired and contracted costs were up £8.9 million including £7.2 million from the hot, dry summer.

Power costs were £5.3 million higher than the previous period. Unit prices were higher mainly due to increased pass through costs.

Bad debt charges were £2.5 million higher period-on-period and represent 2.1% of household revenue, (2017/18 full year: 2.2%). Collection performance on current debt continues to improve but recovery of older debt remains slow.

Other costs increased by £4.5 million. A change in legislation reduced income from radio masts by £1.2 million period-on-period. Environment Agency charges increased by £1.1 million.

Infrastructure maintenance expenditure was £0.5 million higher in the period. We expect to see a higher level of activity in the second half of the year.

Depreciation was £8.4 million higher period-on-period. Our focus on innovation and introduction of new technology led to redundant assets written off in the period increasing by £4.4 million and an increase in shorter life technology assets, which contributed a further £3.5 million. 

Business Services

In our Operating Services business turnover decreased by £4.6 million and Underlying PBIT decreased by £0.6 million. There was lower activity on our MOD contract and additional costs as a result of the hot, dry weather. The prior period figures have been restated to reflect the impact of the implementation of IFRS 15 on the recognition of revenue and costs for the MOD contract (see note 1 to the financial statements). Both periods are reported on an IFRS 15 basis.

In our Energy business turnover increased by £3.3 million and underlying PBIT decreased by £0.4 million. Higher energy prices contributed to the increase in turnover together with expansion of our crop energy plant near Nottingham and the impact of the first full period operating our West Birmingham food waste plant, which we opened last year. However, we have seen additional operating expenditure due to costs of a delayed start-up at our new Derby food waste plant and higher costs in food waste at existing plants.

The results above exclude the US Operating Services business, which was sold on 30 June 2017 and is treated as a discontinued operation in the prior period (see note 7).

Corporate and Other

Corporate overheads were £7.3 million (2017/18: £6.3 million). Other businesses generated a profit of £11.2 million (2017/18: loss of £0.3 million) including a profit of £10.7 million from Property Development, which is reported in Business Services on the new basis.

Exceptional items before tax

There were no exceptional items in the period. In 2017/18 an exceptional gain of £8.3 million arose from the expected benefit of a pension increase exchange arrangement under which members of the defined benefit schemes will be offered the opportunity at retirement to exchange future non-statutory inflationary increases on a portion of their pensions earned prior to 1997 for a higher pension payment.

Net finance costs

The Group's net finance costs for the six month period were £93.1 million, £17.4 million lower than the prior period (£110.5 million). The effective cash cost of interest (excluding the RPI uplift on index-linked debt) was 3.1% (2017/18: 3.6%) as we benefit from lower interest rates on new and refinanced debt. Interest cost on RPI debt decreased by £5.6 million, largely as a result of lower inflation, so the effective interest rate, including index-linked debt, for the period was 3.8% (2017/18: 4.5%). Net pension finance costs were £0.6 million lower than the previous period because the opening net deficit was lower and the discount rate at the opening balance sheet date did not change.

During the prior period a counterparty requested to terminate four interest rate swaps with a notional principal of £150 million. The gain on termination of £2.6 million was included in finance income.

Interest capitalised of £15.7 million was £4.4 million higher than the prior period due to the increased level of capital work in progress.

The Group's EBITDA interest cover was 5.5 times (2017/18: 4.4 times) and PBIT interest cover was 3.5 times (2017/18: 2.8 times). See note 18 for further details.

Gains/losses on financial instruments

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

· Exchange rate exposure on borrowings denominated in foreign currencies;

· Interest rate exposures on floating rate borrowings;

· Exposures to increases in electricity prices; and

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

The Group holds interest rate swaps with a net notional principal of £181 million to balance our interest rate mix in line with our strategy; cross currency swaps with a sterling principal of £141 million, which economically act to hedge exchange rate risk on certain foreign currency borrowings; and inflation swaps with a notional principal of £250 million, which swap RPI linked cash flows for CPI linked cash flows. These swaps did not meet the hedge accounting requirements of IAS 39 and the Group has chosen not to apply the hedge accounting provisions of IFRS 9 to these instruments. Therefore the changes in fair value are taken to gains/(losses) on financial instruments in the income statement.

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 88% of the estimated wholesale energy usage for 2018/19 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. As well as corporation tax on profits, which is included in the tax charge in our accounts, we incur a range of other taxes, charges and levies imposed by government agencies including business rates, employer's National Insurance, Climate Change Levy, Carbon Reduction Commitment, Landfill Tax and Insurance Premium Tax. Our 2017/18 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 2019.

The tax charge reported in the income statement is calculated at a rate of 19.1% (2017/18: 19.0% based on restated profit before tax), 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 £23.7 million (2017/18: £21.7 million) and the deferred tax charge before exceptional tax was £14.8 million (2017/18: £12.6 million).

The benefit of the capital allowances from our increased capital programme reduced our underlying effective current tax rate (in line with guidance) to 12.1% (2017/18: 13.2%).

Profit for the period and earnings per share

Reported profit for the period from continuing operations was £165.1 million (2017/18: £146.6 million). The increase was largely driven by the growth in PBIT and lower finance costs discussed above.

In 2017/18 the profit for the period from discontinued operations was £17.5 million.

Total reported profit for the period including discontinued operations was £165.1 million (2017/18: £164.1 million).

Basic earnings per share from continuing operations increased by 12.2% to 69.8 pence (2017/18: 62.2 pence). Underlying basic earnings per share were 76.2 pence (2017/18: 65.5 pence). For further details see note 9.

Cash flow

Six months ended 30 September

Net debt comprises:

At 30 September 2018 we held £79.9 million (31 March 2017: £38.5 million) in cash and cash equivalents. Average debt maturity is 14 years. Including committed facilities, the Group's cash flow requirements are funded until January 2021.

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

Net debt at 30 September 2018 was £5,418.5 million (31 March 2018: £5,356.6 million). Balance sheet gearing (net debt/net debt plus equity) at the half year was 82.9% (31 March 2018: 84.3%). Net debt, expressed as a percentage of estimated Regulatory Capital Value at 30 September 2018 was 59.6% (31 March 2018: 60.6%).

The estimated fair value of debt at 30 September 2018 was £1,046 million higher than book value (31 March 2018: £1,184 million higher). The decrease in the difference to book value is largely due to higher prevailing market interest rates.

Pensions

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

Formal three-yearly actuarial valuations have been completed as at 31 March 2016 for the Severn Trent schemes and as at 31 March 2017 for the Dee Valley Water scheme. The current future funding plan for the Severn Trent Pension Scheme ('STPS'), which is by far the largest, includes:

· Inflation-linked payments of £15 million per annum through an asset backed funding arrangement potentially continuing to 31 March 2031, although these contributions will cease earlier, should a subsequent valuation of the STPS show contributions are no longer needed.

· A further payment of £10 million for the year ending 31 March 2019.

· Continued payments under an earlier existing asset backed funding arrangement of £8.2 million per annum to 31 March 2032.

· In addition to these payments the company will directly pay the annual Pension Protection Fund levy incurred by the STPS.

Payments are typically made in the second half of the year and there were no material payments in the six month period to 30 September 2018.

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 £465.5 million as at 30 September 2018. This compares to a deficit of £519.8 million as at 31 March 2018.

The movements in the net deficit during the period were:

On an IAS 19 basis, the funding level has increased marginally to 83.1% (31 March 2018: 81.8%).

On 26 October the High Court issued a judgment in relation to gender equality in Guaranteed Minimum Pension rights that will have an impact on the Group's defined benefit pension liabilities. The situation is complex and the amount of the liability will depend on the scheme rules and the administrative practices that have been applied in the past in implementing the rules. We are currently assessing the impact and at this stage we are unable to make a reasonable estimate of the amount.

Dividends

The Board has declared an interim ordinary dividend of 37.35p per share (2017/18: 34.63p per share), which will be paid on 4 January 2019 to shareholders on the register at 30 November 2018.

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

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

Legal

· There is a risk that processes may fail or that our processes may not effectively keep pace with changes in legislation, leading to the risk of non-compliance.

Operations, assets and people

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

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

· Failure of certain key assets or processes may mean we are unable to provide a continuous supply of clean water and safely take waste water away within our area.

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

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

Political and regulatory environment

· PR19: The regulatory landscape is complex and subject to ongoing evolution. We recently submitted our business plans for the period 2020 to 2025 to Ofwat, however we will not have full clarity on our outlook until we receive our Final Determination in December 2019.

· The UK's decision to leave the European Union (EU): Severn Trent operates almost entirely in the UK and our supplier base and customers are predominantly domestic. Where our supply chain extends into Europe, we are working closely with partners to mitigate the risk that leaving the EU without a deal could create. Further detail is set out in the Group's Annual Report for the year ended 31 March 2018.

· Renationalisation: The most recent Labour Party manifesto stated that it wished to analyse a range of options to improve utilities, including renationalisation. We are seeking to manage this risk by engaging with a wide range of policy makers about the benefits that the privatised water sector is delivering, the financial and practical costs of renationalisation and the alternatives to improve services further.

Technical Guidance 2018/19

Please note that all Technical Guidance is presented on the old segmental basis for comparative purposes.

1 Prior year restated following change in accounting policy under IFRS15. Guidance includes acquisition of Agrivert Holdings Limited.

Further Information

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

Investor Timetable

Condensed consolidated income statement

Six months ended 30 September 2018

Earnings per share (pence)

Condensed consolidated statement of comprehensive income

Six months ended 30 September 2018

Condensed consolidated statement of changes in equity

Six months ended 30 September 2018

 Condensed consolidated balance sheet

At 30 September 2018

Condensed consolidated cash flow statement

Six months ended 30 September 2018

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 2018 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.

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 2018, except as set out below.

Changes in accounting policies - IFRS 9 and IFRS 15

In the current financial year the Group has adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

The adoption of IFRS 9 has not resulted in any significant changes to the Group's existing accounting practices for financial instruments.

The Group has elected to restate comparative information from prior periods upon adoption of IFRS 15.

The core principle of IFRS15 is that an entity should recognise revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services. The impact of the adoption of IFRS 15 on the Group's business segments is set out below.

Regulated Water and Waste Water

There will be no change to the timing of recognition of revenue from charges for water or waste water services.

Business Services

The Operating Services business operates under a series of bespoke contracts with specific performance obligations. The Group has applied the methodology set out in IFRS 15 to each of these contracts in order to identify differences from the current accounting policy. The most significant differences arise in relation to the Group's contract to provide water and waste water services to the Ministry of Defence (MOD). The Group acts as the service provider under the MOD Project Aquatrine Package C - a 25 year contract spanning 1,295 sites across England covering the eastern sea border and from Lancashire in the North West to West Sussex on the South coast.

Under this contract the Group maintains and upgrades the MOD infrastructure assets and provides operating services for water and waste water. Both the operating services and maintenance and upgrade services are charged under a volumetric tariff, along with standing charges, which are adjusted with inflation as agreed in the contract.

Under IFRS 15, the expected revenue over the life of the contract is allocated to the performance obligations based on an expected margin for each performance obligation over the life of the contract under the following headings:

· Operating and maintaining the MOD infrastructure assets;

· Upgrading the MOD infrastructure assets;

· Administrating the services received from statutory water and sewerage undertakers;

· Administrating billing services of the MOD's commercial and Non Base Dependent customers.

Revenue is recognised in line with the delivery of each performance obligation. The expected whole life revenues and costs on the contract are updated regularly. Any changes to revenue relating to performance obligations already delivered are recognised in the period in which they are identified.

The previous accounting policy for this contract was to recognise revenue billed under the volumetric tariff at the point of billing. The expected costs for the upgrade services were recognised on a straight line basis, before adjusting for expected inflation, over the life of the contract. The resulting asset was recognised as a financial asset in accordance with IFRIC 12.

The tables below show the effect of the IFRS 15 adoption on the income statement and earnings per share for the six month period ended 30 September 2017, and the effect on the balance sheet as at 31 March 2018.

Consolidated income statement (extract)

Six months ended 30 September 2017

Earnings per share

Six months ended 30 September 2017

Consolidated balance sheet (extract)

As at 31 March 2018

Going concern

Including undrawn committed credit facilities, the Group is fully funded for its investment and cash flow needs until January 2021. 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

Historically just over half of the Group's PBIT has arisen in the first half of the year.

2. 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.

Business Services includes the Operating Services businesses in the UK & Ireland, the Energy business, the Bioresources business, the Property Development business and our other businesses including affinity and searches.

In 2017/18 and prior years, the sludge treatment activities of the Bioresources business were managed by, and included in, Regulated Water and Waste Water. The renewable energy generating activities of the Bioresources business were managed by, and included in, Business Services. These activities are now managed as a single Bioresources business within Business Services.

Surplus land in the regulated business is, in certain cases, sold to Group companies outside the regulatory ring-fence where its full development potential can be realised. The profits of this activity are shared between the regulated and non-regulated businesses through the initial transfer price and overage agreements relating to the development potential. In 2017/18 and prior years, the gains from the property development activity attributable to the regulated business were reported in Regulated Water and Waste Water and those relating to the non-regulated business were reported in Corporate and Other. All of these activities are now managed and reported as a single business within Business Services.

Comparative information for the new segmentation is not available and the cost to develop it would be excessive. Therefore, the current period results have been presented on both the old and new basis of segmentation, in accordance with IFRS 8.

The disposal of the Group's Operating Services businesses in Italy and the USA were classified as discontinued operations in the prior year. These transactions were completed on 23 February and 30 June 2017 respectively.

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 joint ventures and associates are not included in the segmental reports reviewed by STEC.

The measure of profit or loss that is reported to STEC for the segments is underlying PBIT. A segmental analysis of turnover and underlying PBIT is presented below.

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.

The tables below show the changes from the old to the new segmentation for turnover and PBIT for the six month period ended 30 September 2018:

1 In 2017/18 and prior years, the sludge treatment activities of the Bioresources business were managed by, and included in, Regulated Water and Waste Water. The renewable energy generating activities of the Bioresources business were managed by, and included in, Business Services. These activities are now managed as a single Bioresources business within Business Services.

2 In 2017/18 and prior years, the gains from the property development activity attributable to the regulated business were reported in Regulated Water and Waste Water and those relating to the non-regulated business were reported in Corporate and Other. All of these activities are now managed and reported as a single business within Business Services.

The following table shows the segmental turnover and PBIT on the old segmentation:

Six months ended 30 September

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

Six months ended 30 September

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

Six months ended 30 September

The tables below show the changes from the old to the new segmentation for capital employed as at 30 September:

The following table shows segmental capital employed on the old basis:

Operating assets comprise other intangible assets, property, plant and equipment, retirement benefit surpluses, inventory and trade and other receivables.

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

3. Revenue from contracts with customers

Revenue recognised from contracts with customers is analysed by type of revenue and by business segment below:

Six months ended 30 September 2018

The tables below show segmental turnover on the old basis of segmentation:

Six months ended 30 September 2018

Six months ended 30 September 2017

Income from diversions of £5.4 million (2017: £2.1 million), which is reimbursement of costs incurred for diversions, is included within infrastructure maintenance expenditure within operating costs.

4. 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.

Six months ended 30 September

5. Net 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 19.1% (2017: 19.0%) 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 underlying effective current tax rate was 12.1% (2017: 13.2%). See note 18.

Current tax credits of £4.8 million (2017: £5.7 million) and deferred tax charges of £17.6 million (2017: £9.0 million) have been taken to reserves in the period.

7. Discontinued operations

The disposal of the Group's US business (Operating Services, US), which formed part of the Business Services segment, to US investors PPC Enterprises LLC and Alston Capital Partners LLC was completed on 30 June 2017 and was treated as a discontinued operation in the prior year.

The results of discontinued operations are disclosed separately in the income statement and comprise:

Six months ended 30 September