Severn Trent lost more money through Water Plus over the last year than it has invested in the company to date after the joint venture with United Utilities took a £51.1 million write down on the value of its assets.
It said the impairment was mainly due the impact of the coronavirus on the goodwill and relationships with its customers in the non-household retail market. Severn Trent did not recognise the loss fully, limiting its reported share for the year to its long-term investment in Water Plus of £46.8 million.
Announcing its results for the 12 months to the end of March, Severn Trent (SVT) said the wider business remained resilient but not impervious to the effects of the pandemic. The publicly listed water company said it met the majority of its performance targets over the AMP6 investment cycle and earned outperformance payments of £174 million.
Water Plus
SVT acknowledged that Water Plus has had a difficult year, facing billing and revenue assurances issues early on that impacted its results for the first half. But it said the recovery was “beginning to bear fruit” when it was “stopped in its tracks” by the coronavirus pandemic.
It said Water Plus has already seen “a significant reduction in cash collection from its non-household customers” and expects business failures to increase due to the impact on the economy. As well as the write-down on its long-term assets, Water Plus also recognised an additional bad debt provision of £29.3 million.
SVT noted that before taking these impairments into account, its share of losses for the year was £14.3 million, of which £9.3 million arose in the first six months.
Coronavirus and Brexit risks
Chief executive Liv Garfield described being “immensely proud” of the SVT’s adaptation to the turbulence and challenges of the virus.
The company modelled “plausible and extreme scenarios” to test its finances and found that, while there will be an impact, the business has sufficient resilience to withstand the knock to liquidity, solvency and debt covenants. However, it also warned that the threat of coronavirus may still prove greater than any of its models forecast.
Elsewhere it assessed risks to the business arising from Brexit as having materially reduced since the deal was made and the country formally left the EU in January. It added that sector-wide preparations, which have paused, do not anticipate any significant risks not considered as part of No Deal planning.
Performance and targets in AMP6
SVT said the water and wastewater business performed well, earning outperformance payments for the year of £36 million and bringing the total throughout the AMP cycle to £174 million.
The company said it continued to make improvements to key metrics in 2019/20, with supply interruptions down by 61 per cent year-on-year. Leakages were down 4 per cent, water quality complaints by 14 per cent and incidents of pollution by 11 per cent. Over the five-year AMP6 period, leakages fell by 8 per cent, water quality complaints by 28 per cent and incidents of category 3 pollution by 21 per cent.
Investment cycle
The wastewater division completed a number of environmental programmes to improve river quality and is expected to receive a four-star status from the Environment Agency for its Environmental Performance Assessment (EPA). However, it failed to hit targets relating to flooding in the past year and will incur penalties from the regulator.
The increase in flooding incidents related to the persistent heavy rain that led to more run-off reaching the wastewater network. It incurred a penalty of £19.5 million for last year and looking ahead will has begun training and education programmes as well as investing in repeat flooding prevention activities.
The company’s largest ever capital scheme – the Birmingham Resilience Programme – was completed on time, to budget and will be able to deliver more resilience than planned. It was part of the £3 billion invested during AMP6 on capital projects, including £800 million in 2019/20.
Financial performance
The company said its outperformance over the previous AMP cycle extended to its earnings, with a good set of results for 2019/20. Underlying profits before interest and tax were down by 0.6 per cent to £570.3 million, whilst its return on regulated equity (RoRE) came in at 6.7 per cent for the year.
Despite the uncertainty over the longer-term impacts of coronavirus, the company reported being in a strong funding position with £48.6 million on its balance sheet and undrawn facilities amounting to £755 million. It said all cash flow and investment needs are covered until January 2022.
During the completed AMP cycle, the business generated a cumulative RoRE of 8.5 per cent while tightening its cost base. SVT said this will allow it to deliver improved services within the allowed AMP7 totex. At the year end, the group’s regulatory gearing was 64.9 per cent.
Dividends
The group will pay a dividend of 60.05 pence for 2019/20 as the final ordinary dividend from AMP6 on 17 July. The dividend policy for AMP7 will see dividend growth of at least consumer price index including housing costs (CPIH).
AMP7
SVT said it is pleased with the performance in the start of the new AMP cycle, despite the challenges of coronavirus.
The company announced it is on course to deliver operational improvements and anticipates outperforming on its outcome delivery incentives (ODIs) for 2020/21. It said the capital programme is also on track, with 80 per cent of work already contracted for this first year.
Due to the essential nature of the work, design and construction activity has continued with appropriate safeguards in place. The company said it anticipates “limited impact” on its planned capital activity because of the virus.
Hafren Dyfrdwy
This was the first full year for Hafren Dyfrdwy under its new Welsh Licence during which the business completed the £14 million service reservoir programme to upgrade ageing assets in Wrexham. SVT said there have been “notable” year-on-year improvements to supply interruptions (down 66 per cent) and leakage (down 13 per cent).
Food waste business
The non-regulated food waste business successfully integrated Agrivert to increase food waste capacity with the addition of five anaerobic digestion plants to its portfolio. These plants contributed to overall energy generation of 491GWh, equivalent to 51 per cent of the company’s energy needs. This means all electricity is now either generated or purchased from renewable sources – achieving the company’s first carbon pledge ahead of schedule.