Non-regulated Growth Strategy Progressed

Severn Trent PLC 3 December 1999 Interim Results for the six months to 30 September 1999 SEVERN TRENT STRIDES AHEAD WITH NON-REGULATED GROWTH STRATEGY Severn Trent today reported that the group's strategy was on track with growth in the non-regulated businesses and a strengthened management team in place to continue to drive the business forward. Financial and operating highlights: * Group: Solid financial performance - Group turnover up 12.9% to £748.3 million - Profit before interest and tax up to £226.0 million (£224.3 million) - Profit after tax £153.9 million (£153.1 million) - Interim dividend 17.0p per share (up 4.2% on 1998/99 combined interims) * Non-regulated businesses: Strong growth - profit before interest and tax up 45% to £24.0 million * Severn Trent Services: Rapid development, particularly in the US, with turnover up 46% to £148.5 million (£109 million) and profit before interest and tax up 40% to £7.7 million (before 1998/99 bad debt provision, reversed in second half) - Developing leadership positions in four core market sectors; now market leader in environmental laboratories and chlorine disinfection equipment in the US - Three new laboratory business acquisitions announced today and further acquisitions planned * Biffa: Overall turnover up 17% (14% excluding landfill tax) - Continued growth in collection, special waste and Belgium - Growth through organic expansion and targeted acquisitions * Severn Trent Water: - No appeal to Competition Commission - now focussed on meeting targets of the challenging regulatory review - 1100 jobs to go in next 2 to 3 years - Cost cuts will not compromise quality and safety standards Commenting today, Severn Trent's Chairman, David Arculus said: 'With strong sales and profits growth in the non-regulated businesses, we have made substantial progress towards transforming Severn Trent into an international environmental services business. 'Severn Trent Water is on track to meet the targets set by the regulator. This will be achieved by reorganising the business to take out more costs and make further improvements in operational efficiencies. Since privatisation we have invested nearly £5 billion in the Midlands region to create one of the best and most flexible water and sewerage infrastructures in the world. 'In June we were pleased to welcome Robert Walker as Deputy Chief Executive. His proven international business leadership and marketing skills will be invaluable to the group, particularly in driving the growth of our non-regulated businesses.' Vic Cocker, Group Chief Executive, said: 'Over the past six months, Severn Trent Services has continued to grow at a rapid pace in the USA. With the acquisition of fourteen environmental testing laboratories in the USA we have now established ourselves as number one in this sector of the market. This brings the total number of laboratories to 24 in the US and two in the UK. We have also taken steps to reorganise the business to focus on four areas in the market and strengthened the management team, with the appointment of Bill Cook as President and Chief Executive Officer. We are now well positioned to achieve our aim of becoming an international environmental services group. 'Last week OFWAT published its final determination for the forthcoming five year regulatory period. The regulator has set an extremely challenging regime, but Severn Trent will rise to this challenge. We have decided that an appeal to the Competition Commission would not be in the best interests of our shareholders. We remain committed to maintaining the high standards of service and quality that our customers have every right to expect.' Enquiries: Vic Cocker Severn Trent Plc 0171 404 5959 (on the day) Group Chief Executive 0121 722 4000 (thereafter) Alan Costin Severn Trent Plc 0171 404 5959 (on the day) Group Finance Director 0121 722 4000 (thereafter) Lucas van Praag Brunswick 0171 404 5959 James Bradley Chairman's Statement Over the past six months we have made good progress towards our strategic goal of transforming Severn Trent from a regulated UK water utility into an international environmental services business. The growth in Severn Trent Services in the USA has continued at a rapid pace, and our waste management company Biffa has maintained underlying profits for the first half-year at the record level achieved last year. Total profit before interest and tax from our non-regulated businesses increased 45% compared to the first half of last year, to £24.0 million. Severn Trent Water again produced a sound financial result, coupled with yet further improvements in customer service. Since the half-year we have completed the acquisition of the environmental testing division of Core Laboratories Inc, the FPAS laboratory from Radian Inc and the environmental laboratory of the LawGibb Group. We are now the clear market leader in environmental laboratory services in the USA. Earlier this week Corning Inc announced the signature of a letter of intent under which it will sell Quanterra Inc, its environmental laboratory business, to Severn Trent. The purchase will be subject to full due diligence and regulatory approvals. OFWAT Final Determination On 25 November, Ian Byatt, Director General of the Office for Water Services, published his final determination of water and sewerage charges for the five years ending March 2005. We are disappointed that notwithstanding an increase of £100 million in the capital investment required, the final price determination is unchanged from the draft published in July. We believe that the outcome will not best serve the long-term interests of customers or the environment. The 14.1% real reduction in average charges on 1 April 2000 (11.8% net of the customer rebates paid in 1999/2000 and the four preceding years), followed by two further years of 1% pa real reduction presents a very significant challenge to Severn Trent Water. The price reduction in the regulated UK water business is expected to reduce the company's turnover next year by some £120 million in real terms. This will lead to a significant reduction in regulated profits. The OFWAT determination identifies the factors upon which the price reduction is based. £28 per household (equivalent to more than £80 million) is derived from the benefit of past efficiencies being taken from shareholders and passed to customers, and £20 per household (equivalent to some £60 million) which must be found from future cost efficiencies. These reductions are partially offset by the cost of improvements in drinking water and environmental quality, amounting to £9 per household. Whilst we believe that there are flaws in the OFWAT determination, including the cost of capital, we also believe that the complexity of the appeal process and the uncertainty of the outcome would not justify the management distraction which would result. The board therefore considers that an appeal to the Competition Commission would not be in the best interests of shareholders. We remain absolutely committed to maintaining high quality water supplies and sewerage services for our customers. We are equally determined to achieve the targets built into the determination. To meet the challenge, the company will implement further fundamental changes to the way in which it operates. The programme required to deliver the cost reductions assumed by OFWAT in determining future prices will be finalised shortly. It is anticipated that the number of people employed by Severn Trent Water will be reduced by around 1100, with a large proportion over the next 2 years. In addition, there will be the closure of a number of non-operational locations. Though not yet finalised, the costs of the change programme are currently expected to be in the region of £50 million, much of which it is anticipated will be provided for in the full year accounts for the year ending 31 March 2000. The final provision will be determined in accordance with the criteria set out in FRS 12 for the establishment of restructuring provisions, which has precluded any provision being included in these half-year results. Group results Group turnover was £748.3 million, an increase of 12.9% over the first half of last year. Group profit before interest was £226.0 million, marginally higher than the result for the corresponding period. Interest costs of £56.9 million were £9.1 million (19.0%) higher; approximately £5 million of the increase represents the cost of financing the second instalment of the Windfall Tax. As a consequence of the higher interest charge, profit before tax was £7.4 million (4.2%) lower at £169.1 million. Taxation on profit on ordinary activities was £15.2 million, £8.2 million less than the charge for the comparable period, with the result that profit after tax was marginally higher at £153.9 million. Basic earnings per share for the half-year was 45.1 pence. Net debt at 30 September 1999 was £1732 million, an increase of £253 million during the half-year. The increase reflected the deferred payment of the second interim and final dividends for 1997/98 in addition to the interim dividends for 1998/99, and the continuing high level of capital investment in Severn Trent Water. Expenditure on acquisitions amounted to £100 million. Gearing increased to 68%. The group's financial position remained strong, with interest costs covered almost 4.0 times by profit before interest. Transformation of the group The continued rapid growth in turnover which we anticipate from our non-regulated businesses will significantly change the profile of the group's earnings and do so at an increasing rate. In 2000/01 revenues from existing non-regulated businesses will be equivalent to approximately 45% of total turnover. By 2004/05 we expect those businesses to be producing between 25% and 30% of the group's profit before interest and tax. In addition, we will be seeking acquisitions which will further strengthen our market positions in the waste management industry in the UK and selected European markets, as well as in the supply of products and services to the water and waste water markets, mainly in the USA. These acquisitions may include transactions of significant scale, provided they create value for shareholders. As a consequence of these anticipated developments, within the next five years we expect to realise much of the business transformation which is at the heart of our corporate strategy. We are committed to achieving an efficient financial structure for the group. This will be a key consideration in the arrangements we make and the sources we utilise to finance our businesses, and in our dividend policy. Dividends Since 1996, the board has been implementing a dividend policy which will produce total dividends for the year ending 31 March 2000 which will be covered 2 times by post tax earnings. The board remains committed to that policy, which was established for the second quinquennium post privatisation, of which this is the final year. Accordingly, the board has declared an interim dividend of 17.0p per share, to be paid on 6 April 2000. This represents an increase of 4.2% over the total of the first and second interim dividends declared in 1998/99. The second interim dividend, which was established for a fixed five year period ending in 1998/99, has been consolidated into the base. The board does not propose to offer a scrip dividend alternative. Beyond the year 1999/2000, the board intends to pursue a dividend policy which is appropriate to the changing profile of the group and which will reinforce the business transformation upon which we are embarked. Barring unforeseen circumstances for the next five years, the board intends as a minimum to maintain dividends at the 1999/2000 level. As growth builds in our non-regulated businesses, the dividend outlook will evolve further. Environmental leadership Environmental leadership, supported by quality and service, is the value which binds together Severn Trent's businesses. We aim to perform to exacting environmental standards within our own operations, and seek to apply the skills we are developing in this area to the benefit of our large industrial and commercial customers. There is increasing evidence that we can derive competitive advantage from our environmental expertise. Clear synergies are emerging between our businesses in their ability to jointly solve complex commercial and industrial water and waste stream problems. Working together, Biffa and Severn Trent Water are leveraging their skill base and commercial contacts, and now provide water and waste services to a number of major businesses. Products and services supplied by Severn Trent Services are part of the solution in some instances. As competition begins to gain momentum in the water industry, we have signed the first ever national agreement to manage water and waste water across fifty manufacturing sites in England, Scotland and Ireland. Severn Trent Water has continued to work closely with the Environment Agency and the Drinking Water Inspectorate with a view to improving environmental and quality performance. The company ran a very successful national conference on the impact of climate change in the water industry. In July, we launched our Biodiversity Action Plan which focuses on improving the company's commitment to the environment, nature conservation, and habitat and species preservation and renewal. In November The Rt Hon Michael Meacher MP, Minister for the Environment, was guest of honour at the 1999 Biffaward ceremony. He presented the winner's trophy to the project judged to have provided the most environmental benefit. Biffaward is the landfill tax credit scheme administered for Biffa by the Royal Society for Nature Conservation. We are pleased to report that, after vigorous assessment, Severn Trent Plc has been included in the Dow Jones Sustainability Group Index, which tracks the performance of the world's leading sustainability driven companies. Regulated UK water services Severn Trent Water's profit before interest and tax for the half-year was £209.6 million (1998/99 £213.6 million). Turnover Turnover at Severn Trent Water was £497.1 million (£490.1 million) before the impact of the customer rebate costing £9.0 million (£8.9 million). The increase of 1.4% compared with RPI + K of 3.5%. The shortfall again resulted primarily from two factors which contribute towards water conservation and long term sustainability of supply. The impact of customers opting to switch to the metered tariff reduced income by £4.8 million, and lower consumption by industrial and commercial customers, down 3.6% on the first half of last year, reduced income by a further £4.0 million. The board recognises that further challenges to the company's turnover could result from the introduction of more competition in the water industry. Severn Trent Water has therefore been working hard to address the implications of common carriage and has prepared a draft Network Access Code which has already been discussed with OFWAT and government departments. Operating costs Direct operating costs in Severn Trent Water were £179.3 million, £0.4 million less than in the corresponding period. Operating efficiencies generated £5.2 million to offset upward cost pressures associated with recently commissioned capital investment projects. Depreciation charges amounted to £103.7 million, an increase of nearly 12%. Following the adoption of FRS 12, depreciation includes £33.2 million related to infrastructure assets. The increased depreciation charge reflects the high level of capital investment in the current and two preceding years. The full year depreciation charge is forecast to be approximately £210 million. Investment Capital expenditure in Severn Trent Water amounted to £291 million for the half-year, £26 million higher than in the corresponding period. £91 million was invested in the water distribution system and £28 million in new water resources. £85 million was invested in sewage treatment and disposal assets and £37 million in the sewage distribution and collection system. £16 million was spent on customer metering and £24 million on information technology. Expenditure on vehicles, plant and other fixed assets amounted to £10 million. Large scale projects included: * Major renewals of the sewage treatment works serving Coventry and Cheltenham. * A new trunk sewer in the Black Country. * A series of sludge digestion plants in the Erewash valley. * Refurbishment works at Ladybower reservoir in Derbyshire. Capital investment for the full year is expected to be between £555-£565 million, which will bring the total since privatisation to almost £5 billion, equivalent to £1450 for every customer unit in the region. Investment since privatisation will exceed Severn Trent Water's profit after tax over the same period by more than £2 billion. The capital investment programme is essential to the achievement of the high quality water and sewerage services Severn Trent Water delivers to its customers: overall compliance with water quality standards was 99.92% for the half-year, with sanitary standards for waste water again maintained at almost 100%. Waste Services Biffa Waste Services performed well with revenues up 17% (up 14% excluding landfill tax), maintaining underlying profits before interest and tax at the high level achieved in the first half of last year. However, a change in the methodology used to calculate landfill depreciation required by the newly introduced FRS 15, increased the charge for depreciation by £1.1 million compared with the methodology used in previous years. As a consequence, reported profit was marginally lower, at £15.8 million for the half-year. In the UK, the collection division continued the excellent performance of recent years, strengthening its market position with operating profit up 9%. Industrial and commercial volumes increased by 13% as the division pursued its organic growth strategy through its segmented approach to the market. Profits from municipal contracts also increased, through a combination of strong cost control and service enhancement. The special waste division in the UK had a very successful half-year with operating profit up 80%, driven by the expansion of integrated waste contracts and the provision of waste treatment solutions for customers. Profitability in the landfill division suffered from a slowdown in the contaminated soil market. Whilst total volumes were up overall by 6% on a like for like basis, unit revenues dropped by 10.4%. The main waste types of municipal, industrial and commercial, and specials showed volume improvements at static unit rates, but this was unable to compensate for the 35% drop in contaminated soil tonnages. Operating profit from landfill was 16% lower than the first half of last year before the change in landfill depreciation methodology. Following the Premco acquisition in April, Biffa now has 52.1 million cubic metres of operating void space with another 18.2 million cubic metres in development. Rationalisation benefits have been achieved by reducing overhead costs in both Premco and Biffa's own landfill overhead structure. Biffa continued to expand its activities with new collection depots in North London, Cambridge, Weymouth and York, and a new landfill site opened in Hertfordshire. 69 Biffa facilities now have ISO 9000 accreditation, 6 have ISO 14001 accreditation, and the Redhill landfill site has successfully retained EMAS accreditation. Island Waste Services, Biffa's operations on the Isle of Wight, became the company's second operation to be awarded Investors in People status, emulating the special waste treatment plant at Wednesbury. In Belgium, Biffa's reported operating profit for the period was maintained at the same level as last year, notwithstanding the strength of sterling. Tonnages into the landfill site at Cour au Bois were managed down by 11% from the high levels of last year to ensure continuity as the new cell area was prepared, which is now operational. Further progress was achieved at the Antwerp waste pretreatment centre where volumes increased 22%. Severn Trent Services The rapid growth in the scale of Severn Trent Services was maintained with turnover of £148.5 million up 46% compared to the first half of last year. In turnover terms, the business is now as big as Biffa. Profit before interest and tax from the three main divisions, ie laboratory services, purification and contract services more than doubled to £8.8 million on turnover of £102 million. This was partly offset by a loss of £1.1 million from software solutions. Severn Trent Services now operates twenty-four environmental laboratories in the USA and two in the UK. Turnover in the half-year was more than trebled. The water and wastewater purification division also achieved good growth, with turnover up 56%. Contract services division continued to experience very competitive market conditions, and whilst turnover increased 36%, profit before interest was marginally down. The software solutions division incurred a small loss as a result of the high costs of delivering the new CIS Open Vision customer information system. However, good progress was made with installation of the product at a number of key clients. Customer interest remains strong, with a major new contract signed with Los Angeles District Water and Power. Two important new customers were secured for the STORMS work management system, Cable & Wireless and the City of Austin, Texas. The USA continued to be the principal growth market for Severn Trent Services: turnover amounted to £80.4 million (£41.4 million) generating profit before interest of £5.0 million (£1.3 million). We now employ some 2,700 people in the USA. During the half-year we invested £77 million in US acquisitions. Property, Engineering consultancy and Insurance Severn Trent Property, together with Charles Haswell and Partners and Derwent Insurance produced profit before interest and tax of £0.5 million for the half-year. At Severn Trent Property's Daventry site a 211,000 sq ft rail linked warehouse for Tibbett & Britten Plc was completed in May. Contracts have been exchanged for three further developments totalling 840,000 sq ft comprising buildings for Eddie Stobart Ltd, a major US company, and a third party distribution operator. Charles Haswell and Partners continued to expand its engineering consultancy activities outside the water industry, with new commissions including Kowloon-Canton railway tunnels, gas transmission pipelines for BG Transco, and cement works redevelopment for Castle Cement. The board anticipates that the full year profit contribution from Property, Engineering consultancy and Insurance will be similar to the level achieved in 1998/99, as a number of property projects in progress move close to completion. Year 2000 Issue All companies in the Severn Trent group have continued to make the requisite progress in addressing the Year 2000 issue, where our objective is to ensure that the performance and functionality of business systems and non-IT applications will not be adversely affected by dates prior to, during and after the Year 2000. Severn Trent Water was declared by both OFWAT Audit and Action 2000 as having 'Blue' status, ie that there would be no material disruption to the business. All the company's major commercial systems and operational sites have been inventoried, audited, remediated and tested as being Year 2000 compliant. Whilst a few issues remain, none of these are business critical. The readiness of key suppliers has been confirmed. In Biffa the corporate data base which runs all the UK financial and operational systems is fully Year 2000 compliant, as are the central servers. All landfill weighbridge software and hardware has been updated and is now compliant. The readiness of key suppliers has been confirmed. In Belgium new financial and operational systems have been installed as part of a total business systems upgrade - the new systems are Year 2000 compliant. Severn Trent Services' businesses are also well prepared for the Year 2000. A small number of non-compliant systems exist within the recently acquired laboratory businesses. These were identified during the acquisition due diligence process and remediation is in progress. Severn Trent Services also operates assets, principally water and wastewater plants, which are owned by our clients. Out of a total of 513 such assets, 7 are not yet Year 2000 compliant but plans to address these are being agreed with the clients concerned. All business critical systems and hardware used by Severn Trent Property, Charles Haswell and Partners and Derwent Insurance are Year 2000 compliant. Contingency plans are in place for all business critical systems throughout the group. We anticipate that the total Year 2000 costs chargeable against profits will be approximately £22 million, of which some £8 million will arise in the current year. The charge in the accounts for the half-year was £3.1 million. Management In June 1999, I was very pleased to announce Robert Walker's appointment as Deputy Chief Executive. Robert has enjoyed a distinguished business career with PepsiCo, McKinsey & Company and Procter and Gamble in the USA, Europe and the developing world. His proven international business leadership and marketing skills will be invaluable to the group at this time of rapid growth of our non-regulated activities. Robert will succeed to the role of Group Chief Executive after next year's Annual General Meeting, shortly before Vic Cocker retires in October 2000. I was also very pleased to announce the appointment of Bill Cook as President and CEO of Severn Trent Services Inc from 2 August 1999. Bill was previously Chairman, President and CEO of Betzdearborn Inc, a $1.3 billion publicly traded global speciality chemical company recently merged with Hercules Inc. He is familiar with the water industry in the USA and will bring focus to the strategic development of Severn Trent Services' business interests in that country and in Europe. Outlook The operating environment for our regulated water business remains tough in light of the recent regulatory review. However, with turnover in our non-regulated businesses up 32%, we have made substantial progress in transforming the Severn Trent group from a regulated UK water utility into an international environmental services business. Severn Trent Water's profit before interest and tax for the current year will be impacted by the high level of depreciation charges arising from the heavy capital investment programme amounting to more than £1.6 billion over the last three years. This investment, together with the full cost of financing the Windfall Tax, will also result in a further sharp increase in the group's interest charge. The board anticipates that profit before interest and tax from the group's non-regulated businesses will continue to grow, partly offsetting the reduced contribution from Severn Trent Water and the higher interest burden. David Arculus Chairman, Severn Trent Plc Group profit and loss account Six months ended 30 September 1999 Unaudited Unaudited Audited 6 months to 6 months to Year ended 30 Sept 99 30 Sept 98 31 March 99 Notes £m £m £m Turnover: group and share of joint ventures 750.7 670.4 1,378.6 Less: share of joint ventures' turnover (2.4) (7.8) (14.3) ---------------------------------------------------------------------------- Continuing operations 728.2 662.6 1,364.3 Acquisitions 20.1 - - ---------------------------------------------------------------------------- Turnover 2 748.3 662.6 1,364.3 ---------------------------------------------------------------------------- Operating costs before exceptional Year 2000 costs (523.4) (439.5) (911.9) Exceptional Year 2000 costs 3 (3.1) (3.3) (11.0) ---------------------------------------------------------------------------- Total operating costs (526.5) (442.8) (922.9) ---------------------------------------------------------------------------- Operating profit Continuing operations 220.2 219.8 441.4 Acquisitions 1.6 - - ---------------------------------------------------------------------------- 221.8 219.8 441.4 ---------------------------------------------------------------------------- Joint ventures and associates Continuing operations 4.2 4.5 9.3 ---------------------------------------------------------------------------- Profit before interest 2 226.0 224.3 450.7 Net interest payable (56.9) (47.8) (100.3) ---------------------------------------------------------------------------- Profit on ordinary activities before taxation 169.1 176.5 350.4 Taxation on profit on ordinary activities 4 (15.2) (23.4) (46.6) ---------------------------------------------------------------------------- Profit on ordinary activities after taxation 153.9 153.1 303.8 Dividends (including non-equity dividends) 6 (58.2) (42.5) (147.0) ---------------------------------------------------------------------------- Retained profit 95.7 110.6 156.8 ---------------------------------------------------------------------------- Earnings per share (pence) Basic 5 45.1 45.0 89.2 Diluted 5 44.8 44.6 88.5 Basic before Year 2000 costs 5 46.0 46.0 92.4 Diluted before Year 2000 costs 5 45.7 45.6 91.7 Group balance sheet At 30 September 1999 Unaudited Unaudited* Audited 30 Sept 99 30 Sept 98 31 March 99 £m £m £m Fixed assets Intangible assets Goodwill 113.3 6.5 56.6 Tangible assets 4,456.4 4,046.4 4,237.9 Investments in joint ventures Share of gross assets 7.6 9.9 5.9 Share of gross liabilities (6.7) (10.3) (6.2) Loans 4.5 8.1 4.7 ---------------------------------------------------------------------------- 5.4 7.7 4.4 Investment in associates 17.0 14.6 17.2 Other investments 4.2 2.7 3.1 ---------------------------------------------------------------------------- Total investments 26.6 25.0 24.7 ---------------------------------------------------------------------------- 4,596.3 4,077.9 4,319.2 Current assets Stocks 86.2 82.8 82.2 Debtors 326.7 263.6 284.9 Short-term deposits 30.7 16.8 22.9 Cash at bank and in hand 17.7 19.4 9.3 ---------------------------------------------------------------------------- 461.3 382.6 399.3 Creditors: amounts falling due within one year (887.0) (1,042.0) (923.4) ---------------------------------------------------------------------------- Net current liabilities (425.7) (659.4) (524.1) ---------------------------------------------------------------------------- Total assets less current liabilities 4,170.6 3,418.5 3,795.1 Creditors: amounts falling due after more than one year (1,581.4) (971.9) (1,306.2) Provisions for liabilities and charges (48.6) (47.0) (42.7) ---------------------------------------------------------------------------- Net assets 2,540.6 2,399.6 2,446.2 ---------------------------------------------------------------------------- Capital and reserves Called up share capital 231.6 231.1 231.1 Share premium account 11.7 5.3 5.4 Capital redemption reserve 147.0 147.0 147.0 Profit and loss account 2,150.0 2,015.9 2,062.4 ---------------------------------------------------------------------------- Total shareholders' funds 2,540.3 2,399.3 2,445.9 Equity shareholders' funds 2,531.2 2,390.4 2,436.8 Non-equity shareholders' funds 9.1 8.9 9.1 Minority shareholders' interest (equity) 0.3 0.3 0.3 ---------------------------------------------------------------------------- 2,540.6 2,399.6 2,446.2 ---------------------------------------------------------------------------- * 1998 comparative figures for Tangible assets and Provisions for liabilities and charges have been restated following full adoption of FRS12 at 31 March 1999. (Note 1) Group cash flow statement Six months ended 30 September 1999 Unaudited Unaudited* Audited 30 Sept 99 30 Sept 98 31 March 99 Notes £m £m £m £m £m £m Net cash inflow from operating activities 8 344.7 324.4 628.0 Dividends received from associated undertakings 1.4 1.6 1.6 Returns on investments and servicing of finance (37.4) (46.3) (79.1) Taxation (1.3) (10.8) (209.6) Capital expenditure and financial investment (300.2) (318.5) (609.7) Acquisitions (82.6) (17.8) (81.3) Equity dividends paid (156.1) (36.0) (35.7) ---------------------------------------------------------------------------- Net cash outflow before use of liquid resources and financing (231.5) (103.4) (385.8) Management of liquid resources (8.1) 15.9 10.1 Financing Increase in debt 230.0 72.8 364.2 Issue of shares 3.3 2.8 2.9 ----- ----- ----- 233.3 75.6 367.1 ---------------------------------------------------------------------------- Decrease in cash (6.3) (11.9) (8.6) ---------------------------------------------------------------------------- * 1998 comparative figures for cash inflow from operating activities and capital expenditure and financial investment have been restated following full adoption of FRS12 at 31 March 1999. (Note 1) Reconciliation of net cash flow to movement in net debt Unaudited Unaudited Audited 30 Sept 99 30 Sept 98 31 March 99 Notes £m £m £m Decrease in cash (as above) (6.3) (11.9) (8.6) Cash flow from movement in net debt and financing (230.0) (72.8) (364.2) Cash flow from movement in liquid resources 8.1 (15.9) (10.1) ---------------------------------------------------------------------------- Change in net debt resulting from cash flows (228.2) (100.6) (382.9) Net debt assumed with acquisitions (17.9) (0.9) (1.5) Inception of finance leases (6.8) - (15.5) Currency translation differences (0.2) 1.1 3.4 ---------------------------------------------------------------------------- Increase in net debt (253.1) (100.4) (396.5) Opening net debt (1,478.5) (1,082.0) (1,082.0) ---------------------------------------------------------------------------- Closing net debt 7 (1,731.6) (1,182.4) (1,478.5) ---------------------------------------------------------------------------- Reconciliation of movements in shareholders' funds Six months ended 30 September 1999 Unaudited Unaudited Audited 30 Sept 99 30 Sept 98 31 March 99 £m £m £m Profit for the period 153.9 153.1 303.8 Dividends (including non-equity) (58.2) (42.5) (147.0) ---------------------------------------------------------------------------- 95.7 110.6 156.8 Other recognised gains and losses relating to the period (4.6) 2.1 3.9 Shares issued (net of expenses) 3.3 2.8 2.9 Scrip dividend - 3.4 3.4 Goodwill written off - - (1.5) ---------------------------------------------------------------------------- Net addition to shareholders' funds 94.4 118.9 165.5 Opening shareholders' funds 2,445.9 2,280.4 2,280.4 ---------------------------------------------------------------------------- Closing shareholders' funds 2,540.3 2,399.3 2,445.9 ---------------------------------------------------------------------------- Notes 1 Basis of preparation The unaudited interim results for the six months ended 30 September 1999 have been prepared on the basis of accounting policies consistent with those adopted for the year ended 31 March 1999,as set out in the financial statements of the group, except as detailed below, where policy changes have been required under Financial Reporting Standards ('FRS') effective for the first time during the year ending 31 March 2000. The interim results have been prepared in accordance with FRS15 'Tangible Fixed Assets'. Adoption of this new accounting standard has necessitated a change in the depreciation method applied by the group to its UK landfill sites. As a result of changing methodology, an additional £1.1 million depreciation has been expensed in the six months to 30 September 1999. This book adjustment has no impact on the group's cash flows. Following full implementation of FRS12 'Provisions, Contingent Liabilities and Contingent Assets' in the group's accounts for the year ended 31 March 1999, it was necessary to reflect in those financial statements a change in method of accounting for infrastructure maintenance expenditure. The change required modifications to the group balance sheet and cash flow statement for that year, but had no impact on the profit and loss account other than to reclassify the renewals charge as depreciation. The interim results continue to be prepared on this basis. Comparative balance sheet and cash flow figures for the period to 30 September 1998 have been amended accordingly. The comparative figures for the year ended 31 March 1999 and other financial information contained herein do not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 March 1999, incorporating an unqualified auditors' report, have been filed with the Registrar of Companies. 2 Segmental analysis of turnover and profit before interest by geographical origin and type of business Other - principally United Kingdom Europe & USA Group ---------------------------------------------------------------------------- Six months ended 30 September 1999 1998 1999 1998 1999 1998 £m £m £m £m £m £m ---------------------------------------------------------------------------- Group turnover Water and sewerage 488.1 481.2 - - 488.1 481.2 Waste management 122.2 101.8 22.5 21.8 144.7 123.6 Services 65.6 60.5 82.9 41.4 148.5 101.9 Property, Engineering consultancy and Insurance 26.7 17.5 0.2 - 26.9 17.5 Inter segment trading (59.7) (61.1) (0.2) (0.5) (59.9) (61.6) ---------------------------------------------------------------------------- 642.9 599.9 105.4 62.7 748.3 662.6 ---------------------------------------------------------------------------- Group profit before interest ---------------------------------------------------------------------------- Water and sewerage 209.6 213.6 - - 209.6 213.6 ---------------------------------------------------------------------------- Waste management - underlying 13.1 13.1 3.8 3.8 16.9 16.9 Depreciation adjustment (Note 1) (1.1) - - - (1.1) - ---------------------------------------------------------------------------- Waste management 12.0 13.1 3.8 3.8 15.8 16.9 Services (1.1) (5.8) 8.8 5.8 7.7 - Property, Engineering consultancy and Insurance 0.5 (0.4) - - 0.5 (0.4) Unrealised profit on inter segment trading (1.6) (1.2) - - (1.6) (1.2) ---------------------------------------------------------------------------- 219.4 219.3 12.6 9.6 232.0 228.9 ------------------------------------------------------------- Corporate overheads (6.0) (4.6) --------------- 226.0 224.3 --------------- Services' UK loss before interest in 1998 of £5.8 million is after charging a £5.5 million bad debt provision which reversed in the following six months. Services' overseas profit before interest in 1999 is shown after deducting US corporate overheads of £0.4 million. Services' comparative figures have been amended to reflect a charge of £0.3 million, previously reported within Corporate overheads. The segmental analysis includes the following amounts in respect of businesses acquired during the six months to 30 September 1999: Turnover Operating profit --------------------------- --------------------------- United Europe United Europe Kingdom and USA Total Kingdom and USA Total £m £m £m £m £m £m -------------------------------------------------------------------------- Waste management 8.5 - 8.5 - - - Services - 11.6 11.6 - 1.6 1.6 -------------------------------------------------------------------------- 8.5 11.6 20.1 - 1.6 1.6 -------------------------------------------------------------------------- Waste management operating profit in the table above is after charging £0.2 million of the £1.1 million depreciation adjustment referred to in Note 1. Water and sewerage services turnover is net of customer rebate as follows: Six months to Six months to 30 September 1999 30 September 1998 £m £m Gross turnover 497.1 490.1 Customer rebate (9.0) (8.9) --------- --------- 488.1 481.2 --------- --------- 3 Exceptional costs Exceptional costs of £3.1 million (1998: £3.3m) relate to the costs of ensuring that all group computer and operating systems are Year 2000 compliant. 4 Taxation Six months to Six months to 30 September 1999 30 September 1998 £m £m UK corporation tax at 30% (1998: 31%) 11.9 58.3 Double taxation relief (0.4) (0.5) Overseas taxation 3.2 2.2 Share of taxation charges: - joint ventures and associates 0.5 0.7 Advance corporation tax - (37.3) ------ ------ 15.2 23.4 ------ ------ 5 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 year, 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. Supplementary earnings per share figures are presented. These exclude the effects of exceptional Year 2000 costs in both 1998 and 1999. The Directors consider that the supplementary figures provide a useful additional indication of performance. Six months to 30 September 1999 ------------------------------------ Weighted average number Per share Earnings of shares amount £m m pence ----------------------------------------------------------------------- Basic earnings per share 153.7 340.7 45.1 Effect of dilutive options - 1.9 (0.3) ----------------------------------------------------------------------- Diluted earnings per share 153.7 342.6 44.8 ----------------------------------------------------------------------- Supplementary earnings per share ----------------------------------------------------------------------- Basic earnings per share 153.7 340.7 45.1 Effect of exceptional Year 2000 cost 3.1 - 0.9 ----------------------------------------------------------------------- Basic earnings per share before Year 2000 costs 156.8 340.7 46.0 ----------------------------------------------------------------------- Diluted earnings per share 153.7 342.6 44.8 Effect of exceptional Year 2000 costs 3.1 - 0.9 ----------------------------------------------------------------------- Diluted earnings per share before Year 2000 costs 156.8 342.6 45.7 ----------------------------------------------------------------------- Six months to 30 September 1998 ------------------------------------ Weighted average number Per share Earnings of shares amount £m m pence ----------------------------------------------------------------------- Basic earnings per share 152.8 339.9 45.0 Effect of dilutive options - 2.7 (0.4) ----------------------------------------------------------------------- Diluted earnings per share 152.8 342.6 44.6 ----------------------------------------------------------------------- Supplementary earnings per share ----------------------------------------------------------------------- Basic earnings per share 152.8 339.9 45.0 Effect of exceptional Year 2000 costs 3.3 - 1.0 ----------------------------------------------------------------------- Basic earnings per share before Year 2000 costs 156.1 339.9 46.0 ----------------------------------------------------------------------- Diluted earnings per share 152.8 342.6 44.6 Effect of exceptional Year 2000 costs 3.3 - 1.0 ----------------------------------------------------------------------- Diluted earnings per share before Year 2000 costs 156.1 342.6 45.6 ----------------------------------------------------------------------- 6 Interim dividend An interim dividend of 17.0p per ordinary share will be paid on 6 April 2000 to shareholders on the register at 6 January 2000. The shares will be traded 'ex-dividend' with effect from 29 December 1999. The cost of the interim dividend amounting to £58.0 million (1998: £42.3 million) was fully covered by dividends received by Severn Trent Plc from subsidiary companies, which comprised £72.5 million from Severn Trent Water (1998: £69.0 million) and £6.0 million from other group companies (1998: £2.9 million). Non-equity dividends of £0.2 million were also paid in the six months to 30 September 1999 (1998: £0.2 million). 7 Analysis of net debt 30 Sept 1999 30 Sept 1998 31 March 1999 £m £m £m Cash at bank and in hand 17.7 19.4 9.3 Short-term deposits 30.7 16.8 22.9 Overdrafts (18.8) - (4.7) Debt due within one year (246.6) (320.7) (281.1) Debt due after one year (1,236.7) (644.0) (958.6) Finance leases due within one year (1.3) (7.7) (0.2) Finance leases due after one year (276.6) (246.2) (266.1) -------- -------- -------- Net debt (1,731.6) (1,182.4) (1,478.5) -------- --------- -------- 8 Reconciliation of profit before interest to operating cash flow Six months to Six months to 30 September 1999 30 September 1998 £m £m Profit before interest 226.0 224.3 Share of results of joint ventures and associates (4.2) (4.5) Depreciation charge 125.0 110.8 Amortisation of goodwill 2.5 - Profit on sale of tangible fixed assets (2.3) (1.6) Deferred income received 0.3 0.7 Deferred income written back (1.4) (1.3) Provisions charged 7.0 2.4 Utilisation of provisions (7.4) (4.3) Movement in working capital (0.8) (2.1) -------- -------- Net cash inflow from operating activities 344.7 324.4 --------- --------- 9 Interim statement The interim report and accounts were approved by the board of directors on 2 December 1999. Further copies of this interim statement may be obtained from the Company Secretary, Severn Trent Plc, 2297 Coventry Road, Birmingham B26 3PU.

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