Severn Trent reports profit drop

Severn Trent has reported a drop in profits at its water business, despite seeing a turnaround in water consumption and lower rate of bad debts.

Turnover at Severn Trent Water rose 1% to £702.3 million in the six months to September 30 after a cut of 0.7% in prices from April was offset by higher household usage and a lower level of corporate failures.

Severn, which had been braced for further pressure on consumption, added that it had worked hard on its collections performance as its bad debt charge in the first half of the year fell to 2.3% of turnover, from 2.5% in 2009/10.

Wages and salaries were £5.8 million lower due to efficiency programmes but there was an increase in depreciation of £15.8 million as underlying pre-tax profits in the regulated water arm fell 2.4% to £272.7 million.

Across the group, which serves more than eight million customers across the heart of the UK, underlying profits fell 16% to £158 million. The drop reflected the impact of higher inflation on its borrowing costs.

Severn also announced a 2.5% cut in its half-year dividend as part of a 10% reduction planned for this financial year due to Ofwat’s latest price controls.

Severn was required to cut average household bills by 4% in real terms by 2015 in a ruling labelled “tough” by the water firm. Despite this, shares in Severn and the UK’s three other listed water stocks have risen by around 25% this year, compared with a 9% fall for the broader utility sector.

Severn announced a new dividend policy for the following four years to 2015 which will see annual growth of RPI inflation plus 3%. Dividend payments are essential for the sector to attract investors as firms look to raise the billions of pounds needed to pay for spending on the network.

Severn said its water business invested £164.5 million in fixed assets and maintaining and improving its infrastructure during the half year.