Severn Trent in fresh round of job cuts

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Severn Trent, the country's biggest quoted water company, is to embark on a fresh round of job cuts after a sharp rise in its energy bills and the cost of tackling leaks.

The renewed efficiency drive will start with the company's Birmingham head office, where Severn Trent aims to save up to £10m by reducing its overheads by one-third. The headquarters employs 90 people. The results of a more wide-ranging overhaul of the company, including its main operating divisions, will be announced in June next year.

The review follows the demerger of Severn Trent's waste business Biffa and the sale of its US laboratories business, which has left the company as a pure water and sewage business with regulated activities now accounting for 97 per cent of revenues.

A combination of increased energy costs and higher spending on leakage reduction coupled with increased bad debt provisions reduced Severn Trent's pre-tax profits by 6 per cent to £142.7m for the first half of the year, excluding Biffa. The fall in profits came despite a 7 per cent increase in customer bills.

Colin Matthews, its chief executive, said the group now expected its net costs for the full 12 months to be £15m-£20m higher than last year. In the first six months alone, energy costs rose by £9.6m, while an extra £3.5m was spent on leak reduction. Provisions of £2.6m were made against bad debts. The result is that Severn Trent is failing to hit the operating efficiency targets set by Ofwat in 2004. However, Mr Matthews said efficiency gains on its £2.6bn investment programme had reached 6 per cent, exceeding the targets set by the regulator. This year the company expects to spend £500m on its water and sewage networks.

The sale of Biffa enabled Severn Trent to load up its balance sheet with more debt and return £577m to shareholders by a special dividend. The group's debts as a proportion of its regulated assets will now be around 60 per cent - the middle of the range stipulated by Ofwat.

Mr Matthews said he was determined that Severn Trent would meet its leakage target this year, having missed it in the previous 12 months. The company's leakage rate is running at about 25 per cent. To try to bring the rate down it has increased spending on mains replacement and leak detection to £95m this year.

Severn Trent declined to comment on the ongoing investigation into the company by the Serious Fraud Office. The SFO is investigating irregularities in the customer service information Severn Trent sent to Ofwat, which has already penalised the company by ordering customer rebates and intends to fine it once the SFO investigation is complete.

Mr Matthews, who was not with the company at the time the irregularities were taking place, said he did not know what stage the SFO inquiry was at but he hoped it would be resolved sooner rather than later.