Severn profits slip despite new formula: Different approaches produce mixed results at water companies

A REVISION of the method of providing for the cost of renewing pipes and other underground assets by Severn Trent, the water company, added pounds 13m to profits in the year to March, but the boost was not enough to prevent a marginal fall overall.

The group made pounds 270.1m before tax, down from pounds 274m, restated for the new accounting rules, on sales up 10 per cent at pounds 821.7m. But the charge for renewing underground assets fell from pounds 83m to pounds 70m as it changed the formula for calculating the provision.

Roderick Paul, chief executive, said Severn would now calculate the charge based on the retail price index, rather than the capital index, bringing it into line with the rest of the industry. He said the heavy capital spending - pounds 550m last year - in recent years had pushed the depreciation charge up by pounds 14m to pounds 67m.

He said the group's water business had a 'very good year' but it had expected overall profits to be flat because of the increase in depreciation and the fact that heavy capital investment had increased its debt. Borrowings at the year-end were pounds 422.4m, up pounds 252m, producing a pounds 29m interest bill compared with a pounds 4m receipt last time. Debt is expected to rise a further pounds 200m this year.

The previous year's results benefitted from an pounds 8.6m profit on disposal of investments. Excluding that, profits rose by pounds 5m. But Biffa, the waste management business that has been the main plank of its expansion into non-regulated businesses, contributed pounds 12m to profits, down from pounds 12.4m the previous year.

Mr Paul said the decline was largely due to pressure on prices in the waste collection business, but the landfill and liquid waste businesses increased both prices and volumes by about 10 per cent. He said landfill and liquid were the key parts of Biffa's business, and it had received planning permission for two liquid waste treatment plants, one in Antwerp, Belgium, the other in the Midlands.

Operating profit in the core water business rose 15.3 per cent to pounds 293m, as productivity increased at a cost of 459 jobs.

Earnings per share were 69.9p, down from 70.6p, but the dividend was increased by 9.3 per cent to 21.1p via a 14.1p final.

Severn did consider offering an increased payment to investors opting for payment in shares - as North West Water did - but ruled it out because it would have diluted earnings per share.