Severn Trent warns of rising costs of financing

Severn Trent shrugged off regulatory fines and concerns over the long-term financing of its investment programme with an improved dividend and higher turnover.

Sir John Egan, chairman, said the supplier of water and sewerage services was maintaining its targets by increasing its interim dividend 8 per cent to 26.29p in spite of increased borrowing costs.

The shares rose 18p to close at £12.22.

Tony Wray, chief executive, said Severn Trent was on track to beat efficiency targets imposed by Ofwat, the water regulator, through a 3 per cent margin while the utility’s capital-spending programme remained on target.

The company took a hit of £7.2m during the period, following a £2m fine and provisions of £5m in charitable donations in further settlement agreed with Ofwat following offences related to the false reporting of leakage data to the regulator in 2001 and 2002.

The company, currently in talks with Ofwat about the setting of customer prices and capital investment commitments between 2010 and 2015, said it was achieving “sustained improvements” in reducing supply interruptions and sewer flooding incidents.

Turnover rose 5 per cent to £814m (£774m) in the six months to the end of September.

Pre-tax profits fell from £149.5m to £138m as Severn Trent absorbed an £18m increase on net financing costs of £107m (£88.6m).

Losses per share were 35.8p (64.7p earnings).

● FT Comment

Defensive qualities aside, analysts remained divided on whether the glass is half full or half empty for Severn Trent. With £1bn of its £3.5bn debt indexed to RPI and half a billion cash in hand, it is trading on an estimated dividend yield of about 6 per cent for the full year and remains relatively well hedged to a deflationary environment as it awaits for calm to be restored in the debt markets. However, Severn Trent and its peers remain vulnerable to political and regulatory risk as it negotiates the next five-year plan of pricing and capital investments. The argument that it needs to offer sufficient returns for both equity and debt investors in more difficult times may have some merit – although consumer champions will argue the current five-year framework has proved over-generous to water suppliers.

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