Severn Trent Profit Falls on Energy, Interest Costs

Severn Trent Plc, the U.K.’s second- biggest water company, said first-half pretax profit fell 7.8 percent because of higher energy prices and interest charges on its debt.

Pretax profit declined to 137.9 million pounds ($207.9 million), from 149.5 million pounds a year earlier, the Birmingham, England-based company said today in a statement. Sales increased 5.2 percent to 814.3 million pounds.

While industry regulator Ofwat has allowed water companies to raise prices to fund investments in the five years through 2010, Severn’s permitted increase this year is 1.7 percent, the lowest in the period. The company said it’s in a “strong” liquidity position, though weaker demand will reduce sales by between 12 million and 15 million pounds this year.

“Interest costs were higher than our expectations,” Edmund Reid, an analyst at JPMorgan Cazenove Ltd., wrote in a note to investors today. Severn Trent’s operating performance beat forecasts on higher-than-expected turnover in the water business, he said.

The utility has hedged for all its energy costs this year and has hedged for 91 percent of volume so far next year, Chief Executive Officer Tony Wray said on a conference call, adding that costs will remain “stable.” Energy and commodity costs rose 7.8 million pounds from last year.

Power Prices

U.K. power for month-ahead delivery averaged 79.31 pounds a megawatt-hour in the six months through September, compared with 26.20 pounds a year earlier. Utilities typically buy electricity forward to hedge against higher prices.

The company reported a net loss of 83.8 million pounds for the period, compared with a profit of 150.9 million pounds last year, because of increased tax charges.

Severn Trent rose 34 pence, or 2.8 percent, to trade at 1,238 pence as of 10:38 a.m. in London. The stock has declined 19 percent this year, valuing the company at 2.9 billion pounds.

The company is fully funded until at least the end of March 2010, Severn Trent said.

The utility, which supplies water to more than 8 million people, has over the past six months agreed to pay fines to resolve regulatory issues that occurred under previous management. Customer bills will need to rise “slightly above inflation” in the five years through 2015 to fund a planned 3.2 billion-pound investment program, the company said in August.

Final Decision

The regulator will announce its final decision on prices and investment targets for the period in November next year.

The next-biggest publicly traded water company after United Utilities Group Plc reiterated today it’s seeking to keep annual operating costs 3 percent below the regulator’s target through the next two years.

It will pay an interim dividend of 26.29 pence a share, 8 percent more than the payment for the year-earlier period. The dividend is payable on Jan. 16 next year to shareholders on the register at Dec. 5 this year.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.