Interim Results Announcement for the six months ended 30 September 2000
06/12/2000
HIGHLIGHTS
Group profit before tax £81.0m (1999: £122.2m).
Yorkshire Water profit before tax down one third following 14.5% price cut in April.
Aquarion earnings enhancing.
Good growth in contribution from share in Waste Recycling Group.
Interim dividend maintained.
KEY FIGURES
2000
1999
Increase/
(Decrease)
Group turnover (excluding associates)
349.2m
£342.9m
1.8%
FRS 3 profit before taxation
£81.0m
£122.2m
(33.7%)
Earnings per share
18.8p
30.2p
(37.7%)
Interim dividend per share
7.5p
7.3p
2.7%
CHAIRMAN'S STATEMENT
Group results for the six months ended 30 September 2000 directly reflect the impact of the November 1999 price determination which reduced prices by 14.5% and profits in the main Yorkshire Water (YW) operating subsidiary by a third. Kelda Group profit before tax at £81.0m was 33.7% down on the comparable period last year. The results benefited from the inclusion of Aquarion, our USA water acquisition, for the first full half year and improved performance from Waste Recycling Group (WRG), our associated waste disposal company. These benefits were offset by higher borrowings and interest costs related to the Aquarion acquisition, increased capital investment in YW and a charge of £5m for the strategic review costs. An interim dividend of 7.5p per share will be paid.
The main and immediate offsetting action has been to substantially reduce costs. This has included the planned closure of the corporate headquarters, and a completed redundancy programme in YW, the full benefits of which will be felt in the second half. With the priority that has to be given to improving quality and service standards, the scope for additional cost reductions is now more limited. The company also has to ensure it has some capacity to respond to the operating pressures of events like the recent flooding. The Board would like to pay a special tribute to all staff for the excellent way they have responded to these events.
The extent of the profit reduction attributable to the price determination, although predictable, after cost offsets, remains the catalyst for an appropriate strategic response taking into account long-term investment needs. The decision to concentrate on water and waste interests and to dispose of non-core activities has been well received and will benefit shareholders. Good progress has been made with the sale process and the majority of the sales should be achieved by the financial year-end with the exception of First Renewables, our renewable energy interests, which will take more time.
Although Kelda's first proposals for restructuring its water business into separate asset and operating companies did not meet regulatory approval, they helped to increase the focus of the Government and the Regulator on longer term issues in the water industry, particularly the need to raise the significant capital sums required at the lowest cost of borrowing. The recently announced 'Not for Profit' ownership structure for Welsh Water, Glas Cymru, is similar to the proposals made by Kelda. There is now more regulatory sensitivity to and acceptance of the dynamics of the linkage between capital and equity markets in the UK.
Further evidence of the need for change was signalled by Thames, who opted to sell itself to a major overseas company. Such companies have the benefits, outside of the UK, of a more stable long-term commercial environment, are allowed more attractive rates of return, can more easily finance investment and have the financial strength to take a longer term strategic view.
There is increasing recognition that the combination of historic privatisation structures, inappropriate "one size fits all" models of competition and a punitive interventionist regulatory approach does not, in the long term, best serve the interests of the consumer, the industry or the wider environment and community, particularly where substantial continuing long term capital expenditure is necessary. Recent events in other industries have helped reinforce this general point.
The imperative is for an agreed long-term strategic view of the water industry with acceptance of the need for more commercial, stable, balanced and cohesive relations with all stakeholders including customers, shareholders, capital providers, the Regulator and Government. The objective has to be to ensure sustainable service improvement and increased long-term investment in both infrastructure maintenance and the environment.
The water industry in general and Kelda in particular has made substantial progress on many fronts, such as cost reductions, water quality and service delivery improvements. We look forward to a greater recognition of these achievements and, believe now is the time for an overall review of all options open to the industry, and with a new Regulator, an opportunity for a more balanced regulatory approach.
The Board expects the focus on water and waste operations to show continued benefits to shareholders into the future. It allows the utilisation of our core operating strengths and clarification of the strategic issues. We believe that wider recognition of these issues is a significant factor behind the short-term improvement in the market perception of water companies. The requirement however remains to deliver long term solutions which allow water companies to effectively service their customers in the short and long run and make the necessary protective investments in essential, existing and future assets and environmental improvements. We look forward to progress in these areas.
Finally I am pleased to report the continued strengthening of your Board and management. Following the appointment of two additional Executive Directors announced in the Annual Report, two Yorkshire based Non- Executive Directors, Mr David Salkeld, Chief Executive Officer of Arla Foods Plc and Mr Ken Jackson, Deputy Chairman and Chief Executive of Carbo plc have been appointed to the Board.
John Napier
Executive Chairman
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