Interim Results Announcement for the six months ended 30 September 2001
05/12/2001
HIGHLIGHTS
Group turnover from continuing operations up 4.6%.
Group profit before taxation £91.4m up 12.8%.
Earnings per share up 11.6% to 19.2p.
Yorkshire Water improving efficiency and service standards.
US land sale agreement signed.
Interim dividend 7.7p.
KEY FIGURES
KEY FIGURES
2001
2000
Increase
Group turnover (continuing operations)
£329.8m
£315.3m
4.6%
Group operating profit (continuing operations)
£132.5m
£121.6m
9.0%
Profit before taxation
£91.4m
£81.0m
12.8%
Earnings per share (stated after deferred tax)
19.2p
17.2p
11.6%
Interim dividend per share
7.7p
7.5p
2.7%
Net debt
£1,347m
£1,397m
Gearing ratio (stated after deferred tax)
44%
46%
CHAIRMAN'S STATEMENT
Your company has produced a very satisfactory set of half year results. These include continued progress in reducing overhead costs and improving efficiencies, service and quality standards in all operations. The highlights include organic and acquisition growth in the USA and our Aquarion land sale to the State of Connecticut for $90m. The one relative disappointment was the slower than expected progress in disposing of our final non-core activity, renewable energy, namely First Renewables which we now expect to complete by the financial year end.
The headline growth in group profit before taxation of 12.8% benefited from the non-recurring strategic review costs of last year and an increase in operating profit contribution from Waste Recycling Group (WRG). The underlying operating profit growth from continuing operations was approximately 9%, driven, in the main, by continuing improvements in efficiency from our UK and US water operations and lower corporate overhead costs. An interim dividend of 7.7p will be paid.
The performance of Yorkshire Water Services was very satisfying. Apart from achieving the required level of efficiency it delivered major improvements in service and quality, achieving best ever reported levels of drinking water compliance. In addition, substantial improvements were made in reducing river pollution and in sea water bathing quality with the delivery of the CoastCare investment programme.
Growth in the US was accelerated, as planned, with the conditional agreement to acquire four New England water supply companies which have an excellent geographic, product and service fit with our existing Aquarion operations. Good progress is being made with the necessary regulatory consents which should be completed in mid 2002. The deal is expected to be earnings enhancing and will grow our scale by approximately 50% in the US market. It will be funded from Kelda's existing cash resources and debt facilities. The proposed sale of surplus catchment land to the State of Connecticut has received State funding approval and the required regulatory processes are due to be completed early in the New Year.
On American matters, this is the first public opportunity the company has had to express our deepest sympathies and support for US citizens generally and the communities we serve close to New York who have been affected by the infamous act of terrorism of September 11th. Aquarion has donated support and provided essential water supplies as part of our efforts to make a tangible contribution to assisting the New York authorities.
We continue to encourage the expansion and growth of WRG which is an active participant in the progressive rationalisation of the household waste industry. WRG recently concluded the acquisition of Hanson's waste interests and has significantly strengthened its commercial and operational management with the appointment of a new Chief Executive, a Commercial Director and a Finance Director. The other smaller group support operations, Loop Customer Management and KeyLand Developments continued to progress satisfactorily, although KeyLand had a smaller net contribution due to planning delays in two major development projects.
The financial strength of the company has increased with the improvement in profit and reduction in debt due to the programme of disposals. An opportunity was taken to support the required investment programme of Yorkshire Water Services with a recent bond issue which raised a further £90m.
The results incorporate technical adjustments relating to the adoption of FRS19, the new accounting standard on deferred taxation. These include reducing the group reserves as at 31 March 2001 by £138m. It is important to note that the adoption of the new standard will have no effect on the group's cash or borrowing position and, in an industry which will continue to invest in improvements to assets and infrastructure and hence attract tax allowances, has resulted in a provision being established which will probably never be paid.
The company continues to debate with government and regulator the need for a strategic view of the industry and their plans for the role of equity. The success of Glas Cymru shows the benefits to customers of the type of restructuring Kelda tried to introduce last year. Acceptance of the logic behind this type of restructuring is needed if the government fails to give better prospects for growth in shareholders' funds. This is required to encourage equity and capital markets to provide the industry's long term investment funding on which all future quality improvements depend.
In the short run changes in the risk perception of bond and capital markets will encourage the leverage of balance sheets as evidenced by the Southern Water and AWG proposals. It is difficult to generalise about the water industry from these examples as each has separate strategic aims and a different financial basis. Such schemes will allow limited monetisation of equity value but, we consider, do not provide a long term solution to the equity question. We will be carefully observing investors' attitudes towards a highly leveraged business that has a need for continuing high levels of capital investment indefinitely into the future.
Therefore, at this time we continue to keep all options under review as well as developing further initiatives of our own. I can report there has been an increase in the understanding of the linkage between the equity and debt markets and improvement in the dialogue with government and regulator. The extent to which this will result in a measurable change is at this time difficult to predict. The willingness of government to listen, however, is encouraging for the longer term prospects of the industry.
I have already made mention of our sympathy and support for our colleagues in the US. They are very much determined to make it business as usual and look forward to the completion of the regulatory approval process of our US acquisition. In conclusion I would like to thank all employees for their contributions in delivering the benefits of increased focus on water and waste water operations and to thank executive and board colleagues for their contribution and support.
John Napier Executive Chairman
REVIEW OF THE BUSINESS
Group financial performance
The group's turnover on continuing operations increased by 4.6% during the period to £329.8m (2000: £315.3m). The group's share of associates turnover increased to £64.5m (2000: £47.1m), including Waste Recycling Group plc (WRG) which contributed £59.4m (2000: £40.0m) following WRG's Hanson acquisition in February 2001. Total group turnover, including share of associates, was £394.3m (2000: £396.3m).
Group operating profit from continuing operations increased by 9.0% to £132.5m (2000: £121.6m). Strategy review costs of £4.9m in the prior year were not repeated and corporate overheads fell by a third as a result of that review. The group's share of associates' operating profit increased to £9.1m (2000: £8.5m) including the contribution from WRG which increased by 24.7% to £9.1m (2000: £7.3m).
The group's interest charge (excluding share of associates) has reduced because of lower net debt following receipt of the business sale proceeds and lower interest rates. Group profit before taxation for the interim period increased 12.8% to £91.4m (2000: £81.0m).
Taxation
Following the introduction and adoption by the group of Financial Reporting Standard (FRS) 19 'Deferred Tax', provision for deferred tax has been made on a discounted basis. Deferred tax is the tax attributable to the timing differences which arise from the inclusion of items of income and expenditure in one period for tax purposes (based on tax legislation) and another for accounting. For the group, tax relief normally exceeds the charge against profit for depreciation because of the size of the UK water services business capital expenditure programme. The interim results include a deferred tax charge representing the change in the provision and the prior year figures have been restated accordingly.
The adoption of FRS 19 has no impact on the amount of tax paid or the group's cash flows because the timing differences are not expected to reverse in the foreseeable future.
The tax charge on profit for the interim period has been calculated by applying the forecast effective tax rate, including deferred tax, for the full year. The charge against profit for the period of £17.7m (2000: £15.0m) represents an overall effective tax rate of 19.4% (2000: 18.5%). This is still well below the normal 30% corporation tax rate, principally because of the discounting of deferred tax.
Earnings per share, stated after deferred tax, increased 11.6% to 19.2p (2000: 17.2p).
Interim dividend
An interim dividend of 7.7p per share (2000: 7.5p) will be paid on 1 March 2002 to shareholders on the register on 25 January 2002. The full cost of the dividend will be met by Yorkshire Water.
Yorkshire Water
Turnover in Yorkshire Water increased by 3.4% to £282.5m (2000: £273.3m) which reflects the allowed overall increase in tariffs. Revenue growth was offset by a small decline in consumption by industrial and commercial customers and the effect of domestic metering. Operating profit increased by 5.6% to £119.3m (2000: £113.0m).
The company continues to improve its quality, service and efficiency and is well placed to achieve the cost reductions required by the last price determination. It has reduced regulated operating costs by a further 1% in real terms from the equivalent period last year. This is in addition to the 2% real reduction achieved in the prior period, despite the further costs incurred as a result of the substantial capital investment programme.
The last six months have seen continued advances in Yorkshire Water's operating, environmental and customer service performance. On all key measures, the company is now reporting best ever levels of performance. This was highlighted by strong endorsement from the company's regulators and these substantial improvements are now being recognised by customers and other stakeholders.
Best ever levels of drinking water compliance were recognised in the annual report of the Drinking Water Inspectorate (DWI), published in June. This showed 99.9% of samples complied fully with DWI regulations, a performance which reflects the investment of over £730m in drinking water improvements since privatisation.
Dramatic improvement in the quality of some of the region's most heavily polluted rivers, such as the Aire in West Yorkshire and Don in South Yorkshire, are highlighted in the Environment Agency's "State of the Environment" report as being a direct consequence of Yorkshire Water's investment programme. Further improvements will derive from the current investment programme. In this, Yorkshire Water will decommission, upgrade or screen more than 1,000 sewer overflows by the end of the year 2005 - almost one a day for the next three years.
Ofwat's recently published Levels of Service Report for 2000-2001 reveals that only one other water and sewerage company performed better than Yorkshire Water. Of the ten major water and sewerage companies, Yorkshire Water now has the lowest number of customers suffering from poor water pressure. 96.9% of the company's 1.7 million customer calls were answered within 30 seconds - its best ever performance. All 1.5 million customer billing enquiries were responded to within five working days.
Following the company's £120m CoastCare investment programme in coastal waste water treatment, the region's bathing beaches have had their best water quality performance since records began, a fact recognised by pressure groups such as Surfers against Sewage and the Sons of Neptune.
Yorkshire Water is delighted to report that the current investment programme is on target to deliver further customer and environmental benefits across the region.
Given the company's position as the most efficient deliverer of capital schemes in the industry, it is well placed not only to meet the regulatory targets but also to deliver further financial efficiencies in this area.
Aquarion
Turnover has increased by 10.4% to £42.5m (2000: £38.5m) and operating profit by 8.3% to £17.0m (2000: £15.7m). Favourable exchange rate movements account for about 5% of this improvement.
In August, Aquarion Company entered into legal agreements to acquire four New England water supply businesses from American Water Works Company Inc. The four businesses supply water in the states of Connecticut, Massachusetts, New Hampshire and New York, close to Aquarion's existing operations. The acquisition will increase Aquarion's business by approximately 50% and is consistent with Kelda's strategy for growth in the US market. The consideration will be two times the book value of the net assets of the acquired companies at the time of closing, which is anticipated to be about $118m in cash, plus the assumption of $115m of debt. It will be funded from Kelda's existing cash resources and debt facilities. The transaction is conditional upon various US regulatory approvals, which are proceeding satisfactorily.
The $90m land sale agreement with the state of Connecticut and the international conservation organisation, The Nature Conservancy, was signed in November and has been submitted for regulatory approval. When completed, it will be the largest land deal for open space preservation in Connecticut history.
Other businesses
An outbound calling service for the National Blood Service was recently integrated into Loop, Kelda's customer management business. Loop is now one of Yorkshire's largest handlers of telephone calls, dealing with more than 4.5 million inbound and outbound calls a year.
KeyLand Developments has had a quiet first half year. Turnover and operating profit were both down on the comparable period in 2000 as planning delays have affected two significant contracts. Substantial progress, however has been made in developing a number of surplus Yorkshire Water properties through joint ventures.
Discussions are continuing with a number of potential purchasers of First Renewables which has interests in a number of energy development projects, including the innovative ARBRE biomass power plant. Progress continues to be made towards commissioning the plant which is now expected to become fully operational in 2002.
Waste Recycling Group (WRG)
The group's share of the results of WRG have been derived from their previously published interim results for the six month period ended 30 June 2001. The trading performance of the business was good and showed the benefits of the recent acquisitions and new waste management contracts.
