Severn Trent PLC

Business and Financial Review • Dec 2, 2013

National Storage Mechanism | Additional information

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RNS Number : 4177U

Severn Trent PLC

02 December 2013

2 December 2013

Severn Trent Water submits business plan for the period 2015 - 2020

Severn Trent Plc confirms that its wholly owned subsidiary Severn Trent Water has today submitted its Final Business Plan (the "Plan") to the regulator Ofwat for the next regulatory period, AMP6, which runs from April 2015 - March 2020.

Note: All plan data is 2012/13 prices unless otherwise stated

Highlights:

·    Price changes equivalent to an average of 1.2% below inflation over the five year period; Prices frozen in year one and then rising by less than inflation. Bills will be £12 lower in real terms by 2020;

·    Total expenditure (totex) of approximately £6 billion;

·    Capital expenditure approximately £3.2 billion, an increase of £600 million on the prior period;

·    Operational expenditure of approximately £2.8 billion, flat over the prior period;

·    RCV expected to be over £10 billion by 2020 (nominal)1;

·    Planned lower blended debt costs of 2.54% (vs. 3.6% in current regulatory period) reflected in wholesale weighted average cost of capital (WACC) reducing to 4.2%, from 5.1%, cost of equity 6.7% (vs. 7.1% in current regulatory period);

·    Retail margin of 0.7% household and 3% business;

·    60% gearing (net debt/RCV) planning assumption;

·    Maintaining investment grade credit rating; funding requirement of £2.6 billion or 60% of current debt portfolio.

1.   Nominal assumes inflation of 3.3% p.a., per Ofwat assumption.

The Plan has been driven by and for our customers and stakeholders. We believe that the Plan offers value for money and is fair and balanced. It delivers better value, better services and a healthier environment.

Value for money

Severn Trent already has the lowest combined average bills in England and Wales with price rises over the current regulatory period being kept below inflation. Price rises in the next period will be kept to an equivalent of 1.2% below inflation, with prices frozen in year one and then rising by less than inflation.

We will invest around £3.2 billion, an increase of £600 million on the previous regulatory period, driven by an increased environmental programme, further investment in network resilience, investment to reduce sewer flooding and the maintenance of private drains and sewers.

Operational expenditure will be flat period on period, in real terms.

Fair and balanced

We believe we have struck the right balance between bills, services and returns to investors. Over 15,000 customers took part in our research, and 160 stakeholders contributed through written consultations, workshops, roundtable discussions and meetings in person. The Severn Trent Water Forum, our customer challenge group, has extensively challenged us as we have developed our plan. Severn Trent has established a track record of sharing the benefits of outperformance with customers and we will continue to do so in the future if we exceed our plan expectations. We will also strengthen our existing wide range of social tariffs.

We will take advantage of the current window of opportunity to obtain lower cost funding and have reduced our wholesale WACC to 4.2% from 5.1%, while maintaining a fair return for shareholders. 

We have also set out 10 customer focused objectives, against which we have proposed clear measures of success. On a number of these measures we have proposed that financial incentives (both rewards and penalties) should be applied. In aggregate, the potential maximum impact of penalties and rewards is between: £(144) million and £98 million over AMP6.

Commenting on the Plan Tony Wray, Chief Executive Severn Trent Plc, said:

"The challenge for Business Plans for the next regulatory period can be summed up as can you do more, deliver what customers want and the environment needs, and still keep prices down? At Severn Trent we believe the answer is yes. We have an established track record of real price reductions over the last five years and for sharing the benefits of outperformance with our customers. We will maintain this record over the next five years and deliver better value, better services and a healthier environment."

Further detail on the Plan, the report from our customer challenge group the Severn Trent Water Forum, and a video of Tony Wray commenting on the Plan can be found at www.severntrent.com/2020-plan        

Severn Trent Plc will be holding a webinar to discuss the Plan at 12:30pm on Tuesday 3 December 2013 at www.severntrent.com

Key facts:

Wholesale weighted average cost of capital:

Real	PR14	PR09
Assumed RPI	3.3%	2.5%
Blended cost of debt	2.54%	3.6%
Cost of equity	6.7%	7.1%
Gearing	60%	57.5%
Vanilla WACC	4.20%	5.1%
Post-tax WACC	3.90% @ 20% tax	4.5% @28% tax

Customer bills (nominal)1 (£):

2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19	2019/20
322	332	336	336	347	358	370	382

1.   Under new Ofwat methodology

Average change (equivalent)	Real
Change in AMP5 (2010-2015)	-0.5%
Change in AMP6 (2015-2020)	-1.2%

K-factor

2015/16	2016/17	2017/18	2018/19	2019/20
-3.3%	-0.2%	-0.2%	-0.2%	-0.2%

Total expenditure:

£ million	AMP6	AMP5	% change
Operational expenditure	£2,845	£2,854	0%
Capital expenditure	£3,175	£2,565	23.8%
Total expenditure	£6,020	£5,419	11.1%

Enquiries:

Tony Wray	Severn Trent Plc	0207 353 4200 (on the day)
Chief Executive		02477 715000
Mike McKeon	Severn Trent Plc	0207 353 4200 (on the day)
Finance Director		02477 715000
Rob Salmon	Severn Trent Plc	0207 353 4200 (on the day)
Head of Communications		02477 715000
John Crosse	Severn Trent Plc	0207 353 4200 (on the day)
Head of Investor Relations		02477 715000
David Shriver / Martha Walsh	Tulchan Communications	0207 353 4200

Forward-Looking Statements:

This document contains statements that are, or may be deemed to be, 'forward-looking statements' with respect to Severn Trent's financial condition, results of operations and business and certain of Severn Trent's plans and objectives with respect to these items.

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends', 'plans', 'projects', 'potential', 'reasonably possible', 'targets', 'goal' or 'estimates' and, in each case, their negative or other variations or comparable terminology. Any forward-looking statements in this document are based on Severn Trent's current expectations and, by their very nature, forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future.

Forward-looking statements are not guarantees of future performance and no assurances can be given that the forward-looking statements in this document will be realised. There are a number of factors, many of which are beyond Severn Trent's control, that could cause actual results, performance and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to: the Principal Risks disclosed in our Annual Report as at May 2013 (which have not been updated since); changes in the economies and markets in which the group operates; changes in the regulatory and competition frameworks in which the group operates; the impact of legal or other proceedings against or which affect the group; and changes in interest and exchange rates.

All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Severn Trent or any other member of the group or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. Subject to compliance with applicable laws and regulations, Severn Trent does not intend to update these forward-looking statements and does not undertake any obligation to do so,

Nothing in this document should be regarded as a profits forecast.

This document is not an offer to sell, exchange or transfer any securities of Severn Trent Plc or any of its subsidiaries and is not soliciting an offer to purchase, exchange or transfer such securities in any jurisdiction. Securities may not be offered, sold or transferred in the United States absent registration or an applicable exemption from the registration requirements of the US Securities Act of 1933 (as amended).

This information is provided by RNS

The company news service from the London Stock Exchange

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