INVESTOR PRESENTATION 1
REFLECTING ON AMP6 The lowest bills and most trusted water company in England 1 Improving service for RoRE outperformance Investing for the Contributing to customers across all levers long term society Investing over Cumulative RoRE of Over AMP6 we expect at least 2 Annually helping over £6bn 9.1% 50,000 ↓50% over first 4 years of AMP6 customers pay their bill External sewer flooding Self-generating Deferring at least 51% Top 3 ↓6% £177m of our energy needs Hampton-Alexander review Leakage of customer ODI revenue Improving Awarded ↓25% 1,600km £460m Green Economy Internal sewer flooding Mark by the LSE of our rivers of totex outperformance Driving real RCV growth of ↓25% Effective interest rate down Top 3 ~9% 170bps in Social Mobility Index 2 WQ complaints 2 1. Future Thinking survey names Severn Trent as the most trusted water and waste water company in England, on average over two years; 2. Based on latest forecasts.
AMP7 BUILDING BLOCKS Performance across AMP6 and fast- track preparation positions us well for AMP7… Strong operational improvement Supply chain appointed and across Water and Waste design team insourced Two thirds of £100m property UQ financing at 3.7%; launched Sustainable Finance Framework profit commitment to come £177m of customer ODI revenue Focused non-reg business to be recognised in AMP7 with growing EBITDA AMP6 cost control puts us on Performance driven culture the right totex glide path and an engaged workforce …underpinned by a strong and experienced management team 3 3
PR19 4
5 5
STW FINAL DETERMINATION Our Final Determination is broadly value neutral versus our April Draft Determination Other changes from DD to FD Value £m Impact Value changes Revenue £180m WACC reduced by 38bps Changes to totex and RCV run-off mean real RCV growth up to 3.8% Efficiency frontier reduced to 1.1% £185m Totex (+ other smaller totex changes) Revenue re-profiled , moving more into the early years Revenue RCV run-off rate reduced by 0.1% £62m (long-term value neutral) New business rates sharing mechanism helps RCV to de-risk our plan £30m Revenue PR14 legacy adjustments 6
STW CUSTOMER ODIS We have a broad suite of customer ODIs, with positive changes to our risk profile 41 Improvements to FD Customer ODIs ODI P10/P90 ranges 1.90% Measured consistently and with 3 1.70% targets based on sector upper comparative DD FD quartile -2.83% Measured consistently but with 12 -3.90% targets based on company common performance We locked in most ODIs in January. Of the five left Unique to Severn Trent with open, two are unchanged, three improved : 26 design and targets based on bespoke • extensive customer research Supply interruptions • CRI (water quality compliance) 35 financial • Mains Repairs 6 non-financial Creating more upside and less downside risk 7
STW INVESTMENT AND RCV GROWTH STW AMP7 totex allowance in line with our original business plan – driving 3.8% real RCV growth STW Gross Totex: £6,797m 5736 907 154 STW and HD are two of the three companies to Real Base Enhancement receive more base totex than requested options Base Totex 1 Enhancement Totex 2 +£126m -£120m AMP6 efficiency enables us to get on the right £5,736m £5,610m run rate for AMP7 492 462 Water Waste 2481 2665 Retail £154m real options for additional work on the environment and metering £1,027m £907m 2667 2579 482 452 1. Base totex includes third party costs and non-price control activity costs – these amounts 545 455 8 are shown separately within the Ofwat Final Determination 2. Enhancement totex includes £42.5m relating to Strategic resources – this amount is Plan FD Plan FD shown separately within the Ofwat Final Determination
MULTI-AMP RCV GROWTH A key driver of long-term value creation Population and household growth 1 Replacement expenditure Environmental expenditure 1.2% 3.0 Greater Most likely 80.0x uncertainty 1.0% 2.5 Investment (£bn per AMP) 2.5 Water Framework Directive Renewal rate 0.8% £0.2 bn in AMP8 2.0 48.3x (integrated river basin 45.5x management) 0.6% 33.0x 1.5 Urban Waste Water Treatment Directive £1.0 bn AMP8-10 0.4% 1.0 (protecting the water environment in relation to 0.9 urban waste water and certain industrial discharges) 0.8 0.2% 0.5 Other stronger standards SVT Weighted average WASCS • hazardous substances (excl. SVT) 0.0% 0.0 • micro plastics AMP6 AMP7 Estimated longer- • microbial resistance Household growth / RCV Population growth / RCV term need Infra expenditure Required renewal rate – water Required renewal rate – waste £0.2bn in WFD schemes in AMP8 Largest population and household growth forecast outside of London Additional £1.6bn per AMP of mains renewals £1bn from AMP8-10 if EU strengthens the UWWTD and sewer refurbishment needed Over 750,000 more people and 430,000 more Potential for further investment should the EU raise households by 2040 Up to £0.7bn investment to meet climate standards on hazardous substances, micro plastics and change challenges from AMP8-10 anti-microbial resistance 9 1 Forecast change in population / household growth to 2040 (‘000) to RCV (£bn)
FAST-TRACK STATUS We have been using the time Fast-Track status gave us wisely We’ve educated our people on what We’re shadow reporting AMP7 We’ve launched our new Community Fund – the plan means for them performance commitments now open for applicants! We’ve appointed our supply chain partners 10 10
DRIVERS OF RORE Financing 11 11
FINANCING PERFORMANCE £93.8m £93.1m Net finance costs up marginally as impact of higher £93.8m average debt is offset by lower effective interest rate 1 RPI rolled up £17.0m £18.0m 170 bps Reduction in effective interest rate in AMP6 Net pension £5.4m finance cost £6.9m 5.4% Effective interest rate PR19 draft embedded debt rate 4.5% Cash interest 2 4.5% £71.4m £68.2m 4.5% 4.4% 3.9% 3.7% 14/15 15/16 16/17 17/18 18/19 H1 19/20 H1 18/19 H1 19/20 12 12 1. Before net pension finance costs but including capitalised interest. 2. Net of capitalised interest.
EFFECTIVE INTEREST RATES: A SECTOR COMPARISON Sector-leading improvement with 170bps reduction in our effective interest rate over 5 years 2015 2016 & 2017 Implementation of balanced and 6.0% floating strategy , refinancing £1bn -170bps 1 • Took advantage of attractive committed facilities 5.5% conditions in the GBP bond market • Issued new low cost debt in floating 5.4% to raise £900m new funds . PR19 draft rates, including USPP debt issue 5.0% embedded debt rate • Cancelled expensive historic interest • First RPI-CPI swap 4.5% rate swaps 4.5% • Repaid expensive fixed rate debt -70bps 4.0% +20bps 2019 2018 4.0% 3.9% 3.7% 3.5% 3.6% • De-risked our portfolio further, 3.4% 3.3% reducing our floating rate exposure 3.0% through two further debt issues at Undertook our 2 nd USPP raising a low all in rates 2.5% further £323m at competitive fixed • Agreed a new bilateral agreement in rates February 2019 2.0% • Amended and extended an existing SVT UU PNN £100m RPI loan to £125m CPI loan Mar-15 Mar-19 Sep-19 13 13 1. Based on March 2015 to September 2019 for Severn Trent.
DEBT MATURITY Average debt maturity of 14 years, £3bn to raise in AMP7 c.63% AMP7 700 AMP8 and beyond Gearing average 2020-25 600 £1.2 bn 500 New funding requirements 400 RCF Debt 300 £1.8 bn 200 Required refinancing¹ 100 BBB+/Baa1 - Targeted minimum 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 credit rating 14 14 ¹ We have already raised £100m of this through an extension of an existing loan
DIVERSE AND DE-RISKED PORTFOLIO Balanced strategy for fixed and floating debt Diverse sources of funding providing stability Fixed Committed Facilities Geographically diverse Including UK, US, Japan £1.1bn revolving credit and Europe facilities and bilaterals 60% CPI (all swapped to GBP) Index RPI £475m 25% Linked £1,034m 15% Over AMP6 we have secured over £2.5bn of new funding and £1.1bn Floating of committed facilities Reduced floating rate exposure Maintained index-linked Private placements Interest rate swaps to 15% , taking advantage of the exposure, now with £475m Established USPP Adjusting our debt mix flat yield curve and locking in low (roughly a third) CPI-linked programme raising between fixed and cost fixed rate debt debt £800m in AMP6 floating rates of interest 15 15
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