Response to Final Determination

12 December 2014

 

Severn Trent Plc - Severn Trent Water response to Final Determination

 

Note: 2012/13 prices unless stated otherwise

 

Ofwat has today published the Final Determination for Severn Trent Water for the period 2015 to 2020 ("AMP6").

 

The Final Determination is a detailed document which will take time to analyse and consider fully. From an initial analysis this morning, we welcome the progress that has been made since the Draft Determination through our constructive dialogue with Ofwat, but we are disappointed on two points.

 

Firstly, Ofwat has reduced the allowed weighted average cost of capital (WACC) for the wholesale business to 3.6% from 3.7%in the Draft Determination of 29 August, giving a WACC for the appointed business of 3.74%, compared to 3.85% in the Draft Determination.

 

We also note that two maintenance schemes proposed, totaling around £60 million, remain excluded. While we disagree with this outcome, given stakeholder support we continue to include these projects in our own total expenditure plans for 2015 to 2020 of £5.6 billion.

 

Despite these points, the Final Determination includes the Birmingham Resilience main scheme, Scenario A in the Draft Determination, plus £50 million of the associated community risk schemes, which were previously excluded from the Draft Determination. We also note that wholesale totex in the Final Determination of £5,623 million is broadly in line with the Draft Determination and our revised business plan (see table 1).

 

We are pleased that legacy adjustments have been reduced by around 30% to £58 million (14/15 year end prices) and based on the Final Determination we anticipate our Regulatory Capital Value (RCV) in April 2015 in nominal terms to be £7.8 billion¹, with average growth of 5% p.a. over the period to give an expected RCV in 2020 of around £10 billion.¹

 

We also note the revised Outcome Delivery Incentives package, including positive changes to the ODI related to Birmingham Resilience.

 

As Ofwat has highlighted today, customers will benefit from higher levels of investment over the next 5 years, with bills falling in real terms. Severn Trent Water customers will continue to have the lowest combined average bills in the land over AMP6.

 

The publication of the Final Determination is the culmination of the price review process. There now follows a period of 2 months during which Severn Trent Water can decide whether to appeal the Final Determination to the Competition and Markets Authority (CMA). The new price limits take effect in April 2015.

 

Liv Garfield, Chief Executive, said: "We have today received the Final Determination from Ofwat, a complex document with a huge volume of information to analyse. We will take the time necessary to review its content and conclusions thoroughly before responding to Ofwat and our stakeholders in February 2015. In the meantime we continue to make good progress in preparing the business for AMP6. We are proud that Severn Trent customers have the lowest average combined bills in the land, and with bills falling in real terms over the next 5 years, this is set to be the case until 2020, when bills will be around £60 below the industry average.²"

 

 The Ofwat Final Determination proposes the following for Severn Trent Water:

TABLE 1

	Severn Trent Water June revised business plan	Ofwat Draft Determination (inc. Birmingham resilience)	Ofwat Final Determination
Wholesale Totex (inc. pensions)	£5,606m	£5,586m	£5,623m
Retail Revenues	£757m	£728m	£743m
Wholesale WACC	3.7%	3.7%	3.6%
PAYG rate	57.2%	57.2%	58.8%
Return on regulated equity	1.1% - 9.6%	1.0% - 9.2%	0.7% - 9.0%
Regulatory Capital Value (RCV) in 20201	£10.1 billion	£10.1 billion	£10.0 billion

 

1.   Nominal, assumes year end 2.5% RPI for 14/15 and an average of 3.3% year end RPI for 2015-2020

2.   In 2014/15 prices. Source: Ofwat

 

Enquiries:

 

Liv Garfield	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
Katharine Wynne / Martha Walsh	Tulchan Communications	0207 353 4200

 

Cautionary statement regarding 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).