Severn Trent Plc · LSE:SVT
Severn Trent — Debt Investor Presentation (October 2012)
45 slides from Severn Trent's debt investor presentation, October 2012
Slide 1: Bond Investor Presentation October 2012
Severn Trent Bond Investor Presentation October 2012
Slide 2: Agenda
Agenda • Severn Trent investment case 3 • Group structure and overview 4 • Update • Financial results and outlook 7 • Balance sheet and funding 14 • Regulatory change & planning for PR14 19 • Drought and water trading 21 • Private drains and sewers 24 • Appendix 27 2
Slide 3: Severn Trent Investment Case
Severn Trent Investment Case A focused water company: • Sustainable, efficient, long term investments • Regulated, inflation linked assets and income • Operational excellence • Efficient financing Exposure to unregulated markets via ST Services Water sector facing change • But evolutionary, not revo
Slide 4: Group Structure
Group Structure Group Market Cap £3.9bn Enterprise Value £8.0bn Turnover £1,771m PBIT* £504m Regulated (“STW”) Unregulated (“STS”) Turnover £1,458m Turnover £332m PBIT* £500m PBIT* £18m Assets £7,089m (RCV) Year ended 31 March 2012. Other smaller activities not presented i.e. excludes Corporate and
Slide 5: Severn Trent Water - Overview
Severn Trent Water - Overview • Severn Trent Water is one of the largest of the 10 Water and Sewerage Companies in England and Wales • We cover an area of 21,000km2 and: Northumbrian ― supply water to c.7m people and sewerage services to c. 8m people United Yorkshire ― supply 1.8bn litres water per
Slide 6: Focus on water - non-regulated
Focus on water - non-regulated • Severn Trent Services - global water technologies and services business • Products • Disinfection • Filtration • BALPURE® • Operating Services ‒ UK& Ireland – non-regulated activities ‒ US municipal contracts • Headquartered in Fort Washington, PA, USA • Global workf
Slide 7: Highlights
Highlights Change 2010/11 2011/12 % Group turnover (£m) 1,711.3 1,770.6 3.5 Profit before interest and tax (PBIT1) (£m) 519.1 504.2 (2.9) Profit before tax (PBT2) (£m) 288.6 275.4 (4.6) Adjusted basic EPS3 (pence) 105.6 88.9 (15.8) Basic EPS (pence) 115.2 72.5 (37.1) Total ordinary dividend per shar
Slide 8: Severn Trent Water turnover
Severn Trent Water turnover Severn Trent Water Turnover* 2011/12 £m 67.7 +4.9% 73.1 1,457.5 4.9 0.2 1,389.8 8 * Business segment turnover is stated gross (i.e. including inter segment trading)
Slide 9: Severn Trent Water PBIT
Severn Trent Water PBIT Severn Trent Water PBIT* 2011/12 £m 67.7 (4.2) (36.1) -0.7% 3.3 (13.5) 1.7 (32.0) 503.7 16.9 500.0 (7.5) 9 * Numbers shown before exceptional items
Slide 10: Exceptional items
Exceptional items £m 2010/11 2011/12 Severn Trent Water 13.0 (10.3) Severn Trent Services 4.5 44.7 Corporate and other 3.9 - Total exceptional operating costs 21.4 34.4 Exceptional finance costs – 16.5 Total exceptional items 21.4 50.9 10
Slide 11: Cash flow
Cash flow £m 725.9 (351.2) 374.7 (210.4) (72.0) (159.0) 2.4 (1.0) (65.3) (33.7) (99.0) 11
Slide 12: Interim Management Statement July 2012
Interim Management Statement July 2012 Trading in line with expectations Severn Trent Water • Opex in line with level of final determination • Bad debt forecast to remain broadly stable at 2.2% • Capex £570m-£590m range; IRE £140m-£150m Severn Trent Services • Low single digit revenue growth; PBIT i
Slide 13: Outlook for AMP5 - STW
Outlook for AMP5 - STW • Remain confident we can meet regulatory settlement – Continuing to drive performance improvements. Operating costs below level of final determination in first two years – Power – years 1-4 fully hedged, saving of c. £30m vs. final determination & renewables growing (natural
Slide 14: Balance Sheet
Balance Sheet • Strong and flexible balance sheet ‒ Net debt/RCV 56.0% ‒ Consistent with strong investment grade credit rating • Severn Trent Water – additional £150m capital investment ‒ Improved customer service and network performance • Return to shareholders paid - £150m • Funding requirement in
Slide 15: Group net debt and finance charges
Group net debt and finance charges Net debt* Finance charge £m 3,968 £m 3,869 230.6 229.0*** 49.2 53.6 Index linked 1,104 1,158 RPI rolled up 'Cash' interest*** Net pension debit/(credit) 176.2 178.4 178.4 Nominal 3,080 3,105 5.2 (3.0) 315 295 Cash (3.0) 31 March 2011 31 March 2012 2010/11 2011/12 •
Slide 16: Debt maturity profile
Debt maturity profile 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 Debt repayment Debt repaid in 2012 Debt issued in 2012 Average debt maturity of 16 years 16
Slide 17: Credit ratings
Credit ratings 31 March 2012 Long-Term Severn Trent Water Severn Trent Plc Moody’s A3 Baa1 Standard & Poor’s BBB+ BBB- Short-Term Severn Trent Water Severn Trent Plc Moody’s P2 P2 Standard & Poor’s A2 A3 Moody’s – long term rating is stable Standard & Poor’s – long term rating is stable 17
Slide 18: Retail bonds a new and alternative approach
Retail bonds a new and alternative approach • Bond available to retail investors – individuals, private Source of Retail Bond orders wealth investors, fund managers • Distributed via stock brokers to: Authorised Distributors Fund ‒ Discretionary fund managers managers Others ‒ ISA, pension investors
Slide 19: Ofwat consultations and White Paper
Ofwat consultations and White Paper • Involving customers in price setting – Ofwat’s customer engagement policy statement (August 2011) www.ofwat.gov.uk/content?id=0a559eee-6048-11e0-85fb-9366962d43d0 • Regulatory Compliance – a proportionate and targeted approach (October 2011) www.ofwat.gov.uk/con
Slide 20: Planning for PR14
Planning for PR14 Now in Phase 2, building Draft Plan for consultation 2011 2012 2013 2014 2015 JAS OND J FM AMJ JAS OND J FM AMJ JAS OND J FM AMJ JAS OND J FM STW 1. Shaping the 2. Shaping the 3. Balancing 4. Assessment 5. Final Plan consultation plan the plan and Challenge Decision Ofwat PR14 Draf
Slide 21: Water Trading
Water Trading The issue Abstraction levels Resource zones for water companies Deficit in England & Wales More than 25% below the natural flow. No further licences should Average Incremental Social be granted. and environmental Cost, rounded up to next 20 (p/m3) More water than Surplus required to me
Slide 22: Drought and water trading
Drought and water trading Two exceptionally dry winters, but no Monthly rainfall versus average hosepipe ban Lowest level of leakage (464 Ml/d) We have not had any hosepipe bans in the last 15 years – last one 1997 • Anglian proposal: Yorkshire ‒ Pumping 30 Ml/d from 5 “drought boreholes” in ‒ Birmi
Slide 23: Our response
Our response We benefit from the ability to move water from North West to South East Possible ‘Grid’ Derwent Extensions Valley Aqueduct Water Elan ‘Grid’ Valley Aqueduct We will continue to develop our grid during AMP6 23
Slide 24: Private Drains and Sewers (PDaS)
Private Drains and Sewers (PDaS) Progress • Successful operation of PDaS assets following transfer on October 1st • To end of March, volume growth lower than expectations ‒ Customer awareness lower than anticipated but showing steady growth ‒ Capital investment will ramp up – initial focus on unders
Slide 25: Contact details
Contact details John Crosse, Head of Investor Relations Key Publications M: +44 (0) 7775 226260 Water Trading e:mail: john.crosse@severntrent.co.uk www.stwater.co.uk/watertrading Changing Course www.stwater.co.uk/changingcourse Gerard Tyler, Group Treasurer M: +44 (0) 7824 623941 e:mail: gerard.tyle
Slide 26: Disclaimers
Disclaimers This presentation contains certain “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
Slide 27: Appendix
Appendix 27
Slide 28: The UK water industry
The UK water industry • Water Companies privatised in 1989 – licences cannot be terminated until 2014 (i.e. 25 yrs after privatisation) and only then with 25 yrs notice • Investment led industry – capital investment is added to the RCV (Regulated Capital Value) • Economic returns allowed on RCV thro
Slide 29: Regulated Capital Value (RCV)
Regulated Capital Value (RCV) • RCV is the value of the capital base of the Company used by Ofwat for setting price limits • RCV is widely used as a proxy for the enterprise value • RCV is adjusted by inflation (RPI) each year Represents the Depreciation current cost value of the capital base Curren
Slide 30: COPI Adjustment to RCV
COPI Adjustment to RCV Ofwat’s model COPI – Construction Output Prices Index • In the Final Determination (FD), Ofwat’s allowed capex spend is stated at 2007/08 prices • This capex spend therefore needs to be inflated to nominal (outturn) prices before being added to RCV, to arrive at forecast RCV a
Slide 31: Cost Of Capital (net of tax - 'real')
Cost Of Capital (net of tax - ‘real’) How the regulated return is derived – AMP4 vs. AMP 5 Pre-tax = 4.3% Pre-tax = 3.6% Nominal cost = 6.8% Cost of Nominal cost = 6.2% Cost of Inflation = (2.5%) Inflation = (2.5%) Risk free rate = 3.0% Debt Debt 3% Risk free rate = 2.0% Debt premium = 1.3% 2.6% Deb
Slide 32: How is Severn Trent Water profit made up?
How is Severn Trent Water profit made up? Illustrative • Ofwat is obliged to ensure water companies can fund themselves • Ofwat sets prices set over a 5 year cycle (current 2010/11 to 2014/15) in real terms, as below: Allowed Partially mandated by Determined by Environments Agency, drinking OFWAT pr
Slide 33: Our customers
Our customers We have 3.6m customers with active accounts (c.8 million people) Domestic Commercial • 3.3 million • 250,000 all billed via meters • 1.1 million billed on a meter (33%) • 2.2 million billed based on • their property (67%) Per capita consumption (average weighted – excluding s/pipe leak
Slide 34: Key Performance Indicators
Key Performance Indicators Track record over 5 years - highlights Customer Written Complaints per Sewer flooding - other causes per 1,000 properties 1,000 properties 20 0.22 16 0.2 Good Good 0.18 12 0.16 8 0.14 4 0.12 0 0.1 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 First Time job r
Slide 35: Operational expenditure
Operational expenditure 5 year view Manpower Hired & Contracted Net other controllable Non controllable £600 5 year RPI £500 +14% +22% Non controllable Non controllable 33.8% £400 31.8% £300 +22% £200 Controllable Controllable 68.2% 66.2% £100 -1% £0 2007/08 2011/12 • Controllable costs risen by onl
Slide 36: Areas of focus – Productivity
Areas of focus – Productivity Example Leakage • Delivered productivity Repair productivity 2011/12 improvements in finding Repairs / Gang / Day and fixing leaks • 2 Good Repair productivity approaching target levels • Also innovating with leakage detection on plastic pipes and 0 April 2011 October 2
Slide 37: Areas of focus going forward
Areas of focus going forward Serviceability Serviceability 2008/09 2009/10 2010/11 2011/12e Water below ground Stable Marginal Marginal Marginal focus area Water above ground Stable Stable Stable Stable Waste below ground Stable Stable Stable Stable Waste above ground Stable Stable Stable Stable
Slide 38: Capital Investment Programme
Capital Investment Programme Additional £150m over the remainder of AMP5 to deliver stable serviceability • Reducing unplanned interruptions • Improving performance of water treatment works • Reducing pollution incidents Targeted section of trunk main • Reducing number of sewage renewal treatment wo
Slide 39: Private Drains and Sewers (PDaS)
Private Drains and Sewers (PDaS) Overview Pre 1 October 2011 Post 1 October 2011 • Home owners are responsible for • All sewers transfer everything up to the main sewer, • All laterals and drains outside property including the connection boundaries transfer - BUT • Home owners are still responsible
Slide 40: Severn Trent Water – RCV
Severn Trent Water – RCV £m 2010/11 2011/12 2012/13 2013/14 2014/15 Per Determination* 6,216 6,244 6,280 6,341 6,385 Actual / Estimated 6,814 7,089 7,267 7,523 7,786 Outturn** Ofwat Actual/Projected 6,814 7,089 7,130 7,199 7,249 Outturn*** * 2007/08 prices 40 ** At year-end actual/estimated prices *
Slide 41: Net finance costs
Net finance costs Year ended 31 March 2012 41
Slide 42: Net debt
Net debt At 31 March 2012 Movement 2010/11 2011/12 in the period £m £m £m 315.2 Cash and cash equivalents 295.1 (20.1) (23.9) Borrowings - current liabilities (89.3) (65.4) (4,320.5) Borrowings - non-current liabilities (4,309.5) 11.0 160.4 Cross currency swaps hedging debt 135.9 (24.5) (3,868.8) Ne
Slide 43: Fair value of net debt
Fair value of net debt At 31 March 2012 43
Slide 44: Analysis of borrowings, net debt and swaps
Analysis of borrowings, net debt and swaps At 31 March 2012 4,579 170 4,399 (136) 121 (295) 3,968 801 3,477 Borrowings X-Currency Cash Net debt per Net debt at IR swaps swaps balance sheet fair value GBP Debt Currency debt @ historical rate Exchange adjustment 44
Slide 45: What are the risks?
What are the risks? • Economy ‒ double dip recession, increasing unemployment, rising bad debt – we have improved collection of debt less than 12 months (>12 months more difficult) – focus on customer payment plans • Inflation – negative inflation harmful to the business model (lower revenue, RCV fa
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