Severn Trent Plc · LSE:SVT
Severn Trent — Non-Deal Roadshow (November 2018)
61 slides from Severn Trent's roadshow presentation, November 2018
Slide 1: Investor Roadshow
INVESTOR ROADSHOW y * a
Slide 2: Disclaimers
DISCLAIMERS 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 object
Slide 3: Contact Details
CONTACT DETAILS Richard Eadie Head of Investor Relations richard.eadie@severntrent.co.uk +44 (0) 7889 806578 Rachel Martin Coventry Head office Investor Relations Manager rachel-f.martin@severntrent.co.uk +44 (0) 7824 624 011 London Vicky Owens Investor Relations Analyst victoria.owens@severntrent.c
Slide 4: Contents
CONTENTS 1. Our Equity Story 2. AMP7 Business Plan 3. From AMP6 to AMP7 4. Half year 18/19 results 5. Regulatory Model
Slide 5: Our Equity Story
OUR EQUITY STORY
Slide 6: The Water Sector in England and Wales
THE WATER SECTOR IN ENGLAND AND WALES Listed companies: Inflation-linked regulatory model - Severn Trent offering attractive dividend yields - United Utilities - Pennon (SW Water) Value accretion through a growing asset base (RCV(1)) with long-term investments in essential assets One of the best reg
Slide 7: Key Value Drivers
KEY VALUE DRIVERS Non-regulated Visible, / competitive inflation-linked yield Attractive Well positioned to Property RCV growth and sales continue to deliver total return enhanced returns to shareholders Totex Financing efficiency Customer ODIs
Slide 8: Attractive Long Term Returns
ATTRACTIVE LONG TERM RETURNS Severn Trent offers an appealing combined return: High near-term dividend yield, reflecting strong AMP6(1) performance Continued need for investment growth in AMP7 (1) and beyond Underpinned by a stable, independent, incentive-based regulatory regime Additional ret
Slide 9: Track Record of Delivering Returns for Shareholders
TRACK RECORD OF DELIVERING RETURNS FOR SHAREHOLDERS RPI linked dividend growth with additional capital return Ordinary dividend CAGR of 4.4%(2) Dividend per share, pence 227 133 127 Special dividend Share repurchase(1) 165 63 47 Dividend promise of 85 87 93 at least 72 76 80 81 82 RPI+4% 62 66 67 65
Slide 10: Our Strategy
OUR STRATEGY Our vision is to be the most trusted water company by 2020: delivering an outstanding customer experience, the best value service and environmental leadership Upper Derwent Valley Reservoir Lowest bills in 4* EPA Most trusted in Upper Quartile England & performance England1 UKCSI positi
Slide 11: Our Purpose
OUR PURPOSE To serve our communities and build a lasting water legacy Creating value through purpose… ….in a sustainable way Customers Customer Employee Investor Colleagues Investors A PR19 plan packed with initiatives to engage and inspire the Communities we serve
Slide 12: Customer
CUSTOMER What our customers said they wanted from us > > O/_ ofemployees » ( 40% ser, improve local communiti : ty Customer panel with re Weituse 1% {C5000 customers €3,5m tax rnd Improved customer . of profits for a providing instant donations annually. 2.62 engagement company new community feedbac
Slide 13: Colleague
97% retention rates 4.Bea onall company that apprentices we're and graduates inspired to work for 70% of leaders trained in mental health, and over 400 mental health 3. Do more to support our first aider lab development and ‘ene wellbeing Employee engagement which is an amazing 7% points ahead of UK
Slide 14: Investor
») ‘ ead Positively contributing to 11 of 17 of the UN Sustainable Held the Carbon Trust standard since 2009 in recognition INVESTOR Ambition to self-generate over = Development Goals of our ongoing (1) carbon reduction (1) 4 Bea FTSE4Good company that FTSE4Good status Only utility company to be sel
Slide 15: Business Services
BUSINESS SERVICES Property Development Non-Regulated Bioresources Regulated Developments in technology frees up surplus land Activities relating to treatment of sludge and energy which can be developed and sold generation from sludge Experienced team to manage portfolio Market opens to compe
Slide 16: Renationalisation Sentiment
RENATIONALISATION SENTIMENT The debate is far from over, but there is a growing body of research and opinion on the challenges of renationalisation The sector has a strong defence through its Publication of reports in 2018 has raised achievements since privatisation important issues in the debate
Slide 17: AMP7 Business Plan
AMP7 BUSINESS PLAN
Slide 18: Our AMP7 Business Plan
OUR AMP7 BUSINESS PLAN 31 Jan Ofwat initial assessment
Slide 19: PR19 Highlights
PR19 HIGHLIGHTS A robust, ambitious and balanced plan Largest bill reduction in two Challenging ourselves on Totex Continued strong growth in our decades RCV A real reduction of 5% in Total spend of £6.6bn, Growth of 13.6% CPIH prices reflecting 13% efficiency in nominal prices Backing ourselves on
Slide 20: The Shape of Our Plan
THE SHAPE OF OUR PLAN A plan built through the eyes of our customers The nine Ofwat ‘IAP’ tests: Our plan contains: Engaging Affordability & Securing long Nine customer outcome chapters (Part 3) Customers Vulnerability term resilience Key additional chapters to also address the nine Ofwat IAP tests,
Slide 21: Customer Bills
CUSTOMER BILLS Our Principles Applying a CPIH-based approach from 2020 Each generation of customers should pay its fair share Bills should be stable over time, where possible, avoiding big fluctuations Balancing debt interest costs paid by We should be able to maintain a stable, low cost fundi
Slide 22: Revenue Summary
REVENUE SUMMARY All figures in £m at 17/18 prices 2020-21 2021-22 2022-23 2023-24 2024-25 Pay as you go 679.2 697.6 691.9 683.6 688.8 Pension deficit repair contributions 9.8 9.8 9.8 9.8 9.8 RCV run-off 469.6 478.0 480.8 477.4 470.3 Return on RCV 253.4 257.2 262.6 267.8 271.3 Tax 17.3 16.7 16.7 16.9
Slide 23: Totex
TOTEX Our plan includes £6.6bn of totex – reflecting efficiency of 13% Total Totex: £6.6bn Key enhancement schemes include: Enhancement expenditure Environmental programme Resilience £1.7bn £0.46bn £0.14bn Maintenance expenditure £4.9bn Supply demand balance Sewer flooding £0.30bn £0.14bn Residentia
Slide 24: RCV Growth
RCV GROWTH Investment in our business generating RCV growth of 13.6% RCV growth in nominal prices(1) £m 10,669 10,439 10,128 9,814 9,389 9,533 7,683 2015 2020 (2) 2021 2022 2023 2024 2025 Growth of: RCV run off increased so that 50/50 indexation of opening All new additions will be - 13.6% nominal R
Slide 25: Customer ODIs
CUSTOMER ODIS +2.6% 41 Performance Commitments 33 Financial incentives 8 Reputational incentives 3 11 19 5 3 Compa rative Common Bes poke Common Bes poke Measured on: Measured on: UQ Company performance RoRE range We have chosen to apply for enhanced rates on two comparative ODIs Pollution incidents
Slide 26: Customer ODIs
CUSTOMER ODIS Comparative ODIs Bespoke ODIs **Internal sewer flooding (enhanced) External sewer flooding **Pollutions (enhanced) Public sewer flooding Blockages Supply interruptions Farming for Water Protecting schools from lead Common ODIs Persistent low pressure Resolution of l
Slide 27: Financing
FINANCING Maintaining a stable and low cost funding platform 63.6% Gearing average 2020-25 (1) Starting AMP7 with a balanced debt portfolio and gearing at the current notional level Average gearing of 63.6% - well below the trigger for sharing financing outperformance of 70% £1.2bn We have app
Slide 28: Dividends
DIVIDENDS Our dividend policy core principles Group dividend policy to be announced in early 2020 Components of our Group dividend will include: Dividends will be fair and balanced • A base regulatory dividend of 5% in line with Ofwat guidance from Severn Trent Water Dividends will be transparen
Slide 29: Our Welsh Business Hafren Dyfrdwy
OUR WELSH BUSINESS HAFREN DYFRDWY Serving future Welsh generations through low bills, better service and a healthier environment The lowest bills in Wales despite a small annual increase of 0.5% above inflation Total totex of £156m including £19m on dams and treated water reservoirs Proposed RoRE ra
Slide 30: Timetable
TIMETABLE Upcoming key dates 12 Dec 2018 Ofwat publishes decision on customer ODI uncapping application 31 January 2019 Ofwat publishes initial assessment of business plans March/April 2019 Draft determinations published for exceptional and fast track plans July 2019 Draft determinations published f
Slide 31: From AMP6 to AMP7
FROM AMP6 TO AMP7
Slide 32: AMP6 Performance
AMP6 PERFORMANCE Sector leading performance in AMP6 providing a strong platform for AMP7 Driving 160 bps Lowest bills efficiency to £870m reduction in finance in England and Wales – keep bills low totex efficiencies costs now and for the future Delivering for UQ customer service2 4* EPA status custo
Slide 33: Return on Regulated Equity (RoRE)
RETURN ON REGULATED EQUITY (RORE)(1) Note: RoRE is a full year measure 11.5% For 2017/18, our highest RoRE to date 9.3% AMP6 cumulative RoRE 6.3% Sector average RoRE for years 1&2 of AMP6 RoRE 6.3% 10.0% 11.5% CUSTOMER ODIs 2.3% £80m of ODI reward from strong Out- performance in most key metrics 0
Slide 34: AMP6 Totex Efficiencies
AMP6 TOTEX EFFICIENCIES How have we unlocked totex £870m of totex efficiencies achieved this AMP efficiencies? £410m £460m Some examples… We committed to deliver in Outperformance, shared between We worked across the supply chain to our PR14 plan us and our customers continue to reduce overheads
Slide 35: £100m of Additional Reinvestment
£100M OF ADDITIONAL REINVESTMENT ROBOTIC PROCESS AUTOMATION, INTELLIGENT ADVANCED ANALYTICS AND DECISION USING PROCESSING AND DIGITAL ASSISTANTS MANAGEMENT OUR Automate repetitive and transactional tasks and introduce digital assistants facilitating fast end Building our capability to use the power
Slide 36: Financing
FINANCING Actions taken to balance our debt portfolio since 2015 have driven reductions in our effective interest rate and place us in a strong position going into AMP7 Gross debt mix Effective interest rates £4,753m 31 March 2015 30 Sept 2018 £5,503m 26% Index- 26% 5.4% Effective interest rate 3.8%
Slide 37: Bioresources: Getting Ready for Competition
BIORESOURCES GETTING READY FOR COMPETITION Moved Bioresources business into Business Services, effective from 1 April 2018 Early actions taken to ready ourselves for competition: - Created regional treatment hubs - six regions to deliver optimised treatment routes - Streamlined logistics - rationali
Slide 38: H1 18/19 Results
H1 18/19 RESULTS
Slide 39: H1 2018/19 in Summary
H1 2018/19 IN SUMMARY PR19 Investment Financing On track for our 76.2p Submitted a high Improved position biggest capex Underlying EPS quality plan we are through diverse spend of the + 16.3% proud of sources decade Resilience Green Power Pathfinder Managed increased 37.35p Enhancing our A company w
Slide 40: Embed Customers at the Heart of All We Do
EMBED CUSTOMERS AT THE HEART OF ALL WE DO PR19: A plan Set to have the lowest bills in England and Wales until at least 2025 built on our customers Ongoing engagement through Tap Chat – an online community needs of 15,000 of our customers In a strong Upper quartile among utilities in the position fo
Slide 41: Progressing in Water
PROGRESSING IN WATER Catchment Management ODI Further reductions in water quality complaints On track to deliver 6% reduction this year -12% -6% On track to hit target by the end of AMP6 Measured by CRI in AMP7 – ambition to halve our score by end of AMP6 2016 Actual 2017 Actual 2018 Forecast Impr
Slide 42: Weather Resilience
WEATHER RESILIENCE Preparation enabled us to deliver more for our customers We saw a 22% increase Remain on track to in demand for water – halve supply the equivalent of an interruptions additional 400ML/d at year-on-year its peak Hot weather cost We entered the £10m in first half, summer well prepa
Slide 43: Excelling in Waste
EXCELLING IN WASTE Our catchment approach to waste water …And waste performance will be even has set us apart in AMP6… more important in AMP7 Invest React Largest RoRE Enhanced ODIs: New and range on internal sewer Bespoke ODIs for customer ODIs flooding & pollutions AMP7 Frontier cost efficiency in
Slide 44: Awesome Place to Work
AWESOME PLACE TO WORK Supporting our colleagues how and when they need it most Top 20 employer and Trained over 70% of only water company in people managers in the Social Mobility mental health Index awareness ‘Blazing a trail’ on Top utility and 4th menopause awareness overall in Hampton- and shari
Slide 45: H1 2018/19 Financial Highlights
H1 2018/19 FINANCIAL HIGHLIGHTS Good results – on track to deliver in line with expectations Turnover1 Underlying PBIT1,2 Effective interest rate £881.5m £299.1m 3.8% +3.6% +4.3% down 70 basis points Property Development Underlying basic EPS1,3 Interim dividend £18.4m 76.2 pence 37.35 pence profit f
Slide 46: Regulated Water and Waste Water
REGULATED WATER AND WASTE WATER Up 4% driven by RPI-linked price increases in Severn Trent Water and Hafren Dyfrdwy (£27.9m) Turnover Revenue uplift from 2016/17 customer ODI rewards (£8.2m) partially offset by WRFIM¹ £823m adjustment for the same period (-£5.4m); other items have a net increase
Slide 47: Regulated Water and Waste Water
REGULATED WATER AND WASTE WATER Underlying PBIT Broadly flat, with turnover up 4%, offset by an increase in net operating costs Largely driven by the costs of hot weather experienced over summer (£10.1m), higher £279m depreciation (£8.4m), and anticipated cost pressures £m 32.6 (10.5) (5.3) (5.0)
Slide 48: Business Services
BUSINESS SERVICES An exciting year in our non-regulated business £18 million1 profit from sale of land near Nottingham; enabling 830 homes to be built Acquisition of Agrivert for £120 million near completion, adding 106 GWh of generation Results on old segmental basis2 Lower MOD activity reduc
Slide 49: Group Cash Flow and Net Debt
GROUP CASH FLOW AND NET DEBT Net debt Increase in net debt of £62m following an increase in net capital expenditure to £340m – on £5,419m track to deliver our biggest annual capital spend in a decade £m 5,356.6 (489.2) 75.9 21.3 5,418.5 122.9 (9.1) 340.1 Opening net debt Cash generated from Net capi
Slide 50: Financing Performance
FINANCING PERFORMANCE Financing strategy drives further reduction in interest cost Finance costs1 3.8% Effective interest rate2 Down 70 basis points from 2017/18 16% £110.5m 3.1% Effective cash interest cost3 £93.1m Down 50 basis points from 2017/18 RPI rolled up £23.6m 24% £18.0m Net pension £7.5m
Slide 51: A Balanced Debt Portfolio
A BALANCED DEBT PORTFOLIO Preparing for AMP7 with a strong balance sheet and a diversified, low cost debt portfolio Index-linked Sourcing low Raised £323m1 in USPP at low cost fixed rates 26% cost debt Liquidity to early 2021 £1,465m Fixed Gross Debt 47% Managing Balanced portfolio, taking adv
Slide 52: Debt Maturity at 30 September 2018
200 300 500 600 100 400 700 0 2019 AMP6 2020 2021 2022 2023 AMP7 2024 2025 2026 2027 Based on carrying value of debt at 30 September 2018 2028 2029 2030 2031 2032 AMP8 and beyond 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 USPP 2018 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2
Slide 53: Gearing & Credit Ratings at 30 September 2018
GEARING & CREDIT RATINGS AT 30 SEPTEMBER 2018 30 September 2017 31 March 2018 Net Debt/RCV⁽¹⁾ 30 September 2018 59.2% 60.6% Severn Trent Group (2) 59.6% 59.8% 60.8% Severn Trent Water Group(3) 59.0% 31 March 2018 30 September 2018 Severn Trent Water Severn Trent Plc Severn Trent Water Severn Trent P
Slide 54: FY18/19 Technical Guidance
FY18/19 TECHNICAL GUIDANCE Guidance in bold has been revised since the last trading update. Please note that all technical guidance is presented under t he old segmental basis for comparative purposes. FY17/18 Regulated Water and Waste Water Year-on-Year (restated) Turnover £1.62 billion to £1.65 bi
Slide 55: Regulatory Model
REGULATORY MODEL
Slide 56: Price Control Evolution into AMP7
PRICE CONTROL EVOLUTION INTO AMP7 One price control Privatisation to PR09 Wholesale water, waste, household and non-household Wholesale controls Retail controls PR14: Non- Water Waste Water Household Household Four controls Collection, treatment, Resources, treatment, distribution Billing, contact B
Slide 57: Calculating Allowed Prices
CALCULATING ALLOWED PRICES In real terms 2015-2020 Totex “Slow money” RCV (total expenditure) (1 – PAYG rate applied to “Fast money” totex spend) PAYG rate (58.6% average for AMP6) applied to totex spend Customer Return on RCV run-off PAYG Tax Interest ODIs equity RCV (depreciation) Allowed wholesal
Slide 58: Regulatory Capital Value (RCV)
REGULATORY CAPITAL VALUE (RCV) Represents the current cost value of the capital base of each company Inflation RCV run-off (depreciation) Opening Totex Closing RCV x RCV (1 – PAYG rate) April Capital grants March = Value added to RCV INVESTMENT
Slide 59: Real Cost of Capital: AMP7 vs AMP6
REAL COST OF CAPITAL AMP7 VS AMP6 (Provisional and subject to change. To be finalised by Ofwat in 2019) Cost of Risk free rate = -0.88% Cost of Risk free rate = 1.25% Debt Debt premium = 2.21% Debt Debt premium = 1.35% 1.3% 2.6% AMP 6 AMP 7 Vanilla Weighted Vanilla Weighted Gearing(1) Gearing(1) Ave
Slide 60: The Growing Importance of Incentives
THE GROWING IMPORTANCE OF INCENTIVES There has been a shift in the proportion of company returns that come from the base allowed return Companies must focus on outperforming on incentive mechanisms to deliver attractive returns At PR14, Ofwat changed the balance of risk and reward in the price
Slide 61: Property Sales Customer Sharing Mechanism
PROPERTY SALES CUSTOMER SHARING MECHANISM Under our licence conditions, we share regulated property disposal proceeds with Severn Trent customers There is a well-established mechanism to do this Surplus land in the regulated business is either: 1. Sold directly to a third party The terms of sale