Severn Trent has issued a trading update for the period to 23 January 2025, together with its acceptance of Severn Trent Water's PR24 final determination (FD) and AMP8 dividend policy.
It confirmed that financial performance for the year remains on track and that management expects the company to perform in line with guidance, which includes delivering a net Outcome Delivery Incentive (ODI) reward in the year of over £100m before customer sharing, in 2017/18 prices. This brings its total net ODI reward in AMP7 to around £420m in nominal prices (post-customer sharing).
It also announced that, following a detailed review and consideration of a broad range of stakeholders, including customers, colleagues and investors, the board of Severn Trent Water has accepted the PR24 FD. Management confirmed that the group’s totex allowance of £14.9bn will generate real Regulatory Capital Value (RCV) growth of 45%.
Having reviewed the FD alongside current performance, the board announced the dividend policy for AMP8; dividends will grow in line with CPIH inflation. Based on the full year 2024/25 dividend of 121.71p, as guided, the dividend for FY25/26 is anticipated to be 126.02p, using November 2024 CPIH.
Severn Trent raised £1.25bn of equity between 2021 and 2023 on the expectation by shareholders of long term RCV growth, stable dividends growing at least in line with inflation and an appropriate base allowed return with scope for regulatory outperformance.
Ofwat set out its new equity and dividend assumptions for 2025-2030 at the FD for all water utilities (not holding companies), noting that its calculations imply a 4% dividend yield. It did clarify that: “Our approach is to include an equity injection to return gearing to 55% in our financial model in any year where notional gearing exceeds 57.5%.”
Given that many boards in the sector assume that their operating company remains financeable at higher levels of gearing, this is a conservative assumption. Ofwat assumed Severn Trent would need £1,863m of new equity for AMP8 on this basis and would pay out £1,595m from the operating company in dividends. Severn Trent management has repeatedly pointed out that its group dividend policy is also underpinned by non-regulated earnings.
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