Severn Trent confident of £300m outperformance rewards in AMP8

Severn Trent held a Capital Markets Day on 5 March at which it announced that it was confident of generating £300m of outperformance against regulatory targets in AMP8 (2025-2030). This includes £50m of rewards from Price Control Deliverables (PCDs) which will be delivered later in the price control period, and £250m of Outcome Delivery Incentives (ODIs).

The £450m of transition spend, funded by Severn Trent’s 2023 equity raise, has allowed management to accelerate improvements. It confirmed that, as a result of this, £25m of ODI rewards would be earned in the first year of the price control period, to March 2026.

Severn Trent also confirmed that, not only would it deliver c45% real Regulatory Capital Value (RCV) growth (including agreed transition spend) in AMP8, but that management believes that investment needs would lead to a further c20% average RCV growth over the next 25 years.

Severn Trent is confident that it will outperform its regulatory targets through efficiencies generated by: the use of AI as a tool for improved asset performance; the insourcing and maintenance of expertise and best practice through recruitment of an additional 5,000 staff; the adoption of the Kraken billing system (used by Octopus Energy and others) to improve customer satisfaction metrics; and accelerated spend through ‘Plug and Play’ standardisation that can be quickly deployed.

Some analysts were disappointed that the guidance was lower than the £420m of ODI outperformance achieved during AMP7 and that there was no indication in the announcement of any prospective totex or financing efficiencies. Shares have traded down 2% since the announcement.

Management defended the limited guidance, given the new regulatory period only starts in April. However the pricing and demand for its recent Eurobond issue seem to suggest that it may be able to issue new debt more cheaply than regulatory allowances.