Severn Trent: FDs “look fair” on first reading

Severn Trent’s chief executive Liv Garfield told analysts on a conference call on 20 December that on first reading, the final determinations “look fair”.

Ofwat has approved £14.9bn of totex for the company, an increase of £3.1bn from the draft determination (95% of the amount requested), and around twice as much as was approved in PR19. The uplift included £1.2bn of base cost increases; £0.7bn of enhancement spend that was reinstated by Ofwat following representations; and £1.2bn of additional investment.

Severn Trent expects to generate real Regulatory Capital Value (RCV) growth of 45% across the AMP, which would take its AMP8 closing RCV to around £17.2bn in 2022/23 prices.

The company will benefit from an additional 30bps reward for creating an ‘outstanding’ business plan above the allowed cost of capital of 4.03%.

In terms of Outcome Delivery Incentives (ODIs), management concluded that Ofwat was now offering a more balanced package of targets. Key measures that were positively modified included: external sewer flooding, greenhouse gas emissions, pollutions targets and discharge permit compliance. Severn Trent concluded that ODI targets, deadbands and incentive rates had all evolved positively and also confirmed that Ofwat had allowed its bespoke capital carbon ODI. The company received c£380m of additional cashflow allowances for energy and business rates. These increased cashflows, the improvement in allowed return to 4.16%, the 2% increase in RCV growth and the equity issuance in AMP7 all combine to reduce the need for additional financial levers.

Analysts asked about the energy price true-up mechanism and its benefits, especially given Severn Trent has invested in renewable energy. They also sought clarification of cost sharing rates, the benefit of transitional spend in AMP7 and the possibility of more Green Recovery in AMP8.

Severn Trent confirmed that its board would consider the FDs for both the main company and Hafren Dyfrdwy in January, so Garfield was unable to confirm any decision at this first reading. The company will also hold a Capital Markets Day on 5 March.

The ODIs will be challenging, and there is a lower likelihood of outperformance in the first year of the AMP given the ramping up required.

Severn Trent’s share price has increased 2.38% over the last six months.