SEVERN TRENT INVESTOR ROADSHOW. New pipeline from Lickhill on the River Severn to Frankley water treatment works

Transcription

1 SEVERN TRENT INVESTOR ROADSHOW New pipeline from Lickhill on the River Severn to Frankley water treatment works

2 INVESTMENT CASE THE WATER SECTOR Inflation-linked regulatory model offering attractive dividend yields Value accretion through a growing asset base with long-term investments in essential assets Trusted regulatory environment providing excellent visibility to companies and investors Effective incentive mechanisms to drive strong operational performance Emerging commercial opportunities through greater competition Clywedog Reservoir near Llanidloes, Wales 2

3 THE WATER SECTOR IN ENGLAND AND WALES Listed companies: - Severn Trent - United Utilities - Pennon (SW Water) Key sector regulators: Our economic regulator, Ofwat, sets the prices charged in each regulatory period, ensuring that we perform our functions properly and that company plans are financeable The drinking water quality regulator - ensures we comply with water-quality regulations The environmental regulator - controlling water abstraction, river pollution and flooding Source: Ofwat Severn Trent Water & Waste Water companies Water only companies 3

4 Operational Regulatory INVESTMENT CASE SEVERN TRENT Capital structure A leading business with an upper quartile ambition: - Waste: remaining in the top 2 (out of 10 companies) from pole position in AMP 5 - Water: moving from 11 th to at least 4 th (of 18 companies) by end of AMP6 Top performer in 2015/16 on customer ODIs Lowest combined average bills Retail Strong voice in driving change and innovation Leading position in a world of incentivisation Well placed for competitive water and bioresource markets Significant RCV growth potential Management Significant progress made in AMP6 to reduce cost of debt and diversify funding Close to notional capital structure of 62.5% Less exposed to change to CPIH indexation than many peers Technology Already moved from 6th position in AMP 5 to 4th (of 18 companies) and ambition beyond WaterPlus JV progressing well in nonhousehold market Material market share in household Improving bad debt performance Expertise and experience in a broad range of sectors Delayered organisation with universal alignment of incentives Proven ability to drive business transformation and deliver significant successes At the forefront of adopting new technology and best practice Value creating digital strategy focused on improving, cost efficiencies and workforce productivity (e.g. apps, predictive maintenance, energy management) Customers at the heart of everything we do 4

5 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 5

6 2016/17 HIGHLIGHTS Group turnover (1) 1,819.2m +3.7% Customer ODI reward (3) 47.6m Underlying PBIT (1,2) 525.1m +4.3% Underlying basic EPS (1,4) pence +19.9% Full-year dividend: 81.5 pence Effective finance cost 4.4% down from 4.5% RoRE (5) 11.0% +260bps Dividend policy upgraded to growth of at least RPI + 4% /16 comparative restated to exclude discontinued operations 2. Underlying PBIT = Profit Before Interest, Tax and exceptional items. Reported PBIT of 543.7m (2015/16: 504.4m) includes exceptional credits of 18.6m (2015/16: 1.0m) 3. Customer Outcome Delivery Incentives. Overall pre-tax reward at 2012/13 prices. Subject to review and confirmation by Ofwat. Post-tax reward of 38.6m using the 2018/19 tax rate of 19% 4. Underlying EPS = Earnings Per Share before exceptional items, net losses/gains on financial instruments, current tax on exceptional items and on financial instruments and deferred tax. Reported basic EPS from continuing operations of 140.1p (2015/16: 133.5p) 5. Calculated on the same basis as reported in 2015/16. Under Ofwat s RoRE definition, we expect to outturn at 10.0%, resulting in a cumulative RoRE of 8.2% 6

7 REGULATED WATER AND WASTE WATER Turnover 1.53bn 1.5% higher, driven by 22.6m RPI-linked price increases m (2.6) (0.4) 1,528.8 (2) 1, /16 Net price impact Consumption Meter optants(¹) Other 2016/17 1. Reflects customers switching from unmeasured to measured supply 2. Includes 2.2m of Dee Valley turnover, representing one month of results from 1st March

8 REGULATED WATER AND WASTE WATER Underlying PBIT 495m Up 2.5% driven by higher turnover and efficiency savings Offset by planned higher IRE (1) spend and increased depreciation m (0.3) (10.2) (9.7) (0.8) (3) /16 as previously announced(²) Turnover Net labour costs Net hired and contracted Power Bad debt Infrastructure renewals Depreciation Material and Other costs 2016/17 1. IRE = Infrastructure renewables expenditure 2. As previously announced in the RNS dated 8 th September 2016 SVT restatement of results following Water Plus JV 3. Includes 0.2m of Dee Valley PBIT, representing one month of results from 1 st March

9 m Turnover: 310m BUSINESS SERVICES 11.9% increase driven by favourable US$: movements, and good underlying growth in Operating Services and Renewable Energy /16 as previously announced(¹) Exchange rate movement Underlying Operating Services growth Renewable Energy growth 2016/17 Underlying PBIT: 37m m Up 31% driven by strong growth and improved margins in US Operating Services, and increased profitability in Renewable Energy (0.3) 2015/16 as previously announced(¹) Exchange rate movement Underlying Operating Services growth Renewable Energy growth 2016/17 1. As previously announced in the RNS dated 8 th September 2016 SVT restatement of results following Water Plus JV 9

10 GROUP CASH FLOW Operating cash flow up 54m Strong cash generated from operations, building on H1 2016/17 m (501.3) (177.0) (21.8) (190.4) (24.3) (77.7) (126.0) (133.0) (259.0) Cash generated from operations Net capital expenditure Operating cash flow Net interest paid Net tax paid Dividends paid Net investment in joint venture Investment in Dee Valley Italy disposal Other Change in net debt from cash flows Net non-cash movements Movement in net debt 10

11 DELIVERING FINANCING OUTPERFORMANCE 5.4% Effective interest cost (1) % Finance cost m -13% % 4.4% -3% % % (2) 2014/ / /17 1. Effective cash interest cost (before net pension finance costs and RPI rolled up): 3.8% down 40bps from 4.2% in FY2015/16 2. Before Eurobond buyback costs % 5% % -28% / / /17 Cash interest RPI rolled up Net pension finance cost 11

12 Index-linked Gross Debt Profile ( m) 4,927m 4,906m 1,262 26% 1,276 26% 5,279m 1,394 A MORE BALANCED DEBT PORTFOLIO 27% (1) Net debt/rcv (4) at 61.6% Key actions and plans Floating % % 1,169 22% Strong liquidity position with 1 billion undrawn facilities and 44.6 million cash Fixed 3,141 64% 2,680 55% 2,716 51% 400m 15 year bond issued in November 2016; swapped to floating rate in line with floating rate strategy 2014/ /16 Net debt (2, 3) 5,082m (31 st March 2016: 4,823m) 2016/17 Diversification of sources and in-filling of maturities on track Balanced and floating rate strategy delivering results; interest rate exposure carefully monitored ~ 1 billion of debt still to raise or refinance in AMP6 1. Includes Dee Valley index-linked debt of 88m 2. Includes cross currency swaps but excludes the pension deficit 3. Regulated net debt 5,027m (31 st March 2016: 4,814m) 4. Estimated Regulatory Capital Value (RCV) at 31 st March

13 FY2017/18 TECHNICAL GUIDANCE Regulated Water and Waste Water (1) FY16/17 Y-on-Y Turnover 1.57 billion to 1.60 billion (including Dee Valley) 1.53bn Opex Higher y-o-y due to the inclusion of Dee Valley's costs and upward pressure from two sectorwide 581m changes to business rates and energy pass-through costs IRE 135 million to 155 million 136m Customer ODIs (2) ~ 23 million reward 47.6m reward Wholesale totex (3) 1.2 billion to 1.3 billion (42.1% of 17/18 wholesale totex will be added to RCV) 1.06bn (4) Business Services Turnover Flat due to the sale of Italy and growth in the remaining business 309.6m PBIT Higher 37.2m Group Interest charge Higher y-o-y as higher inflation (c.1%) and Dee Valley impacts RPI linked debt 204m Tax rate Effective tax rate between 12% and 14% due to lower tax rate and higher capital allowances 16.6% from higher capex Group Capex 620 million to 700 million 501m Dividend Annual dividend growth of at least RPI+4% (5) until March /18 dividend set at 86.55p 81.5p 1. Regulated Water and Waste Water will include a full year of Dee Valley in 2017/18 2. Overall pre-tax reward at 2012/13 prices. If we continue our exceptional operating performance into FY2017/18, the tougher regulatory targets, a lower number of deadbands for those targets and factoring in the potential for less benign weather patterns after two very mild winters, will reduce net rewards to around 23m 3. A reconciliation of wholesale totex is provided in the appendix 4. Includes Wholesale s 12.8m share of the exceptional pension service credit /18 dividend growth is based on November 2016 RPI of 2.2% plus 4% 13

14 PENSIONS MANAGEMENT Active management of pension scheme risks IAS19 net deficit down by 137m since HY2016/17 to 575m New asset backed financing structure implemented Exposure to interest rate and inflation volatility reduced with new hedging strategy underway Triennial pension valuation complete 14

15 ENERGY: CONTINUED PROGRESS On track for generating 50% of our energy needs by % Generation profile to 2020 (1) ~37% ~45% 50% Minworth gas-to-grid plant 2016/ / / /20 Complete In construction Planned 130m of the 190m AMP6 renewables investment programme has been spent or committed to date All new investments delivering double-digit post-tax returns Renewables EBITDA (2) of 26m in 2016/17, up 16% year-on-year Improved energy management via lower consumption and cost: down 10 GWh (3) year-on-year 1. Graph shows generation as a percentage of Severn Trent Water energy needs 2. EBITDA = Earnings before interest, tax, depreciation and amortisation 3. GWh = Gigawatt hour 15

16 REGULATORY CAPITAL VALUE Fastest growth rate of the listed water companies for AMP 6 (1) Nominal prices ~ 2.5bn ~( 1.9bn) 7.7bn ~ 1.2bn 0.1bn ( 0.1bn) ~ 9.5bn 2015/16 Opening RCV RPI growth (2) Totex growth (3) Depreciation Dee Valley 2020 RCV (4) AMP5 midnight adjustments (5) 2019/20 Expected RCV 1. Growth rates as per Final Determinations 2. Based on actual RPI of 1.6% for 2015/16, 3.1% for 2016/17 and assumes an average of 3.3% year end RPI for , based on Office of Budget Responsibility forecasts 3. Includes the impact of 360m of announced forecast totex outperformance and 120m of reinvestment m estimated RCV at March 2020, in nominal prices 5. Includes the forecast adjustment for the Capital Incentive Scheme (CIS) indexation error and the capex true up for 2014/15, which Ofwat are due to finalise by summer Total adjustment of 149m 16

17 TRACK RECORD OF DELIVERING RETURNS FOR SHAREHOLDERS RPI linked dividend growth with additional capital return Dividend per share, pence 227 Underlying dividend CAGR of 4.5% (1.3% real) (1) Dividend promise of at least RPI+4 growth for AMP6 (3) 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E AMP 3 AMP 4 AMP 5 AMP 6 1. CAGR calculated from 2006A 2018E 2. Based on 111m share buyback divided by 237m shares (average number over buyback period) 3. Based on an RPI of 3% p.a. to 2020 Special dividend Share repurchase (2) 17

18 TOTAL SHAREHOLDER RETURN 10 years to 31 st March years to 31 st March % 121% 125% 103% 69% 97% 51% 106% 58% 53% Severn Trent Pennon UU FTSE Utilities FTSE 100 Severn Trent Pennon UU FTSE Utilities FTSE years to 31 st March 2017 Since start of AMP6 47% 43% 25% 33% 20% 24% 15% 16% 17% 17% Severn Trent Pennon UU FTSE Utilities FTSE 100 Severn Trent Pennon UU FTSE Utilities FTSE

19 RETURN ON REGULATED EQUITY 11.0% 5.6% (2) Delivered a 260 basis points increase in RoRE (1) 1.8% 0.2% 11.0% 2.1% 1.3% Base Return Customer ODIs Totex Financing Other Actual 2016/17 RoRE CUSTOMER ODIs An exceptional year of delivery, achieving 47.6m net reward New technology and better processes driving results TOTEX Delivering on our totex efficiency commitments 138m (3) of outperformance achieved in 2016/17 FINANCING (4) Debt strategy continues to deliver outperformance More balanced debt portfolio delivering results 1. RoRE = Return on Regulated Equity (at 2012/13 prices) 2. Adjusted to exclude the non-household retail return now being earned by Water Plus 3. Includes wholesale totex outperformance of 124m (pre-tax and pre-customer sharing) and 14m of retail cost outperformance (pre-tax) 4. Calculated on the same basis as reported in 2015/16. Under Ofwat s RoRE definition, we expect to outturn at 10.0%, resulting in a cumulative RoRE of 8.2% 19

20 EMBEDDING CUSTOMERS AT THE HEART OF ALL WE DO Affordability for all Customer Service Customer Experience Lowest combined average bills in Britain (1) Helped over 50,000 vulnerable customers Average water bills in England & Wales (2) 2017/18 Severn Trent Yorkshire Average less than next cheapest bill Sector leading customer ODI performance Outperformed on commitments customers care most about Customer experience is still too variable when things go wrong Changes in motion to bring improvements: 24/7 Customer service Opening hours extended to 24/7 including digital channels New technology New customer management portal (CMP) New Website 24/7 Wessex South West Improved customer comms New bill design New Keeping Customers Informed 1. Average bill in Scotland, per Scottish Water s website, is Graph shows the two highest and lowest bills compared to the sector average for England and Wales. (KCI) team See for more details 20

21 DRIVING OPERATIONAL EXCELLENCE AND CONTINUOUS INNOVATION Category 3 pollutions Water quality complaints Internal sewer flooding SIM (1,2) Supply interruptions Leakage External sewer flooding Coliform detections (2) 2016/17 performance versus Final Determination performance commitment Category 3 pollutions Water quality complaints Internal sewer flooding External sewer flooding Leakage Supply interruptions End of AMP measures Coliform detections 25% ahead 32% behind 9% ahead 23% ahead 2% ahead 17% ahead 29%ahead 1. SIM = Service Incentive Mechanism 2. These forecast customer ODIs are measured annually but the reward/penalties are end of AMP adjustments 21

22 770m Total AMP6 efficiencies INVESTING RESPONSIBLY FOR SUSTAINABLE GROWTH 160m 610m Further forecast efficiencies Efficiencies locked in to 31 March 2017 Of which 100m announced at FY16/17 410m - required efficiencies (nominal terms) to meet Final Determination 120m being reinvested to benefit customers AMP6 totex programme of over 6 billion, equivalent to ~ 1,400 per customer 22

23 CHANGING THE MARKET FOR THE BETTER Thought leadership Creative markets Prepared for new competition Water resource competition Bioresource competition Our new publication: Designing incentives to deliver for customers 23

24 CREATING AN AWESOME PLACE TO WORK Investing in our people 20% increase in training days and award winning apprentice scheme Investing in digital technology to make our colleagues lives easier Cultural change and increasing employee engagement Employee volunteering scheme encouraging our people to give back to the community 24

25 BUILDING A LEADING BUSINESS The outcomes we are driving to deliver against our Upper Quartile (UQ) ambition: Retail Already moved from 6 th in AMP 5 to 4 th (of 18) and ambition beyond Balancing drive for cost to serve efficiency with UQ customer experience and industry leading support for vulnerable customers Water Moving from 11 th to at least 4 th (of 18) by end of AMP6 Targeting significant annualised run rate totex reduction of ~ 20m Driving better productivity, lower costs and smarter investment decisions Waste Remaining in the top 2 (out of 10) from pole position in AMP 5 Improving service and earning customer ODI rewards Maintaining our sector leading position and seeking to drive further value 25

26 DIGITAL STRATEGY Key levers of digital value Reinventing water with customer at the heart of all we do: Easy and right first time 24x7 channel of choice Affordable for all Customers Colleagues Transforming our colleague experience: A productive day s work Intuitive to use Inspiring our talent Driving financial outperformance: Lower costs Smarter capital decisions Earning customer ODI rewards Totex Assets Reducing our risks: Improved asset health Quality analytics Strengthening cyber defences Devices smartphones, tablets, sensors, wearables, drones, satellites, robots Underpinned by innovation and agility Design apps, interfaces, architecture, integration Data capture, accuracy, analytics, predictive modelling, insight 26

27 We invest responsibly for the future of our business Future talent We have almost trebled our apprentice intake this year and our graduate intake has doubled 2016 graduate intake: females made up over 40%, and those from black, Asian and ethnic minorities made up over 20% ~20% increase in training days in 2016/17 RESPONSIBLE BUSINESS Corporate responsibility commitments We have an important role to play in protecting water as a precious resource and the wider environment: We will make our region the most water efficient in the UK We will play a leading role to help make our region s rivers even healthier and have been recognised for our achievements Met the challenging criteria and awarded FTSE4Good status Demonstrates strong environmental, social and governance (ESG) practices Hampton-Alexander review ranked joint 1 st in FTSE 100 for female Board representation Asian Apprenticeship Awards named Employer of the Year 27

28 NEW BILL FORMAT Total redesign of the customer bill, focusing on simplicity and clarity Now Before Easier to understand bills has resulted in a 17% reduction in unwanted customer contacts since go-live For the recent main billing run, in February alone there were 15k fewer calls Customer feedback on the improvements has been great Currently designing an interactive digital bill to offer even greater ease of understanding and further reduce cost to serve 28

29 APPENDIX

30 OUR EXECUTIVE TEAM A strong mix of experience, industry expertise and fresh perspectives to drive outperformance Liv Garfield Chief Executive Sarah Bentley Chief Customer Officer Martin Kane Chief Engineer Evelyn Dickey Director of Human Resources Helen Miles Group Commercial Director James Bowling Chief Financial Officer Emma FitzGerald Managing Director, Wholesale Operations Andy Smith Managing Director, Business Services Bronagh Kennedy Group General Counsel and Company Secretary Tony Ballance Director, Strategy & Regulation 30

31 AMP6 AMP7 AMP8 and beyond CREDIT RATINGS AND DEBT MATURITY AT 31 MARCH 2017 Credit ratings Severn Trent Water Severn Trent PLC Moody s outlook is stable A3 Baa1 Standard & Poor s outlook is stable BBB+ BBB AMP6 maturities: 150m June 2017 and 400m January 2018 USPP 400m Sterling bond (issued Nov 16) Other maturing debt 31

32 Net ODI post-tax reward/(penalty) m Severn Trent Anglian Yorkshire Wessex Northumbrian United Utilities South West Dwr Cymru Southern Thames COMPARATIVE PERFORMANCE Strong customer ODI (1) comparative performance /16 customer ODI performance (2) ODI = Outcome Delivery Incentive (quoted pre-tax at 2012/13 prices) 2. Source: Company Annual Performance Reports 32

33 In real terms Totex (total expenditure) Fast money PAYG rate (58.6% average for AMP6) applied to totex spend CALCULATING ALLOWED PRICES Slow money (1 PAYG rate applied to totex spend) RCV Return on PAYG Tax Interest Depreciation equity RCV Allowed wholesale revenue (expressed as K-factor) (1) Retail allowed costs and margin Severn Trent Water regulated revenue 1. K factors are real change in wholesale revenue year on year. Adjusted by RPI from November of previous year. (i.e. K factor for 2016/17 adjusted by November 2015 RPI) 33

34 REGULATORY CAPITAL VALUE (RCV) Inflation Represents the current cost value of the capital base of each company Depreciation Opening RCV April Totex x (1 PAYG rate) = Value added to RCV Capital grants Closing RCV March INVESTMENT Current cost basis 34

35 AMP 6 AMP 5 REAL COST OF CAPITAL AMP6 VS AMP5 Cost of Debt 2.6% Risk free rate = 1.25% Debt premium = 1.35% Cost of Debt 3.6% Risk free rate = 2.0% Debt premium = 1.6% Gearing (1) 62.5% Vanilla Weighted Average Cost of Capital 3.74% Gearing* 57.5% Vanilla Weighted Average Cost of Capital 5.1% Cost of Equity 5.65% Risk free rate = 1.25% Equity beta = 0.8 Equity risk premium = 5.5% Cost of Equity 7.1% Risk free rate = 2.0% Equity beta = 0.94 Equity risk premium = 5.4% 1. Gearing = net debt to RCV. Ofwat uses a notional balance sheet 35

36 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 objectives with respect to these items. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as anti cipates, aims, due, could, may, 'will', 'would', should, expects, believes, intends, plans, 'projects', potential, reasonably possible, target s, goal, estimates or words with a similar meaning, and, in each case, their negative or other variations or comparable terminology. Any forward-looking statements in this document are based on Severn Trent's current expectations and, by their very nature, forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and no assurances can be given that the forward-looking statements in this document will be realised. There are a number of factors, many of which are beyond Severn Trent's control, that could cause actual results, performance and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to: the Principal Risks disclosed in our latest Annual Report and Accounts (which have not been updated since the date of its publication); changes in the economies and markets in which the group operates; changes in the regulatory and competition frameworks in which the group operates; the impact of legal or other proceedings against or which affect the group; and changes in interest and exchange rates. All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Severn Trent or any other member of the group or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realised. This document speaks as at the date of publication. Save as required by applicable laws and regulations, Severn Trent does not intend to update any forward-looking statements and does not undertake any obligation to do so. Past performance of securities of Severn Trent Plc cannot be relied upon as a guide to the future performance of securities of Severn Trent Plc. Nothing in this document should be regarded as a profit forecast. This document is not an offer to sell, exchange or transfer any securities of Severn Trent Plc or any of its subsidiaries and is not soliciting an offer to purchase, exchange or transfer such securities in any jurisdiction. Securities may not be offered, sold or transferred in the United States, absent registration or an applicable exemption from the registration requirements of the US Securities Act of 1933 (as amended). 36

37 CONTACT DETAILS Ruban Chandran Head of Investor Relations +44 (0) Richard Tunnicliffe Investor Relations Manager +44 (0) Emma Stone Investor Relations Analyst +44 (0) Coventry Head office London Severn Trent Centre, 2 St John s Street, Coventry, CV1 2LZ 37