Severn Trent PLC · LSE:SVT
Severn Trent — Non-Deal Roadshow (March 2012)
65 slides from Severn Trent's roadshow presentation, March 2012
Slide 1: US Roadshow
US Roadshow A ffocused d water t company driving d i i returns t through sustainable, efficient, long term investments US Roadshow, Roadshow March 2012 Tony Wray, Wray CEO & Mike McKeon McKeon, CFO
Slide 2: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 2
Slide 3: Severn Trent profile
Severn Trent profile p • Regulated “low low risk risk” water utility business – Inflation linked business model – Valuation & returns based on asset base – “RCV” (regulated capital value) – Generating shareholder value through both dividends and asset/equity growth by investing in essential infrastr
Slide 4: Structure
Structure Group Market cap1 £3.8bn Enterprise value2 £7.6bn At 7 March 2012 1. Market cap based on closing price 7 March 2012 Turnover £1,711m 2. Market cap at 7 Mar 2012 + net debt at 30 Sept 2011 PBIT* £519m Regulated g ((“STW”)) Unregulated (“STS”) Turnover £1,390m Turnover £336m PBIT* £504m PBIT
Slide 5: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 5
Slide 6: Severn Trent Water - Overview
Severn Trent Water - Overview • Severn Trent Water is one of the largest g of the 10 Water and Sewerage Companies in England and Wales • We cover an area of 21,000km2 and: Northumbrian ― supply pp y water to c.7m p people p and sewerage g United services to c. 8m people Utilities Yorkshire ― supply
Slide 7: The UK water industry
The UK water industry y • Water Companies privatised in 1989 – licences cannot be terminated until 2014 (i.e. 25 yrs after privatisation) and only then with 25 yrs notice • Investment led industry – capital investment is added to the RCV (Regulated Capital Value) • Economic returns allowed on RCV th
Slide 8: Regulated Capital Value (RCV)
Regulated Capital Value (RCV) • RCV is the value of the capital base of the Company used by Ofwat for setting price limits • RCV is widely used as a proxy for the enterprise value • RCV is i adjusted dj d by b inflation i fl i (RPI) eachh year Represents the Depreciation currentt costt value l off t
Slide 9: Cost Of Capital (net of tax - 'real')
Cost Of Capital (net of tax - ‘real’) How the regulated return is derived – AMP4 vs vs. AMP 5 Pre-tax = 4.3% % Pre-tax = 3.6% Nominal cost = 6.8% Cost of Nominal cost = 6.2% Cost of Inflation = (2.5%) Inflation = (2.5%) Risk free rate = 3.0% Debt Debt 3% Risk free rate = 2.0% Debt premium = 1 1.3% 3
Slide 10: How is Severn Trent Water profit made up?
How is Severn Trent Water profit made up? Illustrative • Ofwat is obliged to ensure water companies can fund themselves • Ofwat sets prices set over a 5 year cycle (current 2010/11 to 2014/15) in real terms, as below: Allowed Partially mandated by Environments Determined by Agency, drinking water in
Slide 11: Severn Trent Water – RCV
Severn Trent Water – RCV £m 2010/11 2011/12 2012/13 2013/14 2014/15 Per Determination* 6,216 6,244 6,280 6,341 6,385 Actual / Estimated Outturn** 6,638 6,979 7,259 7,557 7,857 Ofwat Actual / Projected Outturn*** 6,814 6,844 6,885 6,951 6,999 * Year end 2007/08 prices ** At year average actual/estima
Slide 12: COPI Adjustment to RCV
COPI Adjustment to RCV Ofwat’s model COPI – Construction Output Prices Index • In the Final Determination (FD), Ofwat’s allowed capex spend is stated at 2007/08 prices • This capex p spend p therefore needs to be inflated to nominal ((outturn)) p prices before being g added to RCV, to arrive at fore
Slide 13: Outlook for AMP5
Outlook for AMP5 S Severn T Trentt Water W t • Remain confident we can meet or beat regulatory settlement – Continuing to drive performance improvements – Power – years 1-4 fully hedged, saving of c. £25m vs. final determination & renewables growing (natural hedge) • Cost of significant g p proporti
Slide 14: Regulatory change
Regulatory change Between 1990 and 2010 Two decades of improvement: But at a cost: improved customer standards • customers’ bills have exceeded inflation by 45% improved environmental standards improved quality of service • industry debt has increased from companies p become more efficient z
Slide 15: Is this sustainable?
Is this sustainable? Can customers afford a further 27% bill increase? Can another £27bn of debt be financed? Rate of increase (£ / customer) 2,500 60% Debt / customer 2,000 £ 1,500 1,000 27% Bill / customer 500 0 '90 '95 '00 '05 '10 '15 '20 '25 '30 Source: Severn Trent projections 15 Rising carbon
Slide 16: Changing Course
Changing Course Si changes Six h tto reach h a more sustainable t i bl ffuture t Policy changes Benefits 1. Flexible implementation of Water Framework Lower emissions; lower capex Directive 2 Developing competition through a water 2. More efficient optimisation of trading framework water resources;
Slide 17: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 17
Slide 18: Severn Trent Services
Severn Trent Services Focus on water • Non-regulated global water technologies and services business • 2 main activities divisions: – Water Purification (disinfection & filtration) – Operating Services • Headquartered in Fort Washington, • PA, USA. Global workforce • around 3 3,100 100 • Revenue of
Slide 19: Global Water Market
Global Water Market G Growth th drivers di • Rising capital requirements Financial • Weak municipal finances Constraints • Increased energy prices Increased • Environmental legislation regulation / • IMO ((International Maritime legislation Organization) ballast water • Climate change Water scarcity
Slide 20: Global Water Market: what we do and don't do
Global Water Market Wh t we do What d and d what h t we d don’t ’t d do Building the system - Operating other other’s s assets – Products Operating Services What we do • High value add technologies • Operate plants and systems for focused on water purification municipalities • Critical parts of a ne
Slide 21: Severn Trent Services H1 2011/12 performance
Severn Trent Services H1 2011/12 performance f Presents a g good opportunity pp y in the long g term • But current economic environment challenging in some regions Operating Services • US market – lower bid activity • UK p performed well • Italy – uncertainty post referendum Products oducts • Filtra
Slide 22: Summary
Summary y Low risk, regulated water utility Inflation linked, asset based model Encouraged by direction of regulatory reforms Long term opportunity with Services – short term will remain challenging Delivering sustainable shareholder value 22
Slide 23: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 23
Slide 24: Funding update
Funding g update p • Strong liquidity - £500 million undrawn 5-year RCF, renewed in October 2011 • £413 million cash @ 30 September 2011 • Funding requirement of c. £1.0 billion in AMP5, refinancing c £850 million c. – £250m 30 year bond issued January 2012 @ 4.875% coupon – Tender for 2014 £200m bo
Slide 25: Debt maturity profile
Debt maturity profile Maturity profile of gross debt (£ millions) 700.0 600 0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 2068 Debt Ne bond New B back of 2014s Buyback 25
Slide 26: Outlook
Outlook I t i Management Interim M t Statement St t t Feb F b 2012 Severn Trent Water • Opex below the level of final determination • Bad debt to remain broadly stable • Capex £450m-£470m range; IRE £120m-£130m (ex. PDaS) • On course to hit leakage target • No usage restrictions currently predicted
Slide 27: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 27
Slide 28: Ofwat consultations and White Paper
Ofwat consultations and White Paper p Ofwatt Of • Involving customers in price setting – Ofwat Ofwat’s s customer engagement policy statement (August 2011) • Regulatory Compliance – a proportionate p p and targeted g approach (October 2011). • Future price limits Defra • White Paper (8th December 20
Slide 29: White Paper
White Paper p • Resilience and Security of Supply – Adapting to climate change – Network resilience – Demand management & upstream competition • Sustainability – Re-balancing g of abstraction – Long term, co-ordinated resource planning – Promotion of catchment management solutions – Attracting ongoi
Slide 30: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 30
Slide 31: Water Trading
Water Trading Th issue The i Abstraction levels Resource zones for water companies in England & Wales Incremental cost Average Incremental Social and environmental Cost, rounded up to next 20 (p/m3) Indication of abstraction across England and Wales, taking account of A study on potential benefits o
Slide 32: Our proposal
Our proposal Demand forecast (25 years) Draft WRMP (25 years) Lowest cost and most environmentally sustainable options are included in draft WRMP with evidence of options considered. Periodic Review business plans (5 years) Final WRMP (25 years) Companies are obliged to select lowest cost and most e
Slide 33: How "bidding in" could work
How “bidding g in” could work 33
Slide 34: Water Trading: the opportunity for Severn Trent
Water Trading Th opportunity The t it for f Severn S Trent T t Northumbrian • Our long term demand / United supply is broadly balanced Utilities Yorkshire • Opportunity to be the trading g “hub” Severn Trent Anglian • Efficient operator - lowest bills in England and Wales Welsh Thames • Opportunity
Slide 35: Agenda
Agenda g • Severn S T Trent and d Sector S O Overview i • Severn Trent Plc – investment case • Severn Trent Water & regulatory model • Severn Trent Services • Update • Severn Trent • Ofwat consultations and White Paper • Water Trading • Private Drains and Sewers (PDaS) 35
Slide 36: Private Drains and Sewers (PDaS) Overview
Private Drains and Sewers (PDaS) O Overview i Pre 1 October Post 1 October • Home owners are responsible for • All sewers transfer everything up to the main sewer, • All laterals and drains outside property including the connection boundaries transfer - BUT • Home owners are still responsible for th
Slide 37: Private Drains and Sewers (PDaS) current status
Private Drains and Sewers (PDaS) Current status (November 2011) • Successful S f lh handover d on 1 1stt O October t b • To date in-bound call volumes lower than expectations – 4,000 , jobs j on transferred assets Cost YTD Guidance • Positive customer feedback* Exceptionals £2.5m £6m Opex £1m £12-15
Slide 38: Contact details
Contact details John Crosse K P Key Publications bli ti Head of Investor Relations M: +44 (0) 7775 226260 Water Trading e:mail: [email protected] @ www.stwater.co.uk/watertrading g Changing Course www.stwater.co.uk/changingcourse Severn Trent Plc PO Box 5309 Coventry. CV3 9FH United Kin
Slide 39: Disclaimers
Disclaimers This presentation contains certain “forward-looking statements” with respect to Severn Trent's financial condition, results of operations and business, business and certain of Severn Trent Trent’ss plans and objectives with respect to these items. items Forward-looking Forward looking st
Slide 40: Appendix
Appendix
Slide 41: Severn Trent Water turnover
Severn Trent Water turnover Severn Trent Water Turnover Turnover* H1 2011/12 £m £32.7m +4.7% 37.1 (5.1) 1 (1.1) 1.8 735.0 702.3 0.0 41 * Business segment turnover is stated gross (i.e. including inter segment trading),
Slide 42: Severn Trent Water PBIT
Severn Trent Water PBIT Severn Trent Water PBIT PBIT* H1 2011/12 £m 32.7 (1.6) (3.6) 1.2 (5.5) +0.1% (3.4) (13.8) (1 3) (1.3) (4.5) 272.7 272.9 42 * Numbers shown before exceptional items
Slide 43: Adoption of Private Drains and Sewers (PDaS)
Adoption of Private Drains and Sewers (PDaS) Estimated Financial Impact Based on October 2011 transfer, the impact in 2011/12 is estimated to be in the region of: ─ One –off set up costs of around £6m ─ Opex O cost in i the h range off £12m £12 to £1 £15m ─ Capex cost in the range of £8m to £12m For
Slide 44: Updated KPI benchmarks
Updated p KPI benchmarks Upper Median Lower 1 Lost time incidents per 100,000 hours worked 2 Employee motivation 3 Water quality (test failure rate) - ppm 4 Customer written complaints per 1,000 properties 5 1st time call resolution for billing (%) 6 Unplanned interruptions per 1,000 properties 7 Pr
Slide 45: Who are our customers?
Who are our customers? We have 3.6m customers with active accounts (c.8 million people) Domestic Commercial • 3.3 million • 250,000 all billed via meters • 1.1 million billed on a meter (33%) • 2.2 2 2 million illi bill billed dbbased d on • their property (67%) 45 Retail direct costs per customer 4
Slide 46: Customer demand
Customer demand Per capita consumption (average weighted – excluding s/pipe leakage) 200 180 160 140 d/day Gov. target 130 l/d 120 litres/head 100 80 60 40 20 0 Source: June return data 46
Slide 47: AMP4 summary
AMP 4 summary P f Performance vs. Final Fi l DDetermination t i ti £m Opex 520 Since year 3 consistently outperformed FD 3% outperformance in 2009/10 (year 5) 500 STW 480 460 £m 440 Capital programme 600 Year 1 Year 2 Year 3 Year 4 Year 5 550 STW 500 FD 450 6% outperformance over AMP4 400 £1
Slide 48: Severn Trent Services Overview
Severn Trent Services Overview 48
Slide 49: Global Water Market: Key opportunities
Global Water Market K opportunities Key t iti Market potential Today Tomorrow Italy 30 ATOs run by private 90 ATOs run by private Operating Services sector $1bn p.a. ? sector $3bn p.a. US 5% of municipality 10+% of municipality Operating operations outsourced operations outsourced Services $1.5bn p.
Slide 50: Operating Services
Operating Services F Focus on water t Operating O ti Services S i Developments Further Growth Track Record • O&M for municipalities • O&M for Limerick • Geographic g p • Focus on mid size Council expansion US Ireland US market • 20 year contract- • Outgrown competitors c.€60m and market • 25 year Mo
Slide 51: Hub and Spoke concept
Hub and Spoke p concept p Western Regional HQ in Chickasha, Oklahoma Drivers: – Local support - we are on the ground – Help with maintaining compliance – Regulators know us as a solutions provider – Strong performance begets referrals 1999 TODAY Claremore 1 contract 7 contracts Clinton Jenks $600k p
Slide 52: Products – focused on water purification
Products – focused on water purification Sources of growth Geographic g p Route to Market New Technology gy Operational p Expansion Efficiency •Existing and new •Technology sales •New technologies •Centralise technologies into to new markets product new markets •Solutions focused e.g., BALPURE®- dev
Slide 53: MicroDynamics®
MicroDynamics® Ultraviolet Disinfection System What it is Green benefits Market opportunity Disinfection technology for ‘Chemical free’ technology Global UV disinfection t t treatmentt off municipal i i l and d -substitute substitute for existing market valued at c. c $600 industrial water and chlor
Slide 54: BALPURE®
BALPURE® Ballast water treatment What it is Green benefits Market opportunity Significant, emerging Protection of marine Total market could generate treatment environment by controlling $34 billion revenues opportunity, pp y driven by y IMO movement of non- between 2010 – 2020 regulation to control
Slide 55: Severn Trent Services performance
Severn Trent Services performance p £m Investment cost 172.0 13.0 0.8 164.1 12.0 160.0 6.5 H1 2010/11 H2 2010/11 H1 2011/12 H1 2010/11 H2 2010/11 H1 2011/12 Revenue PBIT* ROIC (annualised) = 5.9% 5 9% 55 * PBIT before exceptional items
Slide 56: Group data
Group p data
Slide 57: Cash flow
Cash flow Si months Six th ended d d 30 S September t b 2011 £m 475.6 (150.1) 325.5 (83.2) (35.5) ( (92.5) ) 2.1 (0.3) 116.1 (6.1) 110.0 57
Slide 58: Group net debt and finance charges
Group p net debt and finance charges g Net debt* debt Finance charge £m £m 119.1 119.4 3,869 3,759 Index linked 1,104 1,135 89.4 91.2 Nominal 3 080 3,080 3,036 26.8 30.0 2.9 Cash 315 1.8 413 H1 2010/11 H1 2011/12 'Cash' interest 31 March 2011 30 Sept 2011 RPI rolled up Net pension (debit)/credit • 7
Slide 59: Net finance costs
Net finance costs Si months Six th ended d d 30 S September t b 2011 Income statement Capitalised Gross interest charge interest incurred £m £m £m “Cash” interest 91.2 3.2 94.4 Pension debit/(credit) (1.8) - (1.8) RPI interest 30.0 1.1 31.1 119 4 119.4 43 4.3 123 7 123.7 59
Slide 60: Net debt
Net debt 30 September 31 March 30 September 2011 2011 2010 £m £m £m Cash and cash equivalents 412.6 315.2 443.9 Borrowings – current liabilities (85.5) (23.9) (58.8) B Borrowings i – non-currentt liabilities li biliti (4 271 6) (4,271.6) (4 320 5) (4,320.5) (4 268 8) (4,268.8) Cross currency swaps h
Slide 61: Analysis of borrowings, net debt and swaps
Analysis of borrowings, net debt and swaps at 30 September 2011 4,358 189 (186) 4,303 164 (413) 3,759 1 073 1,073 3 121 3,121 Borrowings X-Currency Cash Net debt per Net debt at IR swaps swaps balance sheet fair value GBP debt Currency debt @ historical rate Exchange adjustment 61
Slide 62: Gearing
Gearing At 30 S September t b 2011 31 March 30 September Net debt/RCV 2011 2011 57% Severn Trent Plc 54% 58% Severn Trent Water 55% 62
Slide 63: Credit ratings
Credit ratings 30 S September t b 2011 L Long-Term T Se ern Trent Water Severn Se ern Trent Plc Severn Moody’s A3 Baa1 Standard & Poor’s BBB+ BBB- Short-Term Severn Trent Water Severn Trent Plc Moody’s P2 P2 Standard & Poor’s A2 A3 Moody’s – long term rating is stable Standard & Poor’s – longg term
Slide 64: What are the risks?
What are the risks? • Economy y – double dip recession, increasing unemployment, rising bad debt – we have improved collection of debt less than 12 months (>12 months more difficult) – focus on customer payment plans • Inflation – negative inflation harmful to the business model (lower revenue, RCV
Slide 65: TRENT
TRENT SEVERN