Severn Trent pledges 'community dividend' after water failures

Water company Severn Trent, along with its industry peers, has submitted its business plans for the next five-year period to regulator Ofwat, including a 9.6% increase in total spending to £6.6bn.

After being one of the water firms singled out for criticism of its performance in supporting customers during the 'Beast from the East' freeze, the company said it would invest more in its assets to protect water supplies.

This would see nominal growth of 13.6% in regulatory capital value over the five-year period, or 3.5% in real terms, and results in an RCV of £10.7bn for the 2025 financial year, with a planned average debt gearing of 63.6% that is higher than Ofwat’s notional structure of 60%.

Severn Trent was one of four companies slammed by Ofwat for being caught off guard and letting customers down badly in the spring freezes. Probably in light of this, the company has proposed a new "community dividend" of 1% of profits each year, "to support communities" in its supply region and that £1.7bn of its £6.6bn total expenditure was set aside for enhancement spending.

To prepare for the next five-year regulatory proposal, the FTSE 100 group has conducted research among a new 15,000-strong online consumer panel and surveyed almost 32,000 customers.

Average customer bills will be reduced 5% in real terms between 2020 and 2025, Severn Trent proposed, via a planned 13% efficiency in spending.

Severn Trent included a package of ODIs that could result in a range of -3.0% to +2.6% on the return on regulatory equity (RoRE) range versus the allowed return, which will determine its incentive payments from the regulator and the level of payouts to shareholders.

Ofwat will publish initial feedback of business plans in late January 2019, with draft determinations following in July and final determinations in November 2019.

On 10 May 2018, the House of Commons’ environment, food and rural affairs select committee launched a wide-ranging inquiry into the regulation of water companies, aiming to focus on how well the industry serves consumers and the environment, and whether it is adequately delivering its “twin-track” approach of increased water supplies and reduced demand. There will also be an examination of the current regulatory enforcement mechanisms.

Furthermore, a draft of a national policy statement for water by DEFRA, designed to streamline the delivery of new infrastructure, should be ready later this year.

Analysts at RBC Capital Markets said a RCV of £10.7bn at FY25 compares to its forecast of £11.4bn and noted the business plan figure "does not include any real options (uncertainty capex) which are estimated at up to £1bn over 25 years".