Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Perfect. Two good questions. So let's take the first one quite simply. So we're not giving -- so I guess I think the implication from your question, Bartek, almost like we said at least GBP 1 billion for this year. [indiscernible] GBP 1.2 billion, was that an overspend, it's not an overspend. So the guidance we previously said is we were going to be 0.7% RoRE overspent on capital over the 5 years. We've today made that a whole percent so tiny movement. The difference between the GBP 1 billion and the GBP 1.2 billion is just accelerating quicker. So remember, we've got the [indiscernible] recovery program, we've got about GBP 650 million worth the spend on [ green ] recovery, and most of that was in years 4 and 5. We've made better progress in year 4 than we thought on some of that. We've also committed once off what changed the rules on the fact that the transition spend could be done over 2 years, not over 1 year. We got going on that. There's about 50-odd million-ish that is kind of like transitions and unpaid money we're getting ahead of. So those are the activities. So no, you should view it as good news. If we'd not spend the GBP 1.2 billion this year, we have had an even larger year 5. So to stay within our overall range of totex that we've guided to, then we have got GBP 1.3 billion to GBP 1.5 billion in year 5 alone because of the original price view was a growth price view for us. We've got a very strong price view last time around. And we added to that green recovery. And we've now added transition spend to that. We're just making sure that we smooth it slightly. So no. So I think it's a slightly different situation to how you first described it. That's the first part of the question. I'll get Helen to walk you through, I guess, how it works in terms of the guidance on ODIs.

Yes, sure. So as you can see, we're delighted to have guided to over 100 million on ODIs for year 5. That's a combination of in-AMP ODIs, but also end of AMP ODIs that we've guided to previously. Now because of the strength and the breadth of our ODI performance in year 5, we do hit the cap on both water and waste. And what that means is that we -- anything over that -- we earn over and above the caps, we share with customers. And so the sharing heavily depends on where we outperform on the ODIs, which is why we can't be -- we've set around 60 million post sharing. We can't be too precise, but we estimate it will be plus or minus 10% on that number. Really pleased to overall in nominal terms for the AMP, we're going to be earning at least GBP 420 million in ODIs, which is sector leading.

Very good. I think Pavan, it's you next.

I've got two, please. So firstly, looking at the overspend that you guys were just talking about with biotech, is it fair to say then that, that 30 bps of RoRE that we're talking about, is some of that or all of that attributable to some of the transition spend that will, therefore, then you'll be made a whole in AMP8 or is some of that genuine overspend that you think you should go above and beyond your allowances in terms of then setting yourself up to be in a good position. That's my first question. And then my second question, I'm sorry if it's answered already, is on this concept of uncertainty or gated mechanisms that might be featured in the draft determinations. I was wondering if you could share any thoughts on that? And a follow-up on that in terms of enhancement spend. So I think the rationale if this were to be put into place is that Ofwat saying that companies aren't spending in line with the allowances that they've been given. And I've looked in the latest water company performance report and you're in line or slightly ahead of the allowance for wholesale water, but you were behind on wholesale wastewater. Can you talk about the drivers of that? And do you expect to spend your full enhancement allowance by the end of AMP7 and if not by.

Very good. Three good questions there. So I guess I'll hand it to Shane in a second just to talk about the allowance. As -- I mean, bear in mind, the way the price [indiscernible] works is you're given an amount of money and then it's an overall amount of money. And you spend against that overall amount of money on the priorities that come through. So Shane will talk through that. In terms of the first bit on the totex spend, I mean, so it's not -- there was transition spend, it's GBP 450 million. And we've said that, and that you do get treated up for and that's outside of the RoRE. And then separate to that, we are choosing today to spend 0.3% extra. And we're choosing to spend on areas which don't account for transition spend, but we believe give us a fast start. And so Helen's give you 2 good examples, one of which is on plug and play. To set plug and play up isn't eligible transition spend because it's not against the name scheme. So to actually do transition spend, you've got to do it against the named WINEP scheme. It's got a big named activity. There's a statutory need. This isn't against that. But there's no doubt it will make us more effective in the next AMP. So we're choosing to spend a bit more money now to recoup extra money in the next AMP, right? So will we get it back as a team? Yes. Do you have to be patient and wait another couple of years? Yes, you'll probably see an equal amount totex play around the other way in years 2 or 3? Likewise. I guess the [ IoT ] is slightly different. So the investment in tankering resource for waste as we have a brilliant tankering support situation in water, and it's made a massive difference to the ODIs in water, and you've seen that come through with our GBP 35 million water performance on ODIs this year. We think that in order to cope with extreme weather, the changes in the metrics that are likely for the next AMP in waste, then we want to get even further ahead of the curve. So it's not something that will come back now. It's not a transition spend cost, you can't claim it. It is an overspend against base, but we are confident it will give us better ODI performance in the next AMP on the waste metrics. So again, as Helen said, they're all conscious decisions on a business case basis, but they are a -- they are what we spend, that 0.3% is a choice spend. But we're pretty confident we can have it in this next AMP where that came back through either capital on a totex basis in James area or through ODIs in Steph's area.

Should I answer the question. So I guess in terms of spending in line with the allowances, there's two parts. And part of your question is probably a year too early. Because for PR24 of what has changed in the rules. But if we just go to PR19, at the moment, I think Ofwat's frustration was that companies weren't delivering the outputs or the deliverables that they got funded to do, which is not the case. So we're green, for example, on our WINEP schemes. And we have price control. So enhancement in base is blended across that. So as long as you're delivering all your deliverables, for example, WINEP, you're in a fine situation. For PR24 that Ofwat has flagged potentially different sharing rates for enhancement and base. So we'll find out on the 12th of June. So that -- your point there probably has more relevance as we look to AMP8.

And on the gating mechanism, it's not something that particularly has -- it was -- it hasn't affected us to date, and we're not sure it will affect us going forward. So it's not a conversation that we've had with Ofwat as gated mechanisms. So my understanding is that if you have particularly large capital schemes, then that's when the gated mechanisms might kick in or if you've had a history of not delivering your capital program, that's when a gated mechanism might kick in. That's not true for us. we've delivered well against our capital spend, actually, as you've seen today, GBP 1.2 billion. So we've gone up 63% year-on-year. We're actually bang on track now for the year 1 number and we're going to go up again this year to between GBP 1.3 billion and GBP 1.5 billion. So we've got loads of evidence that deliverability is strong. You would have seen in my video earlier as well, but the main difference for us and some of the other companies in the sector is we don't typically deliver a very, very large capital schemes. We sometimes have them, but they normally -- we're typically hundreds of schemes under GBP 20 million rather than a handful of schemes over GBP 200 million. And so that, again, is another difference. That's just topography of the asset base that we look after the way that the Midland is based. There's lots of smaller towns rather than being one or two big [indiscernible]. Of course, we have got Birmingham. But even then, the way we serve Birmingham was quite a lot of smaller assets. So I think for that reason, gated isn't something that we're particularly factoring in, so it's not something we're expecting to have a very significant role in our price view. Very good. Thank you very much. Dominic, back to you.

Yes, there we go. [indiscernible] nice purple screen.

You've gone strangely -- always cosmic, I'd say.

Put you a better view, to be honest. A couple of questions from me, please. Firstly, on energy costs in your nonreg business. Clearly, we've seen a big decline in energy prices over the last few months. Could you just remind us of what your hedging strategy is for your energy costs for your nonreg and whether we should be expecting a step down in profitability on that? And then a leading question on that is then how do you -- how do you mark your medium-term energy contracts when you're selling to yourself in a way that you do it in a fair sort of totex number. I mean it should clearly -- can shift profits from one division to another. So if you can give us some color there, that would be great.

It's not quite as fluid as you describe, I'm afraid, there are very strict rules. So I'll hand to Helen to talk about the -- both of those particular financial questions. But I think I might just ask James after that just to bring up what we've been doing to try and drive that generation because you have two parts. You have the prices and the hedging, then you have the generation with an X and then you have one generation, even though there's more to be done in terms of how it flows. Helen?

Yes. So on our energy costs, we obviously have this fantastic position where we generate 60% of our consumption, which gives us a fantastic hedge at a group level. Now obviously, that plays differently through the reg and the non-reg in terms of RoRE. But overall, we're very comfortable that we've got that natural hedge. If you look at energy prices and where we're guiding to, you can see that in the regulated business, the main consumer, we are guiding down on costs, and you're seeing that play through in the guidance we're giving on business services as energy prices come down. So that's how we look at it. In terms of the process, there is an extremely strict process about how -- where we've got company hedges, how we do that around the [ RACV ] license condition. And we have a RACV committee that agree that. And in terms of the specifics around energy pricing, we do that on a specific date. So we have a formal contract in place, and we price on a specific date, and that's all -- or locked down and reviewed through that committee. So we're very robust process.

Very good and James. Generation.

So from a generation perspective within green power, there's been two focus areas really. The first one has been around operational performance, and we've really focused on basically asset uptime. That's allowed us to really maximize the energy generation capability of the assets that we own. We've also gone through an acquisition, we've bought a company called Andigestion. And we've been able to import for [indiscernible] description our strong operational performance into those particular assets and actually increase the availability of energy generation from those sites. So we've just broken our annual record. We generated 300 gigawatt hours of energy, and I'm expecting that to continue to increase during the next year when we see the full year impact of the Andigestion acquisition.

Very good. Thank you, Mr. cosmic. Okay, John, over to you.

One question from me. I think the main thing I'm interested in is sort of what questions you've received from Ofwat in relation to your PR 2024 plan? I think my impression is that the listed firms have probably received below average number of questions. So is there any information you can give on that. And yes, that would be my question.

So I don't know whether I'd be able to know whether I've received below average because I know there was a total of how many crews have been sent. But I don't know whether they've all gone to one company or whether they've all gone to like maybe -- do you know what I mean. So I guess we've been confident that everything we've received, we'll be able to answer strongly. We're confident that the questions have been high quality and that we're -- and on the basis of the run rate, they've not been inundating us. So I guess they've been asking a good range of questions. I couldn't give you a data point that says it's definitely average or not. Shane.

No, no. And the questions are a good thing as well, I think, because it's an opportunity to make representations before the DD. So yes, there's two 2 of -- or 3 types of questions. There's tell us where evidence is, the other is there's an inconsistency, or the third is perhaps help us justify this position a little bit better. So we welcome the latter queries quite strongly because it gives us an upper hand on a head start, I should say for the DD.

So I don't think we know -- so I don't know how many if it will translate, but we'll find out as well [indiscernible]. So I guess, I'm less worried about how many questions we've had, I'm more worried about what the result is on the 12th of June, but we'll find out on the 12th of June of what's perception of our plan. Mark, we got your hand up again. Is that correct?

Yes. It might be the other hand, but look, just on the dividend at the time that you did the capital raise, the indications were that even with the allowed return at 3.2, there was enough within that business plan for you to be able to maintain the current dividend policy. That was my strong impression. Given everything that's happened since then, given head start on the CapEx scheme, rates slightly up, potentially returns slightly up. Is that still the case that the dividend appears sustainable?

So you know this is my third price view, right? And so this is the third moment in time when I've sat in this chair at the point in time when you're about to get draft, then you get it final, and people want to talk quite right now about the dividend policy next time around, but I'm just not in a position to comment on it. All I can say is the following is that I know that what investors want is they want a progressive dividend policy. I understand that. I understand that what the regulator wants is they want people to look performance in the round, quite rightly, and make sure that all stakeholders have been fairly considered and what we as a company want to do is to outperform because outperforming companies should perform strongly in all of those scenarios. So we'll get the draft on the 12th of June. We'll get the final determination, I guess, depends on the election sometime towards Christmas. [indiscernible] Christmas, it will depend, I guess, as to how early before Christmas it is. And we'll then be in a position to talk about the next AMP. But I guess the best you can do as a management team is to outperform on the areas that give you control. And the areas that we have control is we have a non-reg business, that throws off some nice profits that we manage carefully, and that gives us some dividend cover. We'll be carrying over [indiscernible] of ODIs from years 4 and 5 into the next price view. And you can imagine we're going to be working our socks off this year to try to make that [indiscernible] as large as possible. We'll get ourselves in the right shape for next AMP to make sure that can simply an outperformer on the 3 areas that are RoRE generating. And of course, if you are also considered to be a strong business plan, then that comes with a few -- a little bit of extra award as well. So we'll be working hard to land all of those performances. And our in the ramp performance is really strong. We are an operational good performer. We are a strong environmental performer, and we have got a very strong start rate in terms of our financial gearing. So I can't give you any more insight than that, but hopefully that gives you some sense of how we think about it.

And is there anything that does keep you awake at night? There is something because everything sounds so positive.

I've got [ GCSEs ] at the moment. And I guess I've never gone through that before also. I think [ Latin GCSE ] is probably the thing most keeping me awake at night right now is that. So I guess, I'm a good sleepers. So no, I'm typically sound asleep. And things aren't perfect. If you look at all of our stuff that we've said across all of our RNS and all of our annual [ votes ], it says very carefully and very clearly that we're not the finished article. So nobody around this table thinks we're anything other than in progress. And that is the message we try to land is that we -- you're only as good as your last match. You're only as good as your last set of performance metrics. We're clear on that as a team. And we work hard every day to make sure all that the next numbers we report to the regulator and yourselves will be as good as possible and will be strong in the sector. But of course, every day starts fresh. Every year an ODI starts fresh, every year on [indiscernible] starts fresh, and we work hard to make sure we land that. So no, we're definitely not a finished article, but we've got a good culture in Severn Trent and good cultures have a better chance of landing good results. Good. So I think, Michail, are you actually got a question online. A question with your hand up, is that correct?

Yes, that's correct. Quick question. 5 years ago, the sector had a tail end. So 3 listed companies had an outperformance and received a bonus on the business plan that were fast track. The other companies were thought to improve. And for the past 5 years, they've been hammered with negative ODIs, some of them are now failing and you have shareholders working going. So Ofwat has to clean up the mess. There are not 10 ways to do this. At some point, you will have to ask well-performing operators to take over underperforming operators. Has this conversation started.

So there's quite a lot of beliefs there, right, in terms of -- in terms of -- I'm not sure I agree with the whole sentiment. So I think in any sector, whether it's food, retail, airlines, I guess, you typically have some good performer and some tricky performers. And I guess if you look at performance, I would say Wessex, which are private equity owned, they're not listed. They have been a very good performer for a long period of time. So I'm not sure either that necessarily performance does straight relate to ownership model. I'm sure that's completely true either. And I guess, I think actually that the sector has made some really strong progress on some big areas. So I guess I'm not sure if I agree with your premise. I think specifically you're saying, though, is where do we think the future goes from here and what we think for us is that we need to get it -- drop determination. We've got more investment than ever before in the next few years. We need to get ourselves in the best shape to deliver that. And that's literally all we're focused on. We are solely focused on our task, our company and making sure that we deliver well in the Midlands. Very good. I think that was the last question. So oh, no, we've got another one. No, there's no questions. So now we've got -- so I think we'll give it literally two seconds just to see if somebody rapidly puts their hands up in the air. And if not, then we'll call it. So thank you very much to those dialing and giving these questions have been lowly without them, so it is appreciated. Thank you to my team for another 12 months of very hard labor. And we look forward to catching up again at -- well, certainly, the draft determination, don't forget dates for your diary. Draft determination comes out on the 12th, and we'll be hosting investor calls on the 20th. So note for the diary. With that, thank you very much. Have a lovely day.