PR14 Final Determinations December 2014 Investor Reference Pack Average bills WASC average household bill WOC average household bill Combined water & wastewater 600 200 180 550 160 500 140 450 120 400 100 80 350 60 300 40 250 20 200 0 200 SWT WSX WSH SRN UU `` ANH NES 2010-15 2015-20 at Draft Determinations Industry average 2010-15 Industry average 2015-20 YKY TMS SVT 2015-20 at Final Determinations 2 Cost of capital Sets allowed return for Risk & Reward Guidance Final Determinations FD with companyspecific uplift Enhanced companies Non-enhanced companies Portsmouth and Bournemouth Total equity market return 6.75% Real risk-free rate 1.25% Equity risk premium 5.5% Gearing (Net Debt/RCV) 62.5% Asset beta 0.30 Equity beta 0.80 Cost of equity (post-tax) 5.65% Ratio of embedded to new debt 75:25 Cost of new debt 2.65% 2.00% 2.25% Cost of embedded debt 2.65% 2.65% 2.90% Allowance for debt fees 0.10% 0.10% 0.10% Overall cost of debt 2.75% 2.59% 2.84% Appointee WACC 3.85% 3.74% 3.89% Deduction for retail margin 0.15% 0.14% 0.14% Wholesale WACC 3.70% 3.60% 3.75% 3 Bond yields Risk and reward guidance 5.4 5.2 5.0 4.8 4.64% 4.6 4.4 4.37% 4.2 4.17% 4.0 Dec 14 Nov 14 Oct 14 Sep 14 Aug 14 Jul 14 Jun 14 May 14 Apr 14 Feb 14 Mar 14 Jan 14 Dec 13 Nov 13 Oct 13 Sep 13 Aug 13 Jul 13 Jun 13 May 13 Apr 13 Feb 13 Mar 13 3.8 Jan 13 Nominal Yield (%) 5.04% iBoxx A-rated corporate debt (GBP non-financial) iBoxx BBB-rated corporate debt (GBP non-financial) 4 Forecast return on regulated equity 12.0% Enhanced Companies 10.0% 8.0% 6.0% 5.9% 6.1% 5.8% 5.9% 5.8% 5.8% 5.6% 6.0% 5.6% 5.7% 5.6% 5.7% 5.6% 5.6% 5.6% 5.6% 5.6% 5.8% 4.0% 2.0% 0.0% SWT AFW ANH NES SRN SVT TMS UU WSH WSX YKY BRL DVW PRT SBW SES SEW SSC Financing SIM Totex ODI ODI Totex SIM Financing Note: Ranges based on companies’ representations and Ofwat’s subsequent interventions. Reflect expected variations for an efficient, notionallystructured company. 5 Totex: company plans vs. Ofwat thresholds 63% 57% 50% Water 40% 30% 20% 10% 0% 5% Cap -10% -20% YKY PRT WSH UU NES SBW SVT 1 SES SSC ANH SEW WSX DVW SRN 50% 50% 40% 40% Tideway Wastewater SWT AFW TMS 30% 20% 10% 50%0% 0% -10% -50% `` SVT SVT WSH WSH TMS ANH TMSNES YKY ANH Gap at Risk Based Review SWT NES SRN 5% Cap BRL 102% 30% 20% 10% NA2 0% 5% Cap -10% WSXYKY UU Gap at Draft Determinations SWT SRN WSXTMS UU Gap at Final Determinations (1) Draft determination value for Severn Trent assumes costs of EVA “core resilience” scheme are allowed. (2) Thames Tideway Tunnel (a separate control within Thames Water) received no allowance at the RBR, against a plan of £508m. 6 Serviceability shortfalls Pre-efficiency RCV adjustment (£m) £160 £120 £80 £40 £0 SRN SVT TMS WSH Draft determinations SEW BRL DVW YKY NES Final determinations 7 Notional financial ratios ANH NES SRN SVT1 SWT TMS UU1 WSH WSX ICR 2.88 3.54 3.44 3.12 3.08 2.84 3.28 2.54 3.30 ACICR 1.46 1.84 1.46 1.55 1.53 1.40 1.65 1.59 1.78 FFO/debt 8.57% 11.48% 11.08% 9.60% 9.74% 8.43% 10.25% 6.97% 10.44% RCF/debt 5.98% 8.84% 8.42% 6.97% 7.11% 5.92% 7.53% 4.41% 7.84% 62.62% 62.01% 62.02% 63.09% 62.04% 64.58% 59.83% 62.52% 63.93% YKY AFW BRL DVW PRT SBW SES SEW SSC Gearing ICR 3.03 3.56 3.63 3.33 2.68 3.32 3.46 3.03 3.70 ACICR 1.65 2.17 1.69 1.52 1.33 1.90 1.19 1.76 1.51 FFO/debt 9.20% 12.08% 12.07% 10.87% 8.04% 11.08% 11.23% 9.20% 12.31% RCF/debt 6.59% 9.51% 9.41% 8.43% 5.45% 8.45% 8.62% 6.61% 9.68% 60.49% 63.49% 64.89% 67.59% 62.23% 61.32% 65.51% 62.94% 67.21% Gearing Note: Financial ratios averaged over the 2015-20 period, based on a notionally-financed company with efficient costs, before adjustments to reflect 2010-15 performance. (1) Financial ratios for Severn Trent and United Utilities assume 100% of IRE is expensed. 8
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