Severn Trent Regulatory News (SVT)

29 August 2014

Severn Trent Plc - Severn Trent Water response to Draft Determination

Note: 2012/13 prices unless stated otherwise

Following submission of a revised business plan in June, Ofwat has today published a Draft Determination for Severn Trent Water for the period 2015 to 2020 ("AMP6").

The Draft Determination is a detailed document which will take time to consider fully. From an initial analysis this morning, we welcome Ofwat's recognition that the revisions made to our plan have many strengths. We have been in discussion with Ofwat since April focused on three main areas: the Birmingham resilience scheme, legacy adjustments and outcome delivery incentives (ODIs).

We note that overall wholesale totex in the draft determination of £5,586 million is broadly in line with our revised plan of £5,606 million.

We continue to support the moves by Ofwat to introduce incentive based regulation to the industry and note that Ofwat have accepted 17 out of the 27 Outcome Delivery Incentives that we proposed in our revised business plan. Of the 10 that have changed, 4 are due to industry wide changes by Ofwat to align incentives, with the remaining 6 changes specific to Severn Trent.

The range for return on regulated equity in the draft determination is +1.0% to 9.2%, which is broadly in line with +1.1% to 9.6% in our revised business plan.

On the Birmingham resilience scheme, the draft determination outlines two scenarios, one of which includes and one which excludes elements of this scheme. We will continue to work with Ofwat to satisfy further information requests on cost / benefit and risks with a view to the inclusion of all elements of the Birmingham resilience scheme, which has a planned totex spend of £265 million for the alternative supply and £114 million for community risk and maintenance schemes, in total £379 million, in the Final Determination. The scheme has strong stakeholder support, delivers value for money and significant improvements for customers.

On legacy adjustments, the third area of discussion with Ofwat over the past months, Ofwat is proposing a downward adjustment of £79 million to our RCV1 (14/15 year end prices) at the end of AMP5. This is approx. £48 million more than the adjustments we included in our revised business plan, which reflected the serviceability assessment we reported in May. Despite these adjustments, we remain confident that our RCV will be around £10 billion2 by the end of the next regulatory period ("AMP6") in nominal terms.

The publication of the Draft Determination is an important step in the price review process, which will culminate in a Final Determination being published by Ofwat on 12 December and new price limits taking effect in April 2015. There now follows a period of 5 weeks until 3 October during which we will make further representations to Ofwat, in particular on areas where we disagree.

Liv Garfield, Chief Executive, said: "During the price review Ofwat have challenged us hard to achieve the best possible outcomes for customers, and we have listened and responded. The Draft Determination is a complex document and there is a lot of detail to consider. Over the next 5 weeks we will be carefully and thoroughly reviewing its content and conclusions, and responding to Ofwat. We are pleased that on first reading, in many areas the Draft Determination is in line with our revised business plan. Ofwat has accepted our totex plans, and almost two thirds of our proposed ODIs, and we look forward to providing further information on the Birmingham resilience scheme, with a view to its inclusion in the Final Determination in December."

The Draft Determination is a complex and detailed document which will take time to review fully. Therefore a webcast will be held on 4 September at 15:00 BST to further discuss the content of Draft Determination.

The Ofwat Draft Determination proposes the following for Severn Trent Water:

TABLE 1

1. Assumes 14/15 year end RPI of 2.8%

2. Assumes year end 2.8% RPI for 14/15 and an average of 3.3% year end RPI for 2015-2020

Enquiries:

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 'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends', 'plans', 'projects', 'potential', 'reasonably possible', 'targets', 'goal' or 'estimates' 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 Annual Report as at May 2013 (which have not been updated since); 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. Subject to compliance with applicable laws and regulations, Severn Trent does not intend to update these forward-looking statements and does not undertake any obligation to do so,

Nothing in this document should be regarded as a profits forecast.

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