Severn Trent: Operating costs set to rise

Severn Trent has predicted its operating costs will rise year on year in its interim management statement (IMS).

The company stated the increase would be due to the impact of higher inflation, as well as “increases in quasi-taxes and power costs”, although this will be partially offset by efficiency savings.

The overall operational costs “continues to be in line with the board’s expectations” for the year.

The utility reported today that trading across the group was in line with the earlier expectations.

Severn Trent’s IMS added that customer bills had been increased by 1.5 per cent in April, lower than the rate of inflation (2.6 per cent), and that the company’s bad debt was being managed “effectively” and maintained at 2.2 per cent of turnover.

“Good progress” was said to have been made in delivering the capital investment programme, adding that expectations for the net capital expenditure remained between £510 million and £530 million, including an estimated £15 million related to private drains and sewers.

Severn Trent also updated investors on its revised PR14 business plan for 2015-2020 which reflected Ofwat’s guidance provided earlier this year.

The IMS said that the changes to its business plan included the adoption of Ofwat’s lower overall weighted average cost of capital (Wacc) of 3.85 per cent, down from 5.1 per cent in the current investment cycle.

Other changes adopted in the business plan included a pay as you go rate for the group’s wholesale business of 57 percent, as well as total expenditure of £6.2 billion.

RBC Capital Markets analyst John Musk said the IMS “reinforces our view that the company can deliver a long-term policy for AMP6 that maintains dividends on a real basis whilst still being onside on credit metrics.”