Northumbrian Water Group plc

Northumbrian Water Group plc
Site visit – 28/29 April 2009
1
Agenda
28 April
Welcome
Overview of Kielder
Pre dinner – overview of sector issues
29 April
Presentation covering:
Revenues, opex and efficiencies, gearing, capex, FBP
In attendance:
John Cuthbert (Managing Director)
Chris Green (Finance Director)
Graham Neave (Operations Director)
Ceri Jones (Regulation & Scientific Services Director)
2
Kielder
3
Supply zone - north
4
The Kielder Water Scheme
The Reservoir
• storage 200 million cubic metres (80,000 Olympic swimming
pools)
• surface area 1,086 hectares
• shoreline 43km
• maximum depth 52m
• 185m AOD
• opened May 1982
The Transfer Scheme
• 32km of 3m diameter tunnel
• aqueduct capacity 1,137 tcmd
• installed pump capacity 540 tcmd
• supported supplies to 98% of region
5
Kielder Water & Forest Park
•
•
•
•
•
•
•
Largest man-made lake in Northern Europe
Largest forest in England - over 600 sqkm
Most tranquil place in England
Darkest skies in England
Home to 50 % of the UK’s endangered red
squirrel population.
Working landscape producing timber, water
and hydroelectricity as well as a place of
access and recreation.
Many SMEs and micro enterprises – growth
area is tourism
6
Developing Kielder Water &
Forest Park
• ‘Kielder Big Picture’ – 10 year development plan
• Maximise tourism for economic benefit of the area
• Public, voluntary and private sector collaboration
• Work with the community to benefit economically from developments.
7
Kielder Big Picture (delivered since March 2007)
•
•
•
•
•
•
•
Lakeside Way – 26 miles multi user
track around the shore of Kielder
Water
Kielder Observatory
4 New mountain bike trails – over
50km of flagship single tracks
MTB Hire Centre, Trials Area and
Skills Loop
Network of pontoons, jetties &
slipways
Tower Knowe Visitor Exhibition
Events and Activities Plan
8
Kielder Big Picture (planned 2009 to 2014)
Investments include:
• Leaplish – develop visitor offer –
accommodation, food, water
leisure
• Treetop Walkway – 100 ft high
canopy walk
• Kielder Castle – centre for land
based outdoor activity and art and
architecture
• Green Dragon Railway – a two mile
narrow gauge, steam railway
connecting the Castle to Kielder
Water
• International art commission
9
Corporate Responsibility
10
Recognition
11
Queen’s Award Citation
"Northumbrian Water Ltd receives the Award for its ongoing and
impressive commitment to sustainability.
It has actively striven to promote best practice within its sector and is
committed to ongoing review and continuous improvement.
With a commendable and ever improving environmental performance in
place, it is, however, Northumbrian's extremely impressive social and
economic initiatives which elevate it to the status of sector leaders.
A diverse suite of programmes have been implemented, encompassing
local procurement, strong apprenticeship programmes, individual up
skilling and the continuous leverage of their spending power, employment
and wider economic presence to ensure maximum benefit for local
communities.
Northumbrian's driving commitment to sustainability governance provides
an example and benchmark across sectors, demonstrating that strong
leadership and ambition can make a tangible difference to communities
both local and more widely."
12
Utility of the Year
“Last year for the first time we asked our panel of eminent judges to
nominate and vote for the utility they felt deserved the accolade Utility
Company of the Year. The aim was to open this top category to
companies that deserve such recognition but often don’t enter awards for
various reasons.
“Northumbrian Water was a worthy winner for the way it builds its
business around customers and the community, principles that usually
do not make headlines but show that a successful utility really does put
customers at the heart of its business.”
Steve Hobson, Editor of Utility Week
13
14
14
Abberton
Significant improvement in security of supply for Essex
58% increase in capacity of existing reservoir
(41 million cubic metres)
Protecting and enhancing a major regional asset
Available 2014
Project timeline
1993
Initial studies commenced
2000
Abberton scheme selected from options
2000-04 Feasibility studies
2004-09 Design
2008
Planning submitted
2009
Planning approval
2009
Tendering and contract award
2010
Reservoir raising to commence
2013
Completion
15
16
17
The Group’s activities (1)
Northumbrian Water Group plc
(“NWG”)
Atlantic Water Ltd
Northumbrian Services Ltd
(“NSL”)
JV’s
Northumbrian Water Ltd (“NWL”)
Water & waste
water contracts
Other
Vehicle Lease and
Service Ltd ****
**** Other shareholders
Northern Electric and Gas
Ltd 50%
Regulated water
& sewerage
company
see next slide
18
The Group’s activities (2)
Water & waste
water contracts
AquaGib
Water and
sewerage service
30 year contract to 2020 *
* Other shareholders
Government of Gibraltar
33.3%
CES
Other
Ayres
Waste water plant
Waste water plant
Project and O&M company Project and O&M company
40 year contract to 2040 ** 30 year contract to 2032***
** Other shareholders
Degremont Ltd 25%
NWP
Agrer
Waste water plant
O&M company
20 year contract to 2024
Provision of
overseas aid funded
work
*** Other shareholders
Semperian Ltd 25%
(project company only)
19
Segmental analysis
Turnover
Northumbrian Water Limited
Water & waste water contracts
Other
Inter segment
2008/09
2007/08
6 months
12 months
£m
326.1
19.1
5.5
(3.0)
347.7
£m
628.0
35.5
12.6
(5.7)
670.4
20
Segmental analysis
Profit before interest
Northumbrian Water Limited
Water & waste water contracts
Other
2008/09
2007/08
6 months
12 months
£m
136.0
3.9
(1.3)
138.6
£m
272.0
8.4
(2.6)
277.8
21
NWL turnover analysis
2008/09
2007/08
6 months
12 months
£m
£m
308.9
595.4
Kielder
6.5
12.8
Scientific services
2.5
5.4
Property Solutions
2.3
4.8
Recreation/Fishing
1.9
2.8
Pipeline solutions
0.7
1.5
Radio aerials/property
0.9
1.6
Other
2.4
3.7
326.1
628.0
NWL appointed
NWL non-appointed
22
Appointed revenue
Split of NWL Revenue (inc. North & South, Water & Sewerage)
600
500
Revenue (£m)
400
300
200
100
0
2003/04
2004/05
2005/06
2006/07
2007/08
Miscellaneous
6.2
5.1
5.3
6.0
5.6
Special Agreements
(Bran Sands)
11.5
12.9
13.4
14.2
14.7
10.6
Industrial Water
8.9
9.5
10.2
9.7
Large Users
27.0
34.9
43.7
34.7
36.5
Non-Households (TB)
84.3
91.1
92.9
111.2
114.1
Measured Households (TB)
38.8
46.6
58.4
70.3
83.8
Unmeasured Households (TB)
259.0
287.7
308.2
314.6
329.9
Tariff Basket (TB) Revenue
382.1
425.4
459.5
496.2
527.9
23
Non tariff basket revenue analysis
Water Resource Plan category
%
Chemicals, rubbers, plastics and man-made material (manufacture)
Manufacture of basic metals, fabricated metal products and machinery
Food and drink (manufacture)
Wholesale and retail
Transport and manufacture of transport equipment
Education and health
Fuel refining
Electricity, gas and water supplies
Other services
41
13
10
9
6
5
5
3
8
24
Ofwat’s 2007/08 financial performance
25
Ofwat’s relative efficiency bands 2007/08
Table 1 Relative operating efficiency bands and ranks for 2007-08
Water
Band A to E
Rank 1-21
Sewerage
Band A to E
Rank 1-10
Water and sewerage companies
Anglian
A (Lower)
3
B (Lower)
Dwr Cymru
C (Lower)
16
C (Upper)
4
8
Northumbrian
B (Lower)
9
C (Upper)
7
Severn Trent
B (Lower)
8
B (Lower)
5
South West
C (Lower)
18
C (Upper)
6
Southern
B (Upper)
7
C (Lower)
9
Thames
C (Lower)
15
A (Upper)
1
United Utilities
B (Lower)
12
C (Lower)
10
Wessex
A (Lower)
4
A (Lower)
3
Yorkshire
A (Upper)
2
A (Upper)
2
Water only companies
Bournemouth & W Hampshire
B (Upper)
6
-
-
Bristol
C (Upper)
14
-
-
Cambridge
D (Upper)
19
-
-
Dee Valley
C (Upper)
13
-
-
Folkestone & Dover
D (Lower)
21
-
-
Portsmouth
A (Upper)
1
-
-
South East
B (Lower)
11
-
-
South Staffordshire
A (Lower)
5
-
-
Sutton & East Surrey
B (Lower)
10
-
-
Tendring Hundred
C (Lower)
17
-
-
Three Valleys
D (Upper)
20
-
-
26
Operating cost efficiency targets
• DBP proposed
- 1% p.a. water
- 2% p.a. sewerage
• Ofwat 2007/08 efficiency assessment
- 1.5% water
- 2.2% sewerage
• No change in proposal for FBP
27
Total operating costs
(07/08 prices)
AMP 4
2007/08
AMP5
2010/11
AMP 5
2014/15
DBP
237
256
247
FBP
237
259
259
28
Operating costs: major initiatives
Start of initiative
UV disinfection
Pensions review
Work management
Waste water review
Sludge transport
Bran Sands digestion *
Howdon digestion *
2008/09
2008/09
2009/10
2009/10
2009/10
2009/10
2012/13
* Digestion projects also have income benefit from ROCs
29
Work management
Wireless transfer of information between the office and field force
– 896 PDAs
– 757 vehicles with tracking
– 27 work groups
– £10m investment
• Benefits
– Lower costs (target £4m pa)
– Improved customer service
– Sat Nav and less paperwork for employees
• Progress to date
– All vehicles have tracking devices
– 130 PDAs deployed
• Programme
– Deployment completion December 2009
•
30
Sludge management – position in 2006
BERWICK
• Bran Sands drying plant
• Largest in UK
• Shipping liquid sludge
• Agricultural & cement outlet for dried sludge
AMBLE
• Inland sludges – some digestion, some
dewatering/lime-stabilisation
NEWBIGGIN
CAMBOIS
BLYTH
RIVER TYNE
HOWDON
HENDON
SEAHAM
HORDEN
RIVER WEAR
SEATON CAREW
MARSKE
BRAN SANDS
Road transfer
Ship transfer
RIVER TEES
31
Sludge management – drivers for
change
•
•
•
•
•
Rising energy cost
Rising maintenance cost
Emerging advanced digestion processes
Incentives for renewable energy generation (ROCs)
New carbon obligations
32
Sludge management – our response
• Advanced digestion and CHP at Bran Sands & Howdon
– A more sustainable approach
– Total investment of £69m
• Sustainable benefits
– Energy from waste
– Significant cost savings
– Reduced CO2 footprint
– Reduced odour
– Improved sludge products
– Less transport
33
Overview of proposals
70k Dry
Tonnes In
Cambi
Process
Advanced
Digestion
Recycle to
CHP Power
Generation
8.8MW
Agriculture
35k Dry Tonnes
Out
34
Sludge management – next steps
• Bran Sands commissioning Summer 2009
• Howdon Planning & Construction (2011-13)
• Opportunities for co-digestion
– Other wastes (eg food, commercial, household)
– Benefits of extra energy and income
35
Gearing
36
Gearing (extract from half-yearly results)
% of RCV1
30.9.08
%
NWG
NWL
NWL appointed
72
64
58
Outlook stable to 2010
1
Mid-year RCV estimated at £3,015m (March 2008: £2,976m)
37
Gearing
• Both NWL and NWG often carry the misconception that
they are highly geared structures
• NWL’s appointed gearing is around 58% (Ofwat’s range
55%-65% in PR04)
• NWL’s published net debt/RCV ratio is around 64%. This
excludes the proceeds from the Kielder securitisation
(due to the interpretation of accounting standards)
which were on-lent to a group company
• NWG’s published net debt/RCV ratio is around 72%.
This ignores the value attributable to the Kielder
contract and PFI’s which should be added to the NWL
RCV. The book entry for the 2003 fair value accounting
38
should also be ignored
Gearing analysis (NWL)
Nonappointed
Appointed
EIB
465.2
465.2
465.2
Eurobonds
1,447.0
1,447.0
1,447.0
Leases
110.0
110.0
110.0
215.2
215.2
215.2
Kielder on-lent to NSL1
Cash
Net debt
Gearing (Net debt/RCV)
Mid-year RCV (£3,016m)
(287.7)
1,734.5
(19.7)
195.5
58%
Ignored due to interpretation of accounting standards
6%
Adj
NWL
alternative
£m
Kielder
1
NWL
published
(159.0)
(307.4)
1,930.0
64%
(159.0)
(307.4)
(159.0)
1,771.0
59%
39
Gearing analysis (NWG)
£m
NWL total
NWL debt
2,237.4
Kielder on-lent to NSL
(159.0)
NWG
published
Adj’s
NWG
alternative
2,237.4
2,237.4
159.0
-
-
PFI’s
124.2
124.2
124.2
NSL bank borrowing
125.0
125.0
125.0
FV debt adjustment2
57.4
57.4
(57.4)
-
Cash/other
(307.4)
(62.6)
(370.0)
Net debt
1,771.0
403.0
2,174.0
(57.4)
2,116.6
Mid-year RCV
3,016.0
3,016.0
3,016.0
3,016.0
3,016.0
Kielder (net proceeds)1
215.2
215.2
PFI’s net debt1
124.2
124.2
3,355.4
3,355.4
Quasi Group RCV
Gearing (Net debt/RCV)
1
Other/
consol.
3,016.0
3,016.0
59%
Ignored by market, 2 Book entry – not serviced debt
13%
3,016.0
72%
(370.0)
63%
40
Gross debt maturity profile (at 30 Sep 2008)
600
£m
500
400
NSL 5 year bank debt
matures May 2011.
Fixed in January at 2.8%
NWL appointed
300
Other
200
100
0
2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2035 2040 2045 2050 2055
Yearly
5 year periods
41
Final Business Plan
42
PR09 timeline/Financial calendar
•
Strategic Direction Statements (SDS)
28 November 2007
•
DBP submitted
11 August 2008
•
Capex draft baseline
23 December 2008
•
FBP submission
3 April 2009
•
Preliminary results announcement
3 June 2009
•
Draft Determination
23 July 2009
•
Interim Management Statement/AGM
30 July 2009
•
Final Determination
26 November 2009
•
Half-yearly announcement
26 November 2009
•
Preliminary results announcement
2 June 2010
43
Strategy starts with Strategic Direction
Statement (SDS)
• Analysis of customer complaints and tracking research
• Specific research with Quadripartite involvement
• Research undertaken by CCWater
• Analysis of future challenges
• Discussions with regulators
• Wide involvement in the business
• Board involvement
44
Customer research – broad messages
•
Priorities for improvement were drinking water quality,
continuity of supply, taste and odour of drinking water,
internal sewer flooding and reducing sewage litter
but
•
40% of customers did not identify any need for improvements
•
Around one in five customers not willing to pay any more
•
Around 60% would only pay up to £5 above inflation (to 2015)
45
What has changed since DBP?
• Recession
- Industrial demand
- Energy prices
• Other
- Tax (no IBAs confirmed)
- Asset revaluation (CCD/MEAV revaluation completed)
46
Revenue forecasts
• FBP forecast takes account of recession
• Adjusted for specific closures
• Significant change from DBP
47
Non-household demand forecast
Essex & Suffolk Non-Household Demand Forecast
200
125
180
115
Volume (Mld)
Volume (Mld)
North East Non-Household Demand Forecast
160
140
120
105
95
85
75
100
2006/07
2007/08
2008/09
2009/10
2010/11
Draft Plan
2011/12
Final Plan
2012/13
2013/14
2014/15
2006/07
2007/08
2008/09
2009/10
2010/11
Draft Plan
2011/12
2012/13
2013/14
2014/15
Final Plan
48
Energy
• Energy prices have been volatile and are difficult to
predict
• Significant changes in market price since DBP
• IDoK methodology difficult to apply
• Awaiting clarification of Ofwat approach
49
Energy
Electricity cost (£m outturn prices)
14/15
50
49.7
DBP
FBP
FD 2004
40
36.3
30
23.2
20
10
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
50
FBP – Capital Programme
51
Capital Incentive Scheme (CIS)
• Under the CIS each company recovers its actual
expenditure plus or minus rewards or penalties based on:
- Comparison of company forecast and Ofwat baseline
- Comparison of actual and forecast expenditure
• Full reconciliation of rewards / penalties at next price
review
• Symmetric approach to overspends and underspends
• Treatment of overspends is less punitive and more
predictable than currently
52
NWL’s draft CIS ratios
• No company achieved a CIS score of less than 100
• The average score was 127 overall (128 for water and
126 sewerage)
• NWL scored 119 for water and 113 for sewerage
• Ofwat’s adjustment to our DBP was well below
average
• We expect the final baseline to be an improvement
on the draft
53
Total investment AMP4 forecast to FBP
(07/08 prices)
1400
1136
1316
AMP4
DBP
1105
1267
1200
1000
800
600
400
200
0
Infrastructure m aint.
Quality
Grow th
Baseline
FBP
Non-infras tructure m aint.
Enhanced service leve ls
54
FBP investment profile
• Maintenance accounts for around 60% of total investment
• Quality accounts for <10%
• Investment profile is broadly flat across the five years
other than for the Abberton scheme
Abberton
• Single largest project in AMP5
• Long life asset, low depreciation
• Investment profile:
£m
AMP 3-4
10/11
11/12
12/13
13/14
37
30
57
23
8
14/15 AMP 5
-
118
Total
155
55
PR09 Finance & Impact on
Customers Bills
56
PR09 Finance
• Cost of capital
• Cost of debt
• Financeability
• Inflation
• K factors
• Average household bills
57
Cost of capital
CAPM
All data real terms %
Ofwat Ofgem CC Nov 08
PR04 GD07 Stansted
NERA NWL DBP
Jan 09
& FBP
Risk free rate
2.8
2.5
2.0
2.5
2.5
Debt premium
1.5
1.05
1.6
1.6
1.2
Cost of debt
4.3
3.55
3.6
4.1
3.7
Equity risk premium
4.85
4.75
4.7
5.4
5.2
Cost of equity ^
7.65
7.25
6.7
7.9
7.8
Gearing
55.0
60
50
60
60
Post tax WACC
* 5.1
4.4
** 4.7
4.9
4.7
5.8
5.0
5.2
5.6
5.3
Mixed (vanilla) WACC
^ Assuming equity beta = 1
*Falls to 4.9% at 60% gearing
** Falls to 4.2% at 60% gearing
58
Cost of debt
CAPM
All data real terms %
NERA
Jan 09
NWL DBP
& FBP
Risk free rate
2.5
2.5
Debt premium
1.6
1.2
Cost of debt
4.1
3.7
Historic debt (real)
3.4
3.3
Future debt (real)
5.7
4.8
70:30
74:26
4.1
3.7
Historic: Future ratio
Weighted cost of debt
59
Financeability modelling
A key financial assumption is the cost of capital. Our
estimate is unchanged from the DBP proposal of 4.7% real,
post tax, significantly lower than at PR04 (5.1%). Our
WACC is assessed against the A- investment grade ratios
assuming 60% debt/RCV
Cash Interest Cover (S&P)
Cash Interest Cover
ACIC 1: Maintenance Charges (Moody’s)
ACIC 2: Maintenance Expenditure (Fitch)
FFO/Debt
RCF/Debt
3.0x
3.0x
1.6x
2.0x
13%
7%
60
Inflation – FBP forecasts %
2010/11
2011/12
onwards
RPI (but see below)
2.2
2.5
COPI
4.7
5.0
IOPI
3.8
4.1
RPI
•
Tariffs (%) November 2009: (2.2)
•
Bonds (%) July 2009:
(2.9)
•
RCV (%)
March 2009:
(1.0)
November 2010:
July 2010:
March 2010:
2.4
2.3
1.5
61
PR09 K factors
• Movement in K from DBP to FBP
• FBP K factors by service and region %
• Average household bills
62
Movement in K from DBP to FBP
Average k in draft plan
Reduced demand (fixed costs spread over lower volumes)
Energy price reductions (but still an increase on PR04 assumptions)
Tax increases (removal of Industrial Buildings Allowance)
Revaluation of assets completed – higher Current Cost Depreciation
Other (see appendix)
Average k in final plan
%
1.3
1.0
(0.3)
0.6
0.4
0.4
3.4
63
FBP K factors by service %
Year
10/11
11/12
12/13
13/14
14/15
Total Average
DBP
Water
7.1
7.1
7.1
0
0
21.3
4.3
2.1
Sewerage
3.5
3.5
3.5
0
0
10.5
2.1
0.1
Total
5.6
5.6
5.6
0
0
16.8
3.4
1.3
Total Average
DBP
Water K split
North
18.6
3.7
1.5
South
24.6
4.9
2.8
64
Average household bills £
(07/08 prices)
Year
09/10
FBP 14/15
DBP 14/15
Water North
£130
£148
£133
Sewer North
£167
£174
£157
Total North
£297
£322
£290
Water South
£166
£195
£177
Based on smoothed K
65
66
Appendix
Supplementary Information:
• Customer debt provisioning bandings/bad debt
• Kielder securitisation
• Metering
• Ofwat’s relative efficiency 2007/08
• Price setting methodology
• Movement in K from DBP to FBP
67
Customer debt provisioning bandings
• Current occupier
• Previous occupier
• Summonsed debt
• Linked debt
• Domestic properties
collected via Local
Authority Agreements 13%
• Directly billed domestic
properties paying by direct
debit 57%
Collection initiatives:
• Attachment of earnings, charging orders, warrants,
Alexander James, disconnection-commercial, face to
face meetings, water direct (DSS deduction), intelligent
recovery.
68
Bad debt profile (NWL)
£m (outturn)
2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
10.7
13.4
14.3
13.3
12.4
13.2
13.7
435.8
421.7
435.8
487.7
532.0
560.7
595.3
Bad debt/Turnover (%)
2.5
3.2
3.3
2.7
2.3
2.3
2.3
Industry average (%)
2.0
2.2
2.3
2.1
2.0
2.1
2.2
P&L bad debt charge
Turnover
69
Kielder securitisation (simplified structure)
NWL
Group
NWL
100%
Shares
Operating
costs
Purchase
price
£212m
Assignment of
future revenues
under WROA
Charitable Trust
Reiver
Holdings
Ltd
100% shares
Bakethin
Holdings Ltd
100%
Shares
EA
Annual
sum
Reiver
Finance Ltd
100% Shares
Loan of net Notes proceeds
£212m
Bakethin Finance
plc
Interest on £248m
GIC held for part payment of
interest and capital
Issue of
Notes
£248m
Investors
Notes:
NWL amortisation of £212m over 30 years-£7.1m – only at NWL company (reversed on consolidation)
Bakethin Finance plc – consolidated at NWG as a quasi subsidiary under SIC 12 (IFRS)
70
NWL Non-appointed & Kielder
(2007/08 outturn)
Turnover
Nonapp.
Reiver
(EA)
£m
£m
* 27.1
12.6
Consol
Adj.
£m
* (7.1)
-
Group
£m
32.6
Operating costs
(14.2)
(0.2)
(14.4)
Operating profit
12.9
12.4
(7.1)
18.2
Interest
10.6
(14.2)
0.2
(3.4)
PBT
23.5
(1.8)
(6.9)
14.8
* Amortisation of £212.1m over 30 years
71
Metering
• Over 40,000 meters installed over the year bringing
meter penetration to:
North East
Essex
Suffolk
18.4%
44.7%
53.8%
72
Ofwat’s relative efficiency 2007/08 (1)
73
Ofwat’s relative efficiency 2007/08 (2)
74
Ofwat’s relative efficiency 2007/08 (3)
75
Ofwat’s relative efficiency 2007/08 (4)
76
Price Setting Methodology
77
The process for setting price limits
Output requirements
↓
Operating expenditure
+
Expenditure to finance the capital
Investment programmes
+
Return on capital
+
=
Revenue requirement (£)
↓
Revenue base (bill payers)
↓
Price limits
Tax
78
Assessing expenditure requirements
Total expenditure
Enhancement
(opex and capex)
Base service
Opex
Capital
maintenance
Infrastructure
renewals
Quality
enhancement
Enhanced
supply
demand
balance
Enhanced
service
levels
Non infrastructure
maintenance
79
Operating costs: methodology (1)
Base year Opex -
Efficiency
+
Additions to base = Opex allowance
Base Year 2007-08 but will review 2008-09 data
80
Operating costs: methodology (2)
• Efficiency
– frontier shift plus catch up
– based on econometric models (not robust but
with limited data difficult to better)
• Additions to base
– must be outside company control
– legislation (eg Traffic Management Act)
– result of required investment (new processes)
or
– agreed enhancements supported by customer
willingness to pay
81
Capital maintenance and CCD:
methodology (1)
• Starting point company plan
• Ofwat challenge using:
– cost base (standard project costs)
– assessment of quality of plan
• The allowance in prices is for the accounting charge
associated with capital maintenance investment
– current cost depreciation (CCD)
– infrastructure renewals charge (IRC)
82
Capital maintenance and CCD:
methodology (2)
• Current Cost Depreciation
– assess “broad equivalence” of CCD with
expenditure over 1997-2025
– adjust if not consistent
• Infrastructure Renewals Charge
– average expenditure on renewals for 2005-2020
– take accruals/pre-payments into account
83
Return on capital: methodology
RCV
Regulated
Capital
Value
x
WACC
=
Allowed Return
Weighted
Average
Cost of
Capital
84
The capital programme: methodology
• Capital maintenance (maintaining base service)
• Levels of service enhancement (improving service)
• Quality enhancement (drinking water and
environmental obligations)
• New development and growth (connections and
system augmentation)
85
Cost of capital
• Single cost of capital
• CAPM to be used, with cross checks to other models
• Long term view of debt costs
• Notional balance sheet (60% gearing?)
• Where gearing is lower than notional, tax funding
will be based on notional level, lower than actually
incurred
• Financeability – look for NPV neutral solutions such
as; flexible approach to ratios, ILD, Equity
investment
86
Movement in K from DBP to FBP
Average k in draft plan
Tax increases (removal of Industrial Buildings Allowance)
Abstraction charges and increased water efficiency costs
Rates revaluation
Traffic Management Act and Tribunals, Courts and Enforcement Act
Reduced demand (fixed costs spread over lower volumes)
Pensions deficit resulting from falling stock market prices
Lower inflation
Revaluation of assets completed – higher Current Cost Depreciation
Lower capex programme (some as a result of the recession)
Energy price reductions (but still an increase of PR04 assumptions)
Net changes to other operating costs
Average k in final plan
%
1.3
0.6
0.2
0.1
0.1
1.0
0.2
(0.3)
0.4
(0.1)
(0.3)
0.2
3.4
87