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Protecting consumers, promoting value, safeguarding the future1 City briefing – final determinations 26 November 2009.

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Presentation on theme: "Protecting consumers, promoting value, safeguarding the future1 City briefing – final determinations 26 November 2009."— Presentation transcript:

1 Protecting consumers, promoting value, safeguarding the future1 City briefing – final determinations 26 November 2009

2 Water and environmental quality has improved – more than 100 Blue Flag beaches in England and Wales, and fish in the Thames again Customer service is significantly better than 17 years ago – only 6,620 properties (0.03%) are now at risk of low water pressure, compared with 344,259 (1.6%) properties in Leakage has fallen by 35% since peak in Network is functioning better – more companies have stable serviceability than ever before £85 billion has been invested. Companies are more efficient – bills are 30% lower than they would have been What has been achieved so far Protecting consumers, promoting value, safeguarding the future2

3 Headlines Protecting consumers, promoting value, safeguarding the future3 DD FD Annual average K Change in average bills to % -1% Cost of capital (fully post-tax)4.5 Opex (five year)£17.9 bn £18.5 bn Capex (five year)£20.8 bn £22.1 bn CIS ratio – water CIS ratio – sewerage RCV growth +9% +11% Additional notified items for bad debt and abstraction charges

4 Average annual price limits – weighted industry average Annual average Final business plansDraft determinations Final determinations Protecting consumers, promoting value, safeguarding the future4

5 Total capital expenditure assumptions Protecting consumers, promoting value, safeguarding the future Final business planDraft determinationsFinal determinations £ billion ( prices) £24.2 billion£20.8 billion£22.1 billion

6 CIS baseline ratios Water and sewerage companies WaterSewerageWater only companiesWater Anglian10599Bournemouth & W Hants115 Dŵr Cymru105106Bristol138 Northumbrian103101Cambridge101 Severn Trent102 Dee Valley99 South West105110Veolia Southeast119 Southern122112Portsmouth108 Thames125108South East129 United Utilities94108South Staffordshire107 Wessex10497Sutton and East Surrey124 Yorkshire10093Veolia East143 Veolia Central131 Industry average Protecting consumers, promoting value, safeguarding the future6

7 Actual and projected net capital investment by purpose category Protecting consumers, promoting value, safeguarding the future7 Enhanced service level Supply/demand balance Quality enhancement Capital maintenance RCV FD FBP Price review period Investment in £ billion RCV £ billion

8 Operating expenditure since 1989 Protecting consumers, promoting value, safeguarding the future8

9 Additional operating expenditure £0.4 billion Protecting consumers, promoting value, safeguarding the future9 Pensions 24% Energy 4% Rates 25% Other -2% Traffic management act 2% EA abstraction charges 1% Transfers from capital expenditure 6% Operating expenditure arising from enhanced service 40% The ‘other’ category is negative because it includes spend to save outputs

10 Risk and uncertainty RPI and COPI indexation CIS capex symmetry Revenue correction mechanism Five-yearly price review Change protocol Logging up and down Interim determinations Substantial effect clause Notified items: Climate change Traffic Management Act Bad debt Abstraction charges Protecting consumers, promoting value, safeguarding the future10

11 Cost of capital Protecting consumers, promoting value, safeguarding the future11 FD Cost of equity (post-tax)7.1% Cost of debt (gross of tax shield)3.6% Gearing (debt:RCV)57.5% WACC – gross of tax shield (vanilla) 5.1% WACC – post-tax 4.5%

12 Financeability Protecting consumers, promoting value, safeguarding the future12 Target credit rating of A- or equivalent Incentive adjustments (FD £178 million, DD £307 million) Actual capital structure is a matter for companies and their investors Equity injections assumed for three companies (Thames, Bristol and South East)

13 Conclusions Protecting consumers, promoting value, safeguarding the future13 Scope for innovation and better management Investors can drive management performance Companies and investors can reap the benefits of outperformance But they must accept the risks Future challenges: Climate change Increasing population New environmental standards

14 Questions and answers Protecting consumers, promoting value, safeguarding the future14 See our website for more details: www. ofwat.gov.uk


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