Utility Week

UTILITY Week 22nd May 2015

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UTILITY WEEK | 22ND - 28TH MAY 2015 | 15 Finance & Investment Analysis S evern Trent has hunkered down to focus on its core businesses now the PR14 storm has passed, and the new, financially challenging landscape has been revealed. The price review has been bruising for the water companies, with the weighted aver- age cost of capital falling from 5.1 per cent for the 2010-15 period, initially to 3.85 per cent at the dra determination stage, and then down further still to 3.74 per cent by the time the final determinations were published by Ofwat. This will hit the returns that the water companies, including Severn Trent, are able to make to their investors over the next five years, and put a squeeze on their revenues. For Severn Trent this has meant a ra of cost-cutting measures, including a heavy hit to its dividends. But the water company won't stop there, with news emerging last week that it will let its water purification business fall away – in a £61.9 million sales deal – to partner De Nora. The Italian firm has paid £12.6 million in cash for the business and taken responsi- bility for £49.3 million of net company debt at the same time. The sale of the water purification busi- ness, which reported a loss of £39.2 million for 2013/14, is seen by Whitman Howard utilities analyst Angelos Anastasiou as "a good price and a reasonable deal, freeing up some cash". With the water purification business sold, Severn Trent's chief executive Liv Garfield intends to focus on ensuring the remaining elements of the company's business services division perform. The businesses in the newly created busi- ness division, which was formed during the recent reorganisation of Severn Trent, include the non-regulated areas of the com- pany such as renewable energy and non- domestic retail. The restructure, and the sale of the water purification business, comes in the wake of the final determination. It saw Severn Trent state that 500 middle management positions were going to be lost. The actual number of job losses was closer to 100 with a number of staff being repositioned and moved else- where in the company. A couple of days aer Severn Trent accepted Ofwat's final determination at the end of January, Garfield also announced that the dividend was being slashed by 5 per cent, and that the company was starting a £100 million share buyback. Analysts predict that the cut to the divi- dend will save Severn Trent about £70 mil- lion during the five-year AMP6 period, cash that will be much needed as the company seeks to make up the difference between its business plan and its final determination. Aside from the financial preparations that Severn Trent has made to deal with its PR14 settlement, the company is also gearing up to attack the retail market once it opens for non-household competition in 2017. This is one of the "core businesses" Gar- field has said the company remains "commit- ted" to, and in January she unveiled a new management team. The reshuffle of the management team saw Sarah Bentley hired as the company's chief customer officer, and Helen Miles take up the role of new group commercial officer. These two leadership appointments were made to drive a "greater customer and com- mercial focus" in the company. The water purification business, which has been run in conjunction with De Nora for 13 years, was no longer deemed central to Severn Trent, even though the company has made improvements to its sales process and contract management over the past 18 months. Garfield added: "The business is now on a more stable footing and growing both the top and bottom line. However, it's clear that in order for the business to fulfil its growth potential it needs manufacturing and prod- uct expertise and focus, so it's the right time for it to have a new owner." That new owner is Milan-based De Nora, which now owns the water purification business outright and aims to use it to help broaden its footprint in the water treatment sector globally. On announcing the deal, De Nora chief executive Paolo Dellacha, said: "Water treat- ment has always been in the DNA of our company, and a substantial portion of our turnover is generated by sales of products addressing water issues. "This acquisition certainly enhances the value creation for all customers in need of sustainable solutions for their water treat- ment requirements and for all our other stakeholders." It appears to be a case of the right deal at the right time, especially because merger and acquisition season in the UK water sector is now well under way aer Pennon, subject to approval from the Competition and Markets Authority, acquired Bournemouth Water in a £100.9 million deal last month. For Severn Trent, as the reality of the new price control period and the looming market opening set in, its focus is on shoring up its own business and getting set up for compe- tition. Anything not deemed central to that ambition – be they middle managers or parts of the business – has been let go. Back to core business The price review left many water companies licking their wounds. The consequences for Severn Trent have included a round of job losses, a disposal and slashed dividends. Mathew Beech reports. Profile: De Nora HQ: Milan, Italy Founded: 1923 Chairman: Federico De Nora Chief executive: Paolo Dellacha Sectors: Electrochemistry Areas of operation: 60 countries including Brazil, China, Germany, India, Italy, Japan, Singapore and the US. The water purification business, which was run in conjunction with De Nora, was no longer deemed central to Severn Trent

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