Severn Trent: new investment plan and more liquidity add clarity

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Company chiefs rarely get market plaudits after announcing huge capital raisings. But Severn Trent’s Liv Garfield is a special case. On Friday, the UK water company announced a £1bn equity placement, nearly a fifth of its share capital. Its share price climbed as much as 6 per cent.

This money partly pays for the utility’s plans to spend £12.9bn to improve its water delivery and treatment systems. But so will household bills, up 37 per cent by 2030.

Water utilities should deliver clarity, not filthy run-offs. Instead some like Thames Water scramble to stop sewage run-offs. Severn has received less criticism, though a class-action suit is under way against it.

Garfield, the highest-paid water boss, has cleverly leapfrogged peers on necessary water investment plans. All draft plans were due to water regulator Ofwat on Monday. Instead, Severn has announced it will reduce leakages by 16 per cent and cut sewage run-offs, plus hire 7,000 workers to do so. The outlay roughly doubles Severn’s capital and operating costs.  

Given the sums involved, a £1bn contribution of investor equity may not look like much. Shareholders such as the third-largest Qatar Investment Authority might think otherwise. It will provide £500mn and, depending on the outcome of the placing, will increase its holding from the current 4.6 per cent.

Nevertheless, the bulk of this new spending will depend on funding by debt and householder pocketbooks. Those also help cover the 4.5 per cent dividend yield as negative free cash flow is forecast.    

What matters for credit rating agencies (and Ofwat) is Severn’s net debt-to-regulatory capital value. That should fall 5 percentage points towards 61-65 per cent, says Dominic Nash at Barclays. That will protect an Ofwat-required credit investment rating.

Garfield has opened the nozzle early on Severn’s investment plans. That newfound certainty is good news for shareholders.