Welcome back, and thank you for your patience during the break. I will now hand the floor back to Susan Davy.
Thank you very much, Adam, and welcome, everybody, this morning. Thank you for joining us to discuss Pennon's half year results for 2023-24. As you will have just seen from the video, we have had a step-up in investment across the group by some 87% compared to half one last year. Very much investing, not just for today, but in the future, making progress on the things that matter most to our customers across the regions that we serve. As well as the complementary investment that's going on with Pennon Power to grow the renewables support for the group.
We're focused on customer priorities, protecting water quality, and making sure we've got water resources in place to deliver clean, safe drinking water, tackling storm overflows, eradicating pollution, protecting the environment, and making sure that we're supporting affordability for our customers, and you'd have seen that in the presentation. Absolutely underpinned by a robust balance sheet. We've got stable gearing, sector-leading, efficient financing in place, and that all goes to support our dividend policy of CPIH plus 2%. Thank you for joining. We have members of the executive team here today. We've got Paul, we've got Steve Buck, who's joined and will be taking over from Paul at the end of December. And we've got John Halsall, who's our COO, as well, in the room, as well as many others. Over to Q&A.
Thank you very much.
As a reminder, if you'd like to ask a question today, that'll be star followed by 1 on your telephone keypad to enter the queue. And our first question comes from Martin Young from Investec. Martin, your line is open. Please go ahead.
Good morning to everybody. I just wanted to echo Susan's best wishes to Paul. Thank you for everything that you've done over the years, Paul, and all the very best for the future. Then turning to questions, two of those. You have, in your business plan, obviously, set out a significant uptick in the level of investment in AMP 8 versus what you have done in AMP 7, and indeed, versus what you will do in the last couple of years of AMP 7. Maybe you could say something around the preparation that you have done to make sure that the supply chain is lined up and ready to go on all of this. And then the second question relates to Thames Water.
In their business plan, they have effectively asked for a degree of special treatment, if you like. Water regulation is a comparator, you know, based with penalties and rewards. If something is done to accommodate the request of Thames, what do you think should be done in order to make sure that the good performers in this space are treated on an equal basis? Thank you.
Okay. Thanks for those questions, Martin. So in terms of your first point around the step-up in investment, capital investment, yes, we are ramping up in K 7, and indeed, the ramp-up we've got for this regulatory period is almost a kind of doubling, if not a little bit more, of CapEx delivery already, compared to where we were three or four years ago. So when we talk about preparation and the ability to ramp up, we've already been doing that for this regulatory period. Yes, there's a little bit of a ramp again for our business plan that we've put in. But to your point, in terms of preparation, you know, we have already onboarded our new tier one supply chain for delivery.
We've, you know, had a kickoff mobilization get together with those, and we are absolutely starting that now, in preparation for the new regulatory period. So, you know, the supply chain's in place, but it's not just the supply chain, it's about what we're doing with our teams within the organization, and we have been ramping up in terms of employees to support the delivery that will be coming, as well as what we're doing now. And we've got our fantastic apprenticeship programs and graduate programs in place, where we're getting new talent into the business, and making sure that we are ready for delivery for the K program. But I've got to stress, I think, Martin, you know, we are doing it now. You know, we are—we've already ramped up.
We've already accelerated investment. So yes, there's a little bit of a, you know, an extra pickup for AMP 8, but actually, the big push has been now, and we're on with that. Then in terms of your second point around Thames Water, and, you know, if, the regulator intervenes and does something different with Thames Water, what does that mean for everybody? I mean, I think we have a very robust regulator, in Ofwat. They know what they're doing. They know that, it's incredibly important to incentivize, the sector. It is all about, you know, comparative positioning, and making sure that we've got a, a regulatory framework and a regime that works. And I'm sure, as they have done in the past, they will, they will do their job, and they will do it well.
So, you know, am I concerned about things that happen for one specific company? You know, not when you've, you know, you've got a good, robust regulator. You know, who is able to make sure and have done for, you know, a number of decades, make sure we have got a robust regulation regime in place. So it'll be interesting to see what happens, but I'm sure the regulator will be able to work out how to make it work for the sector, you know, if there is any kind of intervention. Thank you. I hope I answered your question, Martin. Thanks.
The next question comes from Sarah Lester, from Morgan Stanley. Sarah, your line is open. Please go ahead.
Thank you. Good morning. Thanks for taking my question, but of course, a huge congratulations first to Paul, on this, your last result, and a big welcome to Steve. I just have one question for you, Susan, please, but there are kind of three small parts to it. As we approach the end of calendar year 2023, and we look forward to 2024, I'm just curious, firstly, what excites you the most about the year ahead? Secondly, what are you most concerned about or see as the biggest challenge? And then thirdly, if there is one single message you'd like investors to take into 2024, what is it? Thank you.
Well, Sarah, you've really gone for it this morning. Okay, thank you for those questions. So what am I excited about? Well, I am excited about the fact that, you know, we, you saw it in the presentation. You know, we've launched a number of initiatives across the group, and, CREWW that you saw in the presentation is something, you know, I'm really proud of, that, you know, we have delivered alongside the university. It's a really exciting project, where we're bringing together the greatest minds to solve some of the biggest issues we've got. You know, things like microplastics and its aspects of pollution that we really do need to investigate to then resolve. So I'm very excited about the joint venture with the University of Exeter.
So that's a definite exciting point, given we're there this week. I think in terms of concern, I don't have concerns per se. You know, we are getting on and doing what we need to do. We're delivering, we understand what regionally is important to the communities that we serve. We've got our renewables business that you know, we are investing in to make sure that we can offset some of those risks on the wholesale energy market side. So I don't have concerns per se. We've got a good plan in place for the next year. We've got action plans, you know, ready to make sure that we deliver. So no, no concerns from that front. Very much gonna be delivering on our strategy.
And then for 2024 and beyond, you know, again, we've got a great plan in place and brilliant colleagues across the business to deliver it. So I probably disappointed you, Sarah, but I don't think there's anything that particularly concerns me. And excited about just being able to get on and deliver what we need to do.
No, that's perfect. Thank you.
The next question comes from Dominic Nash, from Barclays. Dominic, your line is open. Please go ahead.
Good morning, everyone, and thank you for the questions. I've just got a couple from me. Just following on from Sarah's question about what can excite you in 2024, Susan, and clearly getting a four-star EA score must be quite an exciting prospect. Can you just give us some color on how that is going, and how confident you that we will get a four-star rating for 2024? And second, I've got a question for you, Paul. Echoing earlier comments, you know, well done. Thank you. Congratulations for your final set of results. Now, going back the number of years that you've been CFO and involved in Pennon. Is there... If you go back in time, is there anything that you would have considered doing differently?
And secondly, what's been the most rewarding or most interesting thing that you think you've done, highlight of your time here? Thank you.
Okay. Morning, Dom. Thanks for those questions. So, EPA, we are really focused on, on getting the highest star rating. Not for, you know, for ourselves, but for our communities, and making sure that we're delivering. Just to be really clear as well, Dom, the 2024 assessment, we will get in 2025, because obviously it comes out after, after the year, and that's the one where we will be focused on getting that four star. I've always said it's not gonna be a linear trajectory to get there. We have been working incredibly hard, and, and John, who has joined us, this year, has been really making sure we've got sustainable action plans in place to deliver.
Now, the two focused areas for us to get to the EPA star rating that we need to get to is around reducing our impact on the environment with pollution and making sure from a resource position, post the drought, that we've got our resources back to where we need to get to. So perhaps if I talk about both of those. On the pollution side, you know, I'm pleased in terms of serious pollution numbers, they're down. If we look back to 2021, 2022, they were much higher, you know, up around 8 or so. They have come down last year and this year. We've had 1 to date.
Now, one is one too many, and we want to get to zero, but I'm pleased with the trajectory on that measure. For the number of that are not the serious pollutions, but in indeed, are serious in the sense that they do impact the environment. We've had a trajectory of bringing those down year on year. And we've, you know, taken 50%, as of 2020, off the numbers. This year, we're probably going to have an outcome where we've a slight tick up on that, but it hasn't taken us away from the fact that we will get to where we need to get to next year. And we have the action plans to make sure that's back on track. So we are getting there with the pollutions and eradicating those.
And then on the water resources side, you'll see in the presentation, you know, we're investing significantly to create more headroom, to create more resources. That's one side of the, of the coin, and the second side is making sure that we're supporting customers, and we're being more efficient with the water that we use. So reducing leaks and helping customers to reduce their leaks, as well as encouraging them to use less water. And last year, we had the Stop the Drop campaign, which worked really well for demand management, and we're looking at, you know, similar initiatives that can help us drive demand reductions. But again, we're confident that our resource position is recovering and will be recovered for that assessment for next year. So those are the, the two areas to focus on.
With that, I'll hand over to Paul for his question.
Okay. Thank you, Susan, and thank you for your kind question, Dominic, and for everyone else's kind wishes so far. It's really thankful for that. It's really kind. In terms of things I might consider doing differently, it's a strange question. I'm not sure I've ever dwelt on it too much, but I suppose if I take a step back and look at where the sector is right now, there is, with my treasury hat on, a sort of side of me that wishes perhaps we'd have, as a sector, done more investment in the past ten years, when rates and yields were lower rather than coming to it at this point in time, when rates and yields are obviously in a very different place.
But that's, that's just a reflection on, on where we are as a sector rather than, anything more, more specific. In terms of all the, rewarding things that have happened over the, the time I've been here, obviously, there's been lots of landmark transactions, not least, building out and then ultimately, selling Viridor, as well as, the acquisitions of, of Bournemouth and Bristol, and a, a lot of notable treasury transactions along the way. So there's always been a lot of interesting things that we've done. We've also been at the forefront of many things and, you know, working closely with Susan on, on pushing agendas like, our Sustainable Financing Framework, which is the first in the sector, as well as, achieving the Fair Tax Mark, again, the first water company to do so back in 2018.
Those things really do stand out for me. But obviously, my main highlight would be working with my fabulous colleagues, past and present, over the 14 years I've been here. That's been the main thing for me.
Thank you.
As a reminder, that's star one to ask a question today. The next question comes from James Brand from Deutsche Bank. James, your line is open. Please go ahead.
Good morning. Also best wishes, and thanks, from me to Paul. I had a few questions on ODIs. So firstly, you kind of highlighted that you're third ranked in terms of your ODI performance, in terms of the kind of the... I think the number of measures which you're outperforming on. But you have had, I think, net penalties from ODIs over this period. So just wondering why that was. Is there a few measures, even though you're doing really well on a lot of measures, are there some measures that have just gone very, very badly or relatively badly?
Second question is, given you are performing, I think overall, pretty well on ODIs and are getting net penalties over the period, I think that's a pretty clear sign that Ofwat has been extremely tough on its ODI targets for the industry in this regulatory period. The second question is: do you think there's any scope for their approach to get a bit easier in going into the next period? Now that you actually might have more companies that are able to outperform if they're doing well. And then thirdly, on ODIs, I don't think you said anything specific about kind of ODI rewards or penalties in the half or for the full year. So I was just kind of wondering, are you on track to outperform on ODIs for this year? Thank you very much.
Okay. Thanks very much for your questions, James. The first question, I think, was around ODIs. If you know, given our comparative position, you know, where are we in terms of that overall assessment and other specific measures that are kind of dragging the overall position down? Now, I think in terms of the ODIs, appreciate in the presentation, there are a number of appendices, but in the appendices, I assure you there are a few tables in there that detail the ODI position. You're right, there are a couple of ODIs that have been in penalty that are not as much in penalty as they were when we first started this regulatory period, but are still in penalty, and they're things that you might assume would be.
So we've just touched on with the earlier conversation and the question that we had in from Dominic around the EPA. So, you know, we are not where we wanted to be for our EPA assessment. We are going to get there, but we're not there yet. So obviously, we've got penalty for that, then we've got penalty around the wastewater pollution performance, which, you know, obviously goes some way to explaining, you know, why we have the penalty, the net penalty position that we have. But there are things that have, you know, gone well.
There are things that, you know, we are delivering on, whether it's the bathing water quality, which is incredibly important for our region, or whether it's the catchment work, which again is incredibly important for water quality, which has been improving the water quality and discoloration position that we have relative to the rest of the sector. So there are areas where we have done well, but you're right, in terms of a slight net penalty, that's where we find ourselves. Now, when you look at the, I think your second question was the common performance metrics and where those are across the sector. You know, obviously, if you look at companies, I think companies have really struggled on the common performance metrics to get into a net reward position.
So I'm sure that's something that the regulator will be reflecting on. But having said that, it is important that targets are set to drive us and to make sure that we are delivering and incentivized to deliver for our customers. So I'm sure that is something that Ofwat will reflect on. I think the third point, in terms of the overall numbers, I think we're in a slight net penalty for the half year, 2023-2024. But I think as we've said in the announcement, we don't anticipate the full year penalty being as high as it was last year. So I think we're about GBP 3 million for the half year, and last year we were at GBP 10 million as penalty.
Great. Thank you very much.
The next question comes from Hannah Avery, from BNP Paribas. Hannah, your line is open. Please go ahead.
Hi, good morning, everyone. I have a quick question on your tariff innovation comment. So you mentioned your pilot schemes that are going on. I'm also conscious that you have quite a unique position in terms of the second home ownership being very high in your region. I was just wondering if you could talk a bit more about how the pilot schemes are going, which ones are looking the most promising, and then to what extent these, kind of new changes to the tariffs or potential changes to tariffs rely on smart metering and kind of what's your smart meter penetration at the moment? And with that in mind, kind of when we could see potential new tariffs being introduced?
Yes, thanks very much for your question this morning. So, it's a bit of a first for the sector, really. I know other companies have looked at trialing different tariffs, but we're going out with the sweetest tariffs that we're going to be trialing. We put that in the charges scheme for this coming year so that we can understand, you know, what, what differences that we can make and how we can support our customers. So there's a range of things we're looking at, and for our region, you know, we are looking at seasonal tariffs. We're looking at, you know, rising block tariffs, you know, where you are charged, you know, a certain amount for a a consumption level and then, you know, a higher amount for a block use above that.
We're looking at peak charging, and we're looking at, you know, how we might incentivize customers who come into the region to use less water as well. So lots of trials going on, and we're targeting, you're quite right, some of those charges. We want to make sure that it works in a really efficient way, and smart metering helps us do that. So some of the trials are targeted at specific regions, you know, where we do have, you know, lots of visitors to the region.
So, North Devon, for example, about a third of the customers now have got smart meters in place, and that will help us encourage them to take part in our trials, take part in these pilots, to understand which tariffs will help in terms of their affordability, but also usage and demand. You know, we had our Stop the Drop campaign last year, which was a blanket campaign for Cornwall, as we were trying to recharge resources and make sure the reservoir levels were gonna get to a good place. We encouraged customers to use less water, and they would get an amount off their bill from doing so if we hit a certain level. That was incredibly popular.
It went well, and customers got, you know, GBP 30 off their bill, from doing it. So it was, understanding the outcome from that pilot has led us to think about charging in a different way. Now, you know, this is not usual for the sector, so, you know, there aren't many of these tariffs around, so we want to make sure we're piloting them, and we'll do that next year to then see what works, see what doesn't, and take it forward. But, I have to stress that, these aren't compulsory, tariff trials that we're doing. These are voluntary. You know, we're getting good take-up, and we'll see how those go. And then, obviously, going forward, it will be, something that customers can choose in terms of, you know, the tariff that suits them best.
So dual purpose, helping customers so they're in control and can manage their affordability. And then for us, we think it will help drive water efficiency. And also, there's a fairness point for our region, you know, where we have, you know, lots of visitors coming into the region, during the summer period. We want to make sure that those who are resident, resident all year round, you know, are, are basically, incentivized for their water efficiency, but also perhaps get a discount, you know, at the right time, to reflect that. So lots going on.
Okay.
... talking about the outcomes of those pilots, this time next year.
Okay, super. Thank you. That's all clear. The next question comes from John Campbell from Bank of America. John, your line is open. Please go ahead.
Hi. Good morning. Thank you for taking my questions. And firstly, good luck to Paul with his new endeavors. The first question I had related to the Ofwat investigation of South West Water, among other several water firms as well. Appreciate this is an ongoing investigation, so you can't perhaps provide specifics, but do you have a rough idea of when we could have an answer? For example, would it be by the final determination? And generally, do you feel that Pennon is well-positioned with regards to this investigation? My second question is related to your business plan. Has Ofwat come back with any comments or questions, or indeed, local politicians related to your PR 2024 business plan? Thank you.
Paul?
Yeah.
Yep.
Perhaps I'll take that first one on the Ofwat investigation. So just to remind everyone on the call, there are two investigations underway at the moment. First one relates to wastewater and is an investigation that is being looked at by the Environment Agency and Ofwat, and that was kicked off a number of years ago now and involves all wastewater companies. And then Ofwat have taken further steps with a number of specific companies, six in total. We continue to receive questions in relation to those investigations, and we openly and transparently respond to those questions.
At this point in time, we haven't had any substantive engagement that would give rise to us having any particular insight, unfortunately, on timelines or potential outcomes in that regard. So in terms of the wastewater ones, still very much going through the process of responding to questions as they are raised. Then there is a second investigation that is underway in relation to leakage, particularly around how leakage has reduced following a spike in leakage that we reported through one of the COVID years. That then became a reduction as it became back on track. That is something Ofwat have inquired about and asked us some questions. In regards to that one, again, we've received a number of questions.
We've had some more engagement in terms of meetings, so one would be hopeful that that one might be moving towards some sort of resolution sooner rather than later, in terms of which one might be done first. But similarly, again, we have no insight into actual timelines or potential outcomes.
Okay, thanks, John. And then you asked about the business plan. Obviously, we submitted the business plan. There is a timeline and a timetable for, you know, what happens next. We've had, which I'm sure Ofwat has had, some, you know, technical queries on, on some of the submission tables that we've sent in. But obviously Ofwat will be, you know, working through those, and there hasn't been any kind of substantive conversation with them about the plan that's been submitted. But, obviously, we will, we will await the next steps in the process.
Okay, thank you.
Just a final reminder, that's star followed by one on your telephone keypad. We have a follow-up from Dominic Nash from Barclays. Dominic, please go ahead.
Hi there. Yeah, just a quick one. In your results, you said that your CapEx has gone up by GBP 100 million from GBP 750 million to GBP 850 million through AMP 7. Can you just give us some sort of color as to whether that was included in the business plan submission and the GBP 5.4 billion shadow RAB that you published for April 2025? And what impact that will have or what return will you get on that extra GBP 100 million? I presume you share 50% of it with consumers, but are there any other additional sort of return advantages from that extra GBP 100 million pounds spent? Thank you.
Yeah. So in terms of the technical way that will come through, Dominic, you're right. It will effectively half of that will effectively get through up onto the to the shadow RCV now. At the time we talked about that GBP 5.4 billion and we had a specific breakdown of it in our spotlight presentation, if you remember. I'm sure you will do. Now that element wouldn't be included in that, but as it is GBP 50 million, obviously half of GBP 100 million would go on to that RCV. It will still round to GBP 5.4 billion. So 5.4 is still very much the number, but now it does also include the effect of that extra GBP 100 million coming through.
That extra GBP 100 million, just to give you a flavor, relates to further activity. In terms of our investments, in items such as pollution, such as leakage, driving, performance, activity levels, et cetera, we are going to be spending a little bit more on that, and that is what is coming through there, as well as, an element of higher cost inflation, for particular items. It's, it's a couple of things, but primarily higher activity coming through.
Thank you.
We have no further questions, so I'll hand the call back to Susan Davy for concluding remarks.
Okay. Thanks so much, Evan. Well, thank you everybody for joining us this morning. Great to get those questions in. As you've seen, we've got a robust set of results for the half year, very much underpinning our dividend. As many have said on the call, again, I just want to reiterate my thanks for Paul for his contribution to Pennon, and wish him well for the future. And my hello to Steve, who's here this morning, who's joined this week and obviously part of the planned handover with Paul before taking up the CFO post at the beginning of the new year. So thank you, everybody. And thank you for joining.
Sure.
This concludes today's call. Thank you very much.