Team are just setting that up, and then we will throw it open for questions. I think in terms of questions, hands up already. I think Louise will be coming round with the microphone for the questions for those in the audience. Now, in terms of the information that we have put out onto the website today, obviously you have got that in your booklets. If there are any questions that come from that, then please do ask as well. We are ready to go. Lots of hands going up already. I think then Louise will come round and do that. Team, we are going to join back on for the Q&A. I will perch on the end like a good host.
Is it turned on? Yeah. Thanks for that. It's, yeah, I can hear you. Okay. Sorry. It's, James Brand from Deutsche Bank. Question for Laura, those comments just now on the outperformance. Sounds like you had a lot of these already. You're saying that in the early parts of the period, it was mostly going to be financing that's driving the outperformance, or did I misinterpret that? That seemed to be, you said that was going to be the main factor in the early parts of the period. If that's the case, should we take that to imply that of the 86 million of efficiencies that you're generating, that the vast majority of that will be, or at least a significant majority of that would be reinvested back in the business in the early years of the period?
We do anticipate that we'll be able to achieve some efficiency across all of the areas across all of the AMP. We're not giving out specific elements. We do think next year there's a good opportunity for financing outperformance versus the real cost of debt from Ofwat. Absolutely, we're looking at TOTEX efficiencies as well. We've already achieved the targets we said with Bristol Water. We're on with the challenge of the integration synergies with SES. We've been restructuring the business and reshaping it to make sure it's the right shape and size as we move forward for K8. We think there is opportunity to drive efficiencies. Yes, we will be also looking at how do we balance that with making sure we do the right level of investment over the five-year period to get the performance we need.
I think, particularly with higher inflation, the financing opportunity is good for next year. We have not put out specific numbers or a specific balance, but we also think that there is opportunity around TOTEX, but we are just finalizing what our plans are around that.
Yeah. I think it is, you know, to your point, James, we, and I said it earlier, I very much believe that we have to drive for efficiency. It is right and proper that we do that. That will give us optionality, but we are certainly going to be driving for it every single year with the AMP.
Sorry, just a super quick follow-on. The inflation comment, do you, in your assumption for the 7% real, do you assume that inflation then normalizes? I think you said you assumed 2.5% on average over the period inflation, or maybe you did not specify.
We haven't specified an inflation number, but I think if you look at where we are in inflation today, it's higher than, perhaps it has been, or the long-term average would be assumed. Given we have a low level of index linked debt, that gives us a strong position, I think, in terms of where we're positioned, from both a gearing and an interest perspective.
Thank you.
Hi, it's Mark Freshney from UBS. If I could ask two questions, please? Firstly, on balance sheet flexibility, you've completed the rights issue, but you're still towards the top of the historic 55-65% net debt to RAB range. The known item is the price control we have now, but there will inevitably be other stuff that comes along, right? We don't know what they are, but Green Recovery , another issue comes up, there has to be an interim determination. Can you talk about the options you have for additional flexibility? Secondly, just on reservoir levels, particularly way out in the peninsula, I know that, you know, we were discussing last night, you built, the desalination is not online yet. You are looking to potentially reconfigure that.
As you look at water levels and water resilience, you know, how can you be confident that, you know, the droughts are not going to come back?
Very happy to pick those up and I'll get David to input on the question around water resources. I think on the first question, if I start that one, Laura, just in terms of how will it work out for this period with potential for bringing forward other investments? I think what's very different this period compared to the one we're just exiting is how Ofwat has set up the framework for this five-year period. You mentioned the potential for interim determinations. The period we've just exited, we didn't really have that in place. Very few, in fact, I can't think of one notified item that was available for an interim determination through this five-year period that we're just exiting, but a different position going forward. What does that mean? An interim determination means you can then get the revenues coming in, in period.
Whereas what we've had in this five-year period where we've invested or reinvested is that we then get the revenues in, the subsequent regulatory period, which will obviously put more pressure on the balance sheet. Having an interim determination actually allows you to get the revenues in, in the periods that you are delivering in as opposed to waiting, so that would help the balance sheet. I don't know, Laura, if there's anything else we want to talk about in terms of the gearing levels, because we've said plenty of that before, but possibly worth repeating again.
Yeah, I mean, as part of the rights issue, we talked about anticipating whilst our policy says 55-65%, that we anticipated over the period would be between 60-65% on the gearing.
We are at the top end of that bracket, but I think not, not dissimilar to where we've been for some time. We'll obviously look to manage that, but we've a range of tools available to us. We are targeting efficiency to make sure that we've got a scope and capacity. And, as Susan says, I think the notified items and, as well as the, I guess the cost mechanisms, which help us manage downside risk, meaning that we're in a stronger position to maintain that balance sheet position over the next five-year periods, and be able to respond to any of the opportunities that may arise. Okay. And then drought, David.
The drought will come back. The climate's changed. The drought will come back. I'd say a couple of things about that. First of all, you know, in terms of what we've done in the last two and a half years, we've brought online 50% against average demand. We've brought online 50% new supply for Devon and 32% of average demand new supply for Cornwall. The gap between that 32% and the 45% for Cornwall is the desalination plant, which we are progressing. First of all, we've taken an enormous step up in that period. The second thing I'd say is, your point is why we've got to keep going. We talked about Cheddar 2 Reservoir, which is a build this AMP period.
We do have, by the way, I did not say it in my quick responses before, but we do have a number of smaller supply increments coming online during AMP8. With what we have done during AMP7, we only need those, you know, on a supply demand balance, we only need a very incremental increase between now and 2030. Because of course, the third point is we have driven down our demand input as well. Our supply has gone up, our demand input side has come down as well, creating greater headroom for us, at least in this AMP8 period. Could I just make one other point, because I think it is pretty important.
What we have actually started is the transition from relying on rivers for our abstraction, rivers where we're at the fate of whomever as to whether there's water in the river. We've now got online, and particularly in a Blackpool Pit , which is 27 ML a day peak. That's pretty decent, and obviously desal when that comes in. We are moving to turn off, turn on sources, turn off, turn on schemes. What does that mean? We turn them on when we need them and we don't turn them on when we don't need them.
That, that's moving us to a very, very different landscape in terms of our, the flexibility of our water resources to respond to those sort of circumstances like we saw in 2022 where we hit the go button, we can pump a lot harder to get us through, you know, that sort of summer period.
Sorry, I've got the microphone, everyone. Let's knock it in. Sarah Lester from Morgan Stanley. I've got a question on the Independent Water Commission, but something that's been very, very clear and highlighted today is the unique geographical challenges that you have in your patch. Christmas wishlist time. What's on the Christmas wishlist from the Independent Water Commission in respect of those unique geographical challenges?
I suppose, a couple of things. Critical National Infrastructure . I certainly believe we are that. Do we have the, the same powers as other Critical National Infrastructure ? Not so. I think it would be really good to have that recognized. All the things we've just been debating and discussing around new reservoirs and what's coming on stream and how's that working, just having something that allows us to have a better conversation about that and have it much more joined up, and part of a long-term plan, rather than something that's looked at in the, the five-year chunks as we do now. Certainly, having that status around Critical National Infrastructure , I think would be on my wishlist. I think the second thing is, we all have different priorities within the different regions across the U.K.
You know, we look after a third of the nation's bathing beaches. Our customers' priorities are therefore slightly different to other customers across the rest of the U.K. Having something that has more of a regional focus for a joined-up regulation aspect I think would be really useful. Yes, we have national regulatory frameworks, and we have local input from regulators like the Environment Agency, but it would be really good if we could have much more of a local voice and perhaps a local voice that had some input into the economics of what's happening as well and the investments and the investment programs. I think that would be a couple of things on my wishlist, certainly for the review.
Thank you. Pavan Mahbubani from JPMorgan . Thank you for taking my questions. I've got a few on, on RORE, please, just to help with comparability to other companies. You're 7% RORE. I think you've said that's real before, but if you can confirm that, please. Is the 7% assuming the notional cap structure, i.e., 55-45? O r is that actual if you can confirm that? Can you confirm that is it using the inflation assumptions that Ofwat have embedded in the FD, or is it your own view, whether that's forward curves or, or an internal view? Those are my questions. Thanks.
It is real. I think, therefore in calculating that, we're looking at it on that basis. We are, I guess at the moment, assuming a higher inflation rate in the early years, and then that coming back down. Broadly aligning with Ofwat, but we're seeing higher inflation at the moment, isn't there? We think year one is unlikely to accord with quite the Ofwat positioning. Then, on the RORE out on the balance sheet, we do that on an actual balance sheet rather than the notional.
All right. Is it on? Great. It's Julius Nicholson from Bank of America. Also, two questions on RORE, the favorite topic, of course. On the slide that you shared with us, I think it is 21, the phasing of the ODIs, could you just give us a little bit more color why you see the phasing basically increase and then drop off in the last year? At least that is how I read it. Would you be willing to give a little bit more color on the 7% average, how that progresses over the AMP? Is that something where we should assume to stay at 7% constantly or start lower and get higher? Any additional color would be appreciated. Thank you.
I'll start at the back of that and move forward. Susan, apologies, you can add in. I think we haven't split it across the period into particular years. We've said we'll achieve that over the position, but obviously we won't be targeting that all to be backend loaded. We'll be looking at trying to make that across the period as well. From the ODI chart, yes, it's probably not, don't try and read too much into the shading. I know there was good conversation about shades of blue earlier. I think we are absolutely targeting, I guess, to focus on ODIs meeting the timings and the targets from Ofwat.
Clearly there's a linkage with that to the EPA four -star target they've given us, to some of the ODI links with the upside from our outstanding plan and so on. I wouldn't read too much into it, perhaps trailing back off. Obviously we want to get to a position where we are absolutely meeting all of those ODI targets, overachieving where we possibly can and then maintaining that in a strong position.
I think that's right. I think there are areas where on the outcomes, you know, we've got really clear plans in place to deliver what we need to deliver. Our Achilles heel, if you want to call it that, over this last regulatory period has been around the EPA and the pollutions. The Environment Agency are out to consultation on what that looks like from 2026 onwards.
We know we've got some work to do. They obviously measure on a pollutions perspective, the pollutions to water courses, and those are the ones that we've gotta focus on. Then we'll understand what the new framework is, over the coming weeks and months. We'll obviously need to make sure that we're in a good place to deliver against that. We are confident on the outcomes that we have put into our business plan. We do want to make sure that we can deliver on that Environment Agency new EPA framework when that comes out. Obviously when we get that clarity, in the coming weeks and months, we'll make sure we've assessed that. We're confident on the plans we've put in, but we obviously need to see where the EPA framework lands.
Hello, it's [Markip Tuckwen] from Citibank. A couple from me. The first one, following on from the question about the kind of review, obviously you gave your wishlist, but I guess as it stands and since you accepted the FD patches, has anything that's come out in your conversations with the committee, there that you can share with us, any updates on what you're expecting from it as opposed to what you're wishing from it? The other question is on Pennon Power, just to confirm it, I mean, is it core to strategy, through the AMP? Are you entertaining anything on supposed, may potentially disposing on those assets? Obviously following on from the balance sheet question before.
Of course. I think in terms of the, the kind of, I mean, you'll have seen the call for evidence. I think it's really clear in that call for the evidence, all the areas that are being considered, and, obviously importantly as well, some of the areas that are off the table. Renationalization is off the table. I think that's pretty clear. I don't think I probably need to add too much more to my couple of items on the wishlist, but we can see everything that's being considered with that. Yes, we've got engagement ongoing with the team that are undertaking that review, and Jon himself. You know, good engagement across the sector, and not just with us. Pleased with that.
I think in terms of Pennon Power, we've said before, you know, this has been a strategy, and an initiative that we set up, and we had the impact that we were having in our group, being a group that needed to have all that electricity, and the exposure that we had, without the natural hedge in the group was significant. Bringing Pennon Power in at the time made a really good, was a really good thing to do. Obviously Ofwat has put something new into the framework for this time so that a good proportion of our electricity costs are hedged with the mechanism that they've got in play. When we set up Pennon Power, we obviously set them up so that they were standalone projects, making good returns, ahead of regulatory return allowances.
Therefore, they do stand on their own two feet in terms of investment propositions. We have the flexibility, we have the opportunity, we're gonna keep that under review to see what is best value for shareholders. I've said that before, and I'll keep saying that. We're going through the build out construction phase. In fact, we've got the first coming on stream in a couple of weeks' time. We've got the program that takes us out over 2025, 2026 to get those built out. They are absolutely going to be held under review, and we'll make a decision about the value to shareholders for those going forwards.
Hi there. It's Dominic Nash from Barclays. I've got a couple of questions and a follow-up from an earlier question. Okay. What would be your main sort of differential strategy to try and get you ahead of the rest of the sector in the sense that when Severn Trent did the capital markets day, they came up with, you know, five, whatever, but we're gonna be a lot of insourcing versus outsourcing. Have you got something in the Pennon secret sauce that you are particularly proud that you think is very different to what other people are doing? One area that there's been no mention of is the license split between water and wastewater and how that interacts. Second question I've got is on dividends and fines.
Hopefully at some point we might get clarity from Ofwat on your fines, on CSOs, potential fines on CSOs, and capital leakage. Will you be connecting up your dividend payment to the fines that Ofwat and then later on the Environment Agency provide? The follow-up question, I'm afraid, is just you say 7% RORE can't cave with us, but I think you said it's on actual leverage, not notional leverage. Could you let us know what the RORE would be if you degeared back to the 55% sort of baseline RORE number, please? 'Cause the baseline, of course, is 5.1% at 55% leverage. Then you're saying you're doing 200 basis points of outperformance. I don't think that's consistent. Could you just give us clarity on whether it is notional or actual balance sheet and what the like-for-likes would be?
Please answer follow-up from me.
Okay.
I have answered the question.
Maybe if I start first with the dividends point, and just be clear about that. Yes, in terms of investigations, we've yet to conclude those. Given we haven't concluded those, we don't know where that's going to outturn. We've obviously seen what's happened with three other companies, in terms of the FFT investigation and where that provisionally has landed for those companies. I think everyone can see, you know, a certain range in terms of percentage turnover impact. We don't know where we're landing yet. We're still going through that process. I said previously that with dividends, when we had made an adjustment for the fine that we got for pollution incidents, that that was not a policy position. That was something that we did at the time, on the back of notification that we had received from the regulator.
That was not something that we were setting up as a precedent. That is where we remain. We've obviously yet to work through those investigations, and, obviously, when those are concluded, you know, then that will be clear for the market to see where that has landed. As I say, working through that at the moment, and, you know, nothing that I can update on today in terms of that. Is it worth picking up the RORE point? I have not got the number off the top of my head. I think maybe we come back to you on that, Dom. And then the can lift?
No. Your secret sauce.
Oh, secret sauce.
The two licenses.
Yeah, secret sauce. I hope you've had some indication through the course of today so far, all the work that, you know, my brilliant colleagues are doing to make sure that we can deliver against the plans that our customers have signed off on. There are a lot of initiatives that we have. This whole question of insourcing, outsourcing, I'd call it right sourcing. I think for us, we've got the balance right for us. We've got a brilliant supply chain that's in place. Graham talked eloquently about that before. We have been delivering with them over the last 12-18 months. Already got ourselves in a really good position. I think in terms of license splits, we have got two licenses in our group. We have one for Sutton and East Surrey, and we have got one for South West Water.
At some point we will make a decision about what we're doing with those two licenses. Previously when we've had acquisitions, we have merged licenses, but we are working through the options that might be available to us to look at how we use those licenses and perhaps how we repurpose those licenses going forwards. We have restructured ourselves within the organization. We've got very clearly MDs of water and waste. I think that's the right model for us to make sure that we are delivering on those priorities, and that we've got teams focused on what we need to drive in terms of the outcomes for both of those businesses. We'll work our way through that one.
Hi, this is Ahmed from Jefferies. Got three questions. Firstly, you talked, sort of talked a lot about the, sort of the work you're doing to prepare the supply chain. Could you just give us some granularity, let's say in terms of % of the investment program for the AMP, what percentage is already locked in, in terms of supply chain, in terms of pricing and units, et cetera, just to give us some sense of that? I have a follow-up question from James earlier. Just wanna sort of understand in terms of the TOTEX South performance, how central is the efficiency and synergies program? Is that sort of, sort of core part of what's, what's gonna drive it or are there, there are sort of very small bits spread across the business?
Finally, when you're sort of talking about the storm overflows, there were sort of several things you talked about, you know, stopping the flow, storage, et cetera. Are there any big projects that we can sort of monitor in terms of understanding, you know, how that's progressing, at least from a sort of an outside perspective? Thank you.
Okay, great. Great question. Perhaps I'll start with the last one first, actually, around the storm overflows. We have got nine on 300 interventions that we're making in terms of the planned program for storm overflows. They are focused on the overflows that impact our bathing beaches because of the region that we are. This afternoon you'll get to see a very typical catchment at Sidmouth, which typifies a lot of the work that we will do in this next five-year period. When you see it, you will then realize and recognize that these aren't big schemes. They are big programs, but they are not big schemes in terms of what they are. Don't think Thames Tideway, think something much more local that we will be doing to achieve what we need to achieve.
I think the second thing in terms of the supply chain and what we have so far put into the supply chain, they're working on well over GBP 600 million worth of projects already. Graham, I don't know if you want to talk about some of the work we're doing to lock in efficiency and pricing and how that works across the AMP.
Yeah, we're doing many things to actually lock down the program and deliver it efficiently. As Susan and colleagues have said, there are a vast number of outputs, you know, on the clean and the wastewater programs. One of the things we are doing is we are doing standard designs. We are creating a portfolio of off-the-shelf standard designs. You've seen some of the technologies today that actually drives us in a place to minimize contact time on site. It is about standard designs, minimizing design and rework, and it's about pounds in the ground rather than pounds in overhead. That is absolutely our focus. What that gives us is the ability to reduce the elapsed time in terms of getting to site, minimizing the time on site.
That has a benefit in terms of reducing the risk in terms of health and safety. It also has a benefit of reduction in potential, you know, disturbance to customers. It means we can actually go right back into the supply chain to sort of, you know, tier what we would term tier three suppliers, manufacturers, to actually, this is much about efficiency as securing capacity in supply chain. That gives us the ability to sort of lock down our program and deliver the program on time and avoid any sort of PCD penalties. That engagement in supply chain taking a five-year view is absolutely critical because as obviously the rest of the water industry is trying to do the same thing.
You know, within Amplify, we do not have 23 organizations producing 20 different versions of the Truth of program. There is one central programming function. There is a P6 program and all the deliverable outputs are locked down in that program so that we can sort of scan the horizon, put packages of work together, rather than individual projects. They will all be formed into packages of work and wherever possible, standard solutions. Some of these can be very small. In the first program we talked about, it was just transition spend. We had advanced expenditure approval for GBP 76 million, which we have basically invested to get ahead of the program, particularly on the CSO program. Across the rest of the program, as Susan has alluded to, there is over GBP 600 million of work with Amplify at the moment. We are working forward.
We have a procurement force, you know, a small team within Amplify, which are actually engaging with the wider supply chain to make sure we buy the stuff when we need to buy it. It's joined up. It's not individual orders. It's actually blocks of work, which gives us a efficiency opportunity. As I said earlier, crucially, it locks down the program and supply chain capacity, which is critical.
Thank you, Graham. The efficiency program, Laura, should we just give an update on where we are with that?
Yeah, so we've shared the GBP 86 million, which was announced, I think, last year end around the overall efficiency, which coupled both the integration benefits that we can get across the group, from growing the group with Bristol and SES, but also then had a number of operational transformation measures through it. One component of that, which we've been working hard on, is the reshaping of the business, structuring it under the four business units and managing directors, and then making sure we've got the right focus on the frontline operations that we can really drive productivity, delivery and performance against the ODIs, and have the right skills and expertise in the back office and support functions, but that they're really integrated, streamlined, and efficient in what they're doing.
There's a huge amount of work also ongoing, and I know colleagues are busy, trying to make sure that we deliver as efficiently as possible, through things like our F usion program, which would take out a significant amount of cost from our customer services, operation and function through automation, through ultimately using AI, modernizing our platforms, helping customers access the information they need digitally as well as through our brilliant colleagues. That will drive efficiency as well as improve the performance that we give. Likewise, operationally, we are looking at how do we improve our productivity? How do we work effectively with the supply chain? What's the right balance of insource and outsource to get the right expertise, innovation, and knowledge coming through? I know Paul's touched on earlier as well, things like energy efficiency. People are our highest cost.
Power are our second highest costs. Really important that we are really focused on how do we make sure that we look at all opportunities from an energy efficiency perspective, whether we should put more onsite behind the meter investment into energy generation, renewables, and so on. All of those things come into what we are looking at in terms of driving efficiency and making sure that we can deliver the TOTEX. A lot of what Graham's delivering as well, this is TOTEX, it's not just OPEX. A lot of what Graham's just referenced as well about efficient procurement, effective programming of our capital program and delivering that really well, but really efficiently is also going to be key to that as well.
Awesome.
Hi, yeah, we've got no questions online, so we've probably got a couple of minutes. Any, yeah, James.
Just ask a follow-up then. Just as the, on the four-star target you have, firstly just to clarify, I think what was required in order to get your allowed return uplift from the fast track was that you hit the four-star by 2027-2028. Is that correct? Do you just need to hit it in one year or do you need to hit it across kind of multiple years? Secondly, how are you doing in terms of getting towards that four-star target? Thanks.
It is 2028 and it is a calendar year for EPA.
Just, and just one year or?
got to have it for 2028. In terms of our progress, if you look at the current metrics that make up the EPA, then, apart from the pollutions, total pollutions, number for what hits water courses, for the other metrics, we have hit the equivalent target of what would be four-star, in a number of years. We can do that. We have got plans to get that consistent over the next couple of years. The one aspect for us that is a real challenge is the total number of pollutions that hit water courses. That is the one that we are focusing on. I do not know, Richard, if you want to talk about some of the work that we are doing around that to get us to where we need to get to.
No, definitely. We've said many times, as Susan said many times, one pollution is one too many. That is absolutely our focus and, you know, very much my focus with the wastewater business. My manager is really being focused on being brilliant at the basics. We have fantastic colleagues, many of whom you've already met, and you're going to meet some more this afternoon, who, side by side with a brilliant supply chain as well, are working 24/7 to drive down pollutions and drive up environmental performance. For me, it is very much focused on enabling that, having all the accountabilities in the right place.
As we boost the resources on the frontline, which we're underway doing and really ramping up our capabilities on the frontline, it's getting the whole business really focused in on serving that frontline capability, you know, front and center for everybody in the business. There are some great examples of how that's working for us. For instance, take pumping stations. Pumping stations, we've had too many pollution incidents from pumping stations. We've dedicated resources to pumping stations, making sure that we're getting all the maintenance done. You could call it an MOT, just as you do on your car, which is boosting the resilience of pumping stations and so on. We've also got technology helping us as well.
Once you've got that brilliant at the basics going on across the whole region, supplement that with technology on top. For instance, we've got 12,000 sewer level monitors out there on the network, and they are monitoring the sewers, and they use AI technology to work out when the sewer is not doing what it's supposed to do. If the flows are too high when they shouldn't be high, there could be a blockage starting to form downstream. If the flows are too low and they shouldn't be too low, there's a blockage upstream 'cause there are not enough flows coming through. Using that AI technology, it's flagging in our control room, and we've boosted the resources in the control room. The trick is then, and it sounds straightforward, doesn't it?
Get the right person to the right job at the right time to do it right first time, every time, and get ahead of all of those incidents. We are absolutely laser focused, across the whole business and right in my part of the business to drive those numbers down, and they are coming down.
Thanks.
Great. Thank you very much. We are out of time. Thank you everybody who has joined our Q and A online. Thank you very much.