Pennon Group plc (PEGRF) Q2 2024 Earnings Call Transcript

Pennon Group plc (OTCPK:PEGRF) Q2 2024 Earnings Convention Name November 29, 2023 3:00 AM ET

Firm Individuals

Susan Davy – CEO

Paul Boote – CFO

Convention Name Individuals

Martin Younger – Investec

Sarah Lester – Morgan Stanley

Dominic Nash – Barclays

James Model – Deutsche Financial institution

Hannah Avory – BNP Paribas

John Campbell – Financial institution of America

Susan Davy

Good morning. I am Susan Davy, Chief Government of Pennon. Welcome to our Half 12 months Outcomes Presentation for 2023/2024. At present, we’re at a brand-new state-of-the-art analysis middle right here in Exeter, a three way partnership between ourselves and the college, established to analyze and discover options to points we discover within the pure atmosphere. We have now not too long ago opened the doorways to the primary venture. So the pipeline prepared to return by means of, serving to us sort out essentially the most urgent challenges within the atmosphere and the water cycle proper right here proper now.

We’re all excited concerning the three way partnership, a primary of a form within the U.Ok., and each thought has gone into what it’s going to obtain and the way we are going to work. Even all the way down to the constructing design, as we glance outdoors, you will see the illustration of the significance of water flowing over, with circling home windows reflecting rising air bubbles. It was additionally vital to make sure we had an instance of a residing internet zero constructing in operation, which we have achieved by means of a mix of air supply warmth pumps, excessive thermal effectivity panels, photo voltaic panels and LED lighting contained in the Centre for Resilience in Setting, Water and Waste, or CREWW for brief, we’re bringing collectively the most effective minds from throughout the disciplines of geography, biosciences, engineering, economics and psychology.

Sure, we’re right here in Exeter, however by means of the college, we now have a world attain for the middle with a laboratory working to resolve a number of the most urgent international challenges within the sector, like tackling microplastics with a devoted microplastics analysis lab, and understanding how we are able to higher sort out air pollution within the pure atmosphere. I imagine that CREWW will turn out to be a constructive beacon of change within the sector, not simply regionally, however nationally and globally and in flip, drive profit and funding again into the South West.

This is only one instance of how we’re investing to develop and develop sustainably working with companions and collaborating. Our enterprise mannequin ensures we now have the headroom and capability to be fleet to foot to reply with agility when it issues most, whether or not they’re going through a problem or a chance to take a position like right here at CREWW, and that is what we are going to proceed to do.

So shifting on to the half yr outcomes for 2023, ’24, which Paul and I’ll take you thru. First, we’re delivering a step-up in funding throughout the group with capital funding throughout the water enterprise and Pennon Energy’s renewable initiatives, up by 87% this half yr. With our ongoing dedication to the U.Ok. water sector, we’re delivering on each the Pennon technique of each acquisitive and natural development. Sustainable Bristol acquisition advantages are being realized in keeping with our acquisition plans with £16 million annualized synergies so far on observe for the £20 million acquisition synergies focused to 2025. Regulatory capital worth for the enlarged water enterprise is forecast to extend over the 5 years to 2025 by 60% and additional develop to 100% by 2030, outlined within the Ok-business plan, we now have simply submitted to Ofwat.

Second, while we’re investing in a sustainable future, we’re additionally delivering now making progress on what issues most throughout our areas. Excessive climate patterns proceed to be unstable right here within the South West given our adjacency to the Western approaches of the Atlantic Ocean. It means we relentlessly should double all the way down to each keep efficiency and make sustainable change. We stay targeted on 4 buyer priorities as we make investments to guard water high quality and enhanced resilience, sort out storm overflows at our seashores, eradicate pollutions and defend the atmosphere from local weather change.

With a laser-like deal with effectivity, we’re additionally targeted on making certain we hold payments as little as attainable. Supply highlights on this half yr contains 100% bathing water high quality for the third consecutive yr, a doubling of reservoir ranges in summer time 2023 in comparison with summer time 2022 as we proceed to interrupt the drought cycle throughout Devon and Cornwall, with the area solely very not too long ago shifting from drought to restoration standing.

Higher quartile efficiency for South West Water on the sector-wide comparative measures being one in every of solely two corporations to enhance efficiency in our Ofwat’s rankings. And we’re concentrating on to protect the restoration to 2 star we made in 2022 for the 2023 atmosphere businesses, Environmental Efficiency Evaluation, retaining the deal with reaching 4 star for 2024.

Third, given the distinctive topography of our area, we now have dedicated to making use of a Inexperienced First method to every little thing we do. Given this can be a area largely depending on tourism and agriculture for its financial well being, with over 13,000 farms, a big majority of our land utilized in our area is devoted to farming. How we work in partnership with landowners and farmers is crucial. And with one in six species acknowledged as vulnerable to extinction, it’s important we proceed to assist the wildlife and habitats of our area, too.

Our award-winning catchment administration program continues to work with farmers to alter the way in which they handle their land, enhance water high quality, biodiversity and local weather resilience. And the effectiveness of our work is evaluated and researched with the College of Exeter and will probably be researched proper right here at CREWW. At present, our proactive catchment administration has delivered water high quality advantages for over 6% of rivers, which beforehand weren’t reaching good ecological standing. That is a 3rd of a discount to what we have to goal, which is sweet information.

Given our topography and energy wants, we’re accelerating our funding in renewables to mitigate the longer term impacts of a unstable power market, while additionally counting in the direction of our internet zero plans. And we’re on observe to generate 40% of the group’s power necessities by 2025 by means of our new enterprise, Pennon Energy. With the 40% from Pennon Energy and the power already generated by the water enterprise South West Water, we’re on observe to ship 50% of the group’s power necessities from renewables by 2025.

Fourth, underpinning all our priorities and actions is our monetary resilience and robust stability sheet. Gearing is secure at 61% with sector-leading environment friendly financing in place. Our strong monetary outcomes underpin the return on regulated fairness, doubling base returns for K7 so far at 7.9%. And at group degree, we now have worthwhile B2B retailers, rising by means of contract wins and margin enhancements, with Pennon Energy renewable power initiatives anticipated to generate EBITDA from 2025.

Pennon’s dividend is in keeping with our coverage of CPIH plus 2% development with an interim dividend of 14.04p per share payable to our fairness buyers, a lot of whom are clients. So resilient monetary efficiency underpinning our supply as we make a clean transition to K8. With a powerful stability sheet and monetary resilience, we now have already been accelerating funding with part of the £82 million Inexperienced Restoration initiative, the £45 million WaterFit program, the £125 million to interrupt their cycle of drought and most not too long ago, the £52 million funding as a part of Defra’s accelerated funding scheme.

We could not do any of this with out the assist and dedication of our 3,500 workers which have continued to indicate extraordinary care for purchasers and one another. I would wish to thank them for what they’ve achieved and what they’ll step as much as do as we glance ahead and proceed to make progress and develop sustainably. Our not too long ago submitted formidable K8 marketing strategy to 2030 has had the best buyer acceptability testing we have ever had. And that’s the reason we’re not ready. We’re mobilizing now, and we’re doing this.

And with that, I’ll hand over to Paul to take you thru the monetary efficiency in additional element.

Paul Boote

Thanks, Susan, and good morning, everybody. Total, monetary efficiency for the group this half yr continues to be resilient, and we’re effectively positioned to ship funding and development into the longer term. Within the first half of this monetary yr, underlying EBITDA was down barely on the identical interval final yr resulting from increased prices, however coupled with our persevering with sector-leading efficient curiosity prices, this leads to our cumulative RORE persevering with to double base returns at 7.9%. This robust efficiency allows the group to reinvest in our asset base, driving operational and environmental enhancements, while sustaining a relatively low gearing degree of 61% and delivering on our dividend coverage of development of CPIH plus 2%.

The group’s total outcomes are in keeping with expectations. As was the case within the final monetary yr, inflation impacts proceed to feed by means of into each our revenues and our value base, which I’ll shortly discuss in additional element. As in earlier years, we now have a small variety of non-underlying objects. For this era, these relate to drought prices that continued into the primary half of this yr, enterprise reorganization prices as we search to optimize the enterprise publish the Bristol acquisition, and acquisition prices related to our new renewable power investments. Our underlying revenue earlier than tax for the half yr is £9.1 million. This compares to £22.5 million in H1 ’22, ’23 and a lack of £5.7 million in H2 ’22, ’23. Evaluating to H1 ’22, ’23, the excessive inflation atmosphere has had a positive internet influence on our outcomes pushed by a £30.8 million enhance in income, which is partly offset by increased prices, together with worker prices of £9.1 million and better energy prices of £9.4 million.

The inflationary influence on our financing prices has been stabilized by means of our £300 million RPI hedge entered into final yr that runs by means of to March 2025. Underlying income had been lowered by a one-off discount in income of £14.8 million within the go again of 2021, ’22, ODI internet penalties and income over restoration. Additionally of observe is that our depreciation prices are beginning to step up, reflecting the latest enhance within the degree of capital funding, which drives development in our RCV. We’re additionally persevering with to see robust revenue development in our non-household companies, Pennon Water Providers and water2business by means of contract wins and margin enhancements. Our cumulative group return on regulated fairness is 7.9%, persevering with to double base returns.

As we flagged, as we entered this era of excessive inflation, our outperformance has been skewed into financing and away from TOTEX as key value strains of energy, chemical compounds and development supplies have risen by greater than the headline charges of inflation. Our strategically positioned financing portfolio features a low degree of index linked debt in comparison with the sector common and excessive proportion of fastened debt. This has pushed vital outperformance of £250 million in K7 so far. This financing outperformance drives our total outperformance so far of £190 million.

As beforehand introduced, we’re reinvesting this outperformance into focused initiatives to satisfy our largest challenges. £45 million into WaterFit to enhance river and coastal water high quality, £125 million on water resilience, the most important factor of which will probably be our new desalination plant in Cornwall, and £20 million returned to clients by means of our pioneering WaterShare+ mechanism to assist with affordability. As flagged, our capital expenditure ranges are ramping up as we ship on our K7 marketing strategy, reinvestment of outperformance within the initiatives that I’ve simply set out alongside delivering accelerated initiatives, together with our Inexperienced Restoration commitments. Within the half yr, we now have invested £266 million, an 87% enhance on the identical interval final yr.

The general enhance on the prior yr of £124 million contains a rise of £70 million on clear water assets as we spend money on each water resilience, together with desalination and water high quality by means of the 2 new state-of-the-art water therapy works in our Bournemouth area, a step-up of £22 million in our wastewater infrastructure, together with sewer depth displays to assist ship improved environmental outcomes. Lastly, we have invested £32 million in our new photo voltaic improvement websites that may ship engaging business returns, de-risk our publicity to wholesale energy markets and speed up our journey to internet zero.

Taking a look at our stability sheet place in additional element. We stay effectively positioned on this inflationary atmosphere with a secure, low efficient rate of interest of 5.8% and a low degree of gearing at 61%, which is effectively throughout the historic vary of 55% to 65% that we now have operated in. We proceed to entry a various number of funding sources, securing over £700 million of recent and renewed amenities since March, of which £575 million was secured by means of our Sustainable Financing Framework. This contains our first syndicated £300 million U.S. personal placement that was considerably oversubscribed permitting the optimization of pricing and upsizing of the borrowing degree.

I want to thank all our banking group for his or her continued assist and recommendation as we glance to new markets to safe official funding for the group. As we proceed to ramp up funding ranges, which we anticipate to proceed at an elevated degree into K8, we plan to proceed to entry nearly all of our funding by means of our Sustainable Financing Framework. Sooner or later, this will embrace the issuance of public bonds to optimize any future issuances, we’re concentrating on to acquire two robust investment-grade credit score scores that will probably be in place previous to the beginning of the following regulatory interval.

Trying ahead to the second half of this monetary yr, we anticipate income being marginally decrease than the primary half resulting from extra regularized seasonal demand actions. We anticipate this, although, to be greater than offset by decrease working prices pushed by locking in decrease energy costs, much less drought-related actions and the full-year impact of efficiencies as we optimize efficiency throughout the group.

We have now been in a position to safe decrease energy costs in H2 as we entered the monetary yr with extra open positions in winter and have benefited as ahead energy costs have steadily fallen. This profit will proceed to enhance earnings into the monetary yr ’24, ’25. Our financing prices comparatively flat phased by means of ’23, ’24 partly because of the fixing of the £300 million of RPI debt positioned final yr and better base charges impacting new and floating fee debt, which offsets the falling inflation on our remaining index-linked debt.

Turning to the stability sheet. We anticipate the tempo of capital funding to proceed to speed up as we ship not solely on our K7 commitments, but in addition on the extra and accelerated investments we now have dedicated to. We now anticipate capital investments in South West Water over the 2 years to March 2025 to be over £850 million. Lastly, with the elevated degree of funding anticipated, our opening RCV for the following regulatory interval is now anticipated to be £5.4 billion, which will probably be a key driving issue of worth and income development within the subsequent regulatory interval.

And with that, I will hand again to Susan.

Susan Davy

We proceed to be targeted on the issues that issues most to our clients throughout all our areas, stretching from Devon to Cornwall, Isles of Scilly to Bournemouth and Bristol. We all know what’s vital to our clients as we meet them and discuss to them each single day. And thru our established WaterShare Framework, I personally get to assembly clients and focus on our providers and their priorities on an ongoing foundation. We’re the one water firm to have such a scheme in place.

The primary precedence for purchasers is protected, clear consuming water. Water provide throughout our area is beneath rising stress. With the granite coast of peninsula, we function throughout a singular topography, the place 92% of our water assets are reliant upon rivers backed up by reservoirs. We have now seen that acutely in 2022 with the most popular, driest climate on report, culminating in a one in 200-year occasion for essentially the most westerly a part of our area. For the primary time in over 25 years, we needed to implement our drought plan for Cornwall and components of Devon. With a mix of our interventions and rainfall, we had been in a position to carry the hosepipe bans this September. And in October, the area has moved from being in drought to being in restoration.

The second precedence for purchasers is assuaging the usage of storm overflows and eliminating pollutions. With a 3rd of the nation’s bathing seashores, now 860 miles of shoreline, I’m additionally aware of the influence on the environment on this stunning area, however our clients defending bathing waters is without doubt one of the prime priorities. The third buyer precedence driving environmental good points, whether or not that’s by means of our catchment nature first method or by means of driving our trajectory to realize internet zero in 2030. Given our topography and energy wants, we’re accelerating our investing in renewables pillar, serves to mitigate the longer term impacts of a unstable wholesale power market while additionally counting in the direction of our internet zero plans.

And the fourth precedence, affordability. We additionally proceed to ship for our clients with a deal with buyer affordability by protecting these payments as little as they are often and delivering effectivity, alongside supporting those that are fighting a value of residing disaster. Supporting the actions to sort out the priorities is the most important environmental funding we now have seen in many years. We’re effectively positioned to ship the rest of K7. And for K8, we anticipate what will probably be virtually a doubling of funding to £2.8 billion with our 10-year provide chain frameworks already in place and mobilizing. So let me take you thru the progress we’re making.

Turning to clients’ primary precedence, protected, clear consuming water. Excessive climate patterns proceed to be unstable right here within the South West. It means there isn’t any room for complacency as we relentlessly need to double all the way down to each keep efficiency in usually difficult environmental circumstances and make sustainable change. Reassuringly, for the area, we’re beginning to break the cycle of drought investing an extra £125 million within the interval to 2025 to make sure underlying sustainability to deal with persevering with volatility in rainfall and climate patterns.

For Cornwall and Devon, we’re on observe to see strategic reservoirs construct again to 90% by March 2024 and increase water availability by 45% and 30%, respectively, for these areas by 2025. While we now have seen a forty five% enhance in rainfall thus far in 2023 in comparison with 2022, a 3rd of the reservoir enchancment has been on account of our investments in interventions.

We’re targeted on two sides of a coin. The primary, diversifying our portfolio and delivering new water assets. We proceed with our pioneering repurposing of disuse and deserted quarries, having not too long ago added a fourth to our portfolio with work effectively underway at Blackpool Pit at Cornwall. We’re additionally rising winter pump storage at Gatherley and Devon, and we’re on observe to put in Cornwall’s first ever desalination plant due for operation in 2024.

Second, how we cut back demand in two key areas, fixing leaks and decreasing utilization. We proceed to supply clients freely repairs with a 65% enhance in comparison with 2022. And we now have now issued a record-breaking 250,000 free water effectivity gadgets to clients to assist them cut back utilization and lower your expenses, and we’re progressing our good metering rollout in North Devon with a 3rd of consumers now with a sensible meter in place.

On water high quality, we’re consolidating our prime quartile water high quality place for Devon, Cornwall and Bournemouth with our modern high quality first program, they usually’ve had zero failures year-to-date at any of our water therapy works. And for the areas, we now have acquired with the legacy underinvestment on the Isles of Scilly and Bristol, we’re replicating the rollout of our high quality first program to ship a step change in efficiency and make the mandatory enhancements to infrastructure.

We’re targeted on what’s vital to our area. And with a 3rd of the nation’s bathing seashores, it is a clear focus for us. 90% of the K7 bathing and shellfish water interventions and investments have now been delivered. For the third consecutive yr, we anticipate the Setting Company bathing water high quality assessments, which take a look at the degrees of dangerous micro organism in our seas, to report 100% go fee for bathing waters the place our belongings might influence. With 100% monitoring of storm overflows in place, we now have seen a modest enhance in common spills so far over the washing season, rising from a median of 5% to six% regardless of a forty five% enhance in rainfall. Underlying investments guarantee we are going to make sustained change over the midterm. We’re progressing 70 interventions, targeted on 49 of the 151 bathing seashores in our space.

Our WaterFit Dwell web site, offering real-time data for purchasers, communities and guests concerning the water high quality of their favourite seaside is enhancing transparency and will probably be prolonged to incorporate inland rivers within the coming weeks. We’re piloting wider catchment sampling and monitoring, which can pinpoint air pollution sources and permit for swift catchment coordinated intervention, restoring belief and constructing confidence with our communities.

Turning to our rivers. We had been delighted to assist latest purposes on the River Dart and the River Tavy to realize the area’s first in and designated bathing water standing. We’re at present funding the monitoring of the rivers partnering with Howdy Lamp Publish, making a speaking river, the place guests to the rivers and citizen scientists can report the explanations to be used and their observations utilizing QR codes. With the investments we now have made so far in K7, we now have seen enhancements to river high quality with a 6% lower in influence as measured by the Setting Company.

Turning to pollutions. We proceed to focus on vital reductions by 2025. Our asset well being metrics are trending in the suitable course with sewer collapses and sewer blockages forward of commitments, demonstrating that interventions may have sustainable impacts. For purchasers, we proceed to drive down inside sewer flooding incidents, coupled with an 18% discount in exterior sewer flooding incidents as effectively. The variety of critical Class 2 pollutions to water programs proceed to indicate underlying enhancements, dropping from eight in 2021 to at least one year-to-date in 2023 with zero Class 1 incidents. That stated, the general variety of Class 3 air pollution incidents to water programs is elevated on final yr, and I am clear this must get better.

With 355 hotspot interventions delivered and having a attain 60% of our rising principal program, we’re progressing the sustainable enhancements required for the long term. And as well as, we now have now put in 75% of the sewer depth displays to extend proactive upkeep and administration of the networks. Given this, we’re concentrating on to protect the restoration to 2 star we made in 2022 for the 2023 atmosphere businesses — Environmental Efficiency Evaluation. And we’re retaining our deal with reaching 4 star for 2024, however there’s a lot to do.

In 2021, we established our internet zero program to 2030 with three pillars: sustainable residing, championing renewables and reversing carbon emissions. We’re on observe to ship a 50% discount in our carbon footprint to 2025. We’re additionally targeted on championing renewables with £145 million funding as we make investments to mitigate the wholesale energy market threat by creating our personal technology in provide, and we’re on observe to offering 40% of the group’s power necessities by 2025 by means of this.

I talked earlier about our award-winning catchment administration method, which has secured a £20 million ODI profit for K7 as we take a Inexperienced First method to funding and apply pure options to cut back the agricultural influence on biodiversity and water high quality. Actions vary from putting in water-side fencing, constructing ponds, enhancing farm tracks, slurry storage, beneath sowing maize and planting timber and buffer strips to catch and filter water. This has had the advantage of rising the water desk to the equal of 100 Olympic-sized swimming swimming pools. It’s extremely a lot a partnership method working with 20 companies, NGOs, 2,000 farmers and communities. And we use a science-based experience right here at CREWW to guage and determine options and advantages utilizing pioneering satellite tv for pc knowledge to grasp habitats.

Thus far, we now have improved the administration of over 115 hectares, equal to the dimensions of Dartmoor Nationwide Park. And given globally that peatland retailer extra carbon than all of the world’s forests mixed, but as soon as disturbed, that is launched alongside different greenhouse gases. We’re working as a part of the South West Peatland Partnership and have restored over 1,100 hectares of peatland so far with one in every of our modern approaches involving the usage of sheep wool to create bunds. Having labored in our catchments for the final 15 years, we now have the science to again up the enhancements with a 30% discount in actual water discoloration and measured quantifiable reductions in phosphates. That is excellent news.

One of many advantages of taking a nature-based method is lowered prices for purchasers over the long-term. And with that, I will discuss extra about how we assist affordability. In tackling affordability, it’s about two issues: protecting payments as little as they are often for all clients after which secondly, supporting those that are struggling. The primary precedence, protecting payments as little as they are often. We have now all the time been targeted on being as environment friendly as we may be in delivering our providers.

Throughout this value of residing disaster, we’re protecting invoice will increase to 2025 effectively under inflation for our clients. It is extremely clear although that for quite a few clients, rising costs have weighed closely, and it’s crucial that we proceed to assist clients and communities. Thus far, we now have offered over £90 million of buyer assist, with a 35% enhance in clients benefiting from our social tariffs as we proceed to deal with eradicating water poverty in our area, constructing consciousness of our buyer outreach and engagement applications. Because of this, 100% of consumers in Bristol discover their payments reasonably priced and 97% throughout different areas, with our unhealthy debt cost at 0.9% of family income.

We’re innovating to do extra as we glance forward with tariff trials plan for 2024 forward of introducing a spread of truthful tariffs to assist clients use much less and save extra and recognizing the distinctive demographic of our area with its excessive dependency on tourism, the place the prevalence of second properties may be as excessive as 40% in hotspots. We proceed to play our societal function in communities, supporting neighborhood initiatives and water effectivity initiatives with 273 group initiatives supported so far. Distinctive within the sector, given you may’t select your water supplier, we imagine it’s best to have a say, which is why we intend to develop our distinctive WaterShare+ scheme to at least one in each 10 households and proceed to share monetary good points with clients.

Total, we proceed to ship improved outcomes for purchasers with ODI efficiency of 75% both on observe or forward of goal throughout a spread of bespoke frequent and comparative measures with the business higher quartile efficiency on this space so far. Areas of excellence proceed to be issues that our clients and communities care about most, together with bathing water high quality, biodiversity enhancement and inside sewer flooding. And Bristol Water, C-MeX continues to carry out strongly the place we proceed to deal with sharing the learnings throughout the remainder of the group. As we’re delivering sustainable change for the area, our deal with EPA and air pollution efficiency stays.

Given we’re one of many largest personal employers within the South West, our investments in individuals and communities actually matter, too. Over K7, we now have created 500 further jobs with an extra 2,000 plan as a part of K8 straight and as a part of the broader provide chain. And while our investments in persons are regionally targeted, they’re receiving nationwide acclaim. We’re the one water firm to have been acknowledged for our earn and study method twice operating with gold standing accreditation within the 5% membership, and recognition as a prime 100 employer for apprenticeships.

Our graduate applications are rising in reputation, regionally and nationally, oversubscribed annually. That is making certain we are able to choose the brightest and most numerous expertise for the longer term with our cohort so far, two-thirds feminine and 40% ethnically numerous. And our work with native colleges has meant that we have engaged with over 12,000 individuals as a part of our engagement program and handed for wider plan to supply 5,000 work placements. Lastly, and as a part of our award-winning well being and security technique, HomeSafe, we now have invested over 23,000 personnel as an making certain we assist bodily and psychological well being assist for all of our workers, making certain they go house protected to households and family members day-after-day.

All this implies, as we sit up for PR24 we now have a sturdy base on which to construct, and you will note that on this slide. Our monetary resilience means we’re effectively positioned as we sit up for PR24. Our draft PR24 marketing strategy contains £2.8 billion of capital funding, a 50% enhance on K7. Along with OpEx, this leads to TOTEX of £4.5 billion over the five-year interval. While ongoing operational money flows may also step up and assist fund a few of this spend, we anticipate to wish to lift new funding over K8 of £2.5 billion. This contains £700 million to refinance maturing debt.

We plan to proceed to make the most of numerous funding sources, together with public bond issuance, using our new credit standing that will probably be in place for K8. We anticipate elevating the overwhelming majority of those funds by means of our Sustainable Financing Framework because the investments in our infrastructure will all be deemed eligible spend. Our K8 marketing strategy leads to our gearing degree staying inside our established gearing vary of 55% to 65%, averaging 63% over the interval. It’s an formidable plan. We will probably be investing, however investing effectively. Complete expenditure within the plan will probably be £4.5 billion, up from the £2.9 billion to 2025.

We have now pushed ourselves to be environment friendly, assuming 12% effectivity, which in flip retains invoice will increase to a minimal. Payments will probably be rising in actual phrases by a median 4% each year for Devon, Cornwall, Isles of Scilly and Bournemouth on a median 3% each year for purchasers in Bristol all through the Ok interval. In a value of residing disaster, we all know any invoice enhance may be welcome. We have now examined our plan with clients, and we now have good assist at 74%.

For buyers, there’s development in nominal phrases of 38%. And we now have put ahead an formidable set of outcomes that may see the chance to realize from good efficiency with a capability to share this between buyers and clients, with as much as 8.6% as a return out there. Utilizing Ofwat’s evaluation of the price of capital, gearing is forecast to stay inside a well-established vary at circa 63%. And having submitted our plans in October, draft determinations are anticipated in Might, June subsequent yr with a file of dedication in December 2024.

In abstract, our half yr outcomes replicate resilient efficiency targeted on what issues most right this moment and in constructing our capabilities for the longer term and in getting ready for PR24. We’re stepping up funding throughout the group with our largest funding in many years, delivering each natural and acquisitive RCV development. And while we’re investing for the longer term, we’re additionally delivering now making progress on what issues most throughout our area. For the water companies, we stay targeted on 4 buyer priorities to 2030 as we make investments to guard water high quality and improve resilience, sort out storm overflows at our seashores, eradicate pollutions and defend the atmosphere from local weather change.

With the laser-like deal with effectivity, we’re additionally targeted on making certain we hold payments as little as attainable and are dedicated to making use of a Inexperienced First method to every little thing we do, making certain we do it in the suitable means. The way in which we do enterprise is supporting our worthwhile business-to-business retailers and our rising Pennon Energy renewables enterprise. We will do all this underpinned by a monetary resilient, robust stability sheet and a strengthened provide chain, delivered with gifted individuals doing nice issues for purchasers and one another and delivered in the suitable means as we proceed to make progress and develop sustainably.

And as a remaining level, that is Paul’s final outcomes presentation earlier than his deliberate go away on the finish of December. I needed to thank Paul for his contribution to Pennon, the assist he has given me personally, and I want him and his household the most effective with their future. Subsequent time you see us, I will probably be alongside our new CFO, Steve Buck, who takes over the reins from Paul in December. Thanks.

Operator

We are going to now have a short break earlier than the Q&A session. [Operator Instructions] The Q&A session will start at 8:45 GMT. Please keep related to pay attention or take part. Thanks.

[Break]

Operator

Welcome again, and thanks on your endurance through the break. I’ll now hand the ground again to Susan Davy.

Susan Davy

Thanks very a lot, Adam, and welcome all people, this morning. Thanks for becoming a member of us to debate Pennon’s Half 12 months Outcomes for 2023, ’24. As you’ll have simply seen from the video, we now have had a step up in funding throughout the group by some 8% to 7% in comparison with half 1 final yr, very a lot investing not only for right this moment, however sooner or later, making progress on the issues that matter most to our clients throughout the areas that we serve, in addition to the complementary funding that is happening with Pennon Energy to develop the renewables assist for the group.

We’re targeted on buyer priorities, defending water high quality and ensure we have got water assets in place to ship clear, protected consuming water, tackling robust overflows, eradicating pollutions defending and ensuring that we’re supporting affordability for our clients, and you’ve got seen that within the presentation, completely underpinned by a sturdy stability sheet and we have got secure gearing, set-leading, adequate financing in play, and that each one goes to assist our dividend coverage of CPIH plus 2%.

So thanks for becoming a member of. We have now members of the manager workforce right here right this moment. We have Paul and we have got Steve Buck, who’s joined and will probably be taking on from Paul on the finish of December, and we have got John Halsall, who’s our COO as effectively within the room. So there’s many people. So over to Q&A. Thanks very a lot.

Query-and-Reply Session

Operator

[Operator Instructions] And our first query comes from Martin Younger from Investec. Martin, your line is open. Please go forward.

Martin Younger

Good morning to all people. I simply needed to echo Susan’s greatest needs to Paul. Thanks for every little thing that you’ve got performed through the years, Paul, and all the perfect for the longer term. After which turning to questions, two of these. You’ve in your marketing strategy, clearly, franchise a big uptick within the degree of investments in AMP8 versus what you have got performed in AMP7 and certainly, that is what you’ll do within the final couple of years of AMP7. Perhaps you would say one thing across the preparation that you’ve performed to ensure that the availability chain is lined up and able to go on all of this.

After which the second query pertains to Thames Water, of their marketing strategy they’ve successfully requested for a level of particular therapy, for those who like. Water regulation is comparator primarily based with penalties and rewards. If one thing is completed to accommodate the request of Thames, what do you assume must be performed so as to ensure that the great efficiency within the house are handled on an equal foundation? Thanks.

Susan Davy

Okay. So let’s begin with questions at Martin. So when it comes to your first level across the step-up in funding — capital funding, sure, we’re ramping up in K7 and certainly, the ramp-up we have got for this regulatory interval is sort of type of doubling if not somewhat bit extra of CapEx supply already in comparison with the place we had been three or 4 years in the past.

So once we discuss preparation and the flexibility to ramp up, we have already been doing that for this regulatory interval. Sure, there’s somewhat little bit of a ramp up once more for our marketing strategy that we have put in. However to your level, when it comes to preparation, we now have already onboarded our new Tier 1 provide chain for supply. We have had a kickoff mobilization, get along with these, and we’re completely beginning that now, in preparation for the brand new regulatory interval. So the availability chain is in place, nevertheless it’s not simply the availability chain. It is about what we’re doing with our groups, throughout the group, and we now have been ramping up when it comes to workers to assist the supply that will probably be coming, in addition to what we’re doing now. And we have got our unbelievable apprenticeship applications and graduate applications in place the place we’re getting new expertise into the enterprise and ensuring that we’re actually prepared for supply for the Ok program. However I’ve bought to emphasize, I feel, Martin, we’re doing it now. We’re — we have already ramped up — we have already accelerated that funding. So sure, there’s somewhat little bit of election choose up for Ok, however really, the large push has been now, and we’re on with that.

After which when it comes to your second level round Thames Water and if the regulator intervenes and does one thing completely different with Thames Water, what does that imply for everyone. I imply I feel we now have a really strong regulator in Ofwat. They know what they’re doing. They know that it is extremely vital to incentivize the sector. It’s all about aggressive positioning and ensuring that we have got a regulatory framework in a regime that works. And I am certain, as they’ve performed up to now, they’ll do their job they usually we’ll do it effectively.

So am I involved about issues that occur for one particular firm? Not whenever you’ve bought an excellent strong regulator who is ready to ensure and have performed for quite a few many years, be certain that we now have bought a sturdy regulatory regime in place. So it is going to be attention-grabbing to see what occurs, however I am certain the regulator will be capable of work out the way to make it work for the sector if there’s any type of intervention.

Martin Younger

Thanks.

Susan Davy

Does that solutions your query Martin?

Martin Younger

Thanks.

Operator

The subsequent query comes from Sarah Lester from Morgan Stanley. Sarah your line is open. Please go forward.

Sarah Lester

Thanks. Good morning. Thanks for taking my query. However in fact, an enormous congratulations first to Paul, that is your final outcomes and an enormous welcome to Steve. I simply have one query for you, Susan, please, however there are type of three small components to it. As we method the tip of calendar yr 2023 and we look ahead to 2024, I am simply curious, firstly, what excites you essentially the most concerning the yr forward? Secondly, what are you most involved about or say is the largest problem? After which thirdly, if there’s one single message you want buyers to take into 2024, what’s it? Thanks.

Susan Davy

Nicely, Sarah, you actually bought it this morning. Okay. Thanks for these questions. So what am I enthusiastic about? Nicely, I’m enthusiastic about the truth that we — you noticed it within the presentation, we have launched quite a few initiatives throughout the group after which a crew that you just noticed within the presentation is one thing I am actually happy with, that we now have delivered alongside the college. It is actually thrilling initiatives the place we’re bringing collectively the best minds to resolve a number of the largest points we have got and it is issues like microplastics and its features of air pollution that we actually do want to analyze to the tip outcomes.

So I am very excited concerning the three way partnership with the College of Exeter. In order that’s a particular thrilling level given with out this week. I feel when it comes to concern, I feel I am not involved per se. We’re getting on doing what we have to do. We’re delivering. We perceive what regionally is vital for the communities that we serve. We have our renewables enterprise that may — we’re investing in to ensure that we are able to offset a few of these dangers on the wholesale power market dimension. So I haven’t got issues per se. We have an excellent plan in place for the following yr. We have motion plans and it was able to ensure that we ship. So no issues from that entrance. Very a lot going to be delivering on our technique.

After which for 2024 and past, once more, we have got an ideal plan in place and good colleagues throughout the enterprise to ship it. So I in all probability dissatisfied you, Sarah, however I do not assume there’s something that significantly issues me and it is a query about simply with the ability to get on and ship what we have to do.

Sarah Lester

Good. Thanks.

Operator

The subsequent query comes from Dominic Nash from Barclays. Dominic your line is open. Please go forward.

Dominic Nash

Good morning everybody. And thanks for the questions. I’ve simply bought a pair for me. Simply following up from Sarah’s query about what can excite you in 2024, Susan. And clearly, getting a 4-star EA rating should be fairly an thrilling prospect. Are you able to simply give us some colour on how that’s going and the way assured you — that we are going to get a 4-star score for 2024?

And second, I’ve bought a query for you, Paul. Echoing earlier feedback, effectively performed. Thanks. Congratulations on your remaining set outcomes. Now going again to the variety of years that you’ve got been CFO and concerned in Pennon, is there — for those who return in time, is there something that you’d have thought-about doing in another way? And secondly, as in, what’s been essentially the most rewarding or most attention-grabbing factor that you just assume you performed spotlight of your time right here? Thanks.

Susan Davy

Okay. Good morning, Dominic. Thanks for these questions. So EPA, we’re actually targeted on getting the best star score, not for ourselves however for our communities and ensuring that we’re delivering. Simply to be actually clear as effectively, Dom, the 2024 evaluation we are going to get in 2025 as a result of clearly, it comes out after the yr. And that is the one the place we will probably be targeted on getting that 4-star.

I’ve all the time stated it is not going to be a linear trajectory to get there. We have now been working extremely laborious and John, who has joined us this yr has been actually ensuring we have got sustainable motion plans in place to ship. Now the 2 focus areas for us to get to the EPA star scores that we must get to is round decreasing our influence on the atmosphere with pollutions and ensuring from a useful resource place publish the drought that we have got our assets again to the place we have to get to.

So maybe if I discuss each of these on the air pollution facet, I am happy when it comes to critical air pollution numbers, they’re down. If we glance again to 2021, ’22. They had been a lot increased up round 8% or so. They’ve come down final yr and this yr that we have had one so far. Now one is one too many, and we need to get to zero, however I am happy with the trajectory on that measure. So the variety of different pollutions that we now have that aren’t the intense pollutions however certainly are critical within the sense of what that they do within the atmosphere. We have had the trajectory of bringing these down at year-on-year, and we have taken 50% as of 2020 off the numbers.

This yr, we’re in all probability going to have an outturn the place we now have a slight choose up on that, nevertheless it hasn’t taken us away from the truth that we are going to get to the place we have to get to subsequent yr. And we now have the motion plans to ensure that’s again on observe. So we’re getting there with the pollutions and eradicating these. After which on the water assets facet, and you will see within the presentation, we’re investing considerably to create extra headroom, to create extra assets, and that is one facet of the coin. And the second facet is ensuring that we’re supporting clients and we’re being extra environment friendly with the water that we use to decreasing leaks and serving to clients to cut back their leaks, in addition to them — encouraging them to make use of much less water.

And final yr, we had the Cease the Drop marketing campaign, which labored very well for demand administration, and we’re related initiatives that may assist us drive demand manufacturing. However once more, we’re assured that our useful resource place is recovering and will probably be recovered for that evaluation for subsequent yr. So these are the 2 areas to deal with.

And with that, I will hand over to Paul for his query.

Paul Boote

Okay. Thanks, Susan, and thanks on your sort questions, Dominic. And for everybody else has sort needs thus far, it is — actually grateful for that. That is so sort. By way of issues I would contemplate doing in another way, it is a unusual query, I am unsure I’ve ever dwelled on it an excessive amount of. However I suppose if I take a step again and take a look at the place the sector is correct now, there’s a — with my treasury hat on, there’s a form of facet of me that needs maybe we now have, as a sector performed extra funding up to now 10 years when charges and yields had been decrease reasonably than coming to it at this cut-off date when charges and yields are clearly in a really completely different place. However that is only a reflection on the place we’re as a sector reasonably than something extra particular.

By way of all of the rewarding issues which have occurred over the time I have been right here, clearly, there’s been a number of landmark transactions not least constructing out, after which finally promoting Viridor, in addition to the acquisitions of Bournemouth and Bristol and a whole lot of notable treasury transactions alongside the way in which. So there’s all the time been a whole lot of attention-grabbing issues that we have performed. We have additionally been on the forefront of many issues and dealing carefully with Susan on pushing agendas like our sustainable financing framework, which is the primary within the sector in addition to reaching the truthful tax mark once more, the primary water firm to take action again in 2018.

So these issues do stand out for me. However clearly, my principal spotlight can be working with my fabulous colleagues, previous and current over the 14 years I have been right here. That is been the primary factor for me.

Dominic Nash

Thanks.

Operator

[Operator Instructions]. The subsequent query comes from James Model from Deutsche Financial institution. James your line is open. Please go forward.

James Model

Hello, good morning. Additionally greatest needs and thanks from me to Paul. I had a couple of questions on ODIs. So firstly, type of spotlight it, that you’re third ranked when it comes to your ODI efficiency when it comes to the type of — I feel the variety of measures which you are outperforming on. However you have got had, I feel, internet penalties from ODIs over this era. So simply questioning why that was. Is there a couple of measures, even they’re doing very well on a whole lot of measures. And there are some measures that has simply gone very badly or comparatively badly.

Second query is, given you’re performing, I feel, total, fairly effectively on ODIs and are getting that penalties over the interval. I feel that is a fairly clear signal that Ofwat has been extraordinarily powerful on its ODI targets for the business on this regulatory interval? And second query is, do you assume there’s any scope for his or her method to get a bit simpler going into the following interval that you just really may need extra corporations which are in a position to outperform in the event that they’re doing effectively.

After which thirdly, on ODIs, I do not assume you stated something particular about type of ODI rewards or penalties within the half or for the full-year. So I simply type of questioning that you just’re on observe to outperform on ODIs for this yr? Thanks very a lot.

Susan Davy

Okay. Thanks very a lot on your questions, James. The primary query, I feel, was round ODI. Given our comparative place the place are we when it comes to that total evaluation and different particular measures which are type of monitoring the general place down. Now I feel when it comes to the ODIs recognize within the presentation, there are a variety of appendices. However within the appendices, I guarantee you there are a couple of tables in there that element the ODI place. And also you’re proper, there are a few ODIs which were in penalty that aren’t as a lot in penalty as they had been once we first bought this regulatory interval, however are nonetheless in penalty and I feel that you just would possibly assume can be.

So we have simply touched on with the sooner dialog and the questions that we now have in from Dominic across the EPA. So we’re not the place we needed to be for our EPA assessments. We aren’t going to get there, however we’re not there but. So clearly, we have got penalty for that, and we have got penalty at ramp of wastewater options efficiency, which clearly goes some method to explaining why we now have the penalty, the web penalty place that we now have. However there are issues which have gone effectively. There are issues that we’re delivering on, whether or not it is the washing water high quality, which is extremely vital for our area or whether or not it is the catchment work, which once more is extremely vital for water high quality, which has been enhancing the water high quality and discoloration place that we now have relative to the sector.

So there are areas the place we now have performed effectively, however you are proper when it comes to a slight internet penalty that is the place we discover ourselves. Now whenever you take a look at the — I feel your second query was the frequent efficiency metrics and the place these are throughout the sector, clearly, for those who take a look at corporations, I feel corporations have actually struggled on the frequent efficiency metrics to get right into a internet reward place. So I am certain that is one thing that the regulator will probably be reflecting on. However having stated that, it is necessary that targets are set to drivers and to ensure that we’re delivering and incentivized to ship for our clients. So I am certain that’s one thing that Ofwat will replicate some.

I feel the third level when it comes to the general numbers I feel we’re in a slight internet penalty for the half yr ’23, ’24. However I feel as we stated within the announcement, we do not anticipate the full-year penalty being as excessive because it was final yr. So I feel we’re about £3 million for the half yr. And final yr, we had been at £10 million of penalty.

James Model

Thanks very a lot.

Operator

The subsequent query comes from Hannah Avory from BNP Paribas. Hannah your line is open. Please go forward.

Hannah Avory

Hello, good morning everybody. I’ve a fast query in your tariff innovation remark. So that you talked about your pilot schemes which are happening and in addition aware that you’ve fairly a singular place when it comes to the second house possession being very excessive in your area. I used to be simply questioning for those who might discuss a bit extra about how the pilot schemes are going, which of them are trying essentially the most promising? After which to what extent these type of new modifications to the tariffs or potential modifications to tariffs depend on good metering and type of what your good meter penetration in the meanwhile. And with that in thoughts, type of once we might see potential new tariffs being launched?

Susan Davy

Sure. Thanks very a lot, glad your query this morning. So a little bit of first that’s actually. I do know different corporations have checked out trialing completely different tariffs, however we’re going out with a collection of tariffs that we will be trialing. We put that within the cost scheme for this coming yr, in order that we are able to perceive what companies that we are able to make and the way we are able to assist our clients.

So there is a vary of issues we’re . And for our area, we’re seasonal tariffs. We’re rising block tariffs the place you’re charged a certain quantity for a consumption degree after which a excessive quantity for a block use. Above that, we’re peak charging and we’re how we would incentivize our clients who come into the area to make use of much less water as effectively. So a number of trials happening. And we’re concentrating on — you are fairly proper, a few of these prices we need to ensure that it really works in a extremely environment friendly means and good metering helps us do this. So a number of the trials are focused at particular areas the place we do have a number of customers to the area.

So North Devon, for instance, a couple of third of the purchasers now have gotten good meters in place and that may assist us encourage them to participate in our trial, participate in these pilots to grasp which tariffs will assist when it comes to their affordability, but in addition utilization and demand. We had our Cease the Drop marketing campaign final yr, which is a blanket marketing campaign for Cornwall as we had been attempting to recharge assets and ensure the reservoir ranges had been we will get to an excellent place. And we encourage clients to make use of much less water and they’d get an quantity of their payments from doing so if we hit a sure degree. And that was extremely well-liked, it went effectively and clients bought first little bit of their invoice from doing it.

So it was understanding the result from that pilot as levers to consider charging differently. Now this isn’t traditional for the sector. So not many of those tariffs round. So we need to be certain that we’re piloting them, and we’ll do this subsequent yr to then see what works, see what does and take it ahead. However I’ve to emphasize that these aren’t obligatory tariff trials that we’re doing. These are voluntary. We’re getting good take up, and we’ll see how these goes. After which clearly, going ahead, it is going to be one thing that clients can select when it comes to the tariffs that fits them greatest.

So due objective, serving to clients so they’re in management and may handle their affordability. After which for us, we expect it’s going to assist drive water effectivity and in addition there is a truthful level of our area the place we now have a number of guests coming into the area through the summer time interval. We need to ensure that those that are resident and resident solely round are principally incentivized their water effectivity, but in addition does get reductions on the proper time to reflex that. So heaps happening, and I am certain I will probably be speaking concerning the outcomes of these pilots presently subsequent yr.

Hannah Avory

Okay. Tremendous. Thanks. That is all clear.

Operator

The subsequent query comes from John Campbell from Financial institution of America. John your line is open. Please go forward.

John Campbell

Hello, good morning. Thanks for taking my questions. And firstly, good luck to Paul together with his new endeavors. The primary query I had associated to the Ofwat investigation of South West Water amongst different a number of water companies as effectively. Admire there’s an ongoing investigation, so you may’t maybe present specifics, however do you have got a tough thought of once we might have a solution. For instance, wouldn’t it be by the ultimate dedication? And usually, do you are feeling that Pennon is effectively positioned close to this investigation.

And my second query is expounded to your marketing strategy. Has Ofwat come again with any feedback or questions or certainly native politicians associated to your PR 2024 marketing strategy? Thanks.

Susan Davy

Paul, will take that.

Paul Boote

Sure. Maybe I will take that. First one on the investigation. So simply to remind everybody on the decision, there are two investigations underway in the meanwhile. The primary one pertains to wastewater and is an investigation is being checked out by the atmosphere company and Ofwat, and that was kicked off quite a few years in the past now and entails all wastewater corporations. After which Ofwat have taken additional steps with quite a few particular corporations, six in complete.

We proceed to obtain questions in relation to these investigations and we overtly in phrases, at present reply to these questions. At this cut-off date, we’ve not had any substantive engagement that may give rise as to as having any specific perception. Sadly, on timelines or potential outcomes in that regard. So when it comes to the wastewater ones, nonetheless very a lot going by means of the method of responding to questions as they’re raised.

Then there’s a second investigation that’s underway in relation to leakage, significantly round how leakage has lowered following a spike in leakage that we reported to one of many COVID years that then turned a discount because it turned again on observe. That’s one thing Ofwat has inquired about and requested us some questions with reference to that one. Once more, we have acquired quite a few questions. We have had some extra engagements when it comes to conferences. So one can be useful that, that one could be shifting in the direction of some form of decision sooner reasonably than later when it comes to which one could be performed first. However equally, once more, we now have no perception into precise timelines or potential outcomes.

Susan Davy

Okay. And then you definitely requested concerning the marketing strategy. Clearly, we submitted marketing strategy. There’s a timeline and a timetable for what occurs subsequent. We have had, which I am certain all corporations has some technical queries on a number of the younger submission tables that we spent in — however clearly, Ofwat will probably be working by means of these, and there hasn’t been any type of substantive dialog with them concerning the plan that is been submitted. However clearly, we are going to await the following steps within the course of.

John Campbell

Thanks.

Operator

[Operator Instructions]. We have now a follow-up from Dominic Nash from Barclays. Dominic, please go forward.

Dominic Nash

Hello, there, sure. Only a fast one. In your outcomes, you stated that your CapEx has gone up by £100 million from £750 million to £850 million by means of AMP7. Are you able to simply give us some form of colour as as to whether that was included within the marketing strategy submission and the £5.4 billion shadow RAB that you just revealed for April 2025. And what influence that may have or what return will you get on that additional £100 million? I presume you share 50% of it with shoppers. However are there every other further form of return benefits from that additional £100 million spend? Thanks.

Paul Boote

Sure. So when it comes to the technical means that may come by means of, Dominic, you are proper. It would successfully — half of that may successfully get trued up on to the shadow RCV. Now on the time, we talked about that £5.4 billion, and we had a selected breakdown of it in our highlight presentation, for those who keep in mind, I am certain you’ll do. Now that factor would not be included in that. However as it’s £50 million, clearly, half of £100 million would go on to that RCV. It would nonetheless spherical to £5.4 billion. So £5.4 billion continues to be very a lot the quantity, however now it does additionally embrace the impact of that additional £100 million coming by means of with that additional £100 million, simply to offer a taste pertains to additional exercise.

So when it comes to our investments in objects similar to air pollution, similar to leakage, driving efficiency, exercise ranges, et cetera. We’re going to be spending somewhat bit extra on that. And that’s — one is coming by means of there in addition to a component of upper value inflation for specific objects. So there’s a few issues, however primarily increased exercise coming by means of.

Dominic Nash

Thanks.

Operator

We have now no additional questions. So I will hand the decision again to Susan Davy for concluding remarks.

Susan Davy

Okay. Thanks very a lot, Adam. Nicely, thanks, all people for becoming a member of us this morning. Nice to get these questions in. As you see, we have got a sturdy set of outcomes for the half yr very a lot underpinning our dividend. And as many have stated on the decision, once more, I simply need to reiterate my thanks for Paul for his contribution to Pennon and want him effectively for the longer term. And my whats up to Steve, who’s right here this morning and who’s joined this — we are able to clearly previous the deliberate handover with Paul earlier than taking over the CFO publish firstly of the brand new yr. So thanks, all people, and thanks for becoming a member of.

Paul Boote

Thanks all.