Pennon Group plc (OTCPK:PEGRF) Q2 2024 Earnings Conference Call November 29, 2023 3:00 AM ET
Company Participants
Susan Davy – CEO
Paul Boote – CFO
Conference Call Participants
Martin Young – Investec
Sarah Lester – Morgan Stanley
Dominic Nash – Barclays
James Brand – Deutsche Bank
Hannah Avory – BNP Paribas
John Campbell – Bank of America
Susan Davy
Good morning. I’m Susan Davy, Chief Executive of Pennon. Welcome to our Half Year Results Presentation for 2023/2024. Today, we’re at a brand-new state-of-the-art research center here in Exeter, a joint venture between ourselves and the university, established to investigate and explore solutions to issues we find in the natural environment. We have recently opened the doors to the first project. So the pipeline ready to come through, helping us tackle the most pressing challenges in the environment and the water cycle right here right now.
We’re all excited about the joint venture, a first of a kind in the U.K., and every thought has gone into what it will achieve and how we will work. Even down to the building design, as we look outside, you’ll see the representation of the importance of water flowing over, with circling windows reflecting rising air bubbles. It was also important to ensure we had an example of a living net zero building in operation, which we’ve achieved through a combination of air source heat pumps, high thermal efficiency panels, solar panels and LED lighting inside the Centre for Resilience in Environment, Water and Waste, or CREWW for short, we are bringing together the best minds from across the disciplines of geography, biosciences, engineering, economics and psychology.
Yes, we are here in Exeter, but through the university, we have a global reach for the center with a laboratory working to resolve some of the most pressing global challenges in the sector, like tackling microplastics with a dedicated microplastics research lab, and understanding how we can better tackle pollution in the natural environment. I believe that CREWW will become a positive beacon of change in the sector, not just locally, but nationally and globally and in turn, drive benefit and investment back into the South West.
Here’s just one example of how we’re investing to grow and develop sustainably working with partners and collaborating. Our business model ensures we have the headroom and capacity to be fleet to foot to respond with agility when it matters most, whether they’re facing a challenge or an opportunity to invest like here at CREWW, and that’s what we will continue to do.
So moving on to the half year results for 2023, ’24, which Paul and I will take you through. First, we are delivering a step-up in investment across the group with capital investment across the water business and Pennon Power’s renewable projects, up by 87% this half year. With our ongoing commitment to the U.K. water sector, we are delivering on both the Pennon strategy of both acquisitive and organic growth. Sustainable Bristol acquisition benefits are being realized in line with our acquisition plans with £16 million annualized synergies to date on track for the £20 million acquisition synergies targeted to 2025. Regulatory capital value for the enlarged water business is forecast to increase over the five years to 2025 by 60% and further grow to 100% by 2030, outlined in the K-business plan, we have just submitted to Ofwat.
Second, whilst we are investing in a sustainable future, we are also delivering now making progress on what matters most across our regions. Extreme weather patterns continue to be volatile here in the South West given our adjacency to the Western approaches of the Atlantic Ocean. It means we relentlessly must double down to both maintain performance and make sustainable change. We remain focused on four customer priorities as we invest to protect water quality and enhanced resilience, tackle storm overflows at our beaches, eradicate pollutions and protect the environment from climate change.
With a laser-like focus on efficiency, we’re also focused on ensuring we keep bills as low as possible. Delivery highlights in this half year includes 100% bathing water quality for the third consecutive year, a doubling of reservoir levels in summer 2023 compared to summer 2022 as we continue to break the drought cycle across Devon and Cornwall, with the region only very recently moving from drought to recovery status.
Upper quartile performance for South West Water on the sector-wide comparative measures being one of only two companies to improve performance in our Ofwat’s rankings. And we are targeting to preserve the recovery to 2 star we made in 2022 for the 2023 environment agencies, Environmental Performance Assessment, retaining the focus on achieving 4 star for 2024.
Third, given the unique topography of our region, we have committed to applying a Green First approach to everything we do. Given this is a region largely dependent on tourism and agriculture for its economic health, with over 13,000 farms, a large majority of our land used in our region is dedicated to farming. How we work in partnership with landowners and farmers is critical. And with one in six species recognized as at risk of extinction, it’s critical we continue to support the wildlife and habitats of our region, too.
Our award-winning catchment management program continues to work with farmers to change the way they manage their land, improve water quality, biodiversity and climate resilience. And the effectiveness of our work is evaluated and researched with the University of Exeter and will be researched right here at CREWW. Today, our proactive catchment management has delivered water quality benefits for over 6% of rivers, which previously were not achieving good ecological status. That’s a third of a reduction to what we need to target, which is good news.
Given our topography and power needs, we are accelerating our investment in renewables to mitigate the future impacts of a volatile energy market, whilst also counting towards our net zero plans. And we are on track to generate 40% of the group’s energy requirements by 2025 through our new venture, Pennon Power. With the 40% from Pennon Power and the energy already generated by the water business South West Water, we are on track to deliver 50% of the group’s energy requirements from renewables by 2025.
Fourth, underpinning all our priorities and activities is our financial resilience and strong balance sheet. Gearing is stable at 61% with sector-leading efficient financing in place. Our robust financial outcomes underpin the return on regulated equity, doubling base returns for K7 to date at 7.9%. And at group level, we have profitable B2B retailers, growing through contract wins and margin improvements, with Pennon Power renewable energy projects expected to generate EBITDA from 2025.
Pennon’s dividend is in line with our policy of CPIH plus 2% growth with an interim dividend of 14.04p per share payable to our equity investors, many of whom are customers. So resilient financial performance underpinning our delivery as we make a smooth transition to K8. With a strong balance sheet and financial resilience, we have already been accelerating investment with a part of the £82 million Green Recovery initiative, the £45 million WaterFit program, the £125 million to break their cycle of drought and most recently, the £52 million investment as part of Defra’s accelerated investment scheme.
We couldn’t do any of this without the support and dedication of our 3,500 employees that have continued to show extraordinary care for customers and each other. I’d like to thank them for what they have achieved and what they will step up to do as we look forward and continue to make progress and grow sustainably. Our recently submitted ambitious K8 business plan to 2030 has had the highest customer acceptability testing we’ve ever had. And that is why we are not waiting. We are mobilizing now, and we’re doing this.
And with that, I will hand over to Paul to take you through the financial performance in more detail.
Paul Boote
Thank you, Susan, and good morning, everyone. Overall, financial performance for the group this half year continues to be resilient, and we are well positioned to deliver investment and growth into the future. In the first half of this financial year, underlying EBITDA was down slightly on the same period last year due to higher costs, but coupled with our continuing sector-leading effective interest costs, this results in our cumulative RORE continuing to double base returns at 7.9%. This strong performance enables the group to reinvest in our asset base, driving operational and environmental improvements, whilst maintaining a comparatively low gearing level of 61% and delivering on our dividend policy of growth of CPIH plus 2%.
The group’s overall results are in line with expectations. As was the case in the last financial year, inflation impacts continue to feed through into both our revenues and our cost base, which I will shortly talk about in more detail. As in previous years, we have a small number of non-underlying items. For this period, these relate to drought costs that continued into the first half of this year, business reorganization costs as we seek to optimize the business post the Bristol acquisition, and acquisition costs associated with our new renewable energy investments. Our underlying profit before tax for the half year is £9.1 million. This compares to £22.5 million in H1 ’22, ’23 and a loss of £5.7 million in H2 ’22, ’23. Comparing to H1 ’22, ’23, the high inflation environment has had a favorable net impact on our results driven by a £30.8 million increase in revenue, which is partly offset by higher costs, including employee costs of £9.1 million and higher power costs of £9.4 million.
The inflationary impact on our financing costs has been stabilized through our £300 million RPI hedge entered into last year that runs through to March 2025. Underlying profits were reduced by a one-off reduction in revenue of £14.8 million in the pass back of 2021, ’22, ODI net penalties and revenue over recovery. Also of note is that our depreciation charges are starting to step up, reflecting the recent increase in the level of capital investment, which drives growth in our RCV. We are also continuing to see strong profit growth in our non-household businesses, Pennon Water Services and water2business through contract wins and margin improvements. Our cumulative group return on regulated equity is 7.9%, continuing to double base returns.
As we flagged, as we entered this period of high inflation, our outperformance has been skewed into financing and away from TOTEX as key cost lines of power, chemicals and construction materials have risen by more than the headline rates of inflation. Our strategically positioned financing portfolio includes a low level of index linked debt compared to the sector average and high proportion of fixed debt. This has driven significant outperformance of £250 million in K7 to date. This financing outperformance drives our overall outperformance to date of £190 million.
As previously announced, we are reinvesting this outperformance into targeted initiatives to meet our biggest challenges. £45 million into WaterFit to improve river and coastal water quality, £125 million on water resilience, the largest element of which will be our new desalination plant in Cornwall, and £20 million returned to customers through our pioneering WaterShare+ mechanism to help with affordability. As flagged, our capital expenditure levels are ramping up as we deliver on our K7 business plan, reinvestment of outperformance in the initiatives that I’ve just set out alongside delivering accelerated initiatives, including our Green Recovery commitments. In the half year, we have invested £266 million, an 87% increase on the same period last year.
The overall increase on the prior year of £124 million includes an increase of £70 million on clean water resources as we invest in both water resilience, including desalination and water quality through the two new state-of-the-art water treatment works in our Bournemouth region, a step-up of £22 million in our wastewater infrastructure, including sewer depth monitors to help deliver improved environmental outcomes. Finally, we’ve invested £32 million in our new solar development sites that will deliver attractive commercial returns, de-risk our exposure to wholesale power markets and accelerate our journey to net zero.
Looking at our balance sheet position in more detail. We remain well positioned in this inflationary environment with a stable, low effective interest rate of 5.8% and a low level of gearing at 61%, which is well within the historic range of 55% to 65% that we have operated in. We continue to access a diverse variety of funding sources, securing over £700 million of new and renewed facilities since March, of which £575 million was secured through our Sustainable Financing Framework. This includes our first syndicated £300 million U.S. private placement that was significantly oversubscribed allowing the optimization of pricing and upsizing of the borrowing level.
I would like to thank all our banking group for their continued support and advice as we look to new markets to secure official funding for the group. As we continue to ramp up investment levels, which we expect to continue at an elevated level into K8, we plan to continue to access the majority of our funding through our Sustainable Financing Framework. In the future, this may include the issuance of public bonds to optimize any future issuances, we are targeting to obtain two strong investment-grade credit ratings that will be in place prior to the start of the next regulatory period.
Looking forward to the second half of this financial year, we anticipate revenue being marginally lower than the first half due to more regularized seasonal demand movements. We expect this, though, to be more than offset by lower operating costs driven by locking in lower power prices, less drought-related activities and the full-year effect of efficiencies as we optimize performance across the group.
We have been able to secure lower power prices in H2 as we entered the financial year with more open positions in winter and have benefited as forward power prices have steadily fallen. This benefit will continue to improve earnings into the financial year ’24, ’25. Our financing costs relatively flat phased through ’23, ’24 in part due to the fixing of the £300 million of RPI debt placed last year and higher base rates impacting new and floating rate debt, which offsets the falling inflation on our remaining index-linked debt.
Turning to the balance sheet. We expect the pace of capital investment to continue to accelerate as we deliver not only on our K7 commitments, but also on the additional and accelerated investments we have committed to. We now expect capital investments in South West Water over the two years to March 2025 to be over £850 million. Finally, with the increased level of investment expected, our opening RCV for the next regulatory period is now expected to be £5.4 billion, which will be a key driving factor of value and revenue growth in the next regulatory period.
And with that, I’ll hand back to Susan.
Susan Davy
We continue to be focused on the things that matters most to our customers across all our regions, stretching from Devon to Cornwall, Isles of Scilly to Bournemouth and Bristol. We know what is important to our customers as we meet them and talk to them every single day. And through our established WaterShare Framework, I personally get to meeting customers and discuss our services and their priorities on an ongoing basis. We’re the only water company to have such a scheme in place.
The number one priority for customers is safe, clean drinking water. Water supply across our region is under growing pressure. With the granite coast of peninsula, we operate across a unique topography, where 92% of our water resources are reliant upon rivers backed up by reservoirs. We have seen that acutely in 2022 with the hottest, driest weather on record, culminating in a one in 200-year event for the most westerly part of our region. For the first time in over 25 years, we had to implement our drought plan for Cornwall and parts of Devon. With a combination of our interventions and rainfall, we were able to lift the hosepipe bans this September. And in October, the region has moved from being in drought to being in recovery.
The second priority for customers is alleviating the use of storm overflows and eliminating pollutions. With a third of the nation’s bathing beaches, now 860 miles of coastline, I am also acutely aware of the impact on our environment in this beautiful region, but our customers protecting bathing waters is one of the top priorities. The third customer priority driving environmental gains, whether that is through our catchment nature first approach or through driving our trajectory to achieve net zero in 2030. Given our topography and power needs, we’re accelerating our investing in renewables pillar, serves to mitigate the future impacts of a volatile wholesale energy market whilst also counting towards our net zero plans.
And the fourth priority, affordability. We also continue to deliver for our customers with a focus on customer affordability by keeping those bills as low as they can be and delivering efficiency, alongside supporting those who are struggling with a cost of living crisis. Supporting the activities to tackle the priorities is the largest environmental investment we have seen in decades. We are well positioned to deliver the remainder of K7. And for K8, we anticipate what will be almost a doubling of investment to £2.8 billion with our 10-year supply chain frameworks already in place and mobilizing. So let me take you through the progress we are making.
Turning to customers’ number one priority, safe, clean drinking water. Extreme weather patterns continue to be volatile here in the South West. It means there is no room for complacency as we relentlessly have to double down to both maintain performance in often challenging environmental conditions and make sustainable change. Reassuringly, for the region, we are starting to break the cycle of drought investing an additional £125 million in the period to 2025 to ensure underlying sustainability to cope with continuing volatility in rainfall and weather patterns.
For Cornwall and Devon, we are on track to see strategic reservoirs build back to 90% by March 2024 and augment water availability by 45% and 30%, respectively, for those regions by 2025. Whilst we have seen a 45% increase in rainfall so far in 2023 compared to 2022, a third of the reservoir improvement has been as a result of our investments in interventions.
We’re focused on two sides of a coin. The first, diversifying our portfolio and delivering new water resources. We continue with our pioneering repurposing of disuse and abandoned quarries, having recently added a fourth to our portfolio with work well underway at Blackpool Pit at Cornwall. We’re also increasing winter pump storage at Gatherley and Devon, and we are on track to install Cornwall’s first ever desalination plant due for operation in 2024.
Second, looking at how we reduce demand in two key areas, fixing leaks and reducing usage. We continue to offer customers freely repairs with a 65% increase compared to 2022. And we have now issued a record-breaking 250,000 free water efficiency devices to customers to help them reduce usage and save money, and we’re progressing our smart metering rollout in North Devon with a third of customers now with a smart meter in place.
On water quality, we’re consolidating our top quartile water quality position for Devon, Cornwall and Bournemouth with our innovative quality first program, and they’ve had zero failures year-to-date at any of our water treatment works. And for the regions, we have acquired with the legacy underinvestment on the Isles of Scilly and Bristol, we’re replicating the rollout of our quality first program to deliver a step change in performance and make the necessary improvements to infrastructure.
We are focused on what is important to our region. And with a third of the nation’s bathing beaches, it’s a clear focus for us. 90% of the K7 bathing and shellfish water interventions and investments have now been delivered. For the third consecutive year, we anticipate the Environment Agency bathing water quality assessments, which look at the levels of harmful bacteria in our seas, to report 100% pass rate for bathing waters where our assets may impact. With 100% monitoring of storm overflows in place, we have seen a modest increase in average spills to date over the bathing season, rising from an average of 5% to 6% despite a 45% increase in rainfall. Underlying investments ensure we will make sustained change over the midterm. We are progressing 70 interventions, focused on 49 of the 151 bathing beaches in our area.
Our WaterFit Live website, providing real-time information for customers, communities and visitors about the water quality of their favorite beach is improving transparency and will be extended to include inland rivers in the coming weeks. We are piloting wider catchment sampling and monitoring, which will pinpoint pollution sources and allow for swift catchment coordinated intervention, restoring trust and building confidence with our communities.
Turning to our rivers. We were delighted to support recent applications on the River Dart and the River Tavy to achieve the region’s first in and designated bathing water status. We are currently funding the monitoring of the rivers partnering with Hello Lamp Post, creating a talking river, where visitors to the rivers and citizen scientists can record the reasons for use and their observations using QR codes. With the investments we have made to date in K7, we have seen improvements to river quality with a 6% decrease in impact as measured by the Environment Agency.
Turning to pollutions. We continue to target significant reductions by 2025. Our asset health metrics are trending in the right direction with sewer collapses and sewer blockages ahead of commitments, demonstrating that interventions will have sustainable impacts. For customers, we continue to drive down internal sewer flooding incidents, coupled with an 18% reduction in external sewer flooding incidents as well. The number of serious Category 2 pollutions to water courses continue to show underlying improvements, dropping from eight in 2021 to one year-to-date in 2023 with zero Category 1 incidents. That said, the overall number of Category 3 pollution incidents to water courses is elevated on last year, and I’m clear this needs to recover.
With 355 hotspot interventions delivered and having a reach 60% of our rising main program, we are progressing the sustainable improvements required for the longer term. And in addition, we have now installed 75% of the sewer depth monitors to increase proactive maintenance and management of the networks. Given this, we are targeting to preserve the recovery to 2 star we made in 2022 for the 2023 environment agencies — Environmental Performance Assessment. And we are retaining our focus on achieving 4 star for 2024, but there is much to do.
In 2021, we established our net zero program to 2030 with three pillars: sustainable living, championing renewables and reversing carbon emissions. We’re on track to deliver a 50% reduction in our carbon footprint to 2025. We’re also focused on championing renewables with £145 million investment as we invest to mitigate the wholesale power market risk by developing our own generation in supply, and we’re on track to providing 40% of the group’s energy requirements by 2025 through this.
I talked earlier about our award-winning catchment management approach, which has secured a £20 million ODI benefit for K7 as we take a Green First approach to investment and apply natural solutions to reduce the agricultural impact on biodiversity and water quality. Activities range from installing water-side fencing, building ponds, improving farm tracks, slurry storage, under sowing maize and planting trees and buffer strips to catch and filter water. This has had the benefit of increasing the water table to the equivalent of 100 Olympic-sized swimming pools. It’s very much a partnership approach working with 20 businesses, NGOs, 2,000 farmers and communities. And we use a science-based expertise here at CREWW to evaluate and identify solutions and benefits using pioneering satellite data to understand habitats.
To date, we have improved the management of over 115 hectares, equivalent to the size of Dartmoor National Park. And given globally that peatland store more carbon than all the world’s forests combined, yet once disturbed, this is released alongside other greenhouse gases. We are working as part of the South West Peatland Partnership and have restored over 1,100 hectares of peatland to date with one of our innovative approaches involving the use of sheep wool to create bunds. Having worked in our catchments for the last 15 years, we have the science to back up the improvements with a 30% reduction in real water discoloration and measured quantifiable reductions in phosphates. This is good news.
One of the benefits of taking a nature-based approach is reduced costs for customers over the long-term. And with that, I’ll talk more about how we support affordability. In tackling affordability, it is about two things: keeping bills as low as they can be for all customers and then secondly, supporting those who are struggling. The first priority, keeping bills as low as they can be. We have always been focused on being as efficient as we can be in delivering our services.
During this cost of living crisis, we are keeping bill increases to 2025 well below inflation for our customers. It is very clear though that for a number of customers, rising prices have weighed heavily, and it is critical that we continue to support customers and communities. To date, we have provided over £90 million of customer support, with a 35% increase in customers benefiting from our social tariffs as we continue to focus on eradicating water poverty in our region, building awareness of our customer outreach and engagement programs. As a result, 100% of customers in Bristol find their bills affordable and 97% across other regions, with our bad debt charge at 0.9% of household revenue.
We’re innovating to do more as we look ahead with tariff trials plan for 2024 ahead of introducing a range of fair tariffs to help customers use less and save more and recognizing the unique demographic of our region with its high dependency on tourism, where the prevalence of second homes can be as high as 40% in hotspots. We continue to play our societal role in communities, supporting neighborhood initiatives and water efficiency projects with 273 community projects supported to date. Unique in the sector, given you can’t choose your water provider, we believe you should have a say, which is why we intend to grow our unique WaterShare+ scheme to one in every 10 households and continue to share financial gains with customers.
Overall, we continue to deliver improved outcomes for customers with ODI performance of 75% either on track or ahead of target across a range of bespoke common and comparative measures with the industry upper quartile performance in this area to date. Areas of excellence continue to be things that our customers and communities care about most, including bathing water quality, biodiversity enhancement and internal sewer flooding. And Bristol Water, C-MeX continues to perform strongly where we continue to focus on sharing the learnings across the rest of the group. As we are delivering sustainable change for the region, our focus on EPA and pollution performance remains.
Given we are one of the largest private employers in the South West, our investments in people and communities really matter, too. Over K7, we have created 500 additional jobs with a further 2,000 plan as part of K8 directly and as part of the wider supply chain. And whilst our investments in people are locally focused, they are receiving national acclaim. We are the only water company to have been recognized for our earn and learn approach twice running with gold status accreditation in the 5% club, and recognition as a top 100 employer for apprenticeships.
Our graduate programs are growing in popularity, regionally and nationally, oversubscribed each year. This is ensuring we can pick the brightest and most diverse talent for the future with our cohort to date, two-thirds female and 40% ethnically diverse. And our work with local schools has meant that we’ve engaged with over 12,000 people as part of our engagement program and passed for wider plan to provide 5,000 work placements. Finally, and as part of our award-winning health and safety strategy, HomeSafe, we have invested over 23,000 personnel as an ensuring we support physical and mental health support for all of our employees, ensuring they go home safe to families and loved ones every day.
All this means, as we look ahead to PR24 we have a robust base on which to build, and you will see that in this slide. Our financial resilience means we are well placed as we look ahead to PR24. Our draft PR24 business plan includes £2.8 billion of capital investment, a 50% increase on K7. Together with OpEx, this results in TOTEX of £4.5 billion over the five-year period. Whilst ongoing operational cash flows will also step up and help fund some of this spend, we expect to need to raise new funding over K8 of £2.5 billion. This includes £700 million to refinance maturing debt.
We plan to continue to utilize diverse funding sources, including public bond issuance, utilizing our new credit rating that will be in place for K8. We anticipate raising the vast majority of these funds through our Sustainable Financing Framework as the investments in our infrastructure will all be deemed eligible spend. Our K8 business plan results in our gearing level staying within our established gearing range of 55% to 65%, averaging 63% over the period. It is an ambitious plan. We will be investing, but investing efficiently. Total expenditure in the plan will be £4.5 billion, up from the £2.9 billion to 2025.
We have pushed ourselves to be efficient, assuming 12% efficiency, which in turn keeps bill increases to a minimum. Bills will be rising in real terms by an average 4% per annum for Devon, Cornwall, Isles of Scilly and Bournemouth on an average 3% per annum for customers in Bristol throughout the K period. In a cost of living crisis, we know any bill increase can be welcome. We have tested our plan with customers, and we have good support at 74%.
For investors, there is growth in nominal terms of 38%. And we have put forward an ambitious set of outcomes that will see the opportunity to gain from good performance with an ability to share this between investors and customers, with up to 8.6% as a return available. Using Ofwat’s assessment of the cost of capital, gearing is forecast to remain within a well-established range at circa 63%. And having submitted our plans in October, draft determinations are expected in May, June next year with a file of determination in December 2024.
In summary, our half year results reflect resilient performance focused on what matters most today and in building our capabilities for the future and in preparing for PR24. We are stepping up investment across the group with our largest investment in decades, delivering both organic and acquisitive RCV growth. And whilst we are investing for the future, we are also delivering now making progress on what matters most across our region. For the water businesses, we remain focused on four customer priorities to 2030 as we invest to protect water quality and enhance resilience, tackle storm overflows at our beaches, eradicate pollutions and protect the environment from climate change.
With the laser-like focus on efficiency, we are also focused on ensuring we keep bills as low as possible and are committed to applying a Green First approach to everything we do, ensuring we do it in the right way. The way we do business is supporting our profitable business-to-business retailers and our growing Pennon Power renewables business. We can do all this underpinned by a financial resilient, strong balance sheet and a strengthened supply chain, delivered with talented people doing great things for customers and each other and delivered in the right way as we continue to make progress and grow sustainably.
And as a final point, this is Paul’s last results presentation before his planned leave at the end of December. I wanted to thank Paul for his contribution to Pennon, the support he has given me personally, and I wish him and his family the best with their future. Next time you see us, I will be alongside our new CFO, Steve Buck, who takes over the reins from Paul in December. Thank you.
Operator
We will now have a brief break before the Q&A session. [Operator Instructions] The Q&A session will begin at 8:45 GMT. Please stay connected to listen or participate. Thank you.
[Break]
Operator
Welcome back, and thank you for your patience during the break. I will now hand the floor back to Susan Davy.
Susan Davy
Thank you very much, Adam, and welcome everybody, this morning. Thank you for joining us to discuss Pennon’s Half Year Results for 2023, ’24. As you will have just seen from the video, we have had a step up in investment across the group by some 8% to 7% compared to half 1 last year, very much investing not just for today, but in the future, making progress on the things that matter most to our customers across the regions that we serve, as well as the complementary investment that’s going on with Pennon Power to grow the renewables support for the group.
We’re focused on customer priorities, protecting water quality and make sure we’ve got water resources in place to deliver clean, safe drinking water, tackling strong overflows, eradicating pollutions protecting and making sure that we’re supporting affordability for our customers, and you have seen that in the presentation, absolutely underpinned by a robust balance sheet and we’ve got stable gearing, set-leading, sufficient financing in play, and that all goes to support our dividend policy of CPIH plus 2%.
So thank you for joining. We have members of the executive team here today. We’ve got Paul and we’ve got Steve Buck, who’s joined and will be taking over from Paul at the end of December, and we’ve got John Halsall, who’s our COO as well in the room. So there’s many of us. So over to Q&A. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Martin Young from Investec. Martin, your line is open. Please go ahead.
Martin Young
Good morning to everybody. I just wanted to echo Susan’s best wishes to Paul. Thank you for everything that you’ve done over the years, Paul, and all the very best for the future. And then turning to questions, two of those. You have in your business plan, obviously, franchise a significant uptick in the level of investments in AMP8 versus what you have done in AMP7 and indeed, this is what you will do in the last couple of years of AMP7. Maybe you could say something around the preparation that you have done to make sure that the supply chain is lined up and ready to go on all of this.
And then the second question relates to Thames Water, in their business plan they have effectively asked for a degree of special treatment, if you like. Water regulation is comparator based with penalties and rewards. If something is done to accommodate the request of Thames, what do you think should be done in order to make sure that the good performance in the space are treated on an equal basis? Thank you.
Susan Davy
Okay. So let’s start with questions at Martin. So in terms of your first point around the step-up in investment — capital investment, yes, we are ramping up in K7 and indeed, the ramp-up we’ve got for this regulatory period is almost kind of doubling if not a little bit more of CapEx delivery already compared to where we were three or four years ago.
So when we talk about preparation and the ability to ramp up, we’ve already been doing that for this regulatory period. Yes, there’s a little bit of a ramp up again for our business plan that we’ve put in. But to your point, in terms of preparation, we have already onboarded our new Tier 1 supply chain for delivery. We’ve had a kickoff mobilization, get together with those, and we are absolutely starting that now, in preparation for the new regulatory period. So the supply chain is in place, but it’s not just the supply chain. It’s about what we’re doing with our teams, within the organization, and we have been ramping up in terms of employees to support the delivery that will be coming, as well as what we’re doing now. And we’ve got our fantastic apprenticeship programs and graduate programs in place where we’re getting new talent into the business and making sure that we are really ready for delivery for the K program. But I’ve got to stress, I think, Martin, we are doing it now. We are — we’ve already ramped up — we’ve already accelerated that investment. So yes, there’s a little bit of election pick up for K, but actually, the big push has been now, and we’re on with that.
And then in terms of your second point around Thames Water and if the regulator intervenes and does something different with Thames Water, what does that mean for everybody. I mean I think we have a very robust regulator in Ofwat. They know what they’re doing. They know that it’s incredibly important to incentivize the sector. It is all about competitive positioning and making sure that we’ve got a regulatory framework in a regime that works. And I’m sure, as they have done in the past, they will do their job and they we’ll do it well.
So am I concerned about things that happen for one specific company? Not when you’ve got a good robust regulator who is able to make sure and have done for a number of decades, make sure we have got a robust regulatory regime in place. So it will be interesting to see what happens, but I’m sure the regulator will be able to work out how to make it work for the sector if there is any kind of intervention.
Martin Young
Thank you.
Susan Davy
Does that answers your question Martin?
Martin Young
Thanks.
Operator
The next question comes from Sarah Lester from Morgan Stanley. Sarah your line is open. Please go ahead.
Sarah Lester
Thank you. Good morning. Thanks for taking my question. But of course, a huge congratulations first to Paul, this is your last results and a big welcome to Steve. I just have one question for you, Susan, please, but there are kind of three small parts to it. As we approach the end of calendar year 2023 and we look forward to 2024, I’m just curious, firstly, what excites you the most about the year ahead? Secondly, what are you most concerned about or say is the biggest challenge? And then thirdly, if there is one single message you’d like investors to take into 2024, what is it? Thank you.
Susan Davy
Well, Sarah, you really got it this morning. Okay. Thank you for those questions. So what am I excited about? Well, I am excited about the fact that we — you saw it in the presentation, we’ve launched a number of initiatives across the group and then a crew that you saw in the presentation is something I’m really proud of, that we have delivered alongside the university. It’s really exciting projects where we’re bringing together the greatest minds to solve some of the biggest issues we’ve got and it’s things like microplastics and its aspects of pollution that we really do need to investigate to the end results.
So I’m very excited about the joint venture with the University of Exeter. So that’s a definite exciting point given without this week. I think in terms of concern, I think I’m not concerned per se. We are getting on doing what we need to do. We’re delivering. We understand what regionally is important for the communities that we serve. We’ve got our renewables business that can — we are investing in to make sure that we can offset some of those risks on the wholesale energy market size. So I don’t have concerns per se. We’ve got a good plan in place for the next year. We’ve got action plans and it was ready to make sure that we deliver. So no concerns from that front. Very much going to be delivering on our strategy.
And then for 2024 and beyond, again, we’ve got a great plan in place and brilliant colleagues across the business to deliver it. So I probably disappointed you, Sarah, but I don’t think there’s anything that particularly concerns me and it’s a question about just being able to get on and deliver what we need to do.
Sarah Lester
Perfect. Thank you.
Operator
The next question comes from Dominic Nash from Barclays. Dominic your line is open. Please go ahead.
Dominic Nash
Good morning everyone. And thank you for the questions. I’ve just got a couple for me. Just following up from Sarah’s question about what can excite you in 2024, Susan. And clearly, getting a 4-star EA score must be quite an exciting prospect. Can you just give us some color on how that is going and how confident you — that we will get a 4-star rating for 2024?
And second, I’ve got a question for you, Paul. Echoing earlier comments, well done. Thank you. Congratulations for your final set results. Now going back to the number of years that you’ve been CFO and involved in Pennon, is there — if you go back in time, is there anything that you would have considered doing differently? And secondly, as in, what’s been the most rewarding or most interesting thing that you think you done highlight of your time here? Thank you.
Susan Davy
Okay. Good morning, Dominic. Thanks for those questions. So EPA, we are really focused on getting the highest star rating, not for ourselves but for our communities and making sure that we’re delivering. Just to be really clear as well, Dom, the 2024 assessment we will get in 2025 because obviously, it comes out after the year. And that’s the one where we will be focused on getting that 4-star.
I’ve always said it’s not going to be a linear trajectory to get there. We have been working incredibly hard and John, who has joined us this year has been really making sure we’ve got sustainable action plans in place to deliver. Now the two focus areas for us to get to the EPA star ratings that we needs to get to is around reducing our impact on the environment with pollutions and making sure from a resource position post the drought that we’ve got our resources back to where we need to get to.
So perhaps if I talk about both of those on the pollution side, I’m pleased in terms of serious pollution numbers, they’re down. If we look back to 2021, ’22. They were much higher up around 8% or so. They have come down last year and this year that we’ve had one to date. Now one is one too many, and we want to get to zero, but I’m pleased with the trajectory on that measure. So the number of other pollutions that we have that are not the serious pollutions but indeed are serious in the sense of what that they do in the environment. We’ve had the trajectory of bringing those down at year-on-year, and we’ve taken 50% as of 2020 off the numbers.
This year, we’re probably going to have an outturn where we have a slight pick up on that, but it hasn’t taken us away from the fact that we will get to where we need to get to next year. And we have the action plans to make sure that’s back on track. So we are getting there with the pollutions and eradicating those. And then on the water resources side, and you’ll see in the presentation, we’re investing significantly to create more headroom, to create more resources, and that’s one side of the coin. And the second side is making sure that we’re supporting customers and we’re being more efficient with the water that we use to reducing leaks and helping customers to reduce their leaks, as well as them — encouraging them to use less water.
And last year, we had the Stop the Drop campaign, which worked really well for demand management, and we’re looking at similar initiatives that can help us drive demand production. But again, we’re confident that our resource position is recovering and will be recovered for that assessment for next year. So those are the two areas to focus on.
And with that, I’ll hand over to Paul for his question.
Paul Boote
Okay. Thank you, Susan, and thank you for your kind questions, Dominic. And for everyone else has kind wishes so far, it’s — really thankful for that. That’s so kind. In terms of things I might consider doing differently, it’s a strange question, I’m not sure I’ve ever dwelled on it too much. But I suppose if I take a step back and look at where the sector is right now, there is a — with my treasury hat on, there is a sort of side of me that wishes perhaps we have, as a sector done more investment in the past 10 years when rates and yields were lower rather than coming to it at this point in time when rates and yields are obviously in a very different place. But that’s just a reflection on where we are as a sector rather than anything more specific.
In terms of all the rewarding things that have happened over the time I’ve been here, obviously, there’s been lots of landmark transactions not least building out, and then ultimately selling Viridor, as well as the acquisitions of Bournemouth and Bristol and a lot of notable treasury transactions along the way. So there’s always been a lot of interesting things that we’ve done. We’ve also been at the forefront of many things and working closely with Susan on pushing agendas like our sustainable financing framework, which is the first in the sector as well as achieving the fair tax mark again, the first water company to do so back in 2018.
So those things do stand out for me. But obviously, my main highlight would be working with my fabulous colleagues, past and present over the 14 years I’ve been here. That’s been the main thing for me.
Dominic Nash
Thank you.
Operator
[Operator Instructions]. The next question comes from James Brand from Deutsche Bank. James your line is open. Please go ahead.
James Brand
Hi, good morning. Also best wishes and thanks from me to Paul. I had a few questions on ODIs. So firstly, kind of highlight it, that you are third ranked in terms of your ODI performance in terms of the kind of — I think the number of measures which you’re outperforming on. But you have had, I think, net penalties from ODIs over this period. So just wondering why that was. Is there a few measures, even they’re doing really well on a lot of measures. And there are some measures that has just gone very badly or relatively badly.
Second question is, given you are performing, I think, overall, pretty well on ODIs and are getting that penalties over the period. I think that’s a pretty clear sign that Ofwat has been extremely tough on its ODI targets for the industry in this regulatory period? And second question is, do you think there’s any scope for their approach to get a bit easier going into the next period that you actually might have more companies that are able to outperform if they’re doing well.
And then thirdly, on ODIs, I don’t think you said anything specific about kind of ODI rewards or penalties in the half or for the full-year. So I just kind of wondering that you’re on track to outperform on ODIs for this year? Thank you very much.
Susan Davy
Okay. Thanks very much for your questions, James. The first question, I think, was around ODI. Given our comparative position where are we in terms of that overall assessment and other specific measures that are kind of tracking the overall position down. Now I think in terms of the ODIs appreciate in the presentation, there are a number of appendices. But in the appendices, I assure you there are a few tables in there that detail the ODI position. And you’re right, there are a couple of ODIs that have been in penalty that are not as much in penalty as they were when we first got this regulatory period, but are still in penalty and I think that you might assume would be.
So we’ve just touched on with the earlier conversation and the questions that we have in from Dominic around the EPA. So we are not where we wanted to be for our EPA assessments. We aren’t going to get there, but we’re not there yet. So obviously, we’ve got penalty for that, and we’ve got penalty at ramp of wastewater solutions performance, which obviously goes some way to explaining why we have the penalty, the net penalty position that we have. But there are things that have gone well. There are things that we are delivering on, whether it’s the bathing water quality, which is incredibly important for our region or whether it’s the catchment work, which again is incredibly important for water quality, which has been improving the water quality and discoloration position that we have relative to the sector.
So there are areas where we have done well, but you’re right in terms of a slight net penalty that’s where we find ourselves. Now when you look at the — I think your second question was the common performance metrics and where those are across the sector, obviously, if you look at companies, I think companies have really struggled on the common performance metrics to get into a net reward position. So I’m sure that’s something that the regulator will be reflecting on. But having said that, it is important that targets are set to drivers and to make sure that we are delivering and incentivized to deliver for our customers. So I’m sure that is something that Ofwat will reflect some.
I think the third point in terms of the overall numbers I think we’re in a slight net penalty for the half year ’23, ’24. But I think as we said in the announcement, we don’t anticipate the full-year penalty being as high as it was last year. So I think we’re about £3 million for the half year. And last year, we were at £10 million of penalty.
James Brand
Thank you very much.
Operator
The next question comes from Hannah Avory from BNP Paribas. Hannah your line is open. Please go ahead.
Hannah Avory
Hi, good morning everyone. I have a quick question on your tariff innovation comment. So you mentioned your pilot schemes that are going on and also conscious that you have quite a unique position in terms of the second home ownership being very high in your region. I was just wondering if you could talk a bit more about how the pilot schemes are going, which ones are looking the most promising? And then to what extent these kind of new changes to the tariffs or potential changes to tariffs rely on smart metering and kind of what your smart meter penetration at the moment. And with that in mind, kind of when we could see potential new tariffs being introduced?
Susan Davy
Yes. Thanks very much, happy your question this morning. So a bit of first that is really. I know other companies have looked at trialing different tariffs, but we’re going out with a suite of tariffs that we’re going to be trialing. We put that in the charge scheme for this coming year, so that we can understand what businesses that we can make and how we can support our customers.
So there’s a range of things we’re looking at. And for our region, we are looking at seasonal tariffs. We’re looking at rising block tariffs where you are charged a certain amount for a consumption level and then a high amount for a block use. Above that, we’re looking at peak charging and we’re looking at how we might incentivize our customers who come into the region to use less water as well. So lots of trials going on. And we’re targeting — you’re quite right, some of those charges we want to make sure that it works in a really efficient way and smart metering helps us do that. So some of the trials are targeted at specific regions where we do have lots of users to the region.
So North Devon, for example, about a third of the customers now have got smart meters in place and that will help us encourage them to take part in our trial, take part in these pilots to understand which tariffs will help in terms of their affordability, but also usage and demand. We had our Stop the Drop campaign last year, which is a blanket campaign for Cornwall as we were trying to recharge resources and make sure the reservoir levels were we’re going to get to a good place. And we encourage customers to use less water and they would get an amount of their bills from doing so if we hit a certain level. And that was incredibly popular, it went well and customers got first bit of their bill from doing it.
So it was understanding the outcome from that pilot as levers to think about charging in a different way. Now this is not usual for the sector. So not many of these tariffs around. So we want to make sure we’re piloting them, and we’ll do that next year to then see what works, see what does and take it forward. But I have to stress that these aren’t compulsory tariff trials that we’re doing. These are voluntary. We’re getting good take up, and we’ll see how those goes. And then obviously, going forward, it will be something that customers can choose in terms of the tariffs that suits them best.
So due purpose, helping customers so they are in control and can manage their affordability. And then for us, we think it will help drive water efficiency and also there’s a fair point of our region where we have lots of visitors coming into the region during the summer period. We want to make sure that those who are resident and resident only around are basically incentivized their water efficiency, but also does get discounts at the right time to reflex that. So lots going on, and I’m sure I will be talking about the outcomes of those pilots at this time next year.
Hannah Avory
Okay. Super. Thank you. That’s all clear.
Operator
The next question comes from John Campbell from Bank of America. John your line is open. Please go ahead.
John Campbell
Hi, good morning. Thank you for taking my questions. And firstly, good luck to Paul with his new endeavors. The first question I had related to the Ofwat investigation of South West Water among other several water firms as well. Appreciate there’s an ongoing investigation, so you can’t perhaps provide specifics, but do you have a rough idea of when we could have an answer. For example, would it be by the final determination? And generally, do you feel that Pennon is well positioned with regards to this investigation.
And my second question is related to your business plan. Has Ofwat come back with any comments or questions or indeed local politicians related to your PR 2024 business plan? Thank you.
Susan Davy
Paul, will take that.
Paul Boote
Yes. Perhaps I’ll take that. First one on the investigation. So just to remind everyone on the call, there are two investigations underway at the moment. The first one relates to wastewater and is an investigation is being looked at by the environment agency and Ofwat, and that was kicked off a number of years ago now and involves all wastewater companies. And then Ofwat have taken further steps with a number of specific companies, six in total.
We continue to receive questions in relation to those investigations and we openly in terms, currently respond to those questions. At this point in time, we haven’t had any substantive engagement that would give rise as to as having any particular insight. Unfortunately, on timelines or potential outcomes in that regard. So in terms of the wastewater ones, still very much going through the process of responding to questions as they are raised.
Then there is a second investigation that is underway in relation to leakage, particularly around how leakage has reduced following a spike in leakage that we reported to one of the COVID years that then became a reduction as it became back on track. That is something Ofwat has inquired about and asked us some questions in regards to that one. Again, we’ve received a number of questions. We’ve had some more engagements in terms of meetings. So one would be helpful that, that one might be moving towards some sort of resolution sooner rather than later in terms of which one might be done first. But similarly, again, we have no insight into actual timelines or potential outcomes.
Susan Davy
Okay. And then you asked about the business plan. Obviously, we submitted business plan. There is a timeline and a timetable for what happens next. We’ve had, which I’m sure all companies has some technical queries on some of the young submission tables that we spent in — but obviously, Ofwat will be working through those, and there hasn’t been any kind of substantive conversation with them about the plan that’s been submitted. But obviously, we will await the next steps in the process.
John Campbell
Thank you.
Operator
[Operator Instructions]. We have a follow-up from Dominic Nash from Barclays. Dominic, please go ahead.
Dominic Nash
Hi, there, yes. Just a quick one. In your results, you said that your CapEx has gone up by £100 million from £750 million to £850 million through AMP7. Can you just give us some sort of color as to whether that was included in the business plan submission and the £5.4 billion shadow RAB that you published for April 2025. And what impact that will have or what return will you get on that extra £100 million? I presume you share 50% of it with consumers. But are there any other additional sort of return advantages from that extra £100 million spend? Thank you.
Paul Boote
Yes. So in terms of the technical way that will come through, Dominic, you’re right. It will effectively — half of that will effectively get trued up on to the shadow RCV. Now at the time, we talked about that £5.4 billion, and we had a specific breakdown of it in our spotlight presentation, if you remember, I’m sure you will do. Now that element wouldn’t be included in that. But as it is £50 million, obviously, half of £100 million would go on to that RCV. It will still round to £5.4 billion. So £5.4 billion is still very much the number, but now it does also include the effect of that extra £100 million coming through with that extra £100 million, just to give a flavor relates to further activity.
So in terms of our investments in items such as pollution, such as leakage, driving performance, activity levels, et cetera. We are going to be spending a little bit more on that. And that is — one is coming through there as well as an element of higher cost inflation for particular items. So there’s a couple of things, but primarily higher activity coming through.
Dominic Nash
Thank you.
Operator
We have no further questions. So I’ll hand the call back to Susan Davy for concluding remarks.
Susan Davy
Okay. Thanks very much, Adam. Well, thank you, everybody for joining us this morning. Great to get those questions in. As you see, we’ve got a robust set of results for the half year very much underpinning our dividend. And as many have said on the call, again, I just want to reiterate my thanks for Paul for his contribution to Pennon and wish him well for the future. And my hello to Steve, who’s here this morning and who’s joined this — we can obviously past the planned handover with Paul before taking up the CFO post at the beginning of the new year. So thank you, everybody, and thank you for joining.
Paul Boote
Thank you all.
