south west water: focused on pr19 analyst & investor
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© Pennon Group plc 2017 © Pennon Group plc 2017
South West Water: focused on PR19 Analyst & Investor Presentation
15 September 2017
© Pennon Group plc 2017
Agenda
2
Delivering our strategy
Chris Loughlin Group Chief Executive Officer
Pennon
Susan Davy Chief Financial Officer
Pennon
Iain Vosper Regulatory Director South West Water
Louise Rowe Finance Director
South West Water
Stephen Bird Managing Director South West Water
Bob Taylor Operations Director South West Water
Ed Mitchell Director of Environment
Pennon
Sarah Heald Director of Corporate Affairs and
Investor Relations Pennon
PR19 methodology reflections
Our WaterFuture vision to 2050
Conclusions and Q&A
Close
© Pennon Group plc 2017
SWW: Delivering our strategy
3
Sector leading outperformance
Successful BW integration
Meeting our PR14 ‘Enhanced’ Business Plan commitments
Best in class RoRE outperformance
• Strong in all measures, financing, ODIs and Totex
Focus on customers and our commitments to them
Confidence in future
• Published today – PR19 Consultation response
Plan to 2050
Underpins Pennon’s strong performance and growth
Established and secure RPI + 4% dividend policy
© Pennon Group plc 2017
Delivering our strategy:
Strong performance, confidence in future
4
© Pennon Group plc 2017
Confidence in delivering cumulative K6 Totex outperformance
• Maintaining momentum from year 1
• £73m delivered in 2016/17 – Cumulative £129m for K6
Increased ODI performance
• £3.6m net reward in 2016/17 – Cumulative £5.5m targeting further improvement over K6
Confidence in delivering cumulative K6 financing outperformance
Sector Leading RoRE Outperformance
5
-4%
0%
4%
8%
12%
SWW Northumbrian SVT Wessex Anglian UU Southern Welsh Thames Yorkshire
Cumulative K6 RoRE
Source: Company Annual Performance Reports
ODIs
Financing
Totex
Base Returns
© Pennon Group plc 2017
RoRE Outperformance: sector leading financing outperformance
6
£112m
£165m
£241m
Sector leading effective interest rates Confidence in maintaining financing outperformance
Lowest effective interest rate in the industry
• Diversified funding mix of fixed, floating and index-linked borrowings
• Floating rate debt fixed to protect against rate rises
• Managing maturities and refinancing
• Around 2/3 funding is from finance leases with long maturity and secured margin
• c.25% of net borrowings from RPI-linked debt
£33m
£67m
2015/16 2016/17 2017/18 2018/19 2019/20
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
Pennon Water Sector SWW
K4
(2005-10)
K5
(2010-15)
K6
(2015-20)
© Pennon Group plc 2017
All ODIs set by us in our ‘Enhanced’ plan
ODI Outperformance net reward £3.6m(1)
• Cumulative £5.5m, £7.5m reward : £2.0m
penalty
Confidence in ODI reward for K6
All ODIs on track to be delivered for by 2020
• 12 out of 13 Water ODIs neutral or reward
• 6 out of 10 Wastewater ODIs neutral or reward
RoRE Outperformance: operational outperformance
7
(1) ODI performance 2016/17 of £3.6m split £3.9m net reward will be recognised at the end of the regulatory period and £0.3m net penalty which may be reflected during the
regulatory period. Of £5.5m cumulative reward: £7.5m net reward will be recognised at the end of the regulatory period and £2.0m net penalty which may be reflected
during the regulatory period.
Key Financial ODIs – 2016/17
Source: Company Annual Performance Reports
Net penalty Net reward
£5.2m
£1.6m
© Pennon Group plc 2017
RoRE Outperformance ODIs: water and wastewater
8
GOOD
PERFORMANCE
Pollution Incidents (Cat 1-3)
Sector-leading leakage performance
Best ever numeric and descriptive
wastewater compliance
• Wastewater serious and significant
pollutions – upper quartile performance
• Minor pollutions, area of focus
SW
W
Source: Discover Water
Water sector leakage performance
0
100
200
300
400
500
600
700
Tham
es W
ate
r
Severn
Tre
nt
Wate
r
Anglia
n W
ate
r
South
ern
Wate
r
South
West W
ate
r
York
shire W
ate
r
United U
tilit
ies
Nort
hum
brian W
ate
r
Wessex W
ate
r
Tham
es W
ate
r
Severn
Tre
nt
Wate
r
Anglia
n W
ate
r
York
shire W
ate
r
South
West W
ate
r
United U
tilit
ies
South
ern
Wate
r
Nort
hum
brian W
ate
r
Wessex W
ate
r
2013 2016
Source: Calculated from Environment Agency Environmental Performance Assessment data
Discharge permit
compliance
Severn
Tre
nt
Wate
r
Wessex W
ate
r
Anglia
n W
ate
r
South
ern
Wate
r
South
West W
ate
r
Tham
es W
ate
r
Nort
hum
brian W
ate
r
United U
tilit
ies
York
shire W
ate
r
2016
Numeric
compliance
Source: Environment Agency data
2016
2013
2016
2016
2015
2014
2013
© Pennon Group plc 2017 9
RoRE Outperformance: Service Incentive Mechanism
Investment
22 additional FTE
Providing the capacity to deliver the service our customers want
Previously an area of focus
Best ever SIM performance
• SWW 82, BW 86
• Tracking UK Customer Service Index – most improved utility in 2016
• Written complaints continue downward trend:
• SWW down 29%
• BW down 33%
22 additional FTE positions created
Extra training for employees
Source: Company Annual Performance Reports
2014/15
2015/16
2016/17
© Pennon Group plc 2017
SWW PR14 ‘Enhanced’ business plan targets:
• 2.5% p.a. operating cost savings
• 5.5% efficiencies in the investment plan
Outperforming business plan targets
• 2.9% RoRE outperformance of £129m over first two years
• 94% probability combined water business sets PR19 efficiency frontier
RoRE Outperformance: sector leading Totex outperformance
10
Source: Company Annual Performance Reports Totex outperformance based on RORE % for TOTEX outperformance as reported in 2016/17 Annual Performance Reports
£112m
£165m
£241m
Sector leading Totex outperformance
2.9% 2.9%
1.9%
1.5%
1.1%
0.3%
0.0% -0.1%
-1.2%
Confidence in maintaining cost leadership
494.1
Base Totex Business Plan
Efficiencies
2015/16 2016/17 2017/18 2018/19 2019/20 Targeting Efficient Totex
£112m
£56m
£73m
(% of RoRE)
© Pennon Group plc 2017
Reflections on the PR19 Methodology
& well prepared for K7
11
© Pennon Group plc 2017 12
SWW consultation response published today
• More prescriptive and data dependent methodology than PR14
- Will allow better comparison between companies – SWW focused on ensuring plans continue to reflect customers priorities e.g. Bathing waters
• Stronger incentives for good / best performing companies on cost and service
• Average performing companies likely to incur penalties
• Current market conditions signalling potential for lower returns
- However, equity market conditions may not persist longer term
Our Reflections on Ofwat’s Draft Methodology
Ofwat PR19 methodology – direction of travel well-signalled
Challenging but SWW well placed
© Pennon Group plc 2017 13
Initial Assessment of Company Business Plans
ENGAGING CUSTOMERS
ADDRESSING AFFORDABILITY
AND VULNERABILITY
DELIVERING OUTCOMES FOR
CUSTOMERS
SECURING COST EFFICIENCY
MARKETS AND INNOVATION
SECURING LONG TERM RESILIENCE
ALIGNING RISK AND RETURN
RECOGNITION OF PAST DELIVERY
SECURING CONFIDENCE AND
ASSURANCE
1
8
6 5
7
4
2 3
9
© Pennon Group plc 2017
Engaging Customers (1)
14
Exemplar for customer engagement during PR14
Engagement firmly embedded into SWW during PR14
• Step change expected for PR19
- A wider range of techniques, customer participation and a stronger role for Customer Challenge Groups (CCG)
• SWW has raised the bar further - multi-faceted approach
- Interactive videos
- SWW CCG well established
- Behavioural economics – changing behaviours
• Supplemented by well tested methods:
- Focus groups with customer and key stakeholders
- Customer surveys, acceptability / affordability testing
- Tracking of customer satisfaction and customer preference
Raising the bar for PR19
© Pennon Group plc 2017
• Focus on affordable bills and tailored support for customers in vulnerable circumstances
• Bespoke affordability and vulnerability performance commitments
- Incomes comparatively low in the South West, bills represent greater proportion of income. One of first companies to have a social tariff, implemented a BW social tariff from 1 April 2016
- Dedicated SWW customer affordability team
• Over £45 per week of additional income realised for every customer helped by our affordability initiatives
• Water affordability app being developed to ensure administration completed there and then with customers, removing barriers to support
• Extensive range of affordability measures in our toolkit - expanding further
Addressing Affordability and Vulnerability (2)
SWW leading the way for the last 10 years
15
Aligned with Ofwat’s approach
© Pennon Group plc 2017 16
Delivering Outcomes For Customers (3)
• Ofwat is suggesting 14 common performance commitments, of which 4 standardised ODIs:
- Water quality
- Internal sewer flooding
- Wastewater pollutions 1-3
- Supply interruptions
• CMex and DMex (the new SIM)
• 4 additional bespoke ODIs per company
• Stronger incentives, greater focus on in-period rather than end of period incentives and removal of ‘deadbands’
• Automatic pass through to customer bills inconsistent with own WaterShare framework, which allows for smoothing of customer bills
Supportive of greater incentives for outperformance
Ability to manage bill impacts important
© Pennon Group plc 2017 17
Securing Long Term Resilience, Markets and Innovation (4 & 5)
“Resilience in PR19 means long-term financial, corporate and operational resilience.” Ofwat
• Strong focus on sustainability:
• Well-established upstream and downstream thinking initiatives extended
• Proactive engagement with Local Resilience Forum e.g. deployment of temporary flood defences
• Operational resilience flagship initiative being developed for PR19
• Partnership working e.g. Exeter Flood Defence project
• #BacktheSouthWest, working with the Western Morning News and other key stakeholders to promote the South West’s economic growth agenda
• Annual recruitment of apprentices and UTC feeder programme supporting development of skilled workforce
• Engaging in key projects e.g. FTSE 4 Good, Business in the Community, Carbon Disclosure Project
• Sustainable balance sheet and financing
Resilience: Environmental, Social and Corporate Governance
Supportive of upstream markets where it drives innovation and resilience
© Pennon Group plc 2017 18
Securing Cost Efficiency (6)
• Shift to frontier cost baselines to be set, with companies receiving progressively higher shares of Totex outperformance
• SWW strong track record
- K6 performance built on strong foundation from K5
- Head start in delivering PR14 business plan
- Bournemouth Water acquisition
- Tech and innovation – iOps, innovation hub
• Opportunities for growth and further efficiency with potential market development in water resources, bio-resources and direct procurement
Cost efficiency and outperformance embedded in our business
Supportive of greater incentives for the most efficient companies
© Pennon Group plc 2017 19
Aligning Risk and Return (7)
SWW well placed given balance sheet structure and strategy
• Ofwat intends to sharpen the incentives package for companies by calibrating financial incentives
• Cost of debt reflects industry embedded debt and new debt assumptions
• Indexation of new debt – mirrors SWW WaterShare mechanism
• Notional capital structure is preserved
• Early initial view on WACC due December 2017 – caution current assessment and market condition persisting to 2025
Ofwat maintaining a ‘notional’ structure
© Pennon Group plc 2017 20
Recognition of Past Delivery (8)
It is imperative companies are held to account on promises made to customers
• SWW reports transparently to customers through WaterShare
• Refinement and continuation planned for next regulatory period.
Clarity of performance and engaging with customers
WaterShare scorecard 2016/17
Company responsibility
© Pennon Group plc 2017
Securing Confidence and Assurance (9)
21
• Essential for the development of balanced and well evidenced plan
• WaterShare Panel, WaterFuture Customer Panel and Customer View Group provide significant scrutiny over current performance and plans for the future for PR19
• Significant Board engagement in PR19 process to date at SWW through Board Sub-Committee and customer engagement
Focus on Board governance, leadership and assurance of company business plans
Supportive of Ofwat’s approach
© Pennon Group plc 2017
Timetable
22
2017
September Vision to 2050
September SWW response to PR19 methodology
September Bioresources submission
Mid December Final Ofwat methodology published
December Draft Water Resources Management Plan submitted
2018
January Water resources submission
April Business plan customer consultation
April Customer acceptability
May Updated business plan submission
May Performance commitment submission
September Business plan submission
2019
January Initial assessment of business plans published
March/April Draft determinations (exceptional and fast track plans)
April Companies submit revisions to business plans (significant scrutiny and slow track)
July Draft determinations (Slow track and significant scrutiny)
December: Final determinations published
Well prepared for Business Plan submission in September 2018
© Pennon Group plc 2017
DRAFT
Our WaterFuture vision from now to 2050
23
© Pennon Group plc 2017
DRAFT WaterFuture - Vision to 2050
24
Launched today
• Various forms – Investors, customers, regulators and
stakeholders
• Sets out our long term ambitions / priorities
• Informs our 5 year Business Plan
• Consultation with customers and stakeholders
• Gathers their views and priorities for the future
• Refines engagement and consultation process ahead of
5 year plan
© Pennon Group plc 2017
DRAFT WaterFuture 2050 – Investment Scenarios
25
• £6 - £9bn anticipated between now and 2050
• Informed by
- Defra’s guidance to Ofwat
- Direct engagement with Ofwat
- Customer / stakeholder research and engagement
• Key investment drivers continue to be
- Resilience in the round
- Environmental protection and enhancement
- Security of supply
- Flood protection
- Transformational improvement to customer service
• Choices over phasing of spend
- Tested with customers, stakeholders, regulators
• Engagement will inform 5 year plan
Investment anticipated ‘at least’ comparable to historic levels
© Pennon Group plc 2017
DRAFT WaterFuture 2050 – Service Aspirations
26
• Building on stretching improvements in our
‘enhanced’ PR14 plan
• Focused on customers’ priorities
• Already leading on digital interfaces
• Very mature vulnerable customer support
measures in place
– Essential to ensure investment not
constrained by customer affordability
Ambitious, transformational service improvements
© Pennon Group plc 2017
DRAFT Conclusions
27
SWW performance is leading the sector
Meeting our PR14 ‘enhanced’ business plan commitments
Best in class RoRE outperformance
PR19 methodology builds on challenges in PR14
Increased rewards and penalties on a lower base return
Incentives for top performing companies
• Strong in all measures, financing, ODIs and Totex
SWW well prepared to build on its success
© Pennon Group plc 2017
DRAFT
© Pennon Group plc 2017
South West Water: focused on PR19 Analyst & Investor Presentation
15 September 2017
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