south west water: focused on pr19 analyst & investor

© 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


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


Delivering our strategy:

Strong performance, confidence in future

4


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


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)


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


Net penalty Net reward

£5.2m

£1.6m


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


2014/15

2015/16

2016/17


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)


Reflections on the PR19 Methodology

& well prepared for K7

11


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


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


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


• 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


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


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


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


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


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


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


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


DRAFT

Our WaterFuture vision from now to 2050

23


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


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


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


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


DRAFT


South West Water: focused on PR19 Analyst & Investor Presentation

15 September 2017

south west water: focused on pr19 analyst & investor

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