South West Water: focused on PR19 Analyst & Investor Presentation. 15 September 2017

Transcription

1 South West Water: focused on PR19 Analyst & Investor Presentation 15 September 2017

2 Agenda Delivering our strategy PR19 methodology reflections Our WaterFuture vision to 2050 Conclusions and Q&A Close Chris Loughlin Group Chief Executive Officer Pennon Susan Davy Chief Financial Officer Pennon Ed Mitchell Director of Environment Pennon Sarah Heald Director of Corporate Affairs and Investor Relations Pennon Stephen Bird Managing Director South West Water Louise Rowe Finance Director South West Water Bob Taylor Operations Director South West Water Iain Vosper Regulatory Director South West Water 2

3 SWW: Delivering our strategy 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 3

4 Delivering our strategy: Strong performance, confidence in future 4

5 Sector Leading RoRE Outperformance 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 Cumulative K6 RoRE 12% 8% Financing ODIs Totex Base Returns 4% 0% -4% SWW Northumbrian SVT Wessex Anglian UU Southern Welsh Thames Yorkshire 5 Source: Company Annual Performance Reports

6 RoRE Outperformance: sector leading 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 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Sector leading effective interest rates K4 ( ) 112m 165m K5 ( ) 241m K6 ( ) Confidence in maintaining financing outperformance 33m 67m 2015/ / / / /20 Pennon Water Sector SWW 6

7 RoRE Outperformance: operational outperformance Key Financial ODIs 2016/17 Net penalty Net reward 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 out of 13 Water ODIs neutral or reward 6 out of 10 Wastewater ODIs neutral or reward 5.2m 1.6m 7 Source: Company Annual Performance Reports (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.

8 Severn Trent Water Wessex Water Anglian Water Southern Water South West Water Thames Water SWW Northumbrian Water United Utilities Yorkshire Water Thames Water Severn Trent Water Anglian Water Southern Water South West Water Yorkshire Water United Utilities Northumbrian Water Wessex Water Thames Water Severn Trent Water Anglian Water Yorkshire Water South West Water United Utilities Southern Water Northumbrian Water Wessex Water RoRE Outperformance ODIs: water and wastewater Sector-leading leakage performance GOOD PERFORMANCE Best ever numeric and descriptive wastewater compliance Wastewater serious and significant pollutions upper quartile performance Minor pollutions, area of focus Water sector leakage performance Source: Discover Water Discharge permit compliance Numeric compliance Pollution Incidents (Cat 1-3) Source: Environment Agency data Source: Calculated from Environment Agency Environmental Performance Assessment data 8

9 RoRE Outperformance: Service Incentive Mechanism 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 Investment 22 additional FTE Providing the capacity to deliver the service our customers want / / /17 Source: Company Annual Performance Reports

10 RoRE Outperformance: sector leading Totex outperformance 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 Sector leading Totex outperformance 2.9% 2.9% (% of RoRE) Confidence in maintaining cost leadership 1.9% 1.5% 1.1% 112m 56m 0.3% 241m 0.0% -0.1% m 165m -1.2% 112m Base Totex Business Plan Efficiencies 2015/ / / / /20 Targeting Efficient Totex 10 Source: Company Annual Performance Reports Totex outperformance based on RORE % for TOTEX outperformance as reported in 2016/17 Annual Performance Reports

11 Reflections on the PR19 Methodology & well prepared for K7 11

12 Our Reflections on Ofwat s Draft Methodology Ofwat PR19 methodology direction of travel well-signalled 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 Challenging but SWW well placed 12

13 Initial Assessment of Company Business Plans 1 ENGAGING CUSTOMERS 2 3 ADDRESSING AFFORDABILITY AND VULNERABILITY DELIVERING OUTCOMES FOR CUSTOMERS SECURING LONG TERM RESILIENCE MARKETS AND INNOVATION SECURING COST EFFICIENCY 7 ALIGNING RISK AND RETURN 8 RECOGNITION OF PAST DELIVERY 9 SECURING CONFIDENCE AND ASSURANCE 13

14 Engaging Customers (1) 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 14

15 Addressing Affordability and Vulnerability (2) SWW leading the way for the last 10 years 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 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 Aligned with Ofwat s approach 15

16 Delivering Outcomes For Customers (3) Supportive of greater incentives for outperformance Ofwat is suggesting 14 common performance commitments, of which 4 standardised ODIs: - Water quality - Internal sewer flooding - Wastewater pollutions 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 Ability to manage bill impacts important 16

17 Securing Long Term Resilience, Markets and Innovation (4 & 5) Resilience: Environmental, Social and Corporate Governance Strong focus Resilience on sustainability: PR19 means long-term financial, corporate and operational resilience. Ofwat 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 Supportive of upstream markets where it drives innovation and resilience 17

18 Securing Cost Efficiency (6) Cost efficiency and outperformance embedded in our business 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 Supportive of greater incentives for the most efficient companies 18

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 19

20 Recognition of Past Delivery (8) Clarity of performance and engaging with customers 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. WaterShare scorecard 2016/17 Company responsibility 20

21 Securing Confidence and Assurance (9) Focus on Board governance, leadership and assurance of company business plans 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 Supportive of Ofwat s approach 21

22 Timetable Well prepared for Business Plan submission in September 2018 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 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 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 22

23 DRAFT Our WaterFuture vision from now to

24 WaterFuture - Vision to 2050 DRAFT 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 24

25 WaterFuture 2050 Investment Scenarios DRAFT Investment anticipated at least comparable to historic levels 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 25

26 WaterFuture 2050 Service Aspirations DRAFT Ambitious, transformational service improvements 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 26

27 Conclusions DRAFT 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 27

28 DRAFT South West Water: focused on PR19 Analyst & Investor Presentation 15 September 2017