Pennon Group Stock

Welcome to Pennon's Strategic Update Conference Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand over to Keith Haslett and Laura Flowerdew to begin. Please go ahead.

Thanks, Alex, and good morning, and welcome, everyone, to the strategic update today. So having now completed my strategic review over the last 6 months, I have also now reset the senior team. That team has been part of developing the plan and importantly, they have bought into delivering it. With the strategic review complete, we are now resetting Pennon and are ready to capture the growth opportunity provided by the reopeners.

We have hit the ground running, and we now have a clear path to moving the business forward. We believe we have a compelling investment opportunity ahead of us. Today, we will be presenting our plan to capture it. There will be plenty of time at the end for questions. And with that, let me get underway with unpacking what we are doing and what it means for Pennon's next phase.

In summary, during the full year results, I have provided an insight into my initial observations. But after a fundamental strategic review, it is now clear on the pathway required to 2030. The review has carefully considered our strategy and delivery plans for AMP8 based on our projected spend for both CapEx and OpEx linked to our operational performance commitments. This includes our operating costs and opportunities to become more efficient as well as additional investments to support delivering regulatory outcomes over the AMP8 period. Capital investment plan reflects changes to reduce delivery and compliance risk as well as a change in the operating model to ensure successful delivery of our outcomes in an efficient and timely manner for our customers and regulators.

We have a clear review on areas of growth and asset health, which has shaped our successful bid for Cost Change '26 with Ofwat and how we will approach the rest of AMP8 linked to further investments. This is a significant opportunity for Pennon and for our investors as this approach will now create the ability to reset the trajectory of the business and expedite improvements in our asset base across the remainder of AMP8. It will be supported by a revised funding plan with a GBP 550 million rights issue and the rebased dividend, along with debt through the remainder of AMP8. This plan is built from the ground up, having spent 6 months visiting our sites, core assets, call centers and working with our supply chain partners and undertaking a deep dive into operational performance.

So I've been very visible in all areas of the business and geographic areas to ensure I understand the different challenges, but more importantly, how I stress test that I have focused on the right priorities in alignment with business needs. The review of the business with my executive team has demonstrated we have some great people willing to go the extra mile. In some areas, we have performed well, but overall, there are large improvements to make due to a lack of leadership and clear direction, a culture with a regular cadence around performance linked to meeting delivery plans for targets, operational grip in a broad range of areas, an effective capital delivery team with the correct resource structure in place.

The review has clarified the areas of improvement required across the company that are linked to poor performance and action plans are developed to resolve now and into the future. And I've already hired and put in place key people to strengthen our management team and deliver this. Our new plan, coupled with the cost change process, addressing asset health will transform our operational performance going forward alongside the growth agenda. A critical factor in my strategic plan is the role of the cost change process, providing an unprecedented level of additional investment to fast track improvements in asset health. We view this as a critical component of resetting the business, using the opportunity for targeted investment to accelerate improvements in our asset base and on a revised funded basis.

The cost change process is a key part of our sustainable long-term growth agenda, and we have already secured GBP 230 million in draft determination for this year, and we are targeting a further GBP 170 million of investment across the rest of AMP8. We have also targeted a further GBP 600 million of further investments as well as supporting our transition plan to AMP9, reinvesting efficiencies from the original AMP8 plan into new projects that will deliver improved outcomes in terms of operational performance and compliance. At the outset of AMP8, we planned to deliver 34% in RCV. But based on our revised plans, including Ofwat's new cost change process, we are now targeting at least 40% increase in RCV. I will provide more detail on this additional investment later.

The plan looks to reset the business in terms of operations and ways of working, but we have also identified additional investment opportunities aided by the new cost change process that will expedite delivery and support the health and resilience of our asset base. We have, therefore, also looked to ensure we have a refreshed and revised funding plan that will finance the group through a period of increased growth whilst maintaining a financially resilient balance sheet. Laura will talk more about this later, but at its heart, it is both self-help through the sale of Pennon Power and the reinvestment of previously targeted efficiencies and new financing through the rights issue and increased debt funding. We are also adjusting the dividend, reflecting the increased growth offered by the plan and ensuring a rightsized dividend across the AMP that continues to grow in line with inflation.

The rest of today follows that logic, an operational reset that improves performance, targeted investments that drives growth and a balanced funding package that pays for both, together, building a stronger, more resilient Pennon. If we move towards the operational reset and move into, I guess, the core element of my strategic update. The reset has 5 key pillars, and each one answers a specific opportunity that review highlighted. So every action is tied to the ODI and performance outcomes we target. The 5 pillars focus on, first and foremost, people and culture; secondly, operational excellence; third, ensuring we have strong asset management and support asset reliability; fourth, our environmental program; and last, but by no means least, transforming our service to our customers.

So far, there are a number of areas that have been obvious to action quickly, but we are also setting a vision of transformational activity moving forward. In 6 months, we have established a new target operating model, refreshed the leadership, brought critical roles back in-house, reprioritized the capital plan and launched maintenance excellence. Establishing a clear target operating model in 6 months is the foundation for clear accountability, ownership on performance and a building of culture of putting the customer at the heart of everything we do. I will touch on a number of these areas in the rest of the presentation.

Technology is a key enabler for better data and modern systems, allowing us to intervene earlier, serve customers at lower cost and run the business more profitably. Martin Jones is our Chief Information Officer and is now part of the executive team to help identify and deliver this technology program across AMP8 and the transition into AMP9. We are currently in flight with launching our customer and billing platform now. We have started developing our new planning and scheduling system, and we'll upgrade our asset GIS system across the next 3 years. Further work is underway to review our operational control center to further enhance the technology and applications for delivering our 24/7 ways of working and decision-making in water and wastewater operations.

Beyond AMP8, the intention is to replace our asset enterprise system and financial systems to promote improved reporting and decision-making. In the period of 6 months, we now have the leadership team in place to deliver the plan with experienced new hires and existing executive leaders in the roles that matter most for performance, assets, people and Water Services. Laura, as our CFO, has helped shape the change in leadership and been instrumental with myself and the team in developing the outputs from the strategic review and the revised funding plan, but also playing a large role in driving forward transformational projects that include Project Fusion. Ian Christie, as our new Chief Asset Officer, has been in the role since the start of May.

Since starting, Ian has recruited a new leadership team, started to in-source our asset delivery team in terms of program managers and cost management roles to ensure we take ownership of our program of deliverables with a lower capital overhead in the long term. Hazel Hendley started as our new Chief People Officer on the 1st of October. Hazel picks up from a strong start and helped me reshape the business functions and will be instrumental in leading on our cultural transformation program across the business. Ian Cain is the former CEO of SES Water and with a strong industry background takes up the interim Water Services role to help shape improvement plans for key performance areas that includes leakage and supply interruptions.

I am currently recruiting for a permanent lead for Water Services in the coming weeks with an appointment expected in the autumn. Simon Pugsley is joining as an experienced General Counsel and Company Secretary. He previously worked at Pennon and has significant U.K. water experience. He will start in the next few months. Richard Price continues to lead on the operational delivery of Waste Water Services and the pollution incident reduction plan. Paul Ringham is now Chief Commercial Officer, and I have now consolidated all commercial aspects of the business with Pennon Power, commercial, procurement and our estate areas. Carolyn Cadman is now Chief Environment and Compliance Officer, and I have aligned our water sampling and wastewater compliance functions under Carolyn to enhance our lines of assurance and regulatory reporting requirements.

In terms of Chief Customer Officer, I have appointed Ketan Hindocha into the interim role as we complete the recruitment exercise for the permanent role. Ketan has played a big part in the delivery of our Fusion project and driving customer improvements across the last 6 months with water and waste functions. Sarah Heald continues in the role of Chief Strategy and Regulatory Affairs Officer, delivering on our requirements for Ofwat cost change, PR29 delivery plans and water reform. So now, we have a fully reset executive team and a number of senior leaders have also been appointed in the past 6 months to rebuild our asset management team, drive our performance and leakage and lead our capital investment program.

Moving into operational best practice. I have been fortunate to work in a number of very credible and strong performing water companies that understand strong operational discipline, efficient ways of working and more importantly, ownership of performance. The diagnosis of Pennon has been fast tracked based on my background and understanding of what areas need to be prioritized along with the support of the team I've been putting in place. The pathway to operational excellence requires strong leadership and desire from our leaders for continuous improvement in performance as a culture. So in a short space of time, I have quickly identified a number of themes that have been actioned or linked with transformational projects.

Key areas now actioned include refreshed scorecards across the operational areas with monthly reviews, recruitment of industry talent to refresh our leadership and approach, leading performance indicators to enhance our decision-making, launched a procurement process to secure our long-term framework partners for our network maintenance. These initial changes have been received well by the teams and demonstrate a new approach focused on ownership and performance. Leakage was one of the first areas to in-source and similar to other areas in the business, it did not make sense having an outsourced model, which was expensive, lacked ownership and not delivering the required level of performance. We are in-sourcing our leakage teams now, which means developing our own people who take pride in delivery, using data to find and fix more leaks at a lower cost, and this has started in the South West where the leakage gap is largest.

This change will also be complemented by new senior leaders to refresh the leakage strategy in terms of our suite of interventions to drive down leakage and then deliver with enhanced plans. In time, the leakage performance will see improvements when the delivery plans start to deliver on the interventions required. Initial observations were clear that asset management was devolved across the business, lack direction, identity and inconsistent processes with an outsourced asset delivery model. The centralization of asset management provides better synergy now to deliver the required outcomes for AMP8 and beyond. The asset strategy and delivery plans are now fully integrated across the asset life cycle from concept stage with asset planning to delivery of asset investment on the ground to robust maintenance schedules for improving the reliability of the asset base.

Ian has been focused in his first few months on strengthening these functions by recruiting the right senior team in this area and ensuring they provide the required service for our operational functions. The team has been very busy reviewing our asset investment program and reprioritizing the required outcomes to ensure we can maximize benefits linked to our performance commitments. One exciting area is the introduction of a new capability to the asset management team, which is asset reliability. Maintenance excellence is a framework that provides a detailed insight into our asset base, understanding asset health and creating a maintenance schedule for our field engineers to service the assets and avoid unplanned failures. This is an initiative that has delivered great outcomes for me in past roles.

The business has been in a reactive world with a historic approach to replacing assets at the point of failure, a more planned and proactive approach can deliver improved operational and safety performance, improved buy-in from the operational staff whilst also providing positive impact on asset availability and lowering the risk of asset failures. Chris Bates is our new asset reliability lead and has an in-depth expertise in asset reliability transformation and is already underway with delivering on our maintenance excellence program, which is supported by industry experts. Chris will now lay the foundations for shifting our culture from reactive to proactive across all areas of the business, which starts with our mechanical and electrical asset base. The focus will start on the South West region in order to maximize the largest benefit for reducing asset failures and to ensure we extend the asset life, improve operational performance and deliver cost efficiencies over the longer term.

Our environmental performance is not where it needs to be, and we are now setting a credible target to improve EPA metrics by the end of the AMP8 period. In particular, we need to remain focused on the pollution incident reduction plan, but also demonstrate improvement in treatment compliance, which forms a key part of the EPA performance framework. We have continued our award-winning upstream management and peatland restoration programs to support biodiversity and environmental net gains across our regions. It is clear that to achieve 4-star status now in 2028 is very difficult based on our current position. There are also ongoing challenges in terms of the evolving metrics in the EPA scorecard, and we know this will provide new challenges that we will need to respond to.

As such, our focus will now be on ensuring continuous improvement across AMP8 on the EPA measures, reducing pollutions, improving compliance and ensuring our assets have as little impact on the environment as possible. Sewer rehabilitation shows how cost change funding turns directly into customer and environmental outcomes. We have secured GBP 62 million of additional investment in sewer rehabilitation through the cost change process. which will remove excess groundwater entering our networks, reducing flows and thereby helping to target lower spills, reduce pollutions and improve sewer flooding whilst also lowering operating costs to treat less storm water entering the system.

We also recognize a large opportunity exists for improving our performance on customer and retail satisfaction scores. The C-MeX measure is lagging well behind in the South West and SES regions compared with our strong performance in Bristol. Technology is a key enabler for modernizing our systems and improving digital channels for customer interaction. The application of artificial intelligence and the modern systems interacting with our operational technicians and supply chain will focus on ensuring first-time resolution on customer jobs. Moving the systems into a digital approach for our customers will also allow us to communicate more often and more locally with our customers, taking a community-led approach to sharing the work we are doing in local areas and ensuring we are communicating more often and more effectively with our customers.

A live example of technology implementation is Project Fusion as a modernized customer and billing platform, which will deliver an enhanced service for our customers and an improved system capability for our own customer and billing teams. We are excited for this to take effect as we see it enabling a step change in customer service, better for customers through simpler customer journeys and improved channels of choice, better for colleagues with one system, more accessible information and improved processes. Better for business with streamlined debt management, lower contact volumes and lower operating costs.

The implementation is on track for delivery in the next couple of months. And whilst I'm sure it won't go entirely without challenge, we are excited to see the improved outcomes the new system will help deliver. The approach of setting a time line with clear activities to be delivered and showing progress starts to build momentum and confidence within management and the operational teams, but also with our stakeholders. This slide demonstrates some of the key activities already actioned in my initial 6 months -- whilst this slide shows a large range of activities, both now and into the future, I have a strong leadership team from a solid track record. I understand how to action operational change and it will be delivered.

Based on the operational reset for the business, I will be tracking our progress on a range of activities to align with the improvement plan required on operational performance, particularly in targeted areas, accelerating delivery on the asset investment program to complement the improvement activities linked to operational excellence. A view of the next steps on the slide is also important in sharing the vision for transformational activities linked to future performance as a management tool with employees, and I will come back to update on progress for these areas across AMP8.

Moving to our operational performance and following the challenging year we experienced in FY '26, operational performance has continued to be challenging in FY '27 due to a number of key metrics underperforming that includes the forecast that compliance risk index in South West will miss the target for year 2, supply interruptions across operational areas, leakage in South West requires a recovery plan based on the 3-year rolling average, pollution measures and in particular, serious pollution incidents due to Storm Gerrit in 2026, customer and retail measures requiring improvement in South West and SES. It is worth noting that we do have some positive measures that we will continue to strengthen, which includes internal sewer flooding, unplanned interruptions and biodiversity net gain.

For the rest of the AMP8, we will focus on driving forward our improvement plan for interruptions to supply to deliver performance below 8 minutes. On leakage, the action plan is to close the gap back to target for both SES and Bristol, but applying most of the focus on the leakage strategy and recovery plan into the South West region. On the wastewater measures, the focus is to drive continuous and steady improvement over the AMP, focusing on pollution and compliance measures and looking at adapting our plans as greater clarity develops on the new metrics. On the customer and retail measures, the aim for C-MeX is to maintain our strong position for Bristol and drive improvement in delivery in SES and South West, targeting mid-table performance. On BR-MeX, improvement plans return back to net neutral. On D-MeX, achieve net reward across all areas by 2030.

Overall, we are now anticipating that operational recovery will take the remainder of the AMP to be delivered with ODI penalties forecast across the AMP, although reducing by at least half of the current level by 2030. The ongoing penalties now anticipated to impact on our performance in terms of RORE, both through underperformance and ODI delivery and because we also consider it is now no longer possible to achieve the 4 measures required to access 30 basis points benefit of an outstanding business plan.

Moving to cost change. Ofwat has backed our case for more investment, and we have been allowed GBP 230 million at draft determination and planned for a further GBP 170 million across the rest of AMP8. Clear visibility on the good accelerated growth that then continues through the rest of the AMP period. The scale of the investment will deliver material improvements in our asset base that includes enhancing our water quality performance, reduction in pollution spills by removing groundwater infiltration, better resilience and storage capacity for our service reservoirs linked to supply interruptions. The representations have now been submitted on the 24th of September, and the final determination is expected around the 15th of December.

However, planning is already underway to mobilize these investment areas linked to a number of initiatives with the operational reset. To demonstrate a couple of examples, the cost change process has allowed for a wastewater treatment site at Newquay can now be upgraded in order to cope with a wide range of flows based on seasonal demand as shown with the very popular Boardmasters Music Festival. This investment secures our ability to be compliant with our permit into the future. Our asset base also has some very challenging sewers as shown with Fowey that are expensive and challenging to replace due to the extreme location in the marine environment.

This is a really good example of cost change allowing investment for an asset in poor condition within a challenging environment and currently very expensive to replace due to location and marine challenges. The strategic review has confirmed divestment of Pennon Power as the right strategic approach in order to focus on behind-the-meter projects that provide greater resilience, ODI and efficiency benefits. We will complete the remaining 2 sites currently under construction by spring 2027. We are taking self-help measures as part of the funding plan with Pennon Power to be sold, reducing group debt and focusing the group on the regulated water business. The strategic review has demonstrated a significant opportunity for developing renewable energy assets across our own regulatory asset base.

We, therefore, propose reinvesting GBP 25 million from the Pennon Power disposal to focus on behind-the-meter opportunities at our high energy sites, closer to the regulated assets, tangible OpEx savings and a much quicker payback period while supporting delivery of our greenhouse gas performance regulatory commitment. All of these sites are being delivered using our existing Pennon Power team who have a successful track record in delivery.

At that point, I will now hand over to Laura, who will take you through our funding plan and financial guidance.

Thank you, Keith. So Keith has talked to you through the operational plan, and I'm excited to have been working with Keith in building that plan and now to see the growing momentum and positivity around the business as we start to deliver the reset that's needed. So with that in mind, let me share how we're planning to fund the change and the opportunities that, that brings with it. The strategic review has highlighted around GBP 1 billion of additional investment, GBP 400 million of it providing RCV growth through the Ofwat cost change process, while GBP 600 million will be focused on improving performance and compliance in the wastewater and clean water businesses.

Together, these factors drive growth in excess of 40% by 2030. As Keith has highlighted, we are now anticipating ODI penalties throughout the AMP. As a result, we need a refreshed and updated funding plan that will support the business both to deliver the increased growth opportunity that cost change and new investment represent, but also to ensure we retain a sustainable and resilient funding structure. Operating cash flows and debt funding will, of course, continue to play a critical part in the delivery of our plan, whilst the rights issue and wider funding package announced today will also ensure a resilient and sustainable financial position through to 2030.

In finalizing the revised funding plan, we've explored extensively different options for funding the plan through to 2030. Our plan, therefore, combines both actions we can take within the group the divestment of the existing 4 Pennon Power development sites, reinvestment of identified efficiencies as well as support from investors through the GBP 550 million rights issue, increased debt funding and an adjusted dividend. The rights issue is the core component of this refreshed plan, providing an exciting opportunity for further growth in our asset base whilst also improving our performance and resilience. It also allows us to continue to target gearing at the water business at no more than 65% with group gearing a few percentage points higher, but no more than around 70%.

ODI performance is creating pressure on key credit metrics, which coupled with wider uncertainty around the sector results in rating pressure. We have had extensive discussions with Moody's, in particular, over the past few months. And Moody's have today confirmed a downgrade to Baa2 stable on both South West Water and SES Water's credit ratings. An investment-grade credit rating remains critical to our funding approach and the rights issue will support a resilient and sustainable balance sheet and allow supported growth over the remainder of the AMP. The divestment of Pennon Power is a part of our wider funding package and will allow reallocation of that capital to reduce debt at the group level, allowing greater focus on capital allocation directly into the regulated water group.

We previously targeted outperformance in terms of totex delivery. We are now looking to reinvest the efficiencies on the core program to instead invest in new schemes that will improve performance and strengthen compliance across our regions, but particularly in the South West. And finally, the dividend forms a key part of the overall funding package, which continues to target a progressive and sustainable approach over the AMP. We have deliberated in particular, on the dividend, recognizing the increased growth opportunity the group needs to deliver, but also acknowledging the importance of the dividend to our shareholders. We have taken the prudent decision to rebase our dividend as part of this funding package to ensure solid balance sheet, credit metrics and foundations to unlock the higher growth profile. This means we are reducing the dividend by around 10% or GBP 13 million on the 2025-'26 dividend in absolute terms, reflecting the higher growth levels over the remainder of the AMP.

On a dividend per share basis and taking into account the new shares issued as part of the rights issue, the dividend will be rebased to around GBP 0.18 per share, around 30% dilution as a result of the new shares in issue and the small reduction in absolute terms. We do retain our progressive dividend approach with dividends increasing from this base by CPIH over the forthcoming AMP. The rights issue will support the business across the AMP and provide a strong and resilient position from which to provide the growth to 2030. The rights issue is fully underwritten and gives every shareholder the chance to invest in this plan on the same terms with results expected on the 27th of October. And for the analysts amongst you, the appendix also contains an illustrative impact on our historical financials and the bonus element methodology.

Before I finish, I wanted to briefly reconfirm the financial outlook for the year. We remain in line with market expectations with group EBITDA expected to increase by 5% to 10% for the year. We anticipate slightly higher CapEx than previously, driven by the ongoing capital investment program. As many of you will doubtless have seen, we received judgment in respect of the historic Environment Agency prosecutions on the 29th of September and received a fine of just under GBP 8 million. This, together with a small number of other legacy legal claims, will result in recognition at the half year of around GBP 13 million in provisions for fines and legal costs.

In addition, as part of the strategic review, we have reviewed the desalination project previously committed to following the 2022 drought. The project is no longer considered viable and an impairment charge of GBP 33 million is expected to be recognized at the half year. Together, this revised funding supports our new operational plan, maintains a strong balance sheet whilst we do it and gives shareholders faster RCV growth. The dividend will be rebased but grow in line with CPIH, consistent with our previous policy and providing an attractive value proposition as we turn around the business and support higher growth into the future.

I will now hand back to Keith for his summary.

So let me recap. The plans we have outlined today follow months of detailed workshops with the senior leadership teams, site visits, process reviews and engagement with a broad range of our stakeholders. There are actions that were clearly evident and other decisions that we have scrutinized carefully as a management team and Board. What we have now is a plan to drive a stronger and more resilient business. We have already embarked on our operational reset with a refreshed leadership team focused on delivery and performance with clear accountability being embedded across the organization.

We will accelerate the recovery of our operational performance aligned with the delivery of the asset investment program, complemented by our targeting of additional growth. Looking ahead, we have much work to do, but we have the plans, we have the experienced leadership and colleagues who are passionate and driven to deliver. I firmly believe executing on our plans will deliver better performance for our customers, improvement to the environment, long-term sustainable growth and returns for our shareholders. That concludes the presentation.

I will now hand back for Q&A.

[Operator Instructions] Our first question for today comes from Rob Pulleyn of Morgan Stanley.

After a thorough run through on the presentation. There's lots of questions, so I'll try and limit it to a few in respect of other people. So firstly, I think we all understand why you stepped away from the previous RORE guidance. But without any returns or net income guidance, it's difficult for the market to assess return on increased capital allocation. So can we ask when you -- where you see returns or when you think Pennon will be in a position to guide on earnings growth and/or returns?

Secondly, on the gearing comment, could we just clarify the slide saying gearing -- group gearing, sorry, is unlikely to exceed 70%. Can we clarify whether that is before or after the Pennon Power disposal, i.e., is not exceeding 70% contingent on selling that business?

And thirdly, and finally, to the GBP 600 million additional investment, could we just clarify how much of that actually goes into the RCV, if any? And if the ODI performance is effectively linked to that extra investment to turn around the business?

Well, let me start with that, and then I'm sure Keith will potentially want to add in as well. I think -- we are -- from a -- I think the first question was about RORE. I think we are not providing guidance in terms of RORE as part of this. We obviously have done that before. But given the ODI penalty position and the need to, therefore, reinvest totex back into the business to drive that improved performance at this stage, we don't think that's appropriate.

And the ODI penalties are very much a focus to remediate. So on that basis, we aren't providing guidance at this point on that, but we'll continue to keep that under review as we move forward and as our performance starts to see the improvement that Keith has been talking about. From a group gearing perspective, the timing of the sale of Pennon Power should not be issue in terms of the group gearing, we expect it to stay below that 70%, notwithstanding the sale of Pennon Power. So it isn't sensitive to that. And from a GBP 600 million, it's very much looked at in terms of we are -- we have always been talking about delivering totex efficiencies. We are now instead of simply taking the benefit of that in outperformance, looking to reinvest that money throughout the AMP to improve the performance.

Very much linked, I think you questioned with performance improvements, and we have detailed plans of where that money is going, what ODI performance that links with and therefore, the benefit it's providing. And probably -- and it will all then work its way through both the efficiency and the new spend through the regulatory mechanism. And you'll see we've guided to the scale of growth in terms of RCV by the end of the period, which is probably the simplest way to think about it. So there is some small benefit overall from that to RCV on top of the GBP 400 million of cost change.

I think what's important to demonstrate here is that the GBP 600 million is very much linked to ODI performance commitments. We have -- as part of that GBP 600 million, a large cohort of that is going into leakage and also some targeted interventions for supply interruptions and compliance. We have a capital investment program where we're closing out some schemes in AMP7 and some major projects in AMP8, very much linked to wastewater compliance that form part of that GBP 600 million. We also have some transformational elements in there that are technology-enabled. So beyond Fusion, we're looking to deliver a planning and scheduling system.

We're looking to enhance our operational control center. These are all elements very much linked to efficiency, productivity and ultimately, performance. And lastly, there's about GBP 40 million of that GBP 600 million attached to AMP9 transition. I would suggest we've not transitioned very well into AMP8. We will be making sure that the resources we have today for engineering, for modeling, for solution development on AMP9 projects will be very structured and organized as we go into April 2030.

So that hopefully gives you a bit of insight into what we've targeted.

Our next question comes from Ajay Patel of Goldman Sachs.

And I just wanted to maybe dig into a few more of the questions that maybe Rob was asking. So the GBP 600 million, so I understand that this is financed or funded or the payment for that comes from totex efficiencies. But is it the complete amount? We are investing GBP 600 million here to improve the asset health of the company so that we can see better improvements on the ODI side and some of that is covered by totex efficiencies? Or is that fully funded by the -- or fully paid for by totex efficiencies, won't go into the RAB, won't get any sort of remuneration in the revenue, but I should expect you to save enough on totex to pay for the GBP 600 million?

Or if not, what proportion are we talking here? And then just on the return point, just to labor, just maybe not to labor it too much, but just to kind of get -- make sure I have the right framing in my mind. I think you said it was very unlikely to get an EPA 4-star status score by '28. So I assume then that would mean the 30 bps benefit that, that has disappears. If your ODI delivery is half of what you attained last year, and I think it was a 2% RORE negative last year, that would imply maybe 1.5% negative ODI as an average over the 5 years. And if the totex efficiencies are paying for new CapEx, does that mean that your return for this period is quite low?

And I was wondering, do we expect to be below cost of equity for this period of time out to 2030, while you deliver asset health improvements, turn around that ODI picture so that you're in a stronger position to paint a picture beyond into the next AMP? You maybe help me with that, please?

Yes. Let me start, and again, I'm sure Keith will want to pick up. I think on the GBP 600 million, yes, what we're targeting is effectively to fully spend the allowances from the final determination and end up broadly flat on totex, materially flat on totex by the end of the period, excluding then cost change, which happens on top. So yes, taking in terms of regulatory allowances, efficiencies out of those allowances are then reinvested. So the total totex as we see it sitting here today will be broadly aligned. So maybe to answer in a slightly different way, but hopefully, that gives a bit more clarity.

From a returns, you're right. We are, as Keith mentioned, seeing the 4-star rating by 2028 as challenging, particularly with some of the uncertainties around some of those metrics and measures. And therefore, we are not expecting to achieve the 30 basis points uplift for the outstanding plan. And I think to the last point, yes, we're in a period where we need to really focus on turning around our performance so that we can return to the outperformance levels that you would expect of Pennon. There may be -- and as a result of that, we have -- you're absolutely right, penalties arising throughout the period from ODIs. We are fully expecting to invest 100% of the totex, albeit trying to deliver as much as we can in terms of performance benefit through that spend.

And that then just leaves financing. We have previously outperformed on financing when inflation is higher. Our current projections would use an inflation rate that returns back to 2% during the period. And then we would see less outperformance this period than we would have done historically. But obviously, that would depend on sort of more macroeconomic circumstances as well.

So just to be clear, you're going to spend GBP 1 billion. If we think about the GBP 3.6 billion being spent over the next 5 years, well, GBP 400 million that is through the reopener process, GBP 600 million additionally will be spended for asset health purposes. And that will mean -- that will be effectively paid for by efficiencies on the existing CapEx that you're spending, so there won't be an incremental step-up on that side. Is that the way to think about it?

Correct.

Our next question comes from Jenny Ping of Citi.

A couple of questions from me, please. Just on the lack of targets coming back to RORE once again. I guess you are effectively saying you're spending GBP 600 million back into the business without any additional value creation. So to come to the market without some sense of how long and how visible the recovery is, I think it's very tricky for the market to buy in given the track record of the company. So is there anything you could say with regards to that at this stage?

I understand the ODI underperformance point. But equally, I think you see where your shares are, and that's reflective of the lack of visibility. So anything you can give us on whether it's earnings or RORE, just trying that again because I think that's super, super important.

And then just on Pennon Power, I guess the invested capital of GBP 160 million is what you've assumed in your numbers. Is there any reason why you haven't gone out already with some sort of indicative bid or have you? And is this just purely on timing of when the COD of the assets delivery is?

And then just very lastly, on ODI penalties, you sort of on Page 22, talks about the 50% reduction. Can you just talk us through why it's so difficult to get to a better place, a 50% reduction to spend GBP 600 million on that. Are you being conservative there? How much headroom have you built in? Or is this generally a much worse business, Keith, when you open the hood of the trunk when you arrived and there's just much more issues with the underlying business?

Yes. Let me start and then Keith can pick up. I mean I think on the ODI guidance, we have absolutely looked at that long and hard and tested ourselves to try and provide as much guidance as possible. We have obviously provided the 40% step-up in RCV growth. There's previous guidance out around revenue from a regulation perspective as well as the ODI penalty that we've included towards the end of the AMP. So I guess there are considerations and limitations when raising capital in this way in terms of providing longer-term profit forecast.

But there is -- I think we felt that there was information out there, but it's something that we will continue to look at as we move forward to provide as much information as possible and particularly, as I said earlier, around how our performance improves over time so that we can give more certainty around some of the EBITDA measures as well. From a power perspective, we haven't gone out yet. Again, and I think we've probably discussed this previously, I think it's important that we have completed the 4 projects before we dispose of them. We want to ensure that we are doing it to maximize the value rather than sell in the short term. So we are looking to run that process once completion of the construction has taken place, which we are anticipating to be in spring next year.

Yes. So I think in terms of the timing, Jenny, the strategic review today is that point in time where we will start the process for marketing Pennon Power. We've already completed the benchmarking exercise of all our renewable assets across the U.K. and what the price tag is. So all of that work is already complete. Now it's about the procurement and the disposal in line with what Laura has said by making it operational. Look, I think in terms of the GBP 600 million, Jenny, there is over GBP 300 million of that is linked to performance commitments, particularly in leakage, supply interruptions and some of our MeX measures.

There is over GBP 200 million is linked to resolving capital project challenges, just to be clear on that. And I think, look, what the message is here that I appreciate that 50% reduction may not feel ambitious to you and maybe other investors, but we have a history of overcommitting and underperforming in terms of what we set. And certainly, my intention is to move the business as fast as possible to outperform on that current trajectory that we've demonstrated today. So once we get into the initiatives and start to see some of the improvements in time, we can clearly give better clarity on that forecast.

Our next question comes from Christabel Kelly of UBS.

Chris from UBS here. Just 2 questions. First is on the ODI penalty. This is on Slide 22. How is it modeled, please? Because I understand that post the review, there will be a re-benchmarking, which means the anchor will be reset. And so just trying to understand what will drive the forecast in case the outturn could be better?

And then the second question is on the rating agencies. I believe you're negative on the outlook for South West Water. Do you expect this to go back to stable?

So on the first question, I think what's important here is we've obviously looked at all of the ODI performance commitments, some that are actually performing well and the 5 or 6 measures that are hurting us the most with penalty. And this maybe ties in a little bit with Jenny's question previously. So on leakage, it's a 3-year average. We are seeing quite a large penalty in South West after year 1 and where we are at the minute for year 2. Clearly, that will take a period of time to resolve that 3-year average, but we are almost at in terms of a targeted plan. So that does form part of that forecast in year 5.

Pollution is also an area where we are an outlier in the industry and compared back to the required Ofwat performance target, we are forecasting to be at the cap for pollutions through the rest of this AMP. So that's difficult. We know we've got an outturn adjustment mechanism to come. So that may improve things, but it's difficult to understand that until we see the first I guess, the first outlook on that from Ofwat. And then we've got C-MeX where in South West, again, that is a decent sized penalty. We hope to reduce that, but that takes a bit of time.

So there's a number of measures in there that are probably carrying the weight of the 50%, but there are other measures like supply interruptions where I would hope to make some material gains in Bristol and South West in particular, over the next 18 months with a lot of the work the management team are on with now. So I appreciate back to Jenny's question as well, we will give better clarity on this going forward, but that is our current assessment based on our position today.

And if I just pick up from that, Keith mentioned the outturn adjustment mechanism. I'm not sure if that's what you meant by the re-benchmarking comment. That will apply to this year. We are expecting a benefit coming through from that, but I believe it's taken year-by-year rather than across the AMP. So at this point, we haven't factored anything in as the remainder of the AMP. Obviously, it's dependent on the median company and various other factors in that calculation.

From a rating agencies perspective, we -- the downgrade is to Baa2 stable outlook. I think having had the downgrade, the measures and metrics are seen to be at the stronger end of that level, so to be stable for the rest of the AMP -- it is the ODI penalties that have impacted on that rating in particular. And so again, that's why it's really critical that we drive forward with the planned turnaround and performance and ensure that we can strengthen those credit metrics as we move forward as well.

Our next question comes from James Brand of Deutsche Bank.

The focus on the ODIs. You obviously have set the target for the halving of the ODI penalties and then you also have the consumer measures on top, I believe, where you said you wanted to get to, I think, middle of the ranking on C-MeX and hopefully outperform on D-MeX. So if we kind of take the kind of the ODI measures and the other kind of performance measures together, what should we be thinking about in terms of how the target translates by the end of the period? Are we kind of talking about GBP 20 million to GBP 25 million penalty? I just want to kind of make sure I understand that correctly in terms of what that guidance is pointing to.

And the second question also on ODIs is -- and it was kind of, I guess, touched upon a bit by Jenny, is that, that's still quite a significant penalty. So if we're kind of looking forward and we're kind of thinking about the equity case here being that Pennon actually gets to a position where it's earning good returns again, how should we be thinking about the next regulatory period? Do you need to spend another GBP 600 million in the next regulatory period to get that to zero? Or is there a chance on an optimistic case that it could get to 0 going into the next regulatory period? Because obviously, if you need to do the same again in the next regulatory period to get to zero, then it's more like a 10-year turnaround rather than a 3- or 4-year turnaround.

Okay. Thanks for the questions, James. Look, at the minute, clearly, in terms of that forecast, we are looking at in terms of a number of those measures around GBP 28 million in penalty by year 5, and that would, I guess, look at the operational measures and then there's a bit more on that with the customer measures. We are hoping to outperform in BR-MeX, by the end of the AMP and on D-MeX. And then there's some penalty with C-MeX factored in there. Look, I think what's important to say is my focus now is how we exit AMP8 on performance and how fast we can get there on the performance commitments.

The AMP9 transition piece is also very important because I don't think we have been prepared for the step change in performance that we should have been conditioned to for year 1 and year 2. So for me, it's about targeting the right areas to outperform on this forecast at the minute. And I do have a history of being able to do that in the past. So that's why we've completed the bottom-up plans over the last few months. We will start to see those interventions delivered. And look, for me, it is very much about recovery in AMP8 and hopefully be in a much stronger position to get a fast start in AMP9 and be matching the required performance expected of us.

Our next question comes from Rob Pulleyn of Morgan Stanley.

I rejoined just to ask some more questions. So maybe it's linked to a lot of the prior questions, guys, but maybe just pull this together and appreciating the current management team are obviously relatively new and not been involved for several years. And so the market, as we can see in the share price performance, has been asking for a while how bad things are at Pennon. There was obviously an explicit question on that earlier. And I think your presentation is refreshingly candid about the things that are wrong and what you aim to try and fix. And so should we consider very simply the price tag to fix what is wrong, is this GBP 600 million, right?

And after investing that, then we're going to be back to where -- or at least on the exit velocity of where Pennon should be as we exit AMP8 and going into AMP9, which you're talking about. Is this the right way the market should think about it?

Rob, thank you. Look, I've tried to be fairly open and transparent in, I guess, the diagnosis over the last 6 months, but more importantly, what the action plan needs to look like going forward. And I think it's important that I demonstrate the how in terms of how we get there over the next 2 or 3 years, and you will see more of that in updates in due course to hopefully gain that confidence and momentum from both our customers, but yourselves as shareholders. Look, the package is designed in a way to address some of the major areas of weakness in leakage and compliance.

We know we have a bit of way to go yet on pollution being an outlier. But I think there's a number of aspects in this funding package that should put us in a much better position as we enter into AMP9. So I would suggest that we will be going a long way to resolving a number of the measures, but we appreciate there's still work to do on the likes of pollution and some of those environmental requirements that just require more investment in AMP9 to get there.

And if I just add, I think you're right that GBP 600 million is, if you like, the price tag to focus on performance. But as we said earlier, what we're trying to do is fit that within the original totex envelope, if you like, for the AMP. So rather than having any overspend still targeting to remain within our totex allowances plus cost change is also really beneficial. So together, we are still looking at an upgrade to the growth that we've previously talked about. So the challenge is really the ODI performance. We know we take 100% of that to the company or shareholders account whereas if we deliver efficiencies, we share that with customers. So it really makes sense to drive that totex back into the business, recover the performance and then that will set us up, as Keith says, well for a return to stronger performance ahead of AMP9.

Our next question comes from Joyce Zhu of BNP Paribas.

Thanks, Keith and Laura, for the update today. I'm going to move away from that GBP 600 million and maybe focus on the GBP 400 million, which is on the reopeners. So I think previously, you've sort of indicated that you could walk away from the reopeners if the in-period revenue isn't granted. And it looks like it has been awarded, but it's deferred until the end of the period. In your plans for this -- and it looks like you have agreed to go ahead with the reopeners for this current year. So I just wanted to check in your sort of plans and forecast for the rest of the AMP, have you taken into consideration that you could be granted the in-period revenue adjustments? Or is that still sort of pending? And does the outcome of that in December, will it impact your submission for the next 2 periods?

Okay. Thanks for the question on the cost change process. So yes, look, we worked on the submission on this in April when I started. We very much made sure that the asset health categories we selected were aligned with the areas of performance that we needed to improve. We've clearly linked it to environment with the sewer rehab program. We have asked for additional storage to give us better resilience for drinking water and enhanced water quality as well, and there is a bit of growth in there for Newquay. We obviously are representing back with Ofwat at the minute on the in-period revenue.

So we have to respect that process and let that flow through to final determination in December. And that's really about, I guess, explaining that we are spending, I guess, the totex requirement in line with the allowance, and that's the crux of what we are aiming for to hopefully get that in-period revenue. That will then apply, of course, to making sure we deliver on the investment program going into March next year. And that hopefully will open the door for us to apply for an extra GBP 170 million of asset health categories. We understand some of those categories today.

We're already working up the plan in terms of what we would like to aim for with Ofwat, but respecting the process, we'll have to go through that dialogue and discussion in due course. But again, we'll be picking asset health categories that matter for customer service levels and environment performance. So yes, the in-period revenue is what we are clearly aiming for. And Laura may want to come in just to finalize that.

Yes. I mean if you look at what Ofwat has granted to the sector, it is very much about funding the returns on that investment as that CapEx is delivered. So it's relatively small. It's not a significant pay-as-you-go or similar sort of context around it. We have, as Keith said, had some very constructive and helpful conversations with Ofwat over the last few weeks around this and a number of other aspects. So we'll see what happens in the final determination. But I think ultimately, the number is probably smaller in terms of what will be allowed for that revenue, still very helpful, and we are keen to engage with Ofwat on it.

But ultimately, we've reached the conclusion that the benefit that we can gain from the additional investment, which obviously also provides 100% RCV growth is worthwhile to drive the business forward this AMP. So we would, as you say, get true-up in the end of AMP reconciliation process. But I think the priority is getting the business back on track and this GBP 400 million of additional investment will help with that.

At this time, we currently have no further questions. So I'll hand it back to Keith and Laura for any further remarks.

Thank you, Alex. Look, I guess thank you for everybody that has dialed in today. We hope you find that useful in terms of an update. And clearly, if you want any follow-up calls or meetings or discussions, then please link that back through our Investor Relations team with James Found, and we will get those calls or meetings scheduled in. But again, thank you for your time, and we will speak to you soon.

Thank you very much.

So good morning, everyone, and welcome to the Pennon Full Year Results. So I'm Keith Haslett, the new CEO of the Pennon Group, and I'm now delighted to be in the role having joined on the 1st of April. The agenda for today is an introduction from myself, and then I will hand over to our CFO, Laura Flowerdew, and she will take you through the financial and operational results for the year. I'll then take you through my key areas of focus across the next few months and then finish up on sector reform and the cost change process.

So in terms of, I guess, my background, I'm a Chartered Civil Engineer by origin after following my father into the water industry. I've worked in the industry now for over 25 years in a range of leadership roles that includes capital delivery, operations and more recently, leading Affinity to be one of the highest-performing water-only companies from a low start point. I'm really passionate about my employees and making a difference for our customers and enhancing the environment through large investment plans and operational excellence.

In the past, I've delivered a positive step change in delivering world-class drinking water in our -- for our customers and reaching Blue Flag status for our beaches. I've also enjoyed watching new apprentices and graduates grow into senior influencing roles across our industry today, something I'm very proud of as a leader. In Pennon, I see a huge opportunity as a listed business to really transform in all aspects and drive tangible performance through our growth plans, but also building capability through improved systems, processes and more importantly, our employees.

Based on my experience in various roles and companies, I can quickly diagnose and gain an understanding of what is working well and areas of opportunity to improve. As you can see, some of my first engagements across the first 2 months in role is meeting my colleagues across various office locations, hosting Q&A sessions to get a firsthand knowledge of, I guess, the successes, but also the challenges. Site visits to meet some of the frontline to really understand our culture and the ways we work, meeting our customer call centers, which includes our water retail services as well and deep dive sessions into all areas of the business to really understand our current position in order to develop coherent plans for delivery.

So I guess, just some initial observations and opportunities. This initial period has already given me some very clear perspectives about Pennon and how we deliver for our customers and stakeholders. I'm very focused on reviewing our group strategy as a priority, starting with the regulated business. It has been very clear from my first day that we have very passionate employees that want to deliver an excellent service for our customers and improve the environment that they all enjoy with their families.

We have strong foundations and strategies in a number of areas. Clearly, there are other performance areas that require improvement plans. Outlined plans are now in place after 2 months and more to follow in the next quarter. So I guess, looking at customers' experience here in front of you, it's important to put customers at the heart of our values, our decision-making and our behaviors. C-MeX is a great opportunity for improvement in South West Water and SES to really mirror our performance in Bristol. Similar opportunities exist on D-MeX and BR-MeX, measures based on improvement plans being implemented now and alignment of our resources and systems across the group to be more effective and efficient.

Asset life cycle is an area where streamlining the asset life cycle from inception to operation and maintenance is key. Review and asset health to ensure we have clear asset information and decision-making tools for operational improvement and linking that to future price review submissions. Important to have very coherent totex investment plans that clearly link to our performance for AMP8 and beyond into AMP9.

Environmental performance assessment is a really important area. I guess, firstly, I'm sure you will have seen that Pennon has been provisionally graded as 1 star on its EPA rating for last year. I just want to be very clear that I don't tolerate or even recognize 1 star rating from my previous performance in delivering 4 star in other jobs in the past. Performance will certainly improve and the bar has been raised to meet the expectations of myself going forward, and my action plan has already started.

A number of these metrics are in our control to deliver for WINEP, including the WINEP outputs, really important we deliver these commitments on time. Self-reporting of pollution, we need to improve to meet our requirements on that framework and improving our compliance against permits linked to the investment program ahead of us. So I guess another area just to talk about is really energy management. I've been surprised the size of the opportunity for improving our approach to energy management based on positive step changes I have made in the past. We have an untapped and sizable opportunity for solar generation behind the wire for high-energy sites.

This work has commenced using the skills of our Pennon Power team with 5 sites now identified and being implemented at pace. We have an opportunity to optimize our existing asset base to consume less across our water and wastewater assets. And the Bioresource strategy has a great opportunity to centralize 6 of our sludge treatment centers into 1 or 2 to optimize the sludge into biogas, into energy and to create larger efficiencies going forward in the future. So these are some of the initial observations.

I will now hand over to Laura for the next section on the financial and operational performance.

Thank you, Keith, and thanks all for your time today. So I'll, first of all, start with taking you through some of our financial performance. So the group has seen a return to profitability in the 2025-'26 financial year with a 55% increase in EBITDA and underlying operating profit more than doubling to GBP 326 million. Return on regulatory equity for the year is 6.7%, with outperformance in respect of financing and totex offset by ODI penalties as a result of operational performance, which I will come back to later.

We incurred GBP 644 million of group CapEx in the period as we continue to invest in improvements to our asset base across the water group, whilst gearing for the water group remained stable at 61.8% at the end of the year. We've proposed a dividend for the year of 29.29p per share, in line with our policy. So first of all, focusing a little more on the income statement. Increased revenues provided a material benefit year-on-year, partially offset by an 8% increase in our underlying operating costs, which together provided that 55% EBITDA growth year-on-year. Non-underlying costs of around GBP 20 million include costs from the implementation of our new customer experience platform as well as some restructuring costs, and they also included the closeout costs of 2 regulatory investigations.

Firstly, the income statement impact of the Ofwat wastewater investigation for which enforcement undertakings were agreed last August. And then secondly, the Brixham water quality event judgment was received on the 2nd of June with a full fine of GBP 1.9 million recognized in the full year results. Our ongoing capital program has led to increasing depreciation charges and financing costs are also higher as net debt has increased as we fund investment in our asset base. And as I mentioned, our dividend per share remains aligned with our policy and increased by CPIH.

So as I mentioned, EBITDA has shown strong improvement year-on-year, and revenue has provided significant benefit with a 23% increase in our water tariffs, reflecting our regulatory determination as well as, to a lesser extent, increased consumption from our customers. The start of the new regulatory cycle has resulted in an increase in our underlying cost base through a reset of regulatory and environmental charges, coupled with inflationary increases.

Our focus on commercial, operational and integration measures to drive efficiency savings across the business has resulted in savings in the year and going forward, whilst our commodity price hedging has also provided cost benefit year-on-year. However, operational incidents resulted in around GBP 18 million of cost increases caused by storms and adverse weather conditions as well as the Dousland drinking water supply interruption in April last year. Whilst revenue in our non-household retailers has also increased in line with sector-wide tariff increases, wholesale water costs have also increased in these businesses. A net EBITDA improvement of GBP 2.4 million in those businesses, therefore, results from a strong focus on margin improvement and contract retention and renewal.

Pennon Power has also seen its first income with GBP 1.8 million EBITDA this year as a result. Touching on our capital expenditure. Our capital program has continued with a focus across our business on delivery against our AMP8 targets as well as ensuring closeout of our AMP7 deliverables. CapEx has been lower than originally anticipated in the Water Group as we reprofiled spend to ensure robust modeling and clear design across our major projects prior to commencing on-site delivery.

Our ongoing investment program is supported by a robust balance sheet with a diversified debt portfolio and strong liquidity. Water Group gearing is flat year-on-year and within our guidance. We raised GBP 635 million in the year to fund our capital expenditure through our bond program and other bilateral or lease arrangements. At a group level, debt is a few percent higher at around 65%. So our outturn position results in RORE or return on regulated equity on a real basis of 6.7% in year, slightly below our 7% target. This reflects outperformance as anticipated on financing costs as higher inflation and new financing provided benefit against the allowed cost of debt.

CapEx efficiencies are being delivered as we work through the capital program, although the in-year performance is also aided by timing differences, which we anticipate to reset over 2 years -- over years 2 and 3. From an operational perspective, our performance has been impacted by the adverse weather conditions, resulting in net penalties across our business. This reflects network resilience challenges in water. And whilst we have seen underlying performance improvement in wastewater, we still incurred a net penalty as the last 4 months of the financial year materially impacted on some of the measures, reducing reward and increasing penalties.

Overall, this results in 6.7% RORE in real terms despite the adverse operational performance in the year. And allowing for inflation and the actual balance sheet, this would result in a regulatory return of 12.4%. Moving on to next year, we anticipate a further improvement in financial results with revenue increasing by around GBP 50 million to GBP 70 million, whilst Water Group costs will increase by up to 5% year-on-year. Revenues and costs for our retailers will reflect sector-wide tariff changes with EBITDA remaining stable.

So overall, this will result in a group EBITDA growth year-on-year of around 5% to 10%. Depreciation and financing costs will continue to rise as our capital program progresses and we'll see increases of up to 10% and 15%, respectively. CapEx is anticipated to remain in a similar range of between GBP 620 million and GBP 700 million. We anticipate the underlying operational performance will improve year-on-year, although with stretching targets and some measures still impacted by the extreme rainfall in the first quarter of 2026, it is anticipated that the Water Group will remain a net ODI penalty next year.

So let me talk a little bit more about our operational performance this year. Firstly, as you will recall, we continue to focus on our 4 strategic priorities. These are aligned with the outcomes in our 5-year business plan and are critical to delivering on our commitments across our operating regions. As is clear from the net operational penalties we've incurred, in-year operational performance has been challenging and has been impacted by weather conditions, which have often been localized and extreme, particularly in Devon and Cornwall. This means that whilst the U.K. as a whole has seen lower-than-average rainfall, in the Southwest, we have still seen above-average rainfall, and we have also seen extremes with dry, hot weather in the summer and periods of intense rainfall, including 190% of rainfall across January and February this year in Devon and Cornwall.

So let me talk you through a little bit more our strategic priorities and our performance measures. Our first priority, reflecting the top priority of our customers is building water resources and improving water quality. We've seen significant challenges this year as the hot summer period followed by freeze soil conditions and heavy rainfall in the winter put pressure on our networks. You can see from the chart that January, in particular, was challenging. There were 5 named storms, including the Red Storm Goretti, which heavily impacted power supplies in Cornwall. This created tough operating conditions and impacted our performance across a number of metrics.

Underlying performance outside one-off or weather-related events remains strong, and the operational teams are working hard to bring performance back in line with our ambitious targets. However, this has led to material penalties in terms of supply interruptions, mains repairs and leakage, meaning that network resilience and asset health is an area we will focus on as we move forward. Water quality remains sector-leading in SES with South West Water also retaining a top quartile position and Bristol showing underlying improvement year-on-year.

Moving on to our second priority of tackling pollutions and storm overflows. This has been a particular focus given challenging targets in the topography and historic performance for South West Water. As many of you will be aware, this has been an area of continued focus and one where we have seen improvement over the past year. Our pollution incident reduction plan has been key to this improvement with reductions in pollutions to a water course as well as spills from storm overflows. The absolute number of pollutions has reduced by around 1/3, whilst our revised sewer length agreed with the Environment Agency resulted in normalized pollutions reducing by around 53% year-on-year, bringing us within the range of performance for the sector for the first time.

We continue to work hard to reduce spills from storm overflows and saw the benefit of 17% lower spill numbers, while spill duration reduced by around 25%. These improvements resulted from our continued focus on initiatives to reduce the underlying number of spills, and we've taken action at our top 5 spilling sites that's reduced spills across those sites by more than 50% through both targeted operational interventions and focused investment.

Sewer flooding remains an area of strength. We're in reward on internal sewer flooding, although this is lower than we had targeted as the extreme rainfall in January and February impacted our networks. This increased the number of customers affected and reduced the reward relative to a more normal year. As such, whilst good progress continues, the year outturned with net -- with lower benefit from outperformance and higher penalties resulting in a net wastewater ODI penalty.

In addition, and as Keith mentioned, whilst we've made good progress in moving forward our capital program, 4 projects related to our WINEP program were not completed by the year-end, which will impact on our EPA scorecard. Alongside performance in respect of normalized and serious pollutions, this has resulted in a provisional 1-star assessment for the 2025 EPA. We do remain focused on protecting the environment, not only by improving performance in our wastewater business, but also by delivering on a number of initiatives, which will provide environmental gains.

We've continued our award-winning upstream management program in peatland restoration to support biodiversity and environmental net gains across our regions. Our renewable investments in Pennon Power saw 2 sites energized in the year with first revenues also occurring. The remaining 2 sites are making good progress, and we're also progressing some behind-the-wire projects that will provide multiple benefits in terms of financial returns, resilience and carbon offset against performance commitments for the regulated business.

And then last, but by no means least, our final priority relates to customer affordability and support. With tariffs increasing, the past year has been challenging across the sector, and our customer teams have been managing increased calls due to higher bills, coupled with continued focus on the service we provide as the water industry remains under the spotlight. It's therefore been important to ensure we are communicating, supporting and engaging with customers across our regions.

From a support perspective, we ended the last 5-year cycle with support provided to all customers deemed to be in water poverty. And despite tariff increases, our target is to return to this position by the end of the 5-year cycle. In this year, with the step-up in tariffs, it's therefore been vitally important to support customers who cannot afford their bills, and we increased the number of customers receiving support by 11% year-on-year, both in response to customer contact as well as by proactively enrolling customers on tariffs where we think they need the support.

We're also focused on ensuring we support all our customers and drive improvements in the services we provide. We listen, learn and respond to feedback from our customers through our program of research and community drop-ins as well as using the feedback we get every day on the services we provide. We continue to work with our WaterShare+ panel to ensure we're putting customers at the heart of our decision-making. Our retailers are also going from strength to strength, engaging every day with business customers across the U.K. We've seen excellent Trustpilot scores, including a step change for SES Business Water.

And finally, we're making good progress in investing for the future in our customer service. Both in South West Water and in our retailer business, we're implementing new technology platforms that will drive best-in-class customer service, better functionality to allow customers to self-serve and improved capabilities for communicating and engaging with customers, whether on their bills, on the service they receive or the improvements we're making.

With that, I'll hand back over to Keith.

Okay. So thanks, Laura. Look, I'm very focused on now over the next few months, completing, I guess, an operational review that will now deliver material improvements for our customers and stakeholders. So you can see in front of you, there are 5 key areas that will focus me in terms of the regulated business across the next few months that include our customer transformation, our people and culture, our target operating model, asset management and reliability and our capital investment program.

So I guess just to unpack that a little bit, there's a comprehensive plan now in progress. Actions are being taken, as you can see, and that's already underway with the team as we speak. Customer transformation is an area where we have a Project Fusion going live for our new CRM system in October, which will transform our customer experience with further capability planned. We are planning the next phase to introduce channels of choice to our customers and using artificial intelligence applications already built into the Salesforce platform.

The focus is really to improve our customer experience whilst reducing our cost base through AMP8 and beyond. People and culture. I've completed a survey now with employees and created tangible action plans with our teams. I have introduced a new scorecard from CEO down to the front line to really start to introduce a performance-led culture. I've recruited a new Chief People Officer, who is passionate about cultural transformation in alignment with my approach and ambition. I have elevated the importance of technology and data in our business and our existing Chief Information Officer is now part of the Exec Committee and reports into me.

In terms of the target operating model, I'm now introducing a best practice approach from my experience in previous roles to ensure we maximize our capability and performance. I've introduced new clear lines of accountability and responsibility within my executive team and the senior leaders. I have observed a range of excess processes and rules that require simplification to achieve the required outcome. And I've also made a number of structural changes to accelerate our improvement plan within the initial 2 months.

So real past to mine is also asset management and reliability. I've appointed a new Chief Asset Officer, who started in May and centralizing all asset management functions, which now includes the capital delivery team. Targeted recruitment now for some of the best asset leaders in the industry, and they are due to start in the next few months. Completed a review of our asset management structure and required deliverables for AMP8 and beyond and introduced a new capability for improving asset reliability with a clear focus on asset performance to mitigate and remove the unplanned failures of the past, building our picture, I guess, on asset health for current and future investment plans, including the cost change submission.

And lastly, on our capital investment program, I've completed a deep dive into the AMP8 delivery plan for enhancing our environment. There are certainly opportunities to accelerate the program linked to our performance commitments in an efficient way. And it's important that we map our key dependencies for the investment program to ensure we always deliver on time and to budget. And of course, this will help to improve our EPA rating going forward, as I talked about earlier.

So it has been a solid start in terms of progress and more details will follow in the coming months. So just to talk a little bit about sector reform. We continue to be well positioned and supportive of sector reform, and we are engaging regularly with government and regulators. It is clear that government intend to organize for industry reform that includes increasing the team at Defra with a new structure to support reform work streams, the appointment of Dame Julia Black as the Environment Secretary's new Senior Adviser on water reform transition.

The Environment Secretary is to be given the pars to appoint the Chair of the new regulator as well as its inaugural CEO. And the transition plan is expected to be published and the clean water bill introduced by the end of the year. So in terms of cost change, today, we've announced that we submitted just over GBP 250 million in 2026 cost change claims as part of the reopener process with Ofwat with in-AMP funding requested as part of that submission. We have targeted most of the -- sorry, most of the investment to asset health with a focus on sewer rehabilitation, network storage and rapid gravity filters for water assets.

We also put in a discrete growth claim for U.K. sewage treatment works and a claim for cybersecurity. This represents a carefully prioritized investment package to deliver benefits to our customers and the environment earlier based on customer research and engagement with our WaterShare+ panel. So in summary, the first year results of K8 demonstrate a positive shift in profitability, but our performance must improve across the regulatory commitments for both customer service levels and improving the environment.

I can assure you that my current observations have identified key areas of opportunity, have refreshed plans to target improved performance and have set clear accountability for delivery. Pulling all of that together, I look forward to sharing my operational and strategic update in late September. I would like to take this opportunity to thank everyone at Pennon for welcoming me, and I look forward to engaging with all investors and stakeholder groups across the coming months and years ahead.

So that's it for the end of the presentation. We will now take questions from the room.

James Brand from Deutsche Bank. I was hoping I could ask 3 questions. One is more of a clarification. Firstly, on the 4-star requirement for the 30 basis points uplift to your allowed return on equity, is it still a target to -- I'm not sure that's 4 star or 5 star now, but is that still a target for the group to try and hit that? Or is that looking too difficult now? That's the first question.

Secondly, on the totex outperformance that you delivered, you mentioned that phasing had an impact on that. Is it possible to kind of strip that out or to give an indication of how that -- if it hadn't been for the phasing, how that would have impacted you? Would you have still been outperforming on totex? Or would it be more neutral?

And then thirdly, on the nonregulated businesses, it looks like your guidance is to go into a loss or certainly for profitability to move backwards over the course of this coming year. Could you just explain a little bit what's causing that? Because obviously you got the Pennon Power investments, which are stepping up there.

Okay. Look, thanks for the questions. I'll take the first one, and then I'll maybe just pass to Laura for the last 2. Look, I think in terms of the 4-star rating, clearly, there's a number of components within that framework for the assessment. As we sit here today, clearly, it's not been a good year 1, partly because of what we talked about with WINEP deliverables. We are very sort of, I guess, focused from my perspective on what the challenges look like ahead to get there. From my perspective at the minute, certainly, pollutions and treatment compliance are probably the 2 big challenge areas that I see over the next number of years, and there will be a couple of other measures introduced as well between now and 2028.

So for me, it's really a bit more time required over the next few months to really do a deep dive on those areas to really understand where we are. But look, it is a challenge, okay? So where we are at the minute, we need to deliver what we're in control of, and I think we can definitely improve on that. But there are a couple of big challenge areas that we'll have to think about over the next few months.

If I move on to the more financial ones, James. So the totex, yes, we would still have been in outperformance without that phasing, but there is a little bit of timing difference, too. So it's broadly split between some of it being timing difference and then some of it being efficiencies. As I mentioned, we are driving through the capital program, but will happen across the 5-year period rather than it all landing in the first year. So some of that reverses, but over the 5-year period, we're still very much targeting outperformance on totex and would have seen some of that crystallize despite the timing differences. On the non-underlying, they're broadly flat in the underlying retailers and then power comes into benefit. So we can work through numbers in due course. But no, they are not loss-making.

It's Mark Freshney from UBS. If I may ask about balance sheet. We had an equity raise, which people subscribe to 18 months ago. Since then, I think the ODI incentives weigh quite heavily on things like EBITDA and some of the credit metrics. There isn't a plan to sell the solar assets that you've communicated today. If anything, you're talking about investing more. So I just wondered whether having spent time, and I know your capital delivery operations is your background, Keith. But are you happy with where the balance sheet is? And do you think it can handle all the things that you're talking about for the next 4 years?

Yes, look, I'll maybe let Laura come in a second. But yes, I'm comfortable at the minute, Mark. I think we are going to do a review across the group, including Pennon Power across the next period. So I think it's just important to maybe hold off on that. We are deploying that skill set internally at the minute to do bigger things behind the wires as I talked about in the presentation. But as we sit here, we're certainly very confident in the balance sheet. Maybe Laura might want to come in on that as well.

Yes. I mean I think the power assets that we're talking about behind the wire are a much smaller scale. We will -- we are obviously working together, Keith and I, as he looks at the operational performance, looks at what we need to do to remediate that ODI performance, and we will come back in September to talk about the strategic review, the operational improvements and what that means in terms of the financial outlook as well.

It's Jenny Ping from Citi. A couple of questions, please. Just firstly, on the reopeners, you talk about 65% gearing with the reopeners. Can I just ask what the assumptions behind that. Do they include asset disposals is the first one. And then secondly, linked to that, Keith, I think you talked specifically about AMP, in period AMP funding has been requested. Does this mean that you won't do it if there is no in-period funding? Because what I'm hearing from some of the other water companies is that Ofwat is less inclined to allow in-period funding for the first reopener, in which case this may be pushed back into future periods. So that's the first on reopeners.

Secondly, just on strategy, and I know we have to wait for September to hear the full version. But I was intrigued just that you said starting with water, I think, when you talked about the strategic review. Obviously, the operational side is needless to say. But are you also open to looking at asset disposals given your 3 very distinctive geographies in terms of the regulated business. I'll stop there.

Do you want to take the first question?

Yes. Let me start on the reopeners. So absolutely, we have said in our submission to Ofwat that, a, we have asked for in-period revenues; and b, we have caveated to say that if we don't achieve those, then we do not need to progress. I think it's also worth saying that we have put in a submission that whilst we believe they are the right priorities for the business, I'm sure that they will need discussion and debate with Ofwat. And there are certainly some areas of that as well, which are probably less likely to be fully funded this year, but we thought it was important to put forward a need to start that dialogue with Ofwat as well.

So there's quite a long way to go on all of those reopeners to understand where we end up through the process by December with Ofwat in terms of what the outturn investment might be and to understand the funding position of that as well. So that is something that we will obviously update on in due course. But I think early at this stage to make any confirmed positions in respect of balance sheet and so on. And I think we felt strongly that it was important to make the point about in-period funding given the importance of investability and financeability. And that was obviously a theme coming out of Cunliffe and the white paper and so on as well. So that's probably everything from me on the reopeners.

So I think, Jenny, on the strategy, certainly, my focus initially is, of course, in the regulated businesses and just getting a real sense of where we are. Look, I've been very impressed with SES and Bristol. I think there are lots of strengths in those business geographic areas and the teams there are really committed. I think the performance actually in SES is really strong with Bristol, we have a little bit of work to do on interruptions to supply and just getting back on track with leakage, but again, strong. So actually, when you look at the asset base, pretty much 2/3 of the asset base is clean water only when you include South West in that. And I think that's important for the group and the portfolio and how we perform going forward.

And then, of course, really focusing on wastewater performance and where we can really try and get some quick wins whilst we put the investment plan in place. So as I sit here, obviously, we will look at Pennon Power and how we try and move forward with the water retail businesses as well in that update, hopefully in September. But for now, I've been really pleased with what I've seen with certainly the clean water assets in SES and Bristol and of course, South West.

Sarah Lester from Morgan Stanley. Keith, welcome. It's great to have you in the seat. Two questions from me, please. The first one is back to the FY '27 guidance. The biggest delta to consensus looks to be the OpEx and the key driver of that year-on-year change looks to be inflation. So just wondering, is it fair to say that most of that, all of it could be trued up at a later stage in revenues by the energy true-up, i.e., NPV-neutral noneconomic?

And then the second question, maybe one for Keith. This is a turnaround story. It's a very exciting turnaround story. There's a lot of metrics that we can be following on that turnaround story. So just wondering if you were to narrow it down to 2 key metrics that the market can watch and track, what would they be?

Shall I start?

Take your question. Yes.

Yes. I mean I think there's a lot of different movements going through in OpEx. I think certainly, what we're seeing coming through power, we're in a good position. We're well hedged and that should give us a good position as we move forward. But you would hope to see coming through the regulatory mechanism, any variances in that across the relevant index. And obviously, if inflation is higher, we will certainly see some benefit in that true-up over time as well.

I think we are very focused on delivering operationally. So we do see some costs coming through from things like leakage and so on as we move forward. And then we have a program underway to make sure we minimize all those pressures as well. So there's a whole group of things. But I think, Sarah, you're right, the inflationary protections that we have in the regulatory mechanisms as well should help support that position as well going forward.

Great. So I think in terms of 2 metrics, I would prefer 5 or 6, but I'll take 2, Sarah. So look, I think if I pick water, I would say interruptions to supply. I think we've had a bit of a surprise there in year 1. It's not something I recognize from my past in that space, particularly previously at Affinity, where they're sector leading in that. So that will be one metric. I think the second metric, I would say, treatment compliance. I think from my background, I have got the 0 in this space from a culture of maybe 6 or 7 fieldworks each year. That's where we need to get to as a business. And I think there are components attached to that, whether that's operational performance or capital investments. So those would be the 2 at this point I would pick.

Pavan from JPMorgan. I have 2 questions, please. Firstly, following up on Mark's question on the balance sheet. I just wanted to pick on a particular area in terms of how you see the dividend versus growth. I think one of the attractions of the Pennon story relative to listed peers has been a higher dividend yield. And I was wondering if you could share thoughts on how you think of balancing that versus the growth opportunities that you're seeing, both in terms of cost change and maybe looking ahead into AMP9. That's my first question. And then secondly, I wanted to inquire about the RORE target you had previously guided to a 7% RORE target over AMP8. Is that something you're comfortable reiterating? Or is that also under review?

So I think on the dividend yield, we will -- we've declared a dividend for the full year in line with our policy. And as we progress the strategic review, obviously, the overall position will be part of that, and we'll confirm when that ends up at the end of September. On RORE, I'm going to say something similar. Obviously, the operational performance has impacted this year. We've outturned at 6.7%. But I think in looking with Keith through our operational performance, our financial performance and the targets for the period, that will be one of the components that we look at and come back to you in September.

It's Alex Wheeler from RBC. Just one for me, please. Just on -- well, I don't have the data in front of me, but it feels like weather and the extremities in weather are becoming more common in the sector. I just wanted to get your thoughts on, I guess, how you think about that and whether that should lead to a little bit more conservatism in how you guide on operational performance. .

Yes. Look, I could probably name every storm going back the last 10 years that I've been involved with and they've had different impacts, right, across corners of England. I think what I would say to you is that from Storm Goretti in January, it feels like the extremities in Cornwall is where we probably need to focus on some of our resilience in that space, both now but probably really focus on PR29 and what else we can put into that space from the lessons learned of that red warning.

Look, we are really strong actually on internal sewer flooding, which is always a difficult metric for other companies to tackle. I think from that perspective, making sure we put the plans in place with our drainage water, water management plan and how we sort of look at the risks of flooding and those aspects around storms that you referred to. So look, I think the investment going in is definitely going to help in terms of how we reduce spills, how we deal with power outages, how we deal with getting water to customers 24/7 in more of the extreme parts of Cornwall and Devon. And that's going to be the focus really in AMP8, but definitely in AMP9 as well.

This is Laura Marconi from Barclays. Two questions from my side, please. I'd like to follow up on your GBP 250 million reopener. Could you give us a bit more color on what the proportion of different investment areas would look like? What would your priorities in that be? And the second one is on the EA court hearing. I believe that one has been rescheduled to July. Do you expect that date to be a clearing event? Or do you think we'll have to wait a little bit longer for an actual decision?

Okay. So look, I think in terms of the reopener that I was involved with pretty much from day 1 in terms of the process behind that. It's broken down into a number of areas, as I talked about at a very high level. We've got around GBP 45 million in our asset health category for rapid gravity filters. We have about GBP 23 million in the space of wastewater treatment works. In asset health, we have about -- I think in terms of sewer rehabilitation, we've got probably around about GBP 62 million. And then you sort of move down into the categories of water storage and treatment works, and there's probably about another, I think, GBP 85 million in that space. So cyber picks up about GBP 12 million of that at the end.

So that's kind of the high-level breakdown. I think in terms of, I guess, end of July and the process, I think it's very important to just note that we're in a process at the minute with, I guess, that court case. We have to respect that process. We can't really comment on I guess, that outcome and how we lead up to that at this point in time. Look, we have regulators that will continue to regulate, inspect and challenge, I guess, how we perform. And that's exactly what we expect of the Environment Agency and drinking water inspectorate and others associated. So we will continue to improve our systems, our processes, our capability and our people to make sure that we learn from the lessons of the past and make sure we put some proper plans in the future. So that's really all I can say at this stage. Must be one more question now.

Keith, can I just clarify rather on the 6.7% RORE, is that at the 55% notional gearing? Or is it at your actual water company gearing of 62%.

It's on -- 6.7% is on the notional real balance sheet position, the 12.4% is on the actual nominal.

James Brand from Deutsche again. On the ODIs, obviously it's a pretty big penalty, and you mentioned the weather and there were some kind of adverse effects. But as we look forward, is there any kind of -- it's obviously not formal guidance, but any kind of commentary you could give us in terms of what might be a reasonable expectation for how the ODI penalties might evolve in, say, '26, '27 and in the medium term? Is it possible to get that down to a less material negative number?

Obviously, our target will be to reduce that penalty write-down. There will be some lag effect from last year. And as I said, the first quarter of this year where we saw the red storm will impact because it's in the 2026 environmental period. We've got the calendar around the financial years. That said, obviously, what we're doing at the moment is working through the detailed plans in terms of how to improve that operational performance and what that would look like. So I sound a little like a broken record. But come September, we will give you more, James.

Yes. I think what I would say there is that we've got some really strong performance as well. So it's how do we further that. And there are 5 or 6 key metrics that I'm very focused on over the next few months to really put a plan in place that's going to make a difference. So we'll see that in a few months. Okay. So I think we're going to conclude there with the Q&A. Thank you for attending. Look forward to seeing you in due course. Thank you.

Good morning, everyone. I'm Susan Davy, CEO of Pennon Group. I'm pleased to share the group's half year results speaking to you from Dawlish in Devon, where we are making progress on our investment to reduce the use of storm overflow.

I'm here today to see firsthand what it means for customers and communities and say thank you to my brilliant team here from South West Water and our Amplify supply chain delivery partners. If you're one of the millions of visitors that ever caught the train down to Cornwall, you'll recognize Dawlish. The track runs directly parallel along the sea line and the cliff, giving you a fantastic view for the visible coastline. You might also remember the rail track here being washed into the sea, cutting off Cornwall from rest of UK, a result of climate change and the changing weather patterns.

Those weather patterns have also meant that the wastewater network here in Dawlish is under pressure as more homes are being built and more visitors arrive to this fantastic town with a population of 12,000, more than doubling in the summer months. In response, we're doing 3 things. First, engaging with the community to explain the work we need to do here on a time scale; second, applying a tailor-made solution for Dawlish with a nature-first approach by removing as much flow from the system as we can. And third, installing 2 new underground tanks to store stormwater before it's been treated.

When combined with existing storage, it will hold up to 4.5 million liters of stormwater, the equivalent of 2 Olympics sized swimming pools, which combined will reduce the use of storm overflows by nearly 70%. This investment is just one of our wider multibillion pound regional program to reduce storm overflows and enhance bathing water quality all year around. There will be hundreds of similar projects going on in towns and villages like Dawlish right across the Southwest.

Of course, undertaking this work needs the support of local community, and we're here to do that. From supporting the annual Carnival to Dawlish Cycle Grand Prix, we're here on the ground working together with the council and community groups playing our part. As Dawlish shows, what we do matters and what better place to talk about our half year results for 2025, '26 and here in the heart of the community.

I am pleased to report that we've had a robust start to the U.K. regulatory period. We've had a strong return to profitability and notable operational successes and a step change in [ waste ] water performance. Having had record investment into our asset base over the last 2 years of K7 with early mobilization of our supply chain through Amplifying, the momentum we started then has been maintained at the start of K8, delivering on projects like the one here in Dawlish.

As the only water company to have received an outstanding rating for our business plans for the third consecutive time, our focus is to make sure we deliver on our agreed plans for communities. Of course, alongside that, following the recommendation of the Cunliffe review, we are fully engaged in how the sector is evolving for the future. We are confident that the new regulatory framework will work for customers, for water companies and investors.

In summary, the group is well positioned as the sector evolves. As anticipated, we've seen a good set of financial results for 2025, '26 in the first with a step change in EBITDA with operating profit more than doubling. Revenues have increased period-on-period as the business grows organically, but we have rightsized the cost base and continue to drive efficiencies, which meant wholesale water business operating costs are only rising fully in line with inflation.

We're on track to deliver our targeted return on regulated equity for water group at 7% on a real notional water share basis with our effective efficient financing underpinning the performance in 2025, '26. Supporting our investment program is a robust funding position, having raised GBP 500 million in the first half of this year.

Earnings per share more than covers the dividend share supporting the equity providers of finance this year. With a strong balance sheet and good liquidity and with the Water Group gearing at circa 60%, we maintain the agility to deliver on our strategy in U.K. water well positioned for a sustainable future. We've seen operational successes in the first half of the year across the 4 strategic priorities for our customers.

The first priority always is safe, clean drinking water. And in K7, we invested to bolster water resources with Devon and Cornwall, repurposing disused quarries and mines as many reservoirs, new treatment capacity and building more resilience into the network as we target network upgrades where it was needed most.

In September, the Met office confirmed that the summer of 2025 was the hottest on record with the 5 warmer summers all occurring since 2000 and following the hottest spring in over 50 years. Thanks to our investments, innovative approaches, improved monitoring, network rezoning, and operational focus right across the group, we have not needed to impose water restrictions for our customers across the 5 geographies we serve. The changing weather fronts have, however, tested our network, increasing the number of failures. And whilst the customer impacts have been mitigated on 70% of these, it has been challenging for the operational team.

Despite the 15% increase in activity, we've held leakage at the '24, '25 levels and are targeting improvements in the second half of the year. If as a customer you need supply, you realize that the average GBP 1.85 a day you pay for your water and wastewater services is worth so much more in terms of value. We rely on water for everything from the morning cup of tea to the manufacturing process that makes [indiscernible], to the transport that takes you to the work and still on everything in between. We are therefore focused on repairing and upgrading our networks with our network investment plans on track in 2025, '26. We're never complacent about water quality as Sutton and East Surrey remains the top performer in the industry and South West Water is upper quartile across the water and sewage companies. Bristol is above average, and we are confident that we can do even more as we share best practice across the group.

We continue to roll out a successful quality-first culture and training program in Bristol with plans to replicate in Sutton and East Surrey. Our second priority, tackling storm overflows and pollutions. Whilst we have had a hotter weather front in the first half of the year to '25, '26 across all the regions we serve, in Devon and Cornwall, the rainfall has been in line with long-term averages. We're therefore pleased our operational investment interventions are delivering a step change in wastewater performance. This improved position has meant we are targeting net neutral for wastewater ODIs for '25, '26. And our pollution incident reduction plan with its 5 key pillars has been a key focus of our operational teams, achieving a 50% reduction in Category 1-3 pollutions year-to-date, underpinned by a 75% reduction in repeat pollutions.

Using the EA's EPA metric of total pollution incident per kilometer of main, we're on track to have improved our position for 2025 by 2/3. We've maintained our sector-leading internal sewer flooding performance, having reduced incidents by over 7% since 2020 with 12,000 smart network sensors helping to detect potential issues earlier, shifting from reactive to preventative interventions.

At the same time, storm overflow spills have reduced by 45% so far this calendar year. As part of our 15-year investment program and operational activities, we have avoided around about 6,000 spills in the first half of '25, '26, bringing a total of 20,000 spills avoided over the last 18 months. With spill durations down by 1/4, we are on track to protect our 100% bathing water quality for a fifth consecutive year, whilst working to improve the 6 newly designated bathing water in 2024.

Our third priority is driving environmental gains, how we work with the natural environment and lessen any impact we have. As you can see here in Dawlish, we rely on the natural environment for all that we do, and we have always focused on a priority that improves our position. This is not new for us. In fact, we've just celebrated our 15th year of upstream thinking and are on track for our biodiversity gains in 2025, '26, one of the new common incentives in place for K8 as pioneers in the sector and enhancing biodiversity, we have always held the fundamental belief that the role of water companies needed to be more than just simply treating water to achieve world's quality standards.

We also have a responsibilities to focus on protecting and improving its source. When [ raw ] water is clean, with less sediment, nutrients undepleted, rivers get healthier, biodiversity thrives and environment is protected. By working through long established partnerships to improve thousands of hectares of catchments to increase water retention and water quality in the natural environment, we are now working in over 95% of our catchments. In the first half of this year, we have restored 300 hectares involving 15 stakeholders, as well as contributing of a 350 volunteer hours and hosting 50 stakeholder events. As a significant user of electricity across our assets, derisking the energy requirements in the water business and building a portfolio that can both power Pennon and produce returns higher than the regulated water business with capital allocated is part of a balanced plan to deliver on our net zero targets.

We've continued to make good progress on our 4 sites with 1 now operational and 1 in final commissioning, and we are on track to deliver 40% of the group's energy requirements by 2030 with internal rate of return expected to be between 11% and 15%. Our GBP 20 million investment in CREWW continues to lead the way with our state-of-the-art lab, researching some of the most important challenges facing the sector and society from microplastics in sewage sludge to future fibers and plastics in clothes.

And as we look to support the removal of 8,000 lead pipes in 2025, '26, supporting the commitment to be lead-free by 2050. We have continued to support our customers. Whilst spills have had to increase across the sector and for us, customers pay on average GBP 1.85 a day, we recognize that for some, GBP 1.85 is too much. Our successful water demand customer initiatives, smart metering, financial incentives, customer campaigns and efficiency support continue to help customers to use less and save more.

As a result, we've seen a 20% increase in the number of customers on one or more of our support packages as we work harder than ever before to support customers who need it most. And as part of the GBP 200 million package in place for K8, we've also launched our GBP 5 million Better Futures Fund, working closely with community groups across physical activity, education, health, well-being and positive environmental impact as well as those who work to alleviate hardship.

In the first 6 months, we supported over 55,000 customers with that set to double over the year. Responsible businesses also need to do more than just deliver services. Today, vulnerability can mean many things, and we are focused on increasing the number of customers in our priority services register with 1 in 7 of our households now registered and for which we have been recognized as a leader.

Some of my most enjoyable days are when I get the opportunity to meet customers and talk about what my brilliant colleagues do day to day. And this year, we've held nearly 300 drop-in sessions as well as our WaterShare customer AGM in Bournemouth. WaterShare+ continues to be the sector's most innovative customer engagement scheme, giving customers both a stake in the business and a say in their water company.

We continue to invest in our new billing system and customer platforms using AI to improve the customer and contact experience. Growing the RCV by over 1/3 over K8 ultimately means that everyone will benefit from the investments we're making as we drive efficiency and innovative solutions from the building of new reservoirs to the fixing of storm overflows as we power our net zero ambitions and deliver improved services to customers.

Our capital delivery supply chain partnership, Amplify has a strong pipeline of programs. Having ramped up expenditure during K7, we have made a fast start to hit the ground running at the required K8 run rate with over 60% of the K8 price control delivery program in progress. At the same time, efficiencies are being secured as projects progress from design into delivery.

As someone with a well-furnished copy of the prospectus of South West Water from the time of privatization and as a group who has grown organically in the sector, we have a long history of responding positively. We are engaged in the transition planning and support the direction for customers, the environment and investors. And with that, I'll hand over to Laura to take you through the financial performance in more detail.

Thank you, Susan. Let me provide some more detail on our financial performance in the first half of the year. As Susan has talked about, we've seen a strong return to profitability, benefiting from the commencement of the K8 regulatory period and the inflection point that, that represents. As a result, we've seen a step change in profitability with both underlying and statutory operating profit more than doubling year-on-year, resulting in a profit before tax, again, on both a statutory and an underlying basis, moving from a loss in the prior year to a profit in the current year of GBP 65.9 million.

This means our adjusted earnings per share has increased to 14p from a loss in the prior year of 5.5p, more than covering our dividend per share of 9.26p per share. Our interim dividend reflects our dividend policy of increasing in line with CPIH of 4.1% in the first half of the year. Delivering on our K8 commitments has been the focus of our teams across the business, and we've made a strong start with GBP 305 million of CapEx in the first half compared with GBP 332 million in H1 2024-'25, a strong start to our program, and we're driving efficiency across that program whilst being on track to deliver all our year 1 price control deliverables.

This capital investment is supported by our strong and robust balance sheet with gearing at 60% following the rights issue and given RCV growth of around 8% projected for this year. This places us in a strong position to deliver the around 34% growth in the Water Group RCV across the 5 years as we continue to invest in our assets and to deliver on our customer priorities.

Turning to the income statement for the half year. You will see revenue increased by 25% across the group and by 26% in the regulated water business as a result of the increase in allowed revenues for K8. I will cover that in more detail in a moment. With a strong focus on costs and benefiting from our efficiency in integration programs, costs in the Water Group have increased by 6%, including one-off impacts of around GBP 9 million. We've worked hard to mitigate underlying inflationary and operational cost pressures through our ongoing focus on efficiency and driving the benefits of the integration of SES into the group as well as benefiting from lower commodity prices for power through our hedging strategy. This has meant that EBITDA and operating profit have shown strong improvement year-on-year, whilst financing costs have benefited from our diversified and efficient approach to financing with lower interest and inflation rates mitigating the impact on interest of the higher net debt year-on-year.

These movements mean we've seen underlying and statutory profit before tax move to GBP 65.9 million from an underlying loss of GBP 18.6 million and a statutory loss of GBP 38.8 million in the prior year. We've incurred no non-underlying charges in the current period. Consequently, adjusted basic earnings per share have increased to 14p per share. We've declared a dividend per share of 9.26p, increasing in line with 4% CPIH to September and rebased as a result of the rights issue in January 2025.

Our revenues have increased by 25% year-on-year to GBP 658 million as our financial performance benefits from the commencement of our K8 plans. GBP 88 million of the increase reflects higher tariffs from the regulatory reset, whilst year-on-year, we see GBP 22 million increase from customer consumption, reflecting both low customer demand in '24, '25 due to the water efficiency programs ongoing at that point, whilst the current half year has seen higher-than-normal customer consumption given the hot dry periods we experienced over the summer.

Despite this higher year-on-year consumption, our deferral of current year revenue through tariff mechanisms will benefit future periods. Revenue in our national water retailers has also increased by 24%, given the sector-wide tariff increases passed on to businesses through the market mechanisms. Our water retailers continue to focus on ensuring building a high-quality customer base to deliver a solid financial performance, coupled with strong customer service.

EBITDA over the period has increased by around 55% to GBP 254 million in the current year from GBP 164 million on an underlying basis in the prior year. This resulted from the step-up in revenue, whilst a strong focus on cost discipline has resulted in a 6% increase in the Water Group. Our costs have been impacted by one-off items relating to the hot summer, together with GBP 4 million of customer compensation incurred in the water business in respect of the supply interruption earlier in the year.

Underlying these one-off impacts, we've seen cost pressures from regulatory, supply chain and operational costs as we enter the new regulatory cycle as well as continued investment in our cloud-based customer platform. Our focus on efficiency through our operational and integration programs has stabilized the cost base as we have more than offset these additional cost pressures with GBP 19 million of savings throughout the business.

Susan has already spoken about our ongoing investment program and CapEx in H1 of GBP 305 million reflected GBP 279 million of Water Group CapEx as well as GBP 25 million of ongoing investment in our renewables program through Pennon Power. We have also focused on ensuring we deliver on the price control deliverables and see some strong efficiencies being identified and delivered throughout our enhancement program. We continue to fund our capital investment program through our diversified debt portfolio with strong outperformance against the regulatory allowances being delivered both through our ongoing financing costs and new issuances.

We've raised over GBP 500 million in new debt during the first 6 months of the year. Our GBP 300 million bond issued in September 2025 under our EMTN program provided 109 basis points outperformance against the iBoxx, ensuring ongoing benefits through our financing cost efficiencies. Overall, our 5.6% effective interest rate for our Water Group, 5.5% for South West Water compared with allowed returns on a nominal basis using H1 CPIH, providing over 160 basis points of outperformance in H1.

K8 is a transformative period for Pennon with investment focused on the delivery of the priorities of our customers and our stakeholders, whilst the growth this investment brings, coupled with strong returns on regulatory equity, will also ensure delivery for our shareholders. We remain focused on delivering financial performance in line with market expectations for the full year, with revenue anticipated to reflect normalized demand over the winter period, whilst our continued focus on cost management will help mitigate the impact of inflationary pressures.

Our EBITDA is, therefore, anticipated to increase by around 60% year-on-year, whilst our profit will continue to benefit from our efficient financing costs despite the ongoing impact of our capital program. We anticipate that strong efficiencies being delivered through our capital program will offset the impact of ODI penalties in the water business, and we anticipate that ODIs will be net neutral in our wastewater business. Strong financing outperformance in the current year will support delivery of our 7% RORE target for K8. Susan, back to you.

In summary, a robust start to K8. We're on track financially with a strong return to profitability with operational improvements in train. We have had notable successes and have delivered a step change in wastewater and environmental performance, [ halving ] pollutions and reducing storm overflow spills. The momentum we started in K7 with the early mobilization of our supply chain Amplify is being maintained in the start of K8. We are confident that the new regulatory framework will work for customers, water companies and investors.

Finally, everyone who works at Pennon is fiercely proud of our heritage in the water sector, and I'm extremely proud of our brilliant team. I'd like to thank them for everything they have done and will continue to do. Thank you.

Thank you for your patience. A Q&A session will begin shortly. [Operator Instructions] I'll now hand it over to Susan Davy for some introductory remarks. Please go ahead.

Thanks, Alex, and good morning, everybody, and welcome this morning to the Pennon Half Year 2025-'26 Results Q&A. So I hope you enjoyed the video from Dawlish, where we're looking at the investments we're making to alleviate and reduce the storm overflows. To recap from the presentation, we have had a robust start to '25, '26 and the new K8 regulatory delivery period. We've had a strong return to profitability and some notable operational successes, including a step change in wastewater performance. The momentum of record investment over the last 2 years through early mobilization of our supply chain has continued into H1 '25, '26. And we've got a strong balance sheet and good liquidity.

So in short, we are well positioned for the future and well done to all my brilliant colleagues for the performance this half year. So with that, I'm going to hand back to you, Alex, and over to everyone else for taking your questions.

[Operator Instructions] Our first question for today comes from Sarah Lester of Morgan Stanley.

So a couple of questions, please, from me on reopeners. So firstly, just wondering how much Pennon is planning to lean in to this reopener opportunity? I guess the ultimate question I'm asking is, do you anticipate the RCV growth could meaningfully surpass the current guidance to 2030 once we consider those opportunities? And then just quickly, curious what your understanding is at this stage of what the assessment process will look like for winning any reopener spending?

Okay. Sarah, thank you for that question. So in terms of increased opportunity for K8, obviously, we've got a program to deliver that we've got in our enhanced business plan. But in terms of what else and what's emerging, let's be clear with the new cost change process that came as part of the determination, and if that kicks in from Feb '26.

We've had previous form in doing other investments through a price review period. So we had pre-recovery and accelerated investment, which we did in K7. And of course, there are new mechanisms for aspects like [ cyber, PFAS ] and changes to planning.

Now if you look at all regions, and we've been looking at this and submitting some of our information through to DEFRA and government housing targets and housing expectations have changed since we put in our business plan. And there's something like a 40% increase projected in terms of new homes in our regions. And we've had an assessment of that. And on our wastewater assets, it's around about 10% of our wastewater work that we would have to think about in terms of supply-demand capacity and what we would do with those to support that new growth.

So we can see that there is the potential to accelerate more investment on the horizon. Obviously, there are new change processes in play, and we will look to work through those. But we've been through this process before. We submitted our business plans, and we've had those fast tracks in the past. So we certainly can work around the fact that there are needs, and we will obviously work to support those for the community.

Our next question comes from Julius Nickelsen of Bank of America.

Two from me. Maybe the first one, just a clarification on the guidance. So on the net interest, you no longer mentioned the GBP 25 million to GBP 35 million. The wording has changed a little bit. Just wanted to understand if this is worse or better. And then on the EPA rating, just wondering now with like the changes that are coming in a few years and you're getting 2 star again. Are you still confident to reach the 4-star rating that is needed for your outstanding business plan?

Both great questions. So in terms of guidance for net interest, I'll let Laura that one up. But you'll have seen in our presentation in terms of our efficient financing position and our outperformance for '25, '26 with our target 7% RORE being supported by financing outperformance, and I'll let Laura talk about the guidance.

Yes. So the guidance, we're probably just a little bit lower than we were saying previously, but we're in a good place. As you can see, we have a strong outcome in terms of our financing position and continue to benefit from our diversified portfolio such that we are anticipating efficient financing costs over the full year.

Okay. Thanks, Laura. And then, your second question was around the EA environmental performance assessment. So let me reflect on this. The new EPA framework methodology has been issued. So we know what that is. And having studied that in detail, as you might expect that we would, we think there is a really good opportunity to rerate over the period to 2028, which is obviously when the assessment is taken for our enhanced business plan cost of capital uplift.

And why do we think there's a good opportunity to rerate? Well, 2 aspects really. So if you look at the new metrics that are in the framework methodology, we're in a good position. One of those is around stormwater flow operability. And I think if you look at the stats for last year, then we were second in the sector for that one in terms of our position. Other aspects around climate conditions and water resources, [indiscernible] are all in a good place. And indeed, with some of the measurements for flow compliance post the FFT review, we've obviously ramped up our position on that.

So I feel with the new metrics, we're in a very good place. And the Achilles heel for us, which has been the situation since the EPA was issued and used as a methodology to prevent that, we're also seeing total pollution incident numbers, and that is normalized using kilometerage. Now we've been working with the regulator, and we've been looking at our calculations for that and how that is positioned and that will be changing from 2025 onwards. And that will obviously impact in terms of that metric going forward.

And also in terms of total pollution incidents, that will now be a shadow metric in the EPA star rating assessment until 2028. So it actually comes out of the assessment at this period and then goes back into it in 2028. So I think we're in a good position to rerate on the EPA. And we're very pleased where the methodologies have landed. And I think it will be very clear for customers and for those looking at the assessment, what the metrics are and how they're being assessed.

Our next question comes from James Brand of Deutsche Bank.

Well done on the good results. Three questions from me, please. The first is on the RORE commentary. Obviously, you've reiterated the target of 7% real RORE based on regulatory gearing over the period. And you've also said you're on track for that level this year. Is that a bit -- not to complain, it's obviously a good overall target to have, but like is that a bit disappointing? Because this year, obviously, inflation is quite a lot higher, which is quite favorable to the obviously, the absolute RORE, but also the real RORE, financing costs are starting lower. That kind of feels like if you're going to be averaging 7% over the period, you should be doing a bit better this year. Is that harsh or not question?

Secondly, on the balance sheet. So you people are generally pretty enthusiastic about the reopeners, but then obviously, the counterfactual is then kind of how do the companies finance additional spending. Could you remind us the gearing at the Water Company you said was 60% at the half year? It's obviously a bit higher at the group level. Like what do you see your thresholds at either in terms of net debt to RAB, where you'd want to be over the period or any other metric if there's a better metric to use, please?

And then finally, Keith Haslett, I think the expectation is he'll join as CEO sometime next year. Is there any way you could kind of narrow that down for us? Is it kind of late next year, mid next year, early next year?

Great. Good questions, James. So thank you very much for those. Look, perhaps if I start with the return on regulated equity, we set a target for the whole payout period. We're just 6 months into the first year of that payout period. And we are saying that we would have a supportive position for '25, '26 that delivers that. And in our presentation, we talked about, yes, financing supporting that. We are seeing capital investment efficiencies coming through on our PCDs. And we have had a good position overall for ODIs to wastewater, but we have had a couple of incidents on water that has meant overall will be net penalty for ODIs for this year. But in the round, we're comfortable to pull that 7%.

So I think that's a good performance positioning. And obviously, we've got the whole payout period to deliver. I think, obviously, yes, you're right, it's real returns on regulated gearing. Obviously, if you look at it on an actual regulated return based on actual equity, we're returning something closer to 11%, 12%. So I think we're in a good place in terms of our performance.

And in terms of the balance sheet, I mean, obviously, we mentioned earlier with Sarah's question, what is it we see on the horizon? And yes, there may be investments to come in this period. Obviously, reopeners and interim determinations give you revenue in the period, but that would help with any balance sheet and gearing aspects.

But I'll let Laura just talk about where we're positioned and how strong the balance sheet is and what that looks like going forward.

Yes. I mean, obviously, we did the rights issue in order to strengthen the balance sheet for the plan that came through from the final determination. At that point, you'll recall that we talked about having a gearing policy that was between 55% to 65% with an expectation of being 60% to 65% in the period based on our plan.

Any reopeners, we will obviously need to look at the size and scale of that, but our ambition would be to remain within that approach and policy. And there's some question obviously about timing, the revenue and some of those aspects that we've worked through to make sure that our balance sheet supported the investment that may need to happen.

Great. Thank you, Laura. And in terms of Keith, so obviously, I announced my intention to retire in July, and it's always been in my mind to make sure we have a smooth and orderly transition. And as you can see from today's results, it's very much business as usual. But the brilliant news is we have got Keith. He is coming in. He's got great industry experience and everyone is really looking forward to his arrival, and he's been meeting people and getting up to speed, which is great. Obviously, in the meantime, I'll continue to support the business and my colleagues and the in-train transition plan. And I've got a brilliant team and everyone is focused on the job at hand. There's nothing new to announce today in terms of timings. But as you can see from the results, it's very much business as usual, and we're all excited about Keith's arrival.

Our next question comes from Mark Freshney of UBS.

If I could ask Susan 3 questions.

So Keith clearly starts in 2026. I'm sure there will be a very, very extensive handover. What 3 pieces of advice or 3 priorities would you give Keith when you hand the business over to him?

Okay. Mark, really good question. Now I did say with Keith, he is well experienced in this sector. So he's coming in with vast experience. He's going to hit the ground running. So he knows this sector inside and out. So of course, I'm there and on hand to talk to him about all things. I know then he will grow to love it as much as I do, I am sure.

In terms of advice, actually, I think I only need to take a couple of seconds to say this. If you look at our priorities and what we're focused on, there are customers' priorities. And those priorities are really clear in our presentation. You ask customers to make sure that we are reflecting what they ask us to do every single day and walking in customer shoes is absolutely that. So he knows as he works in the sector. So definitely make sure you're focusing on customers' priorities, and that's what we've done with our plans. And our customers are really seeing the benefits from that. So you'll see one of our priorities -- one of our 4 priorities is absolutely storm overflows and pollutions and tackling those, and we're on it, and you saw that in the video today.

And secondly, I know he is brilliant, got fantastic colleagues in the business, and he will see that in place when it comes. So supporting them to do what they do every day is the only thing you can ask somebody to do. So that's probably it actually, Mark.

Our next question comes from Laura Marconi of Barclays.

Two questions from my side, please. Do you have an update for us on the EA fines? I think last time you said that you're still talking to the EA. How is that going? And can we expect clarity still within this financial year? Or is that too ambitious? And then secondly, on the government white paper that I believe should come out by the end of this year, what will your main focus points be? And what would be the most positive thing that could come out of that for you?

A thank you for your questions. So in terms of the environment agency and the full flow's treatment investigation, we don't have any more news to give you today. Obviously, that investigation continues. I wish I could be clear about the time scales, but I can't. But we are obviously liaising with them and working with them openly and making sure they've got all the information that they need to assess that position. So obviously, that will come out in due course.

Now in terms of the white paper and what we expect, I mean, obviously, we all saw the Cunliffe review and we saw the [indiscernible] recommendations. And we are fully supportive of the sector reform agenda. And we want to make sure that our voice is heard, and I've got Sarah Heald, who is our Strategy and Corporate Affairs Director here with us today, and I'm sure she'll want to comment on this. But we really want to make sure that in the white paper, we see all the things that we saw coming out of the Cunliffe review. We want to make sure that whatever is in that white paper, it's a package.

And there's a really fair deal for investors and having sat around the table with the new Strategy Director for water, and she absolutely recognizes that and recognizes that providing fair stable returns on investment is absolutely key.

As you know, we're looking at how we are structuring the business in terms of water and wastewater plans. And again, that's in line with the Cunliffe review, we'll probably see some more of that coming through in the white paper. But I'll get Sarah to comment because I know she's looking at all things [indiscernible] and liaising with them, if not on a daily basis, certainly on a weekly basis. So Sarah, would you like to comment on this one?

Sure. Thanks, Susan. Hi Laura. So as Susan said, we're very engaged in the process as are our industry peers. One of the things that we've been really heartened by is the way that we've been involved in the process of the Cunliffe review all the way through to the final report. And that, that has been taken through into the transition planning with DEFRA. We're then really looking to co-create the transition plan and get industry views on how things can work in practice. So we're very positive on that.

I think it's really important that the white paper does come out this year. It's been delayed a little bit, but it would be good to see it come out in December. Obviously, we know it's been decoupled from the transition plan just to give DEFRA a little bit more time on that. And we think that's a positive thing because then it's important that they work through all the industry feedback and that they get to the right place and that the transition plan when it comes out, gives real clarity for everybody, particularly for customers and for investors and for us as companies so we can plan and move forward into the next phase.

As Susan said, we're really keen to see the government accept the independent water report as a package. So there are 88 recommendations. We might not take all of them. We've already seen the government has been very clear about the 5, but they definitely are taking forward. Keen to see the establishment of the single regulator as soon as possible. We're very keen on the establishment of the regional element, we think for us in the Southwest, that could be a really positive thing. Obviously, we've got over the nation's bathing water which has got very unique quality and geography and the tourist population that comes down in the summer, and it will be good to be able to move forward into a regulatory framework that allows us to take more account and for the regulator to understand the specificities of the business better.

We're quite keen on the idea of moving to the separate water and wastewater plans, the 9 plans down to 2. We think that will be very positive. And then the 2 areas that we're really focused on, I think, are, as I said, supervisory regime, we'd like to make sure that, that comes through and it's forward-looking, it's proactive, and it's also manageable and transparent. And there's the right balance between the whole firm view and the ability to have some constrained discretion, but also that there's clear benchmarking that's retained and you can -- across thematics like financial resilience, et cetera.

And then system planning, we're very keen to see the role of government set out in clear terms that the government is going to set the trade-offs in the long-term strategy and targets and that there'll be consultation with the involved body. And then on the regional planner, we think that's important that it leaves on some enhancement planning where there's cross-sector coordination that's needed. So things like flooding and storm overflow programs where we've got issues with surface water that could be really positive.

And then obviously, we want to make sure that we retain responsibility for all the areas that are quite clearly the Water Company. So drinking water quality schemes, et cetera. But as I say, coming back to the key point, which we're really heartened with the way that DEFRA has taken forward the co-creation that we're involved, that we're in the room, we're giving our views and as is the rest of the industry, and that feels like a very positive collaborative process. And we're just keen to make sure that they keep up the pace and that we stick to the time line and we get the clarity on the single regulator as soon as possible.

[Operator Instructions] Our next question comes from Jenny Ping of Citigroup.

Three questions from me, please. Firstly, just on -- going back to the EA 4-star rating. Obviously, that's the commitment that you have put forward to receive the QAA. And it seems that you're still convinced 4 star is what you need to achieve in order to get that QAA award. But when I speak to Ofwat, it does seem to be a bit more blurry given the change of the methodology to a 5-star rating. So what sort of conversation are you having with Ofwat and whoever the super regulator may be on how to translate that 4-star into 5 star? So that's the first question.

And then secondly, just going back to James' question in terms of Keith and the start date. Can you tell us why we don't have a further clarity at this stage because we've seen from one of your peers with handover being relatively short. And I know, Susan, you want to get full involvement in the handover, but I think also having that clarity as to when the new management starts is -- would be helpful. So any comments there?

And then just related to that, I guess, is with regards to the sale of -- or potential sale of Pennon Power. Is this something that Keith will have to decide when he starts? Or is this something that you're sort of already in train starting the sales process and he just has to give the final nod as to when he starts. So just some commentary around that would be helpful.

Yes. Great questions. Jenny. In terms of EA 4-star rating, look, obviously, the methodology has just been finalized by the EA, and we're all working through what that means in terms of its assessment, which under the new framework starts in 2026. So obviously, we're working through those aspects. Now in terms of the QAA and that decision point, yes, we'll obviously have to have the conversation with Ofwat just to make sure we're all aligned on what this is.

We signed up to a 4-star rating and the methodology has slightly changed. But let's be really clear, we're 4 star or 5 star, we're in a really good place. So obviously, we'll have those conversations with Ofwat. But as I said earlier, we've got all opportunity to get there with that metric on that trajectory to 2028.

I think in terms of Keith and the start date, look, obviously, Keith coming in from the sector has got lots and lots of experience, but it is an external appointment. So there is obviously a process to walk through with that. We don't have an update today in terms of timing. But obviously, when we've got that, we will let the market know when that will be. And obviously, as the baton will be passed over to Keith, I'll continue to support the business and the in-train transition plan. So I've got a brilliant exec team and everyone is focused on the job in hand, which is what you can see from the results today.

In terms of Pennon Power, obviously, we have been building out the 4 sites that we have got in terms of that portfolio. And as I said before, we want to make sure that we have built out those sites and the timing for that with the last site in Buckingham is 2026, '27 financial year. And we said we would obviously get those built out and they will be valuable assets in this market. As a result, the returns are good and in line with what we said in the business cases. And obviously, in terms of that capital allocation, the returns are comparably higher than the regulated business for what we are investing in as well as derisking our power requirements within the group.

But you're right, Keith will come in, and it will be -- given the timing of the last investment is '26, '27, he will obviously be looking at the strategy for Pennon Power on an ongoing basis.

Okay. So there's no plans to sell them individually. It's going to be a portfolio based once they're all reaching -- have reached COD.

Well, to be fair, Jenny, that's what I've always said that we would get these assets built out. And you can see from the timetable, '26, '27 is when that occurs. And obviously, Keith will come in and with the rest of the Board make an assessment around that.

At this time, we currently have no further questions. So I'll hand back to Susan Davy for any further remarks.

Great. Well, thank you, everyone, for joining this morning, and thank you for your questions. As I said, it's a fantastic time to be in the water sector, and I have a fantastic time in it. I've always said I work in water because it's too important not to. And I know my brilliant colleagues across the business all feel the same, and I'm immensely proud of what they do day in, day out. So looking forward to keep arriving, looking forward to us continuing to deliver and you see a good set of results for this H1 2025, '26. So thank you for this morning, and that's it from us.