Pennon Group Stock

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.