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Edited Transcript of PNN.L earnings conference call or presentation 26-Nov-19 9:00am GMT

Half Year 2020 Pennon Group PLC Earnings Presentation

Exeter Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Pennon Group PLC earnings conference call or presentation Tuesday, November 26, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Loughlin

Pennon Group Plc - CEO & Executive Director

* Phillip Piddington

Viridor Limited - MD and COO of Energy

* Susan Jane Davy

Pennon Group Plc - CFO & Executive Director

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Conference Call Participants

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* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Dominic Charles Nash

Barclays Bank PLC, Research Division - Head of Utilities Research

* Fraser Andrew McLaren

BofA Merrill Lynch, Research Division - Director

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* Jenny Ping

Citigroup Inc, Research Division - Director and Analyst

* Martin C. Young

Investec Bank plc, Research Division - Equities Analyst of Utilities

* Pandelakis Athanasiou

Agency Partners LLP - Equities Analyst

* Verity Mitchell

HSBC, Research Division - Analyst

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Presentation

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [1]

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Okay. Good morning, everybody, and welcome to the Pennon Half Year Results for 2019 -- 2019/2020. And thanks for joining us today, thanks for turning up and thanks for giving your time. We're very grateful for you. So usual format, Susan and I will do the -- share the presentation between us, and then we'll leave some time for question and answers towards the end.

So without further ado, I think we'll get some with it. I'll skip over the disclaimer. I'm sure you'll read that at your leisure.

I'm going to sort of highlights and overview of the results. So I think from my point of view, it's been a good half year for us. The good results right across the board, and we're pleased that the positive momentum of outperformance has been continued into this half year. So good results, good momentum and delivered in the right way. And no apologies for repeating this point. I've made this 2 or 3 times in the past. But for a company like Pennon, which is delivering essential services, water, sanitation and waste management services to the customers and the communities we serve, it's not good enough just to do good results, we need to do good results delivered in the right way. And our results are embedded in the core values. We have core values in the company, which is all about being trusted and responsive and collaborative and progressive and those responsible. Those values are embedded in the way we've delivered these outstanding results to our customers. So overall, a good half year, good momentum, delivered in the right way.

So if I move on to sort of individual components and starting with Viridor. Viridor is continuing to focus on that core infrastructure model. It's been de-risked, as you know, we've talked about it many, many times before about long-term index-linked contracts, our core infrastructure model. And the portfolio of energy from waste plants is consistently performing well and consistently outperforming the base investment case that we made at the start of the investment. And we believe we're well positioned to capitalize on the strong market fundamentals in the waste management area. We're confident about the long-term market outlook, and I've got a credible and a good plan for continuing the growth into the future through further investments into ERFs, more ERFs, more plastics recycling facilities and, of course, developing energy parts around the ERFs and the landfill.

So new news since the last results, but we did mention it in the September trading update is that we've signed a joint venture with Grundon's. Grundon's are our partners for Lakeside, the first ERF we did adjacent to Heathrow for a new ERF in West Sussex, and I'll give you a bit more detail of that in a moment. And also, we mentioned in the last results that we're investing in the first of the next-generation of plastics recycling facilities in Avonmouth, and construction is now underway with that facility. So good results, good half year for Viridor.

So turning to South West Water, it's the same thing, good results, good half year. We're continuing to deliver for our customers in South West Water. We've got the best ever customer service scores, and I'll give you some more details about that a little bit later. But as you can remember, that was an area of focus for us. We're at the beginning of the AMP. We weren't one of the top performers. We were below average in terms of customer performance. Well, now we're pretty much at the top of the pack. So good progress in that regard.

I say this every time, but it's sort of taken for granted that we will be a sector-leading in terms of outperformance. Our RORE cumulative is 11.8%, 11.9% in this half year, consistently right the way through the 5 years outperforming our peers and outperforming the sector and outperforming the assumptions that Ofwat made at the time of the last final determination.

And of course, through our WaterShare mechanism, we continue to share any outperformance fairly between our customers and also the shareholders of the company as well.

And as I say, we're getting towards the end of this 5-year cycle now, almost at the end. So it's time to think about the next 5-year cycle. And of course, PR19, we're awaiting the results of that on 16th of December. So reassessing the draft determinations from all of the companies, we still have the highest potential outperformance as assessed by Ofwat for the coming 5-year period. Of course, we have to deliver that, and we are confident about delivering further outperformance in the next 5-year cycle.

And the fast start is one of the 2 -- the only companies to have 2 consecutive fast-track approvals by Ofwat. So [our plan] was sufficient quality that had to make minimal interruptions -- interventions to it. So we're well on preparing for a fast start to the next 5-year cycle delivering -- and we're focused on delivering projects, which will give us the ODI benefit going into the next 5 years in the early first year.

So good results across the board, as I say. Momentum maintained and delivered in the right way from all of Viridor and South West Water.

So just finally from me, before I hand over to Susan, just to give you an update on the review of Pennon's strategic review, which we announced at the September Trading Statement at the end of September. We're going to look at the growth options and capital allocations in that strategic review, and that's a fundamental strategic review. Now just to manage your expectations, there's going to be no new news about that today. We've only just started that strategic review. We're on with that at the moment. So there'll be no new information and no updates for you today. So just to manage your expectations. So good results, good half year and good momentum maintained.

So with that, I'll hand over to Susan to go through the financials.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [2]

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Okay. Thank you. Thank you, Chris. So good morning, everybody. And I'd like to take you through the financial highlights for the half year 2019/'20. Robust financial performance across the group, all key indicators of performance increasing period-on-period. Adjusted EBITDA and earnings per share on an adjusted basis up 3.3% and 4.3%, respectively, with statutory EPS up 17.6%. That's been delivered through a focus on strong operations, the cost base and efficient financing.

And in terms of our balance sheet, we're in a very good, strong position there with liquidity in place for investments and an effective, efficient interest rate of 3.5% for the group, and slightly reduced from the last prior period. So those key indicators are all supporting our sector-leading dividend policy to the end of this financial year, which is to increase the dividend by 4% above RPI, and I'm declaring an interim dividend at today, that's up 6.4%.

So as Chris said, it's about delivering in the right way and responsible delivery of our financial results benefits all stakeholders. And whether that's through aligning our sustainability objectives, through our sector-leading sustainable financing framework where we're matching lenders to what we're trying to achieve within the business, whether it's through our tax strategy, which has been accredited for the second year running with the fair tax mark and so very transparent so that all stakeholders can see our approach to tax or whether it's through sharing financial outperformance with our customers through our innovative WaterShare mechanism. And we are the only company in the sector to have pledged to do that in this 5-year period out to 2020, and that is going very well and giving financial benefits and service benefits to customers.

And it's also through making sure we are responsible with our obligations, whether it's through the pension scheme, which I will talk about in a bit more detail later or whether it's through our total tax contribution. Total taxes borne and collected by the group are, for this first half year, GBP 141 million. So as you can see, it's a significant area for us to focus on. So a good set of results and responsibly delivered.

So just looking at the financial highlights and starting with the Pennon Group highlights in some more detail. I'm just going to explain, so this year, we've added another column into the results, which is the second column in -- on the left-hand side and that's because for '19/'20, it's the first year of adopting the IFRS 16 leasing standard, which puts all leasing, whether operating or financial, on a consistent basis for accounting.

Now in terms of comparability with last year, where it wasn't in place, then the middle column gives us the comparator so that we can talk about operational performance. So that's what I'm going to focus on for this presentation. But obviously, you can see the statutory results for the comparator as well.

So in terms of our overall performance, starting first with revenue. As anticipated and expected, revenue has decreased across the group. That's really for 2 reasons. One is on the Viridor side, we ceased the recycling operating contract with Greater Manchester as we announced that we would be doing and, therefore, the revenues have reduced accordingly. And on the South West Water side, in 2018, we had a prolonged period of dry weather, we have a large metered base and the revenues have fallen this year where demands haven't been as great and, therefore, that has impacted revenue. However, at the EBITDA level and the adjusted EBITDA, as far as EBITDA, you can see those increasing against prior periods as we focus on good performance on the Viridor activities and the cost base in South West Water.

You can see, as we build out our asset base across the group, depreciation and interest through our borrowings in absolute terms have increased, as you might expect it to do. And our share of joint venture profit after tax has increased, obviously good performance in those joint ventures, but at the end of 2018/'19, we acquired an extra stake in TPSCo, which is Runcorn I ERF. And you can see the results of that coming through. So overall, profit before tax has increased against the prior period, up by 0.8%.

So as is usual, we've excluded a small number of items to give a more representative view of our operational performance. In nonunderlying items, the principal item that's in there is an GBP 80 million credit to do with some derivatives that we have now settled on a long-dated South West Water 2040 bond. I'll come on to that in a minute. But in terms of the financing aspect, just to really note, I talked on the first slide about our efficient, effective interest rate and that has reduced both at the group level in South West Water for this period. We've had the opportunity to cash-settle one of the derivatives that we had in place on one of our bonds and that's given us some real value. And that performance is also supporting our South West Water return on regulated equity, which is a measure that we've had for this 5-year period. So doing very well on the financing side.

So looking at our results on a before and after tax basis, you can see they're increasing by 22.7% before tax and 15.8% after tax. And earnings per share on a statutory basis are up by 17.6%. So a good, robust set of financials.

So just moving on to the subsidiaries and looking first at Viridor in a little bit more detail. So good better results for Viridor for this first half year. Starting with revenue, I said at the beginning, the revenue reduction is not a surprise as anticipated because we have obviously finished the contract with Greater Manchester on the recycling, operating those recycling assets. Obviously, we still have the ERF, et cetera, but that was to do with operating those recycling assets. And we have had, along with our planned program of reducing the number of landfill sites, open to waste arisings at 2 of those and have been closed compared to last prior period. So we've had lower landfill tax coming through on the revenue side. So both of those have fed through into the revenue line. But we had already flagged that we anticipated a minimal profit impact from the cessation of the Greater Manchester contract. So you can see on an EBITDA level, EBITDA for the activities on Viridor is actually up 9.9%.

So starting first with ERFs. We have 10 operational ERFs. We've got the 3 that are in ramp-up from last year. So we've got Glasgow, Beddington and Dunbar that are still in ramp-up. But you can see there, on a like-for-like basis, last year in the prior results, we have those 3, but they were being contractually supported with revenues, whereas this year, it's operational revenues. So we are performing very well on the ERF operational fleet. And we've had the strong contribution on the JV line with Lakeside and at TPSCo, and you can see that coming through on the share of JV profit after tax line.

In terms of capital investment, the principal investment that we've been making is in those ERFs over the last few years. You can see there with capital expenditure, it is reduced to GBP 94.4 million from the GBP 131.9 million last half year, it's still significant. We're still building our Avonmouth, and we are investing in the plastics recycling facility at Avonmouth. So it's still significant, but as we anticipated, lower than it was this time last year.

Moving on to landfill and landfill gas. Very much optimizing our activities in this area, and we have been investing in the engines on these landfill sites to ensure that our yield for gas is as good as it can be and that is coming through in terms of the numbers and the pricing has held well, both on a landfill gate fee basis, but also on the landfill gas basis, and you can see that against the prior period.

On recycling, moving on to recycling. Pretty consistent financial performance against prior periods. We have seen reduced volumes as we've been optimizing what we've been doing on the recycling side. And we have our contract paying game mechanisms in place, so that supports the financials. But our self-helps, obviously, assisting with performance there, and our financial performance is pretty consistent with where we were last period.

Not too much movement in contracts collections and other and indirect costs. They have reduced against prior periods and since '15/'16, those have reduced in real terms by about 20%. So a good focus on the cost base for indirect costs for Viridor.

So with those results, you can see, obviously, depreciation and interest has increased as we've built out the asset base and the now operational and profit before tax overall has risen by some 15.7% for Viridor.

So moving over to South West Water. This is the last year in this regulatory delivery period out to 2020. And we are on track for the highest sector returns for this 5-year period, and that's returned to investors, but also for customers as well who benefit from that performance.

In terms of the income statement, just taking you through that. And as I said, revenue has decreased against prior period. In 2018, we did have the exceptional long dry period in that summer and that's not been repeated for this summer. And we do have a metered base of 84%. So you might imagine then, when we do get those weather impacts, that revenue can fluctuate. We have had a net tariff increase of 0.6%. But as I said, that demand change has meant that we have had lower revenues, but we do have mitigation. And if we were to be below the revenue cap, then we would have mitigation for that in future periods through the Ofwat revenue true-up mechanism.

As I said before, though, really focusing on cost base and efficiency in South West Water. And you can see in terms of the operating costs, those are down against prior period. And even if you take into account the fact that we haven't had the repeat of those exceptionally difficult costs for the weather last summer, that's still down. And that's really to do with our efficiency program, how we're delivering against that, despite the fact we've had, on average, about 2.8% RPI inflation in the period, and those operating costs are still down.

And in fact, our totex deliveries of operating and capital costs, we've delivered GBP 268 million to date in this regulatory period. With the last 6 months to go, we are on track for GBP 300 million of totex, and that splits roughly about 1/3 for OpEx, 2/3 for CapEx in terms of where the efficiency has come from.

Financing. You can see there a slight reduction in absolute terms as well as rate for financing South West Water. Again, our financing strategy supporting the business well. And our overall return on regulated equity, 11.9% for this half year, very much on track to deliver what we think would be about 11.8% by the end of this regulatory period.

Capital expenditure, pretty much at following what's required in terms of our regulated business plan as we set it out in our plan.

So just going back to the group results and just pausing a moment on the nonunderlying items and, in particular, just thinking about that derivative credit that we've got in there, just a bit of background really. As you know, across the Pennon Group, we've got a predominance of floating rate instruments in place, where we use derivatives to commercially hedge interest rate volatility over those interest -- over those instruments, pretty much short term in nature and are hedge accounted for. We have had, though, and you've seen it in our results in our income statement previously. We have one instrument, which is the South West Water 2040 bond, which is a fixed rate bond, and we've taken out 3 derivatives over that for the period of that bond to swap it into floating rate.

Now because of the low interest rate environment, then the volatility and the benefits that we were getting from that meant we weren't hedge accounting for those instruments anymore, and you'll have seen the income statement with the nonunderlying items for a few periods now.

Given where rates and yields went to this first half year, we have the opportunity to effectively lock in that benefit and that credit, and that's what we've taken as the opportunity to do, the GBP 18 million that you see there and would have been the usual nonunderlying charge for those derivatives. We've actually locked in the benefit now of that derivative and have a cash inflow of some GBP 87.2 million, which you'll see in the net debt bridge for that. So as I say, in terms of our financing, we're in a very good place of financing and where we see opportunity to crystallize the benefits as we did with these instruments than we have taken it.

The other item in nonunderlying items is just to do with the wind down of the Greater Manchester contract and the pension schemes that were associated with those. We've ended up with a rather GBP 2.2 million credit that's come through at the income statement as a result of that. Obviously, got tax on those on underlying items. So overall, a GBP 15 million impact to the income statement.

So just sticking with the Pennon results and going back to corporation tax, I said at the beginning, this is about being responsible and about being transparent and about being clear with all our stakeholders about our approach to taxation and being responsible about how we are managing tax, not just corporation tax. Hence, why we have the fair tax accreditation. This is the second year that we've been accredited with that. And our tax contribution, as I said at the beginning, is significant across the group. Whether it's taxes borne or collected, it is an area of focus for us.

But just concentrating on corporation tax for the purpose of these results today, then corporation tax, you can see there in terms of our current year -- current tax effective rate, fairly comparable with prior period, but really reflective of the significant investments that we're making across the group in our capital assets, which is why it's lower than the headline rate of 19% because, obviously, we get capital allowances, which is what the tax system is there to incentivize corporates to do in terms of investment. So that's why that's lower. We also, given the nature of our program and the build-out and the conversations that we have with HMRC, there are some items that we need to discuss with them in terms of the treatment. And you will see there are some prior adjustments that we have every period that come through as and when those are agreed and settled. So a small adjustment of GBP 2.4 million this year for those.

Together with our nonunderlying items, our overall tax charge is some GBP 29.6 million for this half year.

So just looking at capital investment across the group, you can see the profile on the left-hand side of what we've been doing over this 5-year period out to '19/'20. And we are past the peak, although it's still significant across the group. And starting first on the water business side with South West Water, we've been focusing on a few areas, but we also have been focusing on the K7 investments that we want to make. So we've got a good head start and a good fast start into that new regulatory periods. So we have invested in our asset base to help improve the ODIs that are in place for K7. We've also been focusing on our achievement works, whether it's College or whether it's Mayflower that's now into commissioning, which is our new innovative water treatment works serving Plymouth, making sure that our assets in good place moving into the new regulatory periods.

And then on the Viridor side, obviously, focusing on constructing Avonmouth and the plastics recycling facility at Avonmouth as well as investing on the material recycling facility that we've got at Mason's, which is contract back. So again, targeted investment where we've got contracts that support that investment, which will serve us well with the revenue stream in the future.

So just looking to the net debt movement and the cash flows associated with that. In terms of cash flow from operations at GBP 339.8 million cash flow inflow from operations this first half year, a significant outflow on the right-hand side, which I've just touched on associated with the capital investment. So you can see the outflow on the right-hand side of the chart. Just going through some of the other aspects that we have in there. The cash settlement of derivatives that I talked about on the 2040 bond has come in at GBP 87.2 million. That's cash inflow to us. And then we've got other contributions that we need to make, at least on the pension side, where we've made contributions as per the schedule required, but also we have been optimizing South West Water's balance sheet. And in doing so, we've also accelerated the last couple of payments that were due to go to the pension scheme at pre-2022. So about GBP 17.2 million we've accelerated in terms of pension contributions there.

We've got our taxes, other taxes, corporation tax, then payments to provide us a finance that make up the bridge. So you get to the net debt of GBP 3.177 billion on a consistent basis, then with IFRS 16, which is the change in accounting for the leasing that adds the debt of GBP 118.3 million, but just to note, that doesn't have any debt covenant impact.

So just looking at that net debt profile and how that's been built up, I mean, we have a diversified portfolio in place, which (inaudible) predominantly floating rate debt, which I think has served us well in our strategy of making sure we could be efficient and effective. You can see the makeup between fixed index income floating there. And we've got good long maturity on an average of 18 years.

In terms of South West Water, we're in a good position for funding the South West Water, and we've just issued our first CPI-linked instruments. We have been watching that market as it has developed, and where previously you might be able to have taken out CPI instruments that were focused on looking at that wedge between RPI and CPI. This is a fully aligned CPI instrument that we've issued. So it's our first dipping our toe into that CPI market. So that's a good place for us to be.

And in terms of the gearing position, slightly elevated this half year, not at least recognizing the timing of our dividend payments. We've got 2 that come through in the half year and, obviously, anticipated as we've done previously to reduce by this year-end.

And on the South West Water side, as I said, we've been looking at balance sheet optimization for South West Water and that's increased the gearing so that we're in a good place for the end of this regulatory period and going into the next.

Funding and liquidity, GBP 1.6 billion of cash and committed facilities, which obviously is a good place to be and our headroom for investment, which we've talked about before, just over GBP 800 million.

So one thing I just wanted to switch on, I said at the beginning, we've been working with quite a number of you in this room on the sustainable financing framework that we put in place back in 2018, very much matches what we're trying to do as a business and aligning our sustainability objectives. So why have we put this framework in place and what's it trying to do? Well, actually, it gives us speed of execution. So having a framework in place and that's been verified externally in terms of the type of organization that we are and the type of investments that we're making, means that we can speedily put instruments in place as a result of having that framework. And we've raised GBP 845 million to date.

And on the right-hand side, you can see the portfolio of the types of financing that we've put in through this framework, whether it's linked directly to our delivery of ESG metrics for Pennon or whether it's directly linked to some of the ODIs that we've got like bathing waters for South West Water or whether it's just making sure that we're investing in assets that are going to improve and protect the environment. Then you can see there, we've been very successful at raising the finance in this area. And a big thank you to many of you in the room today, who have been supporting us with that.

So we've been raising that finance, but what about the rates? And what does that look like from an efficiency perspective? As I said at the beginning, our effective interest rate has reduced compared to the prior period, both at the group level and at the water business level. And you can see that 3.5%, 3.4% for South West Water. In terms of our -- we're often asked about our strategy for hedging into the next regulatory period, which starts next financial year. And our approach is to ensure that we have hedging in place before we enter into a new regulatory period. We know of what methodology has changed in this area and it's looking at 10-year rolling hedges. So we have been mirroring some of that in what we've been doing. We have around about 50% of South West Water's debt now hedged going into that regulatory period. And this graph on the right-hand side, where the little ellipsis are, show you where in terms of time and the rates -- in terms of the swap rates that we've been getting on some of those tranches, just to give you an indication of the types of rates that we've been getting going into that new regulatory period. So very efficient place for us to be.

And then lastly for me, around the dividend. We've had our 10-year policy in place, which is due to finish this financial year. And today, with that policy of increasing 4% above RPI, we are declaring interim dividend of 13.66p, which is up 6.4%, very much supported by Viridor's earnings and the outperformance from South West Water. And as shareholders appreciate it, we have the dividend reinvestment plan available and in place.

So with that, I'm going to hand back over to Chris.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [3]

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Thank you very much. Thank you very much, Susan. So I just want to take you through some of the operational highlights, just very briefly, from both Viridor and South West Water before we hand over to yourselves for any comments, questions or discussion you want to have.

So as I say, it's a good half year for us, good results, good momentum, good outlook for the future, but also delivered in the right way. So starting with Viridor, I mean, as I said in my sort of opening remarks that Viridor is a U.K. waste management core infrastructure business, a leading infrastructure business in the U.K. and we're focused on that de-risked long-term contract back to index-linked contracts to give us that de-risked core infrastructure business. And as Susan says, and I said in my opening remarks as well, it's been a strong half year for us, good results in the half year. And we're continuing that momentum for outperformance into this 6 months, but also into the future as well, particularly, pleasing as we're bringing the latest tranches -- latest tranche of new ERFs online and into production.

So Viridor has a unique platform for growth. And this chart at the top there attempts to show the time line and how that platform has been grown over the years. So starting not long after privatization with landfill and the associated collections into the 2000s, focusing, moving as national policy shifted into recycling this decade into ERFs. And I guess, if we were to draw a 2020 box on top of that, it would be very much focused around our defined strategy of focusing more investments in more ERFs, more plastics recycling and, as I say, capitalizing on the opportunities for energy parts going forward. So I think we've had a significant track record of building on that platform, using that complementary platform to give us growth and the bottom chart gives you the consistent EBITDA growth over the most recent years.

And I think, as I say, we have that defined strategy, and we think we're well placed to benefit from that sustained imbalance between supply and demand, particularly in ERFs and particularly in plastics recycling.

So looking at residual waste in a little bit more detail. So residual waste is the waste that can't be recycled. So you burn it to recover the energy from it in an ERF or as the last resort you dispose within the landfill. So just talking about ERFs first, as we said already, we've got 10 operating ERFs. They're performing well. And indeed, they are outperforming the base investment case. And the chart on the right there shows you that since 2017, we've outperformed the base investment case by GBP 35 million, which is a not insignificant number. Glasgow, Beddington, Dunbar are ramping up into operational ramp-up as we speak and going well. A new news for today is that, we have confirmed that we've got rocks for the Glasgow ERF.

And another good feature, and I think I mentioned this before, is a measure of how well or otherwise the plants are operating, is their availability. And for the fourth consecutive year, we have over 90% plant availability and some of the highest plants availability in the sector. So strong operational performance from the ERF portfolio.

Avonmouth is the last one of the current portfolio, which is on track for commissioning in the second half of 2019/2020 this year and operational ramp-up in the following year.

And just to remind you about the contracted position, because I talk about the de-risked index-linked contracts. So just to confirm, all of our ERFs are 100% contracted. And 80% of those contracts are secured under long-term index-linked contracts. So as I say, 25-year contracts were typically indexed against inflation. The remaining 20% is also contracted, we called it, in short to medium term. And that typically means up to 10 years as well. So it's not exactly a spot price or anything. And one trend that we've noticed in the last few months or possibly a year or so is an increasing tendency for people who're looking at short-term contracts to move those to longer-term contracts and at higher prices, good prices, which is giving you some of that cumulative outperformance. And that's as export markets become tighter, anxiety is about Brexit and so forth. So we're seeing that trend. And all the plants are 100% contracted, just to confirm.

So we've talked about developing new ERFs and just the new heads of terms that we announced with the September trading update, the heads of terms with Grundon's. Grundon's are our partners for the Lakeside Energy from waste plant or Energy Recovery facility near Heathrow. We've had a long-term relationship with them. We've signed a new 40-year joint venture with them for West Sussex and Ford. The site has outlined planning permission. And indeed, we have energy park potential there as well because we have our own materials recycling facility just across the road. So we'll continue to develop it along that model that we've been talking about so far today on the other facilities. It's continuing to capitalize on that trend of more U.K. processing. And as I said just now, less export and reduction of exports and that become a tighter market for us. So that's where we are with ERFs, good performance, good prospects for the future.

Just a couple of words on landfill. I mean landfill is -- obviously is phased -- to be phased out with the government policy, but we're continuing to see a strong demand in both the volumes and prices for landfill. And indeed, we've opened 2 new cells. So we'll continue to manage that in the dynamic and responsive way. It is in targeted geographies though. It's not right across the country, it's in specific places.

One thing to update you on today is a new development, which we're quite excited about with CarbonOrO. I have signed a contract with them, which is a global first, really, which is taking landfill gas and transferring -- they're transforming that into transport fuels. I'd say, that's a global first. That's something we're very excited about, and we're looking forward to working more closely with that organization and developing that technology further. So gas yields are continuing to hold up well. We talked in previous results presentations about reinvesting the gas engines to make sure we got the yields up, which we're doing very well. And we're capitalizing on the grid capacity that we can export from the landfills, as we've talked about and possibly even energy box as well.

So just a word on recycling, an update on recycling, particularly in plastics. This is the artist impression of the Avonmouth plastics recycling facility, which we talked at the full year results in the summer. It's on track, it's under construction and it's in there to contribute earnings in 2020 to 2021.

Just an update on the contracting position. As I said, we had a base contracts when we made the investment decision originally. Well, the latest position is that we have 85% of the inputs already under contract and 75% of the offtake already under contract. And you may have seen, I think, a week or so ago that we announced a contract and a partnership with Unilever. I think it was last week we announced that. So we're continuing to sign those up. And as I say, that will take us into the same infrastructure model that how we've been developing the ERF portfolio over the years.

So this sector has continued to be underpinned by strong policy and regulatory drivers, and indeed, public perception. You're all aware of the Blue Planet effect, which I've talked about before. So we're seeing more requirement for plastics recycling, and I'll go through that in a moment. And one point to emphasize is that this means that Viridor is moving up the value chain and capturing more margin by going into this sort of broader recycling technology for plastics.

So opportunities for further plastics recycling. We've talked about 2 more possibilities, 2 further plastics recycling similar to the Avonmouth facility at Ardley ERF and Dunbar ERF. And if we do bring those online, that will get our potential market share up to over 15%, which is starting to mean that we've got a meaningful presence in a very rapidly growing and attractive segment.

So a word on energy parks. Just to remind you what energy parks are shorthand for what we talk about, if we can attract high energy users to our facilities, the ERFs or the landfill, which are generating electricity, high energy units or high heat requirement plants to our facility, we can cluster those around the ERFs or the landfill and distribute through private wire connections directly to them. So you cut out the grid connection charge and the distribution charges for electricity or for heat. And for virtually no or very limited capital investment, we can get a significant benefit, which we can share between the organizations that we bring towards us. So that's a focus for us. It's an interesting development for us, and I say, with virtually no capital requirement.

This is an update of some of the facilities that we've had in place and also some of the new ones that we've got online. So for example, the new 2 plastics recycling facilities at Dunbar and Ardley, I was talking about, those obviously aren't in our models, but those are in our minds to do.

But one thing I would like to concentrate on is the Beddington facility there. So we already had a heat offtake to a local housing association to do district heating in the area, but we've just signed in the last few months a contract with a large data center to provide a private wire connection. I think that's for a 25-year contract and 27 megawatts is the capacity. So a significant investment. And these data centers, it's going to be almost double the cost of one of our ERFs. So this is not a small plant. This is a big plant in a big facility. As you know, they use a lot of energy. And all that gives us the advantage with no capital outlay at all. So that's a great example of how we can capitalize on the potential from our ERFs particularly, but also landfill.

Another one, Avonmouth. We just recently signed arrangements to control more land around the Avonmouth facility. So that gave us the opportunity to bring more facilities into the Avonmouth area. But those are examples. Those are the things that we're on with at the moment. Some of those have been in place for a little while, but we're also capitalizing, plant by plant, more opportunities.

Now this is in the green box down the bottom there. 50% of our total output -- power output will supply long-term private wire or our own usage. So it's starting to make a meaningful impact on our energy generation and the uses of it.

So I said I'd talk about market growth and the potential. So first of all, for residual and ERF demand, then I'll go onto plastics recycling. I think you're fairly familiar with this chart. And it goes through to 2035, if you can't read it. So just to get your head around it, so the blue facilities at the bottom are the facilities that are ERF capacity from other participants, not ourselves. The middle slices of gray is ours, the ERFs that we have in operation and coming online. And the green is the capacity gap going through -- right through to 2035. And just to put a scale and a size on that, that green capacity gap in 2035 is 23 more ERFs are required.

Now as you probably remember me talking about, the government had a strategy, and the resources and waste management strategy is to increase recycling. So we tried to overlay the impact of what that would have on this capacity gap. So if the government implements all of its recommendations and it delivers exactly what it says it's going to do, there will still be a capacity gap but -- this is the orange or the red line there, it will be somewhat lower than we're currently forecasting. If, however, none of their strategy has any impact whatsoever, it would actually make the capacity gap even more larger, and there will be a further 12 ERFs required. The green line is a modest expectation of what might be successful. Obviously, it remains to be seen. But the point is there is a continuing capacity gap going forward, and that's one of the reasons why we're continuing to focus on possibilities in this area and gives us good growth potential.

Then a similar thing for plastics recycling. So again, it's the same sort of coding, really, and legend. So the blue at the bottom is the plastics reprocessing facilities for others. The gray is ours, so not the ones that we have in our minds but the ones that we've committed. And again, just bearing in mind, the government's target is to recycle by 2030 -- this is at 2025, 75% of the plastics, to recycle 75%. A reasonable expectation of the progress we might make. So this is the 2025. It's about 67% in 2025, moving towards that government target. That means you'd need 14 Avonmouths to meet that gap by 2025. Now if all of the plastics, not 75%, if all of the plastics was recycled, which might well be in government's mind, that takes you up to the demand forecast up to the gray there. That's another 10 on top of the 14. So as you can see, there's quite a significant demand for these plastics recycling facilities, underpinned, as I said before, by the fact that export of plastic is becoming less and less likely and more and more difficult.

So good growth prospects in both of those areas. So I think what I was trying to say is we've got a confident outlook for Viridor. We've got, obviously, the EBITDA of GBP 225 million that Susan has talked about now. I do remember mentioning about the target of over GBP 100 million from EBITDA from energy from waste plants, ERFs and some cynicism in the room when we talked about it. Well, we're looking at GBP 225 million of Viridor at the moment. And we've got that expected growth from committed -- completed projects in the green in the middle there, those are the things that we know about, and then good prospects of further growth going forward. So a visible pipeline for growth going forward and good prospects and good outlook for Viridor going forward.

So that's Viridor. Moving onto South West Water. So strong foundations for continued outperformance. As I say, it's taken for granted that we've got the best performance in this 5-year cycle, cumulatively delivering 11.8% RORE over the 5 years so far, 11.9% in this half year. But we're delivering for our customers. We're delivering in the right way, as I've talked about.

And it's just worth focusing on our bills because our bills are actually lower today than they were 10 years ago. Now that's lower in cash -- pound note terms. That's not after inflation da di da di da. That's lower in cash terms. And when we get to the end of our 5-year cycle, let's just say, 2025, they will be lower than they were 15 years ago. Now I don't know how many utilities can say that. I don't know how many people can naturally stand and say that the cash terms you've billed are lower than they were 15 years ago. So we're looking forward to continuing that positive momentum. And all that's been driven by our efficiency, the efficiency both in terms of totex efficiency, getting ourselves to the top of the power, being the most efficient, as assessed by Ofwat; and also financing efficiency, which Susan has been talking about. And of course, helped by ODIs, but efficiency in and around has been delivering that.

So looking forward to continuing momentum into the next 5-year period, driven by innovation and continuing to work in the public interest.

So I'll just to give you a little bit more detail briefly on that. So according to Ofwat, we're in the upper quartile of service delivery in their latest report. And we've given you a simplified version of Ofwat's chart here. And just to explain it to you -- and the detailed version is online with Ofwat, of course, but each one of these little dots is a service metric. So for example, supply interruptions, sewer flooding and so forth. And if you're dark green, this is where we are, dark green, that's above industry average, that's top quartile performance; if you're middle, average performance, middle, 50%, you're in the pale green; and if you're in the bottom quartile, you're in orange. And Ofwat have used those metrics to rank the companies. And as you can see, we're in the upper quartile of performance.

And why that's important, and we talked about it in the last results, is these elements of service delivery will form the basis of the common performance commitments for the next 5-year period. And I think we said before that yes, we've got some things to focus on, but we've got some very strong performances well above average in performance of many of our peers. So that gives us a lot of confidence moving forward into the next 5-year period for ODI outperformance.

Just -- I mentioned it before, but just a word on SIM, the Service Incentive Metrics. It's a bit small here, but you can remember that the average performance is this gray box here. Bournemouth Water was always one of the top performers, and it's maintained its position. South West Water wasn't. It's an area of focus for us for the last 5 years. And as you can see, we're now well above the industry average and the top performer, and indeed, ranked as second in the industry for customer service. So a rapid transformation from where we were.

Just a word on supporting our customers and particularly those in vulnerable circumstance. And here it gives a diagramatic of all the things that we're doing to help support our customers. Obviously, the most important thing is lower bills, and I've talked about that, but a whole range of award-winning, industry-leading, and indeed, copied initiatives that we've put in place.

But one I wanted to focus on, 59,500 customers supported through a range of measures, is the WaterCare program -- the WaterCare, not WaterShare, I'm sorry. We're not very much (inaudible). WaterCare program was started in 2007, I think it was, and it's been working for a long time now. That's working in partnership on a household-by-household basis, understanding which customers are struggling to pay their bills in vulnerable circumstances, using partners like charities, independent organizations going into individual households. And they work out with an audit and a questionnaire and spending time with a householder. Would they benefit from a low-flush toilet and moving to a metered account rather than a ratable value account? Are they in the receipt of benefits that they're entitled to? And we've now developed an app which the adviser can use in the household and say, "If you put in a low-flush toilet here, it would save you so much money."

And what a startling and sort of sobering statistic is the people that have been through that program aren't necessarily the most sophisticated at claiming all the benefits they're entitled to. And on average, the people that have been through that program are not receiving GBP 90 per week of unclaimed benefits. There's unclaimed benefit of GBP 90 per week. So you can imagine what the variation is. And that GBP 90, we help them claim those through the app directly, those benefits. And that brings more income into the household, and of course, it isn't just to pay our bills, but it does help paying our bills. And it's one of the reasons why we've got our bad debt charge -- customer bad debt charge is down to industry level -- very low levels compared to industry average is this sort of WaterCare program. It's delivered GBP 2.5 million of benefits to householders since 2015.

So I won't take too much time on RORE. I think we've mentioned it several times. We're consistently the highest RORE, 11.8% cumulative. Susan and I both mentioned that several times. It's taken for granted that we will be best in the sector, and we are best in the sector. One thing to focus on, however, is that we've outperformed in every area in every period of the 5 years, so that's totex, financing and ODIs. And I think we're just about the only company that can say that. So I have not actually doubly checked that, but I think we're about the only company who can say that. And as we've said, we're sharing those benefits fairly not only with our shareholders but with our customers as well, around GBP 120 million of benefits shared with customers, reducing builds, reinvestment, better services.

And of course, our flagship project for the next 5 years is the WaterShare+ scheme, which is allowing customers to have the opportunity to have shares, a stake and a say in our business, going forward from next year.

Looking forward to the next 5 years. I mean we've talked about this, but this is -- the chart here is that we've got the highest potential outperformance from all of the water companies as assessed by Ofwat's draft determination. That's us. Those are the other companies. There is potential, of course, we've got to deliver it, but there's a potential. But I would say we're confident in being able to continue that outperformance into the next 5 years in each of the 3 areas. We're confident of the continued outperformance.

We got a strong base position for the ODIs. I've talked about the common ODIs. The bespoke ODIs are ones that we've devised and proposed to Ofwat, and we've locked those in and again there's a significant reward for those. So we're in a good position for outperforming in each of the 3 areas.

Briefly, a word on partnerships. We've got key partnerships in place. It's our policy and our strategy not to do that at the end of the 5 years, do it before the end of the 5 years so we're ready for a fast start. So they're all in place, strategic consultants, capital delivery partners confirmed, et cetera.

Just a very brief word on innovation. I never get too much time to say anything about this. But we're very excited and we can now more formally announce that we're setting up an industry sector -- water industry sector innovation center in Exeter. So this is for the whole of the U.K. It's been co-funded. We've got government funding from the U.K. government of GBP 10 million, and that's why we couldn't announce it at the last results because that wasn't confirmed by the government, and they want -- a Minister wanted to announce it, not us. So we had to wait for that announcement. But that's a new innovation center based in Exeter for the whole of the U.K. It's providing much funding in time and money from us, and that's in our PR19 price settlements so that's already secured. And we will bring in other partners from around the world, from around the industry to try and use new technology and innovation to drive efficiency and better service for the whole of the sector.

And hand-in-hand with that, we recently signed an international innovation exchange in Singapore. That's us in Singapore on the largest conference in the world -- the water conference in the world with a Singapore leading utility and Dutch technology innovation company. And that's building on the technology that we use for the new water treatment works in Plymouth Mayflower. That, as I think I've said to you before, is a first of its kind in the world. So very exciting.

Several other things as well. Digital twins, building on our PUROS program of getting ourselves to the top of the efficiency league by making new technology available, new ways of working, and lots of work there about smarter networks and digital twins. But time prevents me going into too much detail.

So finally from me, on South West Water, working in public interest. I think you may have seen the whole sector is signed up to something called a Public Interest Commitment, which is like a social contract. Our 5 major initiatives are all signed up on, including South West Water and all the other companies. Few things that are in there: leakage, of course, that was already in business plans to reduce leakage by 15% by 2025, and of course, we've signed up for that; targeting 0 carbon emissions by 2030, the whole sector signed up to that as well. Another one is eliminating water poverty. The industry has signed up to eliminating water poverty by 2030. Our business plan, as you probably can remember me saying, we're targeting in eliminating water poverty in our area by 2025. So quite a commitment and quite a development with the whole sector to try and have this Public Interest Commitment.

And finally, the WaterShare+ mechanism. That's in place to give this unique opportunity for our customers to have a stake and a say in our business, shareholding from 2020 as an option, if they wish to take that up, and continuing to share any outperformance we generate with our customers.

So good shape. Lots of things happening in South West Water, trying to push the boundaries of being a responsible company.

So that's the conclusion. Over to you to question and answers. But good results, momentum maintained, delivered in the right way. I hope you got the sense that we've got a very confident outlook for the future. We're very confident in the future for both businesses, Viridor and South West Water, and we look forward to answering your questions.

So I think if we do go to the question-and-answer session, there are some microphones at the back, and if you could just put your hand up, which Jenny is starting to do, if you could just say briefly who you are. And if you could limit yourself to one question at a time that will be great to make sure everybody has the opportunity to ask questions.

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Questions and Answers

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [1]

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So Jenny, please?

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Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [2]

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Jenny Ping from Citi. You obviously said in your opening remarks in terms of strategic review that you haven't made a final decision. But is there anything that you've ruled out at this stage in terms of dramatic transformations, like ultimately becoming a waste company rather than water or acquiring another waste company to double up or something dramatic? Is -- just trying to get a sense of the direction of travel.

And then secondly, just in terms of --

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [3]

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Secondly? Only at a time, I said. Well, go on.

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Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [4]

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No, well, it's related. With regards to the strategic review also, how much input are you getting from your existing shareholders in terms of what they want?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [5]

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Well, strategic review, I did try and manage expectations in the beginning by saying we've only just started the strategic review. And I'm sorry. No matter how many times -- like, Jenny, if actually you ask me this question, I'm going to give you the same answer, which is we've only just started. It's early days. We've not ruled anything in or anything out. We think it's an opportune time to have this strategic review given the 5-year cycle and where Viridor is in its investment and delivery. So it's early days. We have nothing to say and nothing to report at the moment. Sorry, Jenny.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [6]

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Iain Turner of Exane. In the conservative manifesto over the weekend, there were a couple of things I'd be interested in your take on as it applies to you. One was a ban on plastic exports in non-OECD countries, and the other was a continuation of the GBP 50 payment for your customers and what impact that will be on you?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [7]

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Yes. Thank you. And you deserve a price to find the latter one because it's in this morning printout, the (inaudible) about GBP 50.

Plastic exports, I think, is a point I've been making in the presentation. And Phil makes his point very well that it's increasingly going to be difficult, whether it's from our side, banning plastic exports or banning recycling material leaving the country or whether it's the receiving countries not wanting to receive the waste. It's going to be complete -- continuingly more and more difficult. And it's going to be a strong trend for processing and reprocessing domestically here in the U.K., hence, why we've got the focus on investment here.

I mean it's worth pointing out that the plastics recycling that we're talking about is reducing -- in Avonmouth is reducing it to little plastic pellets, which then go straight into the production process. And that's not waste then. That's an infeed to production processes, which we hope will be done in the U.K. But it might be done -- in the case of Unilever, it might be done in European countries. But that's plastic feed. That's not waste as such. That's not what we've been talking about as such. So yes, I think that's a positive dynamic for us, really, and it's a statement of fact which is sort of happening anyway.

With regard to the GBP 50, of course, as you know, the GBP 50 was put in place 7 years ago, I think, it is now. Because it was the government -- it was the coalition government at that time recognized that there was some perhaps historic injustice by the fact that the amount of capital to be expended to upgrade the facilities in the South West was disproportionately high, and perhaps we didn't get the share of the green dowry at the time of the original privatization. That was not to give the GBP 30 equivalent, so GBP 36 million per annum or something like that, GBP 38 million maybe, to us. It was passed straight through the customers. And the government has recognized that, that is still something that they wish to support, if they are re-elected. So that's in the manifesto, as you rightly said, which not many people have noticed.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [8]

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I was just going to add as well, if I may, just on the exports point, just to put it in some context. I think in terms of our half year results, the amount of revenue we got from exports was around about GBP 8 million outside of the EU against over GBP 700 million of revenues for the half year. So it just gives some context as to how much that is in terms of what we're doing.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [9]

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Thank you. So there's a next question there.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [10]

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Martin?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [11]

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Martin, is it?

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Martin C. Young, Investec Bank plc, Research Division - Equities Analyst of Utilities [12]

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Yes. It's Martin Young from Investec. As a company that has previously undertaken some consolidation in the water sector, and obviously, a company that is held in high regard by Ofwat, at a sort of industry level, as we move into AMP7, could you sort of just share your thoughts as to whether we might see any consolidation in the sector? And if so, what type of things will be driving that? I'm thinking more about sustainability of resource, et cetera, et cetera?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [13]

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Yes. Thank you. And I'm sure that's not a question related to the strategic review, is it? No. I mean -- sorry, this isn't related to the strategic review. I mean you asked me to speculate. And it's only speculation. I mean we -- as you know, about 5 years ago this time, we're in conversations with Bournemouth Water and Sembcorp to acquire the shareholding of Bournemouth Water. And that was something that's tremendously successful for us. That helped us maintain our ability to stay at the top of the efficiency frontier by cutting out 25% effectively the operating costs of Bournemouth Water by sharing the back-office stuff. So that was something that was a positive development. I think the regulator has understood that story and helps to drive lower prices, both for customers in Bournemouth Water, South West Water and also the industry by setting a tougher benchmark for everyone else.

So you could imagine that trend might continue. But it really does depend on what happens in PR19. It really does depend on the sort of perspectives or perceptions of the shareholders and the existing shareholders of the other companies at the moment and what their value or aspirations are and whether they wish to continue to own or wish to divest of their shareholding. So it depends on their perception going through to PR19, and I guess, the political backdrop as well. I mean you could argue and speculate that -- I don't know how many companies there will be if we continue with the same model in 25 years, but it won't be the same shape as it is today. So there will be some change and some consolidation and some shifting over that going forward. But it's really not something I wish to speculate on much more than it would be in the public domain. But it's certainly something we would track as we have been doing for many years.

Dominic was next, yes, I think.

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Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [14]

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It's Dominic Nash, Barclays. The weekend press, I think, there was an article that SSE and National Grid are putting the holding company in place outside of this [territory] in order to give better investor protection in the event of nationalization. Have you already put something in place? Or is this something that you would consider going forward?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [15]

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Okay. Thank you, Dominic. We were just debating whether I'm going to continue to answer all the questions, and it's seems like there I am. So you did say that it is press speculation. I mean, I think the thing to say is, obviously, the most important thing for us is to focus on running our businesses on a day-to-day basis and affecting what we can affect. So making sure we don't lose sight of the operations in both Viridor and South West Water is the first and the most important thing for us and making sure everyone's focused on that. And that's what we have been doing.

You might argue that the probabilities of a labor administration going through and trying to renationalize the whole of the sector is probably a lower probability. And I've always thought that we shouldn't focus on things that may or may not happen. We should focus on reality. But of course, as directors, we are mindful of our responsibility to protect the interest of our shareholders. And that's something we take very seriously. We are mindful as well of legal advice about whether or not you could protect shareholders' interest by having some complex offshore structures and so forth. But bear in mind that this is also something that the regulator has been trying to discourage us from doing for a number of years. So there is a negative, if you were to try and do that. And also, you have to look at the practicality of whether or not even these complex arrangements would actually protect you. Because it would seem, I believe, I'm not a legal expert, if you are doing that to protect in the threat of a renationalization scenario, that defense automatically falls away anyway because you're doing it to protect something that our government has already announced or potentially our government has already announced. So it will give you limited protection anyway.

Anything else?

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [16]

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(inaudible)

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [17]

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Let me ask you a financial question. Lakis is going to ask you a financial question. He's bound to.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [18]

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I would like to ask 2 questions, but I'll limit it to 1. We saw the results from you and Severn Trent last week. Some eye-watering losses coming through in the non-household. And I then think...

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [19]

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On the?

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [20]

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Non-household. It's a half year for the total water, plus an estimate like GBP 25 million loss. You guys are breaking even. Well done. Do you have any insight into what you're doing better than them or what problems they're having that you are not having or you could potentially have? I mean they are your competitors so you know something about them. I mean it's not like on the water side it is a competitive market. What is it you're doing different that allows you to be more successful than them, do you think?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [21]

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Do you want me to take it?

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [22]

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Yes. No, I can do that. That's fine. Okay. So I think, I mean, yes, you're right in terms of the financials and the kind of [widening] space in terms of a proposition. And up until this year, we were one of only, I think, 4 of the companies in that space to have actually gained in terms of customers and our position in the market. What is it we're doing? Well, I think the first thing, it's always important to understand your customer and your customer base. And we're able to make sure, when we launched into that market, that we were able to quite clearly segregate our customers between household and non-household customers, and whether that's a function of the fact that we have to after the GBP 50 rebates so we know who that was.

But I don't think it's just that because we also partnered with South Staffs, and we've got a good partnership there, where they understood their own customer base as well. So I think having that combination and having the ability as we did to set up in a stand-alone way in Bournemouth -- out at the Bournemouth Water offices with South Staffs and run a very successful campaign with the business customers that we had, I think, has served us well. And we've been able to be fleet of foot in terms of some of the acquisitions that we've made around customer base and also targeting dual-service customers from the base that we had. The strategies have worked well. The collecting from customers on the debt side worked well. So yes, I think it's been a good, robust performance from that team. But it is a tough market. It is a tough market.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [23]

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I don't expect you to make that much money from it, just like not to have losses.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [24]

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I think Susan's got it right. I mean you're just targeting, understanding and segmenting your customers. It's perfectly possible to build massive market share but not profitably, so focusing on what we want to do.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [25]

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Yes, exactly.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [26]

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Fraser had his hand up. I think Fraser did have his hand up.

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Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [27]

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It's Fraser McLaren from Bank of America. Your headroom for investment number of GBP 800 million looks a little higher than it was earlier in the year. Could you just remind us of the maths, please?

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [28]

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So I think it's fairly similar. It is about GBP 785 million at the year-end, so it's thereabouts. I mean it's just a function of our covenants at the group level, which are a combination of debt to RCV and EBITDA multiple against our debt levels. It's no more complex than that. But it's there thereabouts given where we were at the year-end.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [29]

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There was another question over there. Yes?

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [30]

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Chris?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [31]

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Chris, yes?

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [32]

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Chris Laybutt, JP Morgan. A question on pensions quickly. (inaudible) the decision to accelerate your deficit repair, why now? How does that affect your K7 cash flows? And I assume that's also going to be impacted by the triennial review, which is coming through now.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [33]

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Okay. So in terms of the pension position, overall, you'll see in our results, our net deficit is, on a post-tax basis, around GBP 32 million. So it's kind of -- first of all, put it in the context of the whole group and our market cap, it's less than kind of 1% in terms of market cap level. So just to put that in context. In terms of the triennial evaluation, we're just going through that now, and we have a deadline of getting that completed by the middle of next year. So we're embarking on that now. The contributions that we accelerated were a couple of payments on the South West Water portion of that pension scheme. And that was because we've gone through a process of optimizing South West Water's balance sheet heading into the new review periods and our new dividend policy within South West Water. That means we also assess what other responsibilities that we have. Pensions is one of those, so where we're making a dividend out of South West Water within the group. Then we also look at those obligations as well. So that's why we accelerated what was in place out to 2022. But also, I suppose, to just give you some context, I talked about the net deficit post-tax being around GBP 32 million. I would say, for us, we have that kind of broad alignment of IAS 19 on the accounting side and the kind of actuarial funding assumptions broadly aligned for us. So I'm obviously not going to talk about where we are in terms of our valuation process, but it gives you some indication of what that looks like.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [34]

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So Verity, here.

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Verity Mitchell, HSBC, Research Division - Analyst [35]

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Verity Mitchell, HSBC. I'm just quite interested in Slide 49, back in the slide. I don't quite understand. What are the percentages? It's an interesting slide. What do they represent? And could you just talk us through it? I think it's a new one. I haven't seen it before from you.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [36]

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Oh, yes. So that's the percentages in terms of the generation of power, how much is taken up by those different activities we've got on the left-hand side. So in the presentation, we talk about in terms of the power being generated by Viridor, how much is being used within Viridor or within the South West Water from a group perspective, or indeed, from the activities where we -- Chris talked about them, the energy parks and the different studies that we're building out. So how much is basically long-term use within the business versus what will go into the market. So I was just giving a bit more color around those volumes that are used -- or going to be used within the business on a long-term basis.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [37]

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Is that okay? Lakis, would you do another one? Lakis, only 1 to 2 questions. So...

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [38]

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Back to Viridor. Your landfill EBITDA contribution is staying remarkably resilient. Where do you think the profile of that's going to be going forward? You seem to be suggesting we could just flat line on that level or come down because your volumes were down, I think.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [39]

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The price is holding up.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [40]

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Yes. Pricing is holding.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [41]

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And your EBITDA is staying fairly flat. So where do you think the profile is going to be over the next 5, 10 years?

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [42]

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So a couple of things to say. Obviously, the pricing is holding and the number of sites that we've got open we're coming down to 6. I think it's what we've said in terms of the medium term, so a couple more to go to get to there. And we are facing on the cost base. So it's -- I'm not going to give a forecast profile, but I think that gives some indication of what it looks like.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [43]

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It's difficult to predict entirely like this. But I mean, with Brexit, with the possibility of some hiatus of export of RDF, possibility for exchange rate, you could argue and you could see or speculate perhaps, that in the South and East, even there might be some shortage of capacity. And certainly, we're seeing some longer-term contracts emerging and people more interested in that. To an extent that's a long-term trend or a short-term trend, I think it goes back to that -- if the ERF demand shortfalls, stays like it is, the waste is going somewhere. If you can't release it by taking it to export as much, you're going to have to put more in landfill unless the ERFs are built. So I think with us, I think we've talked about in previous presentations, a dynamic strategy, and that means we just need to be fleet on our feet, as Susan was saying earlier, and doing it case by case. So in certain geographies, it's looking very promising. Others were winding down, as you say. But the prices are holding up for those reasons.

Any more questions? Yes, Fraser, you got one.

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Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [44]

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Just a quick one on Glasgow, please. Could you remind us where you are in the whole recovery process, please, and when you expect to know if you'll receive the money?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [45]

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So you're talking about the GRREC facility and the decision we made some time ago to replace Interserve as a contractor. And we were very disappointed and very -- it was a big decision for us to make -- to replace them, but it was the right decision to make. And that has been proven by what's happened not only in our facility in GRECC but the other Interserve energy from waste plants or energy recovery facilities in other parts of the country, which had difficulties. So we're pleased we've taken the right decision.

As you know, we've made allowance for what we think the company owes us through the contract arrangements. And also, I think at the last results, Susan did an assessment of the creditworthiness, I think, as how Susan would categorize it, and that's what's in our accounts. We continue to talk to Interserve, and we would like to come to some settlement with them, if that was possible. But otherwise, we have recourse to legal provisions in the contract to recover the money. I don't think there's anything else to add, really.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [46]

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Yes. And we have finally started that.

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Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [47]

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The timing?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [48]

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The legal process would take some time, as you can imagine these things often do.

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Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [49]

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We have started that. We have started the [allocations], yes.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [50]

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Yes, more questions? I'm sorry, I was just thinking of something else when you mentioned that. But Dominic, yes, please.

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Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [51]

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Yes. Dominic Nash from Barclays again. Just a question on the agreement that you've signed within INEOS, I think you signed yesterday. Could you give us an update on what sort of costs could be involved or benefits we could see coming out of that, please?

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [52]

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Do you want to answer that? Do you have a microphone? So Phil

will answer that. You need to give him the microphone.

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Phillip Piddington, Viridor Limited - MD and COO of Energy [53]

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Thank you. That's part of the Avonmouth offtake agreement. So the 75% that we talk about is contracted. So it's on a cost-plus basis, so index-linked. It is part of a new product that INEOS are launching. So blending virgin material with recycled. So that opens up a whole new market, and we're quite excited by that.

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Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [54]

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Thanks, Phil. Any more comments, questions, things we should talk about?

No? Well if not, thanks very much for your time. Thanks very much for joining us. Thanks. We're very grateful for you coming. I hope you got the sense that Viridor, South West Water, Pennon is in good shape. I'm very confident about the future, and we're very confident about a good half year. And looking forward to another good half year coming. So thanks very much for your time, and a safe journey to wherever it is you're going next. Thank you very much.