Full Year 2020 Pennon Group PLC Earnings Presentation
Exeter Jun 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Pennon Group PLC earnings conference call or presentation Thursday, June 4, 2020 at 8:00:00am GMT
TEXT version of Transcript
* Christopher Loughlin
Pennon Group Plc - CEO & Executive Director
* Susan Jane Davy
Pennon Group Plc - CFO & Executive Director
Christopher Loughlin, Pennon Group Plc - CEO & Executive Director 
Welcome to the presentation of Pennon's full year results for the year 2019-2020. My name is Chris Loughlin, I'm the CEO, and I'll be joined today by Susan Davy, who's our CFO, and together, we'll be presenting the results.
This has been an unprecedented year for Pennon. Looking back over the year, there have been so many momentous events affecting Pennon's outcome. We've successfully concluded our 5-year price review for South West Water and of what said, our business plan was of sufficiently high quality to be assessed as fast-tracked approval. We're the only companies who have had that fast-tracked approval twice in a row.
We've had a general election, where many commentators thought there's a realistic prospect of renationalizing the water industry with all of that would have entailed. Throughout the year, we've been dealing with and planning for the preparations for an uncertain Brexit and an interruption to our supply chains. Back in September, we have announced a fundamental strategic review of Pennon and after much work and thought that has led to the agreement to sell Viridor for GBP 4.2 billion. That's far in excess of the implied market capitalization of Viridor back at the beginning of the financial year.
We've also seen Pennon enter the FTSE 100. If all of those things weren't enough, we ended the year having to deal with and cope with the impact of the most significant global pandemic the world has seen probably for a century and possibly longer. As I said, an unprecedented year. But Pennon has come through all of that and has emerged in good, strong shape. We're dealing with the impact of the coronavirus event. We're delivering strong results. We're releasing significant shareholder value, and we've got a strong foundation for the future.
So to summarize those -- the results, starting with coronavirus. All our business continuity and planning has borne fruit, and we've adapted quickly to the unprecedented conditions. All our essential services have continued uninterrupted, and the vast majority of our operations now are continuing just as normal. We've delivered good results right across the board financially and operationally, and we've maintained the momentum of previous years. I make no apologies for repeating that for a company like Pennon, delivering essential services to the customers and the local communities, it's not good enough just to deliver good results. We need to deliver them in the right way and consistent with our values, and that's what we've been doing.
So South West Water has had a very strong finish to the previous 5 years, Viridor is successfully delivering on its growth investments and we are sharing any outperformance equally between -- and fairly between our customers and our shareholders. We've really significant value for our shareholders, particularly the sale of Viridor, of course, but also through the continuing outperformance of South West Water. And the continuing group is well positioned for the coming 5 years.
So we're very confident about the future, and that confidence gives us the ability to announce a new dividend policy for the continuing group for the coming 5 years, which is to grow our dividends by CPI plus 2%.
So with that overview, I'll hand over to Susan who'll take you through the financial results.
Susan Jane Davy, Pennon Group Plc - CFO & Executive Director 
Thank you, Chris, and good morning, everybody. So a few aspects that I would like to cover this morning.
First of all, managing COVID-19 impact. The nature of our business, delivering essential infrastructure services, means that our group is relatively more resilient. However, I will touch on the impact for 2019/'20 and give some guidance for 2021. I also want to talk through the results for 2019/'20, which, as Chris said, delivering good results, benefiting all stakeholders. It's not just how we've delivered -- it's not just what we've delivered, it's how we've delivered, whether that's raising finance through our sustainable financing framework and linking our sustainability objectives to how we're raising that finance, whether it's paying our fair share of tax from being accredited with a Fair Tax Mark for the second year running, or whether it's sharing, when we have good financial performance, those benefits with our customers through lower bills, through improved services or through our innovative new share scheme, which we'll be launching in 2021. That obviously is underpinned by a robust, strong balance sheet, and we have good, strong liquidity and funding, helping us obviously mitigate any impacts of COVID-19.
We want to touch on the sale of Viridor and where we are in terms of the process. And lastly, talking about the dividend, not just for 2019/'20, but also our new dividend policy for 2020 to 2025.
So I'm going to start first with COVID-19. The impacts of the stay-at-home measures and the lockdown really came at the end of the financial year 2019/'20 for the Pennon Group. We are a group that is providing essential services, and we have continued to operate through that period. In terms of the impact for 2019/'20, there's been no significant additional operating or capital expenditure or totex as a result of the pandemic. And indeed, there hasn't been an increase to date.
What we have done, though, for 2019/'20, given our customers, whether they're businesses or households, we have looked to consider the impact that might have on their credit and their availability to pay the -- for the services that we provide. And as such, we have provided a GBP 9 million increase in provision across the group, largest impact being for our business retailer, Pennon Water Services.
That said, and whilst we have put more into the provision, the cash collections post the year-end for April and may have remained strong. So we have provided in 2019/'20, but cash collections have remained strong. So just looking at the guidance for 2020/'21, in terms of the scenario that we're working towards, that is a gradual recovery of businesses post lockdown. And on that scenario, if I start first with the water businesses, South West Water and Pennon Water Services, I just touched on expected credit losses. And yes, we will be monitoring those impacts in that year 2021. However, as I said, we have provided GBP 9 million in 2019/'20, and actually cash collections are remaining robust. And we have good measures in place, both through PWS for businesses that are struggling and also for South West Water for households who find themselves in circumstances where they need our support.
Looking at revenues. So in terms of the impact of the stay-at-home measures and the lockdown, if I perhaps, first of all, talk about business customers, we know some businesses have not been able to trade through that lockdown and about 1/5 of our revenues come from business customers. We have seen demand reduced by around about 20% for those business customers. And necessarily then, that will obviously impact revenues.
Having said that, with the stay-at-home measures, we have seen increased household demand. And metering for our households is up at 84%. So we can see that, that increase in consumption is coming through. As a net position then, we anticipate revenues being about GBP 10 million lower as a result of the impacts of COVID-19.
Just looking at the Viridor side of the business, at Viridor, predominantly now [in terms of its] activities focused on energy recovery facilities, a good resilient ERF position backed with strong local authority contracts. There are some commercial -- smaller commercial customers that Viridor supply services, too, and we have assessed some of the credit impacts for those small commercial customers, but the impact is much smaller. So that just gives you an overview of COVID-19 and the financial impacts of it.
So moving on to the results for 2019/'20. First of all, I'm just going to talk through the table that we have in terms of results and the layout of that. As Chris said earlier, we are going through the sale of Viridor, but we have owned Viridor the entire 2019/'20 financial year and, in fact, we still own Viridor.
So in terms of these results on the table, on the left hand side, given the accounting standards, mean we represent Viridor as a now discontinued operation to the group. On the left hand side, the continuing group represents South West Water, Pennon Water Services and Pennon (the company ).
On the right hand side of the table, I've put together the continuing group with Viridor. As I said, we've owned Viridor for the entire financial year, and it aids comparability of the results year-on-year by doing that. So with that explained, I'll move on to the actual results.
So a solid set of results for 2019/'20. And I'll start first with the underlying results. Revenues, as we noted at the half year results, are down year-on-year. That really is as a result of the cessation of Viridor's Greater Manchester contract, which has had a little impact on the EBITDA, and also demand reduction to South West Water, driven by weather, it's been a wetter year in 2019/'20 than it was in 2018/'19. So revenues have fallen. However, EBITDA and adjusted EBITDA are up 3.1% and 4.6%, respectively. And that's as a result of good operational cost control across the group, delivering on our services and delivering on our financial outcomes.
Necessarily with the amount of investment that we have in our capital assets across the group, depreciation and interest have risen in absolute terms as a result of that investment. However, interest, looking at the effective rate that we pay on that debt that we raised, has reduced year-on-year. So efficient financing is in place.
If you look at the profit before tax on an underlying basis, that has, therefore, increased year-on-year by some 2.6%. So we've got a solid set of results for the group.
In terms of non-underlying items, there are a small number of items that we pull into the non-underlying items line to give a more representative view of our results year-on-year. The non-underlying items is a credit of GBP 13.9 million for 2019/'20, the largest element of which is the benefit we got from crystallizing a mark-to-market benefit of derivatives that we have over 2040 South West Water bond. So profit before tax has increased by some 15.8% and then tax has increased significantly year-on-year, really as a result of the deferred tax charge with the change in the government's headline corporation tax rate now staying at the 19% and not reducing to 17%. So on an after-tax basis, there's a 7.3% reduction. But on an adjusted basis for earnings per share, if we remove that deferred tax impact, then we're up 6.7%, and dividend per share for '19/'20 is up 6.6%.
So just moving on to look at the subsidiary performance in a bit more detail and starting first with South West Water. So '19/'20 is the final year of the K6 delivery period for South West Water, and South West Water has performed year-on-year through that 5-year period and delivered continued outperformance and delivering the highest sector returns.
If I look at the income statement for 2019/'20 and start with the underlying results, revenues are reduced. As I said earlier, as a reflection of the demand reductions due to the wetter weather that we had in '19/'20, and given our high customer at metered base, and obviously, we have those volume impacts. There has been a tariff increase of 0.6%. And one thing to note, where revenues are lower than those determined by the regulator, then there is a true-up mechanism to get those back in subsequent years.
Key effort that is focused on the South West Water is the cost base. Delivery of efficiency continues. Momentum continues. And you can see that overall cost reductions of 3.6%, that's after the fact that we've had average inflation of 2.4%. So efficiency is very much offsetting inflation and weather-related costs that we had in '18/'19 not repeated. And even if you take those into account, our costs are lower.
In terms of non-underlying items for South West Water, we have the fair value of the 2040 bond swaps, which come into there and that obviously is an opportunity that we took in '19/'20. And we also have the impact of the COVID-9 (sic) [COVID-19] provision that we have added to our doubtful debt provision for that year.
It's worth noting that in terms of being able to mitigate the impacts of collection issues and performance that may arise from COVID-19, the South West Water is on a trajectory of continued improvement in that area. And pre the provision for COVID, bad debt as a percentage of revenue was at 0.5%, and that has fallen from 1.7% at the start of the K6 period. So we're in a very good place to mitigate any impact. And then lastly, looking at the return on regulated equity, again, another year of strong performance of South West Water, 12.1% and, cumulatively, bringing that to 11.8% for the K6 period.
So just moving on to Pennon Water Services, our business retailer. In terms of the income statement for Pennon Water Services, you can see revenues are pretty consistent year-on-year. And while we have had some attrition on the South West Water wholesale side, that has been mitigated with other customers that we have gained as wins outside of our area. And Pennon Water Services is performing well in the sector.
The focus of Pennon Water Services in '19/'20 has been to reduce that unit cost to serve. And there's been some investment made either through automation, through allowing more self-service for customers, that has allowed that to happen. And costs and -- administration costs and operating costs have reduced as a result of that. You can see that coming through into the EBITDA line, where EBITDA is higher for '19/'20 than it was the previous year. And indeed, cash generation has increased.
The non-underlying item for COVID-19 of GBP 5 million really reflects our view given the lockdown impacts for the customers that PWS serves of the potential credit impact on those customers. However, as I said earlier, cash collections have remained strong in April and May. And again, for PWS, in the same way I talked about South West Water, their debt as a percentage of revenue, their debt charges as a percentage of revenue, less than 0.5% pre COVID. So again, PWS is in a very good position to manage those impacts going forward.
And Viridor, very solid delivery from Viridor in '19/'20, a good strong set of results. Revenues, really reflecting that cessation of the Greater Manchester contract, by far and away, the largest impact there and some reduced revenue from recycling given some of the headwinds on the paper side. But EBITDA up 10.7%. And you can see that the performance with the energy recovery facilities, ramp-up from Glasgow, Beddington and Dunbar and availability of 90% for that fleet. So good performance. And Avonmouth into commissioning, as I've said it would be in '19/'20.
Landfill and landfill gas really benefiting from pricing. Volumes for landfill slightly down year-on-year, but pricing holding and good generation with the investment that's been made into the landfill gas assets, and good generation of gas and gas yield.
Recycling. There have been headwinds in the paper recycling markets, but obviously, Viridor has positioned itself to mitigate those impacts and the pain/gain share mechanisms with the contracts in place have helped to mitigate that, but recycling is lower year-on-year.
And another aspect we just pull out for Viridor is the indirect costs. So real focus has been on the cost base and reducing that. And indeed, those indirect costs have been reducing year-on-year and certainly have reduced by some 20% over the last 4 years. Overall, then, a good set of results for Viridor. Profit before tax up from 18.2%.
So just going back to the Pennon level and looking at those non-underlying items. As I said, a small number of them so that we can give a more representative view of performance year-on-year. COVID-19 expected credit loss for Pennon Water Services, a GBP 5 million charge; South West Water, GBP 3 million charge; and Viridor, GBP 1 million charge. The derivatives, that's the mark-to-market benefit that we've had through from settling the swaps that sit over that 2040 bond, and we have the opportunity to do that. We got an income statement benefit there, GBP 18 million, and a cash benefit of GBP 87 million that we'll see coming through into the cash flows.
Some charging up around the Greater Manchester contract with some past service credits for pensions. But by far, the biggest impact on non-underlying items is the change in rate of tax with the headline corporation tax rate no longer reducing to 17%, but staying at the 19%.
So just sticking with tax and looking at that in a bit more detail. So in terms of the group and in terms of our approach to tax, we've been through quite a process with stakeholders and reflected some of their views in our strategy, which is why for the second year we've been accredited with a Fair Tax Mark. Overall, our tax contribution for the group is some GBP 278 million. So it is a large area for us to manage. And our Fair Tax Mark accreditation obviously demonstrates that transparency and best practice that we have across the group.
For the purpose of this presentation, I'm going to focus on corporation tax. And if I was to look at the current year tax, pretty consistent year-on-year at around GBP 55 million. The effective rate slightly lower on a current year, current tax basis, so that really reflects the mix of the investments that we've made. Prior year credit of GBP 2.7 million. Obviously, the group our size, there are estimates that we make and have discussions of HMRC, which we then close out on an annual basis, and those credits just reflect some of those assets being resolved. Overall, then, the tax charge with a deferred tax and non-underlying item means our statutory tax charge is up to GBP 95 million for this year.
So just moving on to the net debt movements and the cash flows. As you can see, in terms of our opening net debt and our closing net debt before the impact of IFRS 16, as you can see in terms of our opening net debt and our closing net debt before the impact of IFRS 16, there is a slight increase in net debt, but the pleasing thing to see for the group is very strong cash inflow from operations, obviously, helping fund that capital investment you can see on the right hand side.
We've had the settlement of the derivatives, the GBP 87 million that's come through. And then we have our responsible contributions to the pension scheme, our tax that we pay, other taxes and corporation tax, and then our payments to providers of finance, be that either debt holders or equity holders. So you can see there that our net debt has increased year-on-year, but marginally. The impact of IFRS 16 has no debt covenant impact, but you can see there, it is GBP 137 million which adds to the overall net debt position.
So just looking at that balance sheet and that net debt position in a little bit more detail. The group net debt at GBP 3.264 billion. I have shown for the presentation today, the split between an implied Pennon company debt, South West Water and Viridor. Obviously, with the Viridor transaction, the Viridor debt will fall away and then you'll be looking at the implied Pennon Company's debt and South West Water's debt.
Gearing levels at pretty stable year-on-year. You can see there at around about 65% for the group. And South West Water's debt to RCV broadly aligns with the notional level for K6, 62.5%.
In terms of managing the impacts of COVID, we're in a good position in terms of our cash and committed facilities with GBP 1.6 billion available to us. And we have had the strategy of having a mix and a diversified mix of funding to achieve good overall effective rate for our operations. We're also very pleased that we've been raising our financing through the sustainable financing framework, matching those sustainability objectives to the debt that we raise and paying interest according to how well we perform. And we've raised GBP 845 million since we launched that in 2018.
In terms of balance sheet optimization. Just to note that following the year-end 2019/'20 year-end, we have called and repaid the perpetual capital securities of GBP 300 million that will obviously add to the implied Pennon Company debt level. And we have the opportunity to optimize facilities post Viridor sale.
So just looking at the effective rate for that financing that we raise, whilst in absolute terms the net finance costs have increased, the interest rate and the effective interest rate has reduced year-on-year, both Pennon and for the water company.
The chart that you will see in the presentation looks at where we've been hedging our floating rate debt ahead of the new regulatory period for K7. Majority of debt within the water business is floating rate and, therefore, we fix that with hedges going into new regulatory period. And we've fixed around about 60% of South West Water's floating rate net debt for that period.
The chart on the right hand side with the red ellipsis shows where we have been hedging in terms of those swap rates. And in effect, if you compare the rates that we are hedging now compared to K6, so K7 to K6 is about a 60 basis points reduction.
So just going back to the sale of Viridor and just to talk through where we are in terms of timing for that. As Chris said earlier, it recognizes the strategic value with a GBP 4.2 billion enterprise value and an EV to EBITDA multiple of 18.5x.
In terms of progress, good progress is being made to completion. We have 3 conditions precedent before completion can occur. The first is Pennon shareholder approval, which we gained last week; European Commission merger clearance, which was received early May; and the last condition precedent, which is to do with swapping out Pennon for KKR with some of those parent company guarantees that are in place, good progress is being made with the expectation of completion early summer 2020.
Cash proceeds of GBP 3.7 billion. We've announced previously that in terms of the use of those proceeds, the Board will be considering that when we obviously get the proceeds and we complete the transaction, the areas we will be considering.
You saw from the previous slide, we've got GBP 822 million of Pennon Company level debt with hybrid crystalizing then we've got about GBP 1.1 billion. So we'll be considering what the appropriate capital structure of Pennon Company level will be going forward. We'll make some responsible payments into the pension schemes. And we want to look at growth opportunities for the business going forward as well as a return to shareholders to reflect that transaction.
So lastly from me, in respect of the dividends, obviously, a majority of our shareholders, our pension funds, charities, small retail holders, dividend income is important to them. Looking at the 2019/'20 dividend, full year dividend of 43.77p per share, up 6.6%, reflecting our policy of increasing for that period by 4% above RPI. Interim dividends paid, and we're recommending a final dividend of 30.11p per share, with dividend reinvestment plan available for those shareholders who want to reinvest.
So looking forward for the dividend period for K7. The continuing group, which is Pennon, Pennon Water Services and South West Water, we've considered what that dividend policy will be for that continuing group. And if I take the 43.77p per share for '19/'20 and consider what the crystallization of the Viridor sale has done, that means the continuing group at dividend for '19/'20 would imply a 21.11p per share.
In terms of growing that dividend going forward, we've looked at a sustainable growth policy, given our expectations of outperformance with South West Water, given our sector-leading position and a sustainable dividend cover. And we have reflected the change in the regulatory methodology in indexation to move from RPI to CPIH, which will match allowed revenues. So our new dividend policy going forward will be CPIH plus 2% per annum out to 2025.
And with that, I'll hand over to Chris.
Christopher Loughlin, Pennon Group Plc - CEO & Executive Director 
Thank you, Susan. So given the imminent sale of Viridor, I'll concentrate my remarks now on the operational highlights for the continuing water business; South West Water, Bournemouth Water and Pennon Water Services.
So we're continuing to deliver for the customers and the communities we serve. And as I said, delivering the right way, being consistent and true to our values. Now values are to be trusted, progressive, responsible and collaborative, and that's how we've been responding and delivering our results.
So these are the 3 areas I will be talking about in this sort of operational review; how we've responded to the coronavirus challenge first, the continued delivery and strong performance through the previous 5-year period and then looking at how we're preparing and how we're making a fast start to the coming 5-year period, K7. So that's what I'll be covering.
So starting with the impacts of coronavirus. We started and focused initially on the health, safety and well-being of our employees and our customers. And if you cast your mind back to, say, middle of March when the implications of coronavirus is starting to become clearer, it was obvious it would start in that place. And we made an early decision and an early commitment to make full payment to all our employees, whatever their circumstances, whether they're isolating at home with symptoms, whether they're protecting a shielded relative, whether they're having difficulty with child care and so forth. So we decided to maintain full pay, whatever the circumstances. And we decided to do that without government support because a company like Pennon, which is a strong liquidity, it's not appropriate to ask for government support.
So we've made swift changes, of course, to our working locations and our working practices. And I'm pleased to say that our technology and IT infrastructure held up very, very robustly to those changes. But given that we have so many people working at home, so many loan workers, so many new working practices, it's absolutely essential to retain extensive staff engagement in these circumstances and that's whether it's video, breakfast meetings, daily newsletters or indeed a dedicated online information service and facility on our company intranet. So that was our initial focus.
Our next focus, of course, was to making sure -- make sure that we maintained essential services. And I'm pleased to say that we've -- from the very beginning, all essential services have continued without interruptions. And indeed, the vast majority of our services have continued -- are continuing now and overcoming the problems. And that includes the delivery of our capital schemes as well, working with our partners to ensure safe working practices.
Just as a side to note in the middle of all this, on the 1st of April, we had to expand our service area to include the Isles of Scilly and that was successfully transferred on schedule.
So another priority, of course, was understanding that our customers would be having financial stresses and pressures going forward in these difficult circumstances. So our approach was to build on the well-established support mechanisms we have in place already. So we provided additional funding to support the affordability schemes that we have in place, the social tariffs and so forth. And that meant that 60,000 of our customers are benefiting through these whole range of support programs.
Two interesting asides or anecdotes is that we wanted to get access to the government's database for shielded customers, those were shielded for medical reasons or for elderly customers and so forth. But for one reason or another, the industry wasn't able to receive that database. So we, as an industry first, set up our own online register to ask our customers to tell us, and we needed that in case there is an operational difficulty where we needed to get, for example, bottle water out to their homes quickly. So that was successful.
And another interesting aside is the photograph on the bottom right hand side there. We heard in Cornwall, the NHS was having difficulty providing medical support to the remote rural areas. So we've loaned them one of our mobile incident support vehicles, so that became -- has become a medical consultation room and indeed a testing center as well. So that's how we've dealt with the coronavirus.
So moving on to how we've gone through the 5-year period just gone by, the K6 regulatory period. We've seen strong delivery and strong performance. And I pick out a few highlights, starting with customer service. We've seen a transformation in South West Water's customer service. And those of you can remember that perhaps going back to the beginning of the 5 years, this wasn't necessarily an area of strength for us, but it certainly is ow. We're at the top or very nearly at the top of the customer service metrics. We've seen a step change in SIM, the service incentive mechanism. You can see that chart in the middle there showing how we've gone from below average to significantly above average in the 5-year period.
And there's a whole range of statistics that will back that up. So written complaints have more than halved in the 5-year period; customer waiting times in the call center down to less than a minute; unwanted contacts down by 40%; complaints raised to the independent Consumer Council for Water down by almost 2/3.
And interestingly, customers understand and accept that from time to time things go wrong, but what's important to them is that we fix them quickly and without fuss. And we're pleased to see that our operational contract -- contacts are resolved. 96% of them resolved at the first time of asking, which is a great metric.
So there's a whole range of things I could talk about. We've had a very strong performance, as I say. But looking at some of the operational metrics, I won't go through all of them there. But it's been a transformation and an excellent performance overall.
So bathing water quality important in our part of the world, 99% meeting quality standards. The 2 bathing waters that failed had nothing to do with our assets. We've met the leakage targets every single year since they've been set. We've maintained our asset reliability throughout the whole of the period. Supply interruptions more than halved in the 5-year period and so on and so forth. Taste and color contacts down by 44% over the 5-year period. So very strong performance.
But looking at environmental performance, it's more of a mixed bag, and it does remain an area of focus for us. But it has been -- we have seen progress during the course of the 5 years in terms of compliance with permits, numerical permits or indeed descriptive permits. We're now at or above industry average in that regard. And in terms of the more serious pollution incidents, the ones that have significant or serious environmental harm, we've dramatically improved there. And last year, for example, we only had one of those incidents right across our pouch.
But in terms of the minor pollution incidents, the ones which have minimal or very limited impact on the environment, that is still stubbornly above where we would like to be. So that remains a target for us, and it remains a key area of focus.
So looking at return on regulated equity, Susan talked about it, but it's been a very consistent performance every single year. The 11.8% that Susan talked about has been delivered year-on-year, and we've outperformed in every single area in every year and looking at how we closed out to the 5-year period, 12.1% in the year just gone by. So every single year.
And we've outperformed in every area, as I say, so in totex, financing and ODIs. And totex, you can see that we've delivered GBP 300 million of savings, which is reducing bills and improving service, we can use that for. But that represents a 15% outperformance on what was allowed at the last FD.
So we're continuing to share fairly between our customers and our shareholders. Delivered over GBP 140 million of benefits over the 5-year period and enables us also to have that GBP 20 million share scheme, which we've proposed in our business plan, which we'll be rolling out from the coming year.
So that was the 5-year goal. And looking at the 5-year coming forward, the K7 plan and delivering our fast-track plan there. Starting with RORE. As I think many commentators will know and understand that the PR19, the price review process, reduced the returns -- the potential returns to the industry through a lower base return of 3.9% compared to about 6% last year through a whole range of mechanisms. What we've done with this chart is on the right hand side is we've shown the 11.8% the cumulative RORE performance over the year, just the 5 years just gone. And we've restated that with a new metrics with our current performance into the new metrics. And that shows that the industry-wide changes moves at 11.8% to 9%.
And on the far right hand side is what Ofwat assess is a reasonable outcome for South West Water. Now as you can say -- as you can see, there is a challenge there, but it's not as dramatic a challenge as it might first appear. So South West Water is continuing to target outperformance in all areas for the coming 5 years. And we do see the potential for doubling those base returns, doubling that 3.9%.
So looking at all sorts of operational metrics, and we do have confidence in the future. And the reason we have confidence in the future is that we've had a strong track record, as I've said, of delivering in the previous 5 years and indeed earlier than that. And just picking out some of the highlights in that regard, and we've got a significant investment program to enhance our facilities. Clearly, we're going to target the investments in the early years to improving and getting key target ODI metrics where we want them to be.
We've got a significant investment in new drinking water facilities, particularly down in the Bournemouth Water area, where we're going to build 2 new water treatment plants, mirroring the one that we built in Plymouth in -- North Plymouth works, the innovative works, which is the Mayflower works, which is on the top right hand corner of that slide. And of course, we'll be focusing investment into improving our environmental performance and, particularly, our minor pollution performance, as I said.
I mentioned Isles of Scilly, but Isles of Scilly was successfully transferred on the 1st of April in the middle of the height of the anxieties about the coronavirus. And that is an industry first. It's the first time we've -- any company has had a new service area added on to its existing service area, and that's required quite a lot of collaboration from all the regulators, all the stakeholders, and all that's gone very well. All the teams are now fully operational, the assets are transferred, and we're starting to deliver those improvements for the customers on the islands.
So a few words on Pennon Water Services. As Susan mentioned, this is a high-quality business, delivering well. And we all know that it's a very difficult marketplace. We've seen a number of the non-household retailers struggling over the recent years. And indeed, I think a couple of the more minor players have ceased trading altogether. But that's not the case for Pennon Water Services. This is delivering a high-quality customer service, which is very important. We're in the top 3 position in terms of our market performance, in the Trustpilot score, you can see there of 9.1 out of 10, which is very creditable. And as Susan has mentioned, underpinning that strong performance has been a focus on operating cost efficiency, but also making sure we control our revenues and control our bad debts going forward.
So a strong performance. Just a word on the coronavirus implications. As I said, a number of the retailers, non-household retailers, have been struggling. And the regulator has put a regulatory safety net in place to defer payments to wholesalers to maintain their liquidity. Just to say Pennon Water Services hasn't had to do that. Obviously, we are not absolutely certain about the future, but we haven't had to do that to date. So that's it.
So to summarize our results. I mean it's been -- as I said originally, it's been an unprecedented year, but Pennon has emerged strongly from those challenges and those external events. We've responded well and continue to respond well to the coronavirus impacts. We've delivered good results right across the board, and we've maintained the momentum from previous years. And we've continued to create value, obviously, through the sale of Viridor, and we have confidence in the future and announced a new sector-leading dividend policy.
So that concludes our results presentation. Thank you for listening. And we hope you'll have the opportunities to dial in to listen to the question-and-answer session, which will follow shortly after this video. Thank you very much.