U.S. Markets open in 6 hrs 50 mins

Edited Transcript of PNN.L earnings conference call or presentation 29-Nov-17 9:30am GMT

Half Year 2018 Pennon Group PLC Earnings Presentation

London Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Pennon Group PLC earnings conference call or presentation Wednesday, November 29, 2017 at 9:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Loughlin

Pennon Group Plc - CEO & Executive Director

* Susan Jane Davy

Pennon Group Plc - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Dominic Charles Nash

Macquarie Research - Former Head of European Utilities Research

* Guy MacKenzie

Crédit Suisse AG, Research Division - Equity Analyst

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* Jenny Ping

Citigroup Inc, Research Division - Director and Analyst

* Lakis Athanasiou

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Good morning, everybody. I think everybody is settled. Thanks very much for joining us. And can I just say, welcome to the Pennon half year results for 2017, '18. Can I just start by saying thank you all for coming. I know how busy you are. It's a busy time of the year. So thanks for giving up your time this morning, and we really appreciate it. So thanks for being with us.

It will be the usual format. That's to say, I'll do a few minutes of overview and high-level messages. Susan will go through the financial results in more detail. I'll come back and do the sort of some of the operational highlights -- this -- some of the operational highlights, and then, we'll hand over to questions and answers for you to ask us any questions you have. So that's the format. So that's how we'll try and take our time.

Joined by many of the executive team with us here today, but most notably -- the Pennon executive team, but most notably the Managing Director of the Viridor business, Phil Piddington, the Managing Director of the wastewater -- sorry, the water -- South West Water and Bournemouth Water, is what I'm trying to say, which is Stephen Bird here as well. But that's who we're with. That's who's with us.

I'll trust you all to read the disclaimer. I'm sure you'll read every single world of it and you'll absorb the information correctly.

So moving on to the overall -- the overview from me. So I guess if I translate it in one sentence, it's a good solid robust set of results from Pennon, both in water and waste. And we're focused on delivering for our customers, delivering for the communities we serve, and of course, of relevance this morning is delivering for our investors. So that's the one sentence or a couple of sentences overview from me.

And now just, before I go into the high-level messages, and before we present the results, just to recap, what we said, a bit of background or information for you, overview, is the fact that we've always, in Pennon, always focused on -- tried to focus and focused on our customers and the communities we serve. We're very, very mindful of the trust that our customers and the communities we serve put in us, and therefore that brings responsibilities. And that's true in water, and it's true in waste as well. And we're always mindful of that responsibility. And therefore, if we do have outperformance, and you will see that we do have outperformance, we always want to share that equitably and fairly between ourselves, that's to say our shareholders and also the customers that we serve.

So that's a backdrop. We've always had that in our mind. We've always delivered like that, and that will be the backdrop going forward as well.

So turning to the results themselves and starting with the water business. As you can see, it says there we're on track to deliver against our business plans. So that's the current business plan, and we're halfway through the current year business plan now, 2.5 years through the 5-year cycle. And we're on track to deliver all of our commitments that we made in the last time we did the [price] review, PR14. Why emphasize that? And why that's important is, as Ofwat start to prepare and look for the PR19 process, and as we submit our business plans as companies and Ofwat assess them, one of the explicit tests going forward is whether or not we've delivered on what we promised we would deliver in this 5-year cycle. So we're absolutely on track to deliver everything we promised in our business plan in this 5-year cycle halfway through.

And that includes the ODIs. That includes our ODI commitments, and that's no small feat. That's no small achievement, because as an enhanced company, we tended to have more financial ODIs than any of the other water companies. And of course, we inherited the Bournemouth Water ODIs as well. So we ended up with, I think, it's 36 financial ODIs. So to have -- on track to deliver against all of those is no small achievement. And of course, once we have delivered against those ODIs, that gives the opportunity to think about reinvesting in our services, or indeed, mitigating and reducing our prices.

And one statistic that we'd like to sort of share with you is our bills are now lower than they were 8 years ago. So the bills in real pound note terms are lower than they were 8 years ago. And the WaterShare mechanism is a transparent way of taking that outperformance I've talked about, sharing equitably between ourselves and our customers, our shareholders and our customers. And that's working, and I'll give you some more detail of that. But I'll say, it gives us the opportunity to focus on reducing bills or improving services.

We've always tried to work in long-term partnerships. Throughout the Pennon operations, so that's water and waste. And that's very true of Viridor as well. And a particular highlight is the Greater Manchester contract, which as you know is a large waste management contract for Viridor. It's been the focus of attention for a little while. Very pleased to say that a lot of hard work working with our partners and friends in Manchester, we've come to a mutually satisfactory outcome. A little bit more detail about that in a moment.

So that's the backdrop. Robust financial operational results as I've talked about, and the water continue to have sector-leading RoRE performance, consistently over 11%, outperforming in the 3 components, that's to say financing, Totex outperformance and ODI outperformance continuing, and we're confident about the future of that.

The Bournemouth acquisition, the merging of the 2 companies together under one license. If you merge under one license, that enables you to really get the synergistic benefits of having the 2 companies together. That's complete now, and that's enabled us to strip 25% out of the cost base of Bournemouth, which delivers greater efficiency and, of course, lower bills going forward.

So water going well, equally so in the Viridor business, and the ERF portfolio is one of the highlights for us. You know we've invested very heavily in the ERFs. We've got a fleet of 12 ERFs, 8 in operation, 3 in various stages of commissioning, and one, the Avonmouth one, [in full-scale] of construction right now. And that's performing well and helping us to deliver going forward.

Our focus on efficiency, that continues. We continue to focus on efficiency, doing that both in the water business. I've talked about Totex. We're also doing it in the waste business, but also at a group level by bringing the group a bit closer together. We committed to deliver GBP 17 million per annum in efficiencies by the end of the period, and we've already delivered GBP 11 million. So that's just the group-level efficiencies.

So a good, solid set of results, focusing on the future, and this is probably growth going forward. I mean, probably, we have -- this is what differentiates us from our other water peers, really, that we have the Viridor growth kicking in now. So obviously, we have what we regard as a top-performing water company. We think we're uniquely well placed to prepare for the next price review, PR19. But what's differentiating us from our water peers is the fact that the investment in the ERFs, the cash flows coming out of the ERF are starting to ramp up and ramp up towards 2020. And that will give us this growth kicker over and above whatever comes after PR19. So that's going well, and we're very pleased with the progress we're making.

So all of the above, all of the above, helps us continue with our dividend policy of growing dividend by RPI plus 4%, which has been a long-established dividend policy. Almost into a decade of that dividend policy now. So all in all, good solid results.

And I'll hand over to Susan to go through financial results in a little bit more detail. I did not switch that off for you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

All right. Thanks, Chris. Okay. Good morning, everybody. In terms of the financial results for the half year at 2017, '18, robust set of financials this half year period, very much supported, as Chris said, by the good operational performance across the group, and underpinned by a strong balance sheet, which all goes to support that sector lease and dividend that Chris just touched on.

Just looking at the financial highlights in a bit more detail. Key performance indicators for the group all increasing compared to prior period. If I first start with the underlying results and look at adjusted EBITDA is at 3.1% compared to the prior period, and profit before tax on an underlying basis is up 2.3%. In terms of adjusted EBITDA for the water business at -- very much at continuing at the cumulative performance we've seen in terms of outperforming financially at that regulatory business plan and the structuring determination that we received, continuing the focus on efficiencies.

In terms of Viridor, strong performance for Viridor activities. In terms of ERF performance, that now accounts for, on a kind of gross EBITDA basis, almost 2/3 of their performance on the Viridor side, and a good strong performance from ERFs coming through. Our performance in EBITDA flows through to profit before tax. In terms of finance costs in absolute terms, they have increased period-on-period. In terms of the overall effective rate, it's 3.7% for the group, and still very much sector-leading in terms of that efficiency.

Just moving from underlying results to statutory positive results. And as is usual, we've excluded a small number of items to give a more representative view of our underlying results. At this period, you can see the impact of those very much reduced compared to prior periods. Those items represent 2 aspects: one, Chris mentioned, the Greater Manchester contract reset. We have previously reported we expected a net non-underlying, nonmaterial impact from that, and that's certainly what we've had in this first half year. And we've also, as usual, excluded the movement on derivatives associated with one particular instance we have out to 2040 in South West Water.

So in terms of our statutory results, our statutory profit before tax is up 26.8%, and statutory profit after tax is up 26%. Looking at EPS, both on an adjusted basis and a statutory basis, ahead of prior period. EPS, on an adjusted basis, up 7.2%; and statutory, up 23.2%.

So just looking at the financial performance of the subsidiaries. Starting first with the water business in South West Water. In terms of revenues, up 2.6%. We have had a net tariff increase this first half period for '17, '18. We have also seen higher demand coming through, both in terms of consumption but also in terms of new and structured connections given the infrastructure investment that's going on in the region. And that's net of the impact as we have year-on-year for those customers switching to a meter.

In terms of EBITDA, as I said, very much focused on the cost base initiatives in the water business. In terms of cost increases, there's a slight increase in costs period-to-period. But in terms of the rate of increase, very much kept below the headline rate of inflation of 3.7% for this first half period.

Cumulative Totex efficiency of GBP 159 million has been achieved since the beginning of this regulatory period, and about 1/3 of that has come through in operating cost efficiencies compared to the business plan.

One area we've really been focusing on, on the retail side and on the household side, is the cost to serve, and one aspect to that is bad debt. In terms of our positioning in retail cost to serve, we seem to be very much at the efficiency at frontier, if you excluded bad debt costs. So the bad debt are the ones we've been concentrating on. Bad debt as a percentage of revenue has fallen again. As of this period, it's now 0.9% of revenue. At the end of K5, it was 1.7% in terms of percentage of revenue. So going in the right direction.

And just finally, in terms of the measure for overall financial performance, looking out for this regulatory period, return on regulated equity at the first half period, 11.1%; at -- cumulatively for the K6 period, 11.8%. On our measure that feeds into our WaterShare mechanism, I know, obviously, Ofwat calculate it in a slightly different way, but you can see there, just comparatively, however you look at it, it's sector-leading. And in terms of base returns, almost doubling those against the allowed level.

Just moving on to -- at Viridor then. Strong performance from Viridor for this first half period. Looking at the activities and how they're feeding through into EBITDA and adjusted EBITDA. At ERFs, as I said, good operational performance. Availability across the facilities has been up over 90% in the first half. In terms of the waiting for the numbers, EBITDA for the first half period has slightly increased. We've had availability that's been pretty consistent period-on-period, but we have been able to generate more power by focusing on the efficiency in that area and looking at the cost base.

In terms of H2, we do expect H2 wasting on the area side because we have the financials for (inaudible) coming through in H2. And we also have increased pricing from the power generation in H2 of that winter period.

In terms of landfill and landfill gas, we've talked about our strategic focus of reducing to a small number of sites open to waste arisings. But we're being very flexible with that, depending on commercial availability in the market. We've actually seen landfill volumes increasing from the back end of '16, '17 into '17, '18, and pricing is holding up. We've had about a 4% increase in pricing. So you'll see that coming through in the results, pretty consistent period-on-period. Landfill gas, a slight reduction in volumes, and as a result of focusing on engine maintenance and replacement. We don't expect that to reoccur going forward.

Recycling. Slight reduction in volumes, but in terms of margin, slight increase overall. And the EBITDA, very much consistent with prior period. As I've said, focusing on costs on the Viridor side, and indirect costs heading in the right direction as showing how we are focusing on those cost base initiatives. So good set of results from Viridor for the half year.

Just very briefly touching on Pennon Water Services. This is our new joint venture, 80-20 joint venture, with South Staffordshire Plc that started in April this year, as the markets opened. In terms of performance, PWS very much growing in that new market, one of only 4 retailers to have achieved net growth, very much focusing on enhancing contracts to customers and delivering good service to them. So financially, you can see not material in terms of the overall Pennon Group, but very material in terms of the service differentiator for us and how we're delivering good service to business customers.

In terms of the first half '17, '18, there have been some setup costs, about GBP 1.5 million of setup costs, which again, we don't expect to recur.

So again, that's the group level, and looking at capital investment across the group. As said previously, that we expect '16, '17 and '17, '18 to be the peak years in terms of our capital investment, and you can see that from the graph here for those 2 periods. On the water side, whilst we've seen, as you can see on the right-hand side, a kick up in investment in water, that's very much following the regulatory business plan, focusing in the areas you can see in the above box and at least the new water treatment works in Plymouth.

On the Viridor side, dominated, really, by the energy and recovery facility program. Expenditure to date has been GBP 1.26 billion, and we've got another GBP 0.25 billion before we finance that portfolio through to 2021. But progressing well.

Just very briefly on corporation tax. Overall, corporation tax has increased from H1 '16, '17 to H1 '17, '18, up to GBP 17.5 million. In terms of, first of all, looking at current year -- current tax. In terms of our headline rate, because we are investing quite significantly across the group, we are able to claim cost allowances, which is what the tax system incentivizes companies to do to increase that investment. And our effective rate, therefore, is 10.9% against the headline rate. In the prior period, we just have charges related to Peninsula MB, but was ceased in the prior financial year, which have not reoccurred this period.

And last, as you'll see, on the deferred tax side. There was a large credit that came through that's not been repeated as the headline corporation tax rates were announced to fall. So overall, net tax, slight increase period-on-period.

Just looking at the balance sheet now, looking at net debt and how that's moved. Net debt has increased by 4.7% in the period, but we are seeing strong cash inflows from operations, as you can see from this chart. And during the period, we have refinanced perpetual capital securities. And there's a net impact to that of GBP 8.1 million. And on the right-hand side of the chart, you can see the large outflow for the capital investment that we are making.

Just one other thing to note on that chart, in terms of the dividends, because of the way we've now structured our reporting, then both the interim and the final dividend will hit at the first half year results. You'll see them coming through.

So just looking at the balance sheet in a bit more detail. As that net debt profile has increased over this half year period, but very much in line with our expectations given the investment that we're making across the group. We do continue to have that diversified funding mix in place and the predominance of finance leases as we have talked about previously. But that gives us a good maturity in terms of our debt profile, with an average maturity of 20 years.

In terms of our index-linking at the group level, it's 20%, and at the water business level, it's 25%. It is below Ofwat's notional level of 33% that it has in the business plan, which really gives us some headroom for that transitioning between RPI and CPIH, when that comes through.

In terms of our cash and committed facilities, a slight decrease from year-end. We've seen that -- reducing balance of that. And that's really just trying to manage availability of funding with the cost to carry. And development of the portfolio for this half year period is GBP 450 million of new renewed funding that have happened -- that has happened, including the GBP 300 million hybrid that we refinanced. The rate of that, we had a 2013 hybrid that was at 6.75% and the new rate for GBP 300 million perpetual security that we issued is now 2.875%. As I said there, low [service was a] sterling issue, and the book was well oversubscribed.

We're also looking at other aspects of funding, should really prepare us for the next regulatory period as we are fully funded now for the build-out of our engine recovery facility program as we are fully funded for the regulatory delivery plan for this regulatory period to 2020. There is some refinancing that we are looking at though. And previously, we talked about a financing with EIB, they've been a great supporter in the past of South West Water. Obviously, those conversations went rather quiet for a period while they were discussing things with government, but we are continuing those conversations now. However, we are also looking at other opportunities as well. And a big thank you to a lot of you in the room for your continued support in this area.

In terms of our gearing. Obviously, going through that perpetual security issuance. Our gearing is pretty stable period-on-period. The group gearing is at 64.8%, and water business, very much aligned with Ofwat's notional level in this area.

In terms of our investable capacity, that has increased, obviously, as a result of the hybrid and is now at over GBP 800 million. So that just really underlines the strength of our balance sheet.

In terms of the rate of financing for the instruments that we've got in place, we have seen an increase in absolute terms of finance costs. What's driving that on the South West Water side, we talked about the index-linking debt, so 20% of group, 25% at the water business level. Majority of that is linked to November RPI, and the November RPI has kind of almost doubled from period-to-period. So there's an absolute increase that has come through as a result of that, which has ticked the effective rate up. And then, at the group level, previously we had the benefit of an interest rate derivative in place that has given us about a GBP 4 million benefit per half year and that has now ceased. So again, the group level has just ticked up a little bit as a result of that.

But overall, you can see the chart on the right-hand side with Pennon and South West Water at the bottom of the graph and the water sector at the top. So it's still, compared to our peers, in a very efficient financing that is in place.

And then, finally, for me, in terms of our dividend, we're announcing today, an interim dividend of 11.97% -- 11.97p, up 7.9%. And that is very much in line with our 4% above RPI policy. We're also announcing today that as a result of the strength of our balance sheet, we are ceasing the scrip dividend alternative. But for those shareholders who do like to reinvest with their cash dividend, we will be offering a dividend reinvestment plan for '17, '18.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks very much, Susan. So as I say, I'll go through some of the operational highlights, just pick up one or 2 things, and then hand over to you for Q&A.

So I'll just pick out some of these themes here, of delivering for customers and so forth, so into a little bit more detail. So first of all, we're on track to deliver our business plan commitment. So I said that already. Customers are very, very much at the heart of what we're doing for South West Water.

So starting with the water business. I mean, we've seen GBP 7 billion of investment since the -- since privatization. And that investment, as I say, will continue to go forward in the periods beyond this current price review period.

A word about SIM. Bournemouth Water has always been top or nearly top of the SIM performance league tables, and that's where it continues to be. South West Water, it was an area of focus for us. And I'm pleased to say we've seen our best-ever SIM performance in South West Water just gone. We were ranked as the most improved, and this was an area of focus for us, as you remember me talking about before. We're now in the mid-range of SIM performances in the sector, and we're out of that sort of potential penalty territory that we were in before. So as we said, we're focused on that, bringing that up, and we're now a mid-pack performer, and we're intending to improve beyond that going forward as well.

So SIM is a strength for us. I must say, that all of these companies are starting to bunch together, so the differential between the top performers and the [least good] is now much tighter than it was before. So all good in the water business. Written complaints are down half since privatization, 30% down in the last year. Customer bills, as I said, is already -- already said, is 8 -- lower than they were 8 years ago.

We've always focused on affordability issues in South West Water. We've had in place now, award-winning schemes to support customers in vulnerable circumstances for over a decade now. Currently, we're supporting about 51,000 customers through those various schemes, and they've got plans to develop that even further as we move forward.

I mentioned ODIs before, 36 ODIs, on track to have all of those delivering by the end of the price review period. Currently, 33 are either in reward territory or in neutral territory. I'm picking out some of the highlights of that 21 consecutive years without any water restrictions, always a good leakage performance from us. Met our leakage target every single year since targets have been set, [to half] since privatization, and very close to our best-ever leakage performance this year just gone. Water quality standards, Bournemouth Water is top of the pack in terms of water quality. South West Water, very high performer as well.

Bathing water quality. New environmental standards came in from the EU -- or improved EU directives a couple years ago. Very pleased to see 98% of all of the bathing waters in our part of the world have achieved that new standard. That's no small achievement. Again, because we've got 1/3 of the countries designated bathing waters, 143 in our part of the world; 140 met that new standard, and the 3 that didn't meet that new standard, it was nothing to do with our assets. Our assets weren't involved in that at all. So that's good environmental performance from us.

Wastewater compliance. That is an area of focus for us. We've talked about that before. Pleased to see in terms of permit compliance, so that's actual physical permits to discharge into the environment, 98.4%, our best-ever performance, into the mid-pack of all of the companies in the sector now. And we're hoping to drive that forward by the end of the 5-year period. So we're out of penalty territory for that one as well.

Need to focus on pollution incidents. I think we talked about this at the Capital Markets Day a few weeks or months ago now. In terms of significant ones at -- environmental agency has 4 bans: serious; significant; minor; and sort of near misses or [missed] categories 1, 2, 3, 4. Ones and 2s, which are the more significant ones they've reduced, and most of the ones that they were occurring were amenity failures, if you call them that. So if something's happened, we warn the Breach Manager that there may be a problem. They put up a sign saying you may need to take care of bathing. That isn't actually an environmental breach, and most of the ones we're having are these amenity ones, which is a new definition now. But very small numbers there, so we've made good progress in that, a very good reduction on that.

So it's the minor ones, the ones that have minor or very little environmental impact, which is where we're continuing to focus. And that's where we'll focus ahead of us.

I talked about outperformance, and I talked about sharing equitably with our WaterShare mechanism. This is unique in the water sector and is a transparent mechanism. There it is. It's in our annual report. It's a transparent mechanism to say what is the outperformance and how should that be shared and there's rules written down about how that should be shared between customers and shareholders. And cumulatively, this half year, as you can see, GBP 68 million is available to reinvest in improved services or lower bills and GBP 74 million for shareholders.

That's all overseen by an independent challenge panel. These are community people, stakeholders, people that the -- customer representatives and so forth. And they oversee and give us guidance about where would be the best way to invest this, is it services or lower bills. That's all working well, and that's a unique thing for South West Water.

Update on RoRE. Susan's talked about it, but she talked about the 11.1% in terms of the WaterShare mechanism, how we calculate it in this half year. Cumulatively, as you can see, we're continuing to outperform the 6% base, which is the baseline that Ofwat set us in the 5-year period; 11.8% cumulatively. Outperforming in each of the 3 categories, as I've mentioned before. So Totex, GBP 159 million; Totex cumulatively over the 2.5-year period; ODIs in net reward territory. There was a bit of confusion earlier, about a few weeks ago, about what was in-period rewards and penalties and end-of-period rewards and penalties. And just to be clear about it, that's where we are, we're in a net reward territory of GBP 7 million.

Continuing financing outperformance. Susan has talked about that and showed her graph. That's GBP 83 million of cumulative financing outperformance. So sector-leading by come -- some considerable margin compared to the rest of the industry.

This is just an update on the scorecard of our ODIs. Remember, the areas of focus, the areas of potential for penalty or real penalty. Our task is to move everything up. And as I said, several of them that were in this territory have moved up, and we're focusing now on those minor pollution incidents, which we want to obviously improve our performance in.

So finally, in the water sector, just starting to prepare for PR19 and beyond. And I guess, the one takeaway message from this particular slide is the fact that as we saw in our 25-year or 30-year business plan through until 2050, we don't anticipate the investment slackening off in the periods to come. If anything, it will increase going forward.

Obviously, we see GBP 6 billion to GBP 9 billion coming forward through to the period of -- to 2050. That will be influenced by guidance from Defra to Ofwat, influenced by Ofwat's engagement with us. But most particularly, influenced by the research and customer engagements, stakeholder engagement that we do.

Those are some of the drivers, resilience and so forth. What we will have, and that's what we're consulting on right now, is choices about when to spend this and where to spend that and that's what we're doing with customer research. But like I say, the big takeaway message is we don't see that slackening in the 5-year going forward.

So turning to the waste business. Obviously, the natural place to start is on the ERFs, the Energy Recovery Facilities. We're very pleased with the performance we've made there. As I said already, that's the growth kicker that differentiates us from our water peers. As the earnings from the ERFs start to ramp up, that will differentiate ourselves from our peers. But we're focusing on optimizing the performance, harvesting the investment that we've made in the ERF facilities over the recent years.

Delivered a GBP 52 million EBITDA this half year. We expect it to be stronger in the second half year. But we're focusing on high availability of the plants. And that chart down here shows you the availability of our plants. The green ones are the wholly-owned and these are the joint venture ones by us. And as you can see, in excess of 90%. That's all to do with scheduled maintenance. I've talked about that before. It's all about scheduled maintenance, rather than breakdown maintenance, having scheduled maintenance to make sure you fix things before they go wrong, keep high availabilities. Best not to switch these things on and off or at least for prolonged periods.

We've often been asked what's our anticipation of the cost of that maintenance going forward. I think for the first time, we've given a little bit of guidance here, which is saying, compared to the capital cost, we think about 3.5% per annum will be invested in sort of the ongoing maintenance to keep everything running properly. That's a long-term average. It's tracking a little bit lower than that at the moment because the facilities are new so you don't need to do too much maintenance. So probably about 2% per annum of the capital cost. So that's a little bit of extra guidance that we've given there.

What's also important is the investment. We're often asked this as well. The investment is meeting our original assessments and our original base case business plan, not business assessments. And this chart here shows that. So here's the EBITDA contribution from the various facilities. And on top of the business case that we put forward and the investment case we put forward at the time, we are outperforming. So the fleet is outperforming and doing better than our base case of the investment when we made these investment decisions some time ago.

And just to reiterate, for the year, our fleet, they're all contracted to the long term. 80% contracted to long-term volumes, generally speaking, index-linked prices and volumes.

Moving to recycling. So that was ERFs. So moving to recycling. Obviously, we're focusing on self-help measures, and that's underpinning our performance and underpinning our results. The margins are -- have been held consistent by those self-help measures. There's some pluses and minuses in there. You've heard us talk about renegotiating the contracts to make sure we have more weighting towards a gate fee and less exposure to the recycling volatility -- recycling sales price volatility. We have done that renegotiations. That's meant that volumes of sender to soften come down a bit as we've renegotiated and optimized or rationalized our asset base -- not nationalized our asset base. In the rehearsal, we said nationalized our asset base. Rationalized our asset base. And you can see that we're getting better prices from that renegotiation as well. So volume's down a little, prices up. There have been some headwinds with costs. We've always been focused on quality in terms of our recyclate production. So the quality increasing requirements from China has obviously impacted the sector, less so for us, but it has had some impact for us in terms of our cost, which is shown there. And there's been some change in the shipping environment as well. Hanjin, I think, went out of business and took some capacity out of the shipping market, so the prices have tended to increase for that as well. But overall, EBITDA is steady, thanks to those contract pass-through mechanisms and also our self-help. So we are developing new markets to help mitigate the risk of China, and that's going quite well as well. So Viridor, recycling, going well, all about self-help and mitigating the sort of macro environmental impacts.

Talked about Greater Manchester. We've talked about working in partnership. I know Greater Manchester are a great interest to many people in the room, so a little bit more detail here and there is some more in the appendix, if you want to have a look at it in more detail. I mean, we've spent long conversations with our partners and friends in Manchester, and we've tried to remodel and reset, I think we've called it, in the contract. And we're very pleased to say, that's where exactly where we are now. So we've got a long-term partnership continuing. We've got a mutually satisfactory outcome for all parties, we hope. I'm certain that's how we see it. So we're continuing to have the Energy Recovery Facility Runcorn I supporting Manchester on the same time scales as we previously envisaged, so right through till 2027, I think it is. And there's no significant change to that. So that continues as it was. The remainder of the operations, with recycling, reprocessing facilities and managing of household waste facilities and so forth. So we've agreed with Greater Manchester, at what's called a runoff contract for 18 months to carry on, on revised terms and more profitable terms for us, whilst Greater Manchester go out to a reprocurement process for that -- those recycling and reprocessing facilities. And we'll be eligible and we'll consider obviously bidding for those new contracts, but they will be on new contract terms. So it depends how they come out, but certainly that's consistent with how we've been trying to remodel the general recycling contracts, which I just mentioned about. So mutually satisfactory outcome.

For the record, we're often asked about this, but we still feel confident about the supply-demand situation for residual waste and recycling. We still see the under-capacity. We don't see any softening in prices, even though 1 or 2 people -- I think, you might seem to disagree with us, but that's us. And many people seem to say that's the consensus and we're very confident about the future from this area.

A word on the future, and as I say, we've got the Viridor ERF facilities coming online between now and 2020. That will give us this growth kicker over and above what happens at the price review for the water business. As you can see, Glasgow, South London, Beddington, Dunbar and Avonmouth come online, the GBP 107 million EBITDA in the current period as we talked about. So Glasgow is going well. You'll recall that we suspended or terminated the contract with Interserve, put in Doosan Babcock to replace them a little while ago because we weren't happy with the progress we were making. Doosan Babcock have basically finished their construction part of the contract now and handed over to our commissioning teams. That's where we are. Just to remind you, we generated electricity February of this year. We applied for ROCs as you know. The MRF, the recycling facility and anaero digestion facilities, those have been operating now for a little while. And the ERF, the final part is now, as I say, handed over to the commissioning team, it's in the final stages of commissioning. So a good progress has been made there, albeit a little later than we'd had originally planned.

Beddington, the South London plant, that's going well as well and that's in the final stages of commissioning, hoping to be burning waste very, very shortly. So that's going well as well. Dunbar is in the early stages of commissioning, so it's a little bit behind in the schedule, but Dunbar, we're working on preparing for the -- we're in the early stages of commissioning right now. The Avonmouth -- this is Avonmouth here. I don't know how clear or otherwise it is, but it's a very busy site as you can see. The construction is going full steam ahead as it were, and we're dealing with that well and the construction is proceeding to time and cost.

So one final slide before we hand over to you for questions. This is about our synergies. So we continue to focus on efficiency. We continue to look at synergies in the group. So just to recap in terms of the South West Water, the water business, the Totex outperformance is GBP 159 million. That's driving efficiency to try and maintain our position at the head or near the head of the efficient water companies. The Bournemouth Water synergies, that's -- final integration has happened. You need to merge the licenses to get the synergistic benefits, GBP 27 million over the period, GBP 12 million delivered so far. And as I've mentioned already, GBP 17 million per annum is our target for the group efficiencies, GBP 11 million in place, as we speak.

So to conclude, I mean, I think you'll see that these are a good set of results, a robust set of results. We're very pleased with our sector-leading RoRE performance. The ERF performance portfolio is performing very, very well and that's going to be like a growth kicker going forward, over and above what's happening in the water business. And we are preparing for the next phase of growth, as I say, with those ERFs coming online. And as Susan said, our balance sheet has been strengthened that we've taken this as an opportunity to cease the scrip dividend and then reduce it -- replace it with a DRIP dividend policy going forward if people want to take that up.

So all in all, we're in good shape. We have a strong dividend policy of RPI plus 4% and we're in good shape and confident about the future.

So with that, I think we hand over to questions. So usual drill, we've got some microphones. We'd like to ask questions, people put their hands up and ask questions. If you could, because it is being recorded, say, who you are and what organization you represent. And if you could restrict yourself to a couple of questions, and then we'll come back to other any further follow-on questions you have because many people want to have a turn. So a couple questions and Jenny is first, I can see, with a microphone.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [1]

--------------------------------------------------------------------------------

It's Jenny Ping from Citi. Two questions with regards to the GBP 22.5 million recognized for the reprofiling of the cash flow. Can you confirm all of that is related to the recognition of the low gate fees? Or is there a part of that, a pass-through in terms of the repayment of the debt for the Greater Manchester Waste Authority in there? Following on from that, can you also say how much of the gate fees essentially is coming down and over what period, as well as how much of that GBP 22.50 million is upfront cash payment? Or is it all an accounting quirk so to speak?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Quite a few questions there, Jenny. So this is to do with obviously the Greater Manchester contract reset. And there are different components within that. And as you know, obviously with the -- let's split it into 3 components. There's the Viridor [loan] piece in, which we had our shareholder loans and then obviously, we had a repayment for part of those that came back to us. That was one reset. Then the entity, I think, you're talking about Jenny, which is the TPSCo, which is where the ERF is. As part of the overall contract negotiation that we have with Greater Manchester. And then, as we know, one of their objectives was to pay down the third-party debt that were in those entities. So there was a cash inflow and a receipt that came into at TPSCo, and that was to cover a number of items. And obviously, the accounting for that has flown through that entity, and that's where you see the net benefit in PAT that's come through as a result of that. So it covers a number of aspects, including some of the reset and reprofiling of the gate fees. So that's a net impact in that entity. And then, the last element of the Greater Manchester reset is the operational contract where we're moving that from where it was on, to the moment, an 18-month runoff contract and then, obviously that will be subjected to reprocurement process from Greater Manchester. So we renegotiated in round. In terms of the different entities, there are different aspects as to how all that flowed through. And obviously, VL went off to Greater Manchester TPSCo, but reprofiled with cash coming into it, and the operating piece is going into runoff and then reprocurement.

--------------------------------------------------------------------------------

Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [3]

--------------------------------------------------------------------------------

But you are unable to provide the split between the cash and the noncash as well as the -- what portion of it is Runcorn pricing gate fee readjustment?

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [4]

--------------------------------------------------------------------------------

Firstly, jenny, we -- it was negotiated in the round, so the amounts that came in, it was cash backed in terms of what came into TPSCo, but it was done in the round, and that has flown through and there has been a reset going forward. But we haven't got the specifics in terms of the gate fee reset there at this point, but it has been in the round in terms of how we negotiated it.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Guy, at the back, I can see.

--------------------------------------------------------------------------------

Guy MacKenzie, Crédit Suisse AG, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

It's Guy MacKenzie from Crédit Suisse. I have 2 questions as well, both on waste and, specifically, I guess, recycling actually. You mentioned, Chris, that you've renegotiated a number of your contracts and you're taking more gate fee. But just wondering, you did talk about pressure in H2 on recyclate prices. I realize you can't give explicit guidance, but I mean, of that GBP 14 per tonne margin you made over H1 of this year, are you able to say, sort of, what that it is right now, i.e., what your run rate would be, just given the sharp fall in paper prices over the past couple of months? And secondly, sort of a higher level question, but I just noticed recyclate volumes were down. You mentioned negotiation of contracts, et cetera, but Landfill volumes were up. So just wondering if that's something you've been seeing this year market-wide or if that's specific to your assets and sort of what your expectations are there over the rest of the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Guy. So there's 2 questions on waste, recycling and the price pressures as you say in the stock exchange announcement we mentioned about some pressure going forward. I think, I don't want to give any more guidance than we've already given in the stock exchange announcement really. So I think that's -- we'll just leave it at that. We were trying our best to obviously to mitigate those things, and I think we've been quite successful at those as well. So I think we'll just leave it at that. In terms of volumes. I mean, recyclate volumes are down. I think that was primarily in our understanding is the renegotiation and the asset rationalization as well. I had a joke about, I think, it has to do with that as well. So obviously, the less successful ones we'll probably rationalize those and move those on. And as I say, Landfill is slightly increasing as well. And I think that is a bit of a national trend, and I think you've probably seen government is looking at and renewing and reviewing its waste management policy because obviously, the national strategy of waste minimization, recycle if you possibly can. If you can't, burn the residual waste and recover energy from that waste. And recycling rates had gone up quite noticeably through the previous years. And it seems to me, and I think it seems an industry-wide, that that's stagnating or possibly even drifting backwards in certain places like here in London. And probably, that's meant that some of it is going more to Landfill, and the Landfill closure program isn't quite as clear or as well defined as we might have expected it to be. And I think we've talked -- I know we've talked on previous occasions about a dynamic Landfill strategy, which means a site-by-site, area-by-area, region-by-region, just making sure we understand the local dynamics and keeping them open a little bit longer or even redeveloping [cells] if the waste is still coming through that way. So I think that's a longer-term sort of trend. And I think the government's aware of it and is trying to address it.

--------------------------------------------------------------------------------

Guy MacKenzie, Crédit Suisse AG, Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

[May I have] just a follow-up from that very first question. Are you able to give a rough proportion of how much of your recyclate tonnage is paper by any chance? Because I guess, that's the key material that's been impacted.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [9]

--------------------------------------------------------------------------------

It's about 45%.

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [10]

--------------------------------------------------------------------------------

Something like that. Dominic?

--------------------------------------------------------------------------------

Dominic Charles Nash, Macquarie Research - Former Head of European Utilities Research [11]

--------------------------------------------------------------------------------

It's Dominic Nash, Macquarie. Two questions, please. Firstly, on Pennon Water Services. I think that you gained 5,000 customers roughly, but you'd also lost sort of 3,000, 3,500 and I think that's over a 7 months period. So I look at the churn there, that's about 2%. Is that in line with what you think that the market will be churning? Or do you think that, that will pick up? And second question, on your scrip dividend. Obviously, you've dropped that. You said that you're confident on the robust balance sheet going forward. What are the main balance sheet metrics that you look out when you're looking at -- when you're going to drop your scrip. Is it RCF or FFO net debt or EBITDA or sort of what's sort of like the minimum levels?

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [12]

--------------------------------------------------------------------------------

Okay. I'll pick the PWS one. I'm sure you'd like to pick up the scrip one. PWS, we're very pleased with where we ended up actually. And there is a churn rate, as you say. And I think you're wondering how that's going to look going forward. I think one of the things we've done quite well in PWS is looking at what would be the sort of breaking up the market in different segments and looking at who might be interested in switching, who wouldn't be interested in switching. And we with one of the company certainly sorry, manage to find a circumstance, which we thought would allow people to switch or encourage people to switch quite quickly. And where there's a boundary between a water and the company and water and sewage company, whereas previously, before the deregulation, they might be getting one combined bill and one company would bill on behalf of the other. That tended not to happen after the deregulation. So customers are suddenly faced with 2 bills. And these are business customers, and we assessed that they wouldn't really be bother to do that. And if we made a very preemptive strike on Day 1 of saying well, do you know what, we can do one bill for you and, by the way, we'll offer you a modest reduction in price as well. Please sign up for 5 years, 3, 5 years -- 1, 3, 5 years. We made a rapid, rapid improvement in our market share because of that because the other companies didn't seem to spot that originally as a possibility for people switching. That, obviously, I mean, we've gotten a very good conversion rates with that. That obviously matured and plateaued, and we've done subsequent campaigns, but in the first few weeks, and that gave us a big increase in market share. What the other thing that's happening is, this -- where there's multi-site -- and everyone talks about TESCo, but I don't think it really is TESCo, but big multi-sites with big procurement departments. Naturally, the big procurement departments are going out to big national tenders, very, very thin margins. And we're seeing a fairly quick uptake from the ones that were interested in that. And that's where you've got the 2% churn rate across the piece. Our churn rate is not worse than average. It's in fact slightly better than average. We do monitor that going forward. I think there'll be a tendency for the ones that are very interested in that to have done it or be doing it soon and then it will tend to plateau out. But the margins have been very, very thin on that, whereas the customers I talked about in dual supply, the margin reduction or erosion there has been actually almost nonexistent. Actually, it's margin enhancing because obviously, 2/3 of the bill is sewage and 1/3 is water and they're coming from the water place. So Cambridge Water, South Staffs Water, Bournemouth Water come from the water place, you can attack the sewage margin, which is new margin to you, effectively. So our margins have increased. So I think you'll see that this, I think, it's 2.7% of eligible customers have switched so far. I think you might see that softening a little bit, but we'll see. Probably too long an answer. Sorry about that.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [13]

--------------------------------------------------------------------------------

Okay. And in terms of...

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [14]

--------------------------------------------------------------------------------

Hold it, Susan. Hold on. Got so carried away.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [15]

--------------------------------------------------------------------------------

In terms of the balance sheet. So probably, couple of things to say. In terms of when the scrip was introduced back in 2010, very much there to support the build-out with the energy recovery stability program and then, obviously runs to the hybrid in 2013, again to assist with that. When we looked at the perpetual capital securities issuance again this time, obviously we'd increased the number of ERFs in that portfolio. And that issuance, for the first call date takes us to the end of completion of that ERF program. So having put that in place, and then obviously we're confident in terms of the balance sheet to get us through that investment period. And as you know, with those ERFs, as you can see from the cash flows, they obviously generate -- once they are up and running, they generate and that is coming through. We are not rated, so obviously we don't have a metrics for a rating that we need to publicly talk about. But as you can imagine, obviously, internally, we do look at all those cash flow metrics. And we're very confident in terms of where our balance sheet is and there are a number of metrics that we will use and look at, we're very confident that we can cease that scrip in this period, and we've got the perpetual security to take that to 2020 and the completion of the ERF program.

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [16]

--------------------------------------------------------------------------------

So Lakis just beat you to it. So Lakis is first.

--------------------------------------------------------------------------------

Lakis Athanasiou, [17]

--------------------------------------------------------------------------------

Lakis Athanasiou, Agency Partners. Two questions from me. One is on the scrip retraction again. And kudos to you for doing it. Obviously, a good vote of confidence, as Dominic said. Could you just give us a little bit of your thinking about why you didn't go to scrip plus buyback and instead went to DRIP? And my second question is Labour Party risk or actually to be more specific, Corbyn risk. Is there anything that you as a company or you as an industry can -- is doing and can do to mitigate the risks coming from there?

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [18]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [19]

--------------------------------------------------------------------------------

I'll take the first one. Yes, in terms of the scrip, I just commented on with the last question from Dominic. In terms of our confidence in where the balance sheet is at this point, we're obviously ceasing it going forward. In terms of the DRIP, obviously we are aware that shareholders do like to with, their dividends -- their cash dividend that they receive, reinvest in the company, so that's why we're offering that. And that's obviously in terms of decisions we've made. We think that will be something that shareholders welcome. And in terms of why don't we do a buyback, we're just very comfortable where we are with the balance sheet at this point.

--------------------------------------------------------------------------------

Lakis Athanasiou, [20]

--------------------------------------------------------------------------------

I wasn't (inaudible) doing anything on top. Ongoing, you do a scrip and then mop it up doing a buyback, which is what national grid do. So you're left the same position as if you were doing the DRIP, you see what I'm saying? So I mean, there's obviously thoughts you would have done around that. And I just wondered why you went through DRIP instead of a share buyback, instead of issue going down the road and buying back the scrip going down the road? I'm only thinking of a buyback today.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [21]

--------------------------------------------------------------------------------

Yes. No. So, okay. So I misunderstood your question but yes, we did look at these options, but in terms of feedback just -- we've had a DRIP in place previously at Pennon, and that was very well received. So we just felt that was a good way to go with this.

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [22]

--------------------------------------------------------------------------------

Tell you both, in terms of the Corbyn risk, I don't know if that's right, but the potential risk of nationalization of that agenda, as you say. I mean, there's 2 answers to this, Lakis, in this. I'll try not to be too long like I was with Dominic as well. But there's 2 answers to this, really. One is, I think probably this risk is in people's mind and it has been slightly overplayed. And from our point of view, as a regulated water company, we just need to focus on reality. And reality is all the things that we've been talking about, which is delivering for our customers, delivering outstanding service, trying to understand the affordability pressures, understand what our services mean. And I'll say, take our responsibilities very, very seriously and share any outperformance equitably, which is obviously the theme of what I was talking about. That's one answer to it. I think the other answer is as a company and as a industry, we do need to think about what we can do to mitigate that because certainly the agenda and certainly the sort of messages that seem to be playing out in the media seem to be a little bit one sided. And there are other ways of looking at this and perhaps as an industry and perhaps as an individual companies, probably through third-party advocates, independent research and so forth, we can put at least a counterargument into the public domain, which will have some impact. And I can talk about it a lot more, but I think yes, there is an argument for us to be doing something else to sort of have a alternative rhetoric.

--------------------------------------------------------------------------------

Lakis Athanasiou, [23]

--------------------------------------------------------------------------------

When do you think we'll start seeing any? Because we haven't seen anything so far.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think quite soon, but Iain was next. Yes?

--------------------------------------------------------------------------------

Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [25]

--------------------------------------------------------------------------------

It's Iain Turner from Exane. In the past, when you were building the first sort of phase of your ERF assets, you gave us an EBITDA target. And I wondered if you fancy doing that again for -- now you're talking about the earning step-up in 2020, '21?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

You know the answer to that question.

--------------------------------------------------------------------------------

Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [27]

--------------------------------------------------------------------------------

Or perhaps when will you -- I mean, you may not give us one now, but have you got plans to give us one when it's a bit more advanced?

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [28]

--------------------------------------------------------------------------------

Yes. Thank you very much for that question, Iain. As you know, that EBITDA target came out a long, long, long time ago. That was the GBP 100 million EBITDA target, and the world changed so much and the facts and the basis upon which the target was put in place change beyond recognition. But the market did hang on to that. And perhaps there was some skepticism about whether or not, I don't know, we would achieve it. But we have achieved it, as you know. And I think probably we've always been a company that prefers to deliver and talk about it, rather than promise and see what happens. So I think we'll probably resist the temptation to give you another one for the time being, at least.

--------------------------------------------------------------------------------

Susan Jane Davy, Pennon Group Plc - CFO & Executive Director [29]

--------------------------------------------------------------------------------

And I think in terms of the reports, I mean, obviously you saw the chart today that we put up that shows how we're performing against those base expectations. And obviously that's something that we'll continue to report on going forward.

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [30]

--------------------------------------------------------------------------------

[Dorothy]?

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

(inaudible) Agency. Just thinking forward to the business plan. You've spoken a lot this morning about how you're working through all those pollution-instance issues. But 2 other things where you're moving up. I mean, are you confident about your customer service with new SIM replacement coming in, in 2020 and also a comment perhaps about cost to serve and how you're thinking about that given you are from a -- you have some deprived customers?

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [32]

--------------------------------------------------------------------------------

Yes. So 2 or 3 things, really. You might want to do cost to serve, I don't know if you want to do it. But yes, I mean, as many people know, the SIM mechanism has been in place for a little while now and Ofwat has proposed in its draft methodology to replace it with an alternative mechanism called C-Max, I think it's called. C-Max, which is based very largely on these 2 customer services metrics. And we've been involved and we're actually been members of that for a little while now. And I think the year before last, I think, we were the most improved utility. Or was it last year? I can't remember, the most improved utility. So we've been tracking that new metric for some time and working with the Institute of Customer Service. And as indeed, where Ofwat sort of got it from. I think, as I said briefly, albeit not in much detail in the presentation, we've tended to see there was a big differentiation in SIM performance that's tended to all group together. I don't know, I remember you all know, but the old OPA mechanism, the Ofwat we used to have, we had the same thing there. But there was a big differentiation in performance. And as we obsessed to actually better understand the mechanism well, we all bunched together. And I just jokingly say to many people that we got ourselves to the top of the OPA metric as it was abolished, which was a bit unfortunate. And I'm jokingly saying, we'll do the same with SIM if we're not careful. We will get to this tip of the SIM metric before just that it's abolished. But we're not unhappy with how we're getting on with SIM. We're not unhappy with our overall performance from there. And as I say, we moved up from that potential territory of negative. And we always have an issue in the South West where we have relatively high bills. And therefore, the bar that we have to cross for customer satisfaction is probably a little bit higher than everywhere else. But that's just life. We're not complaining about it, but we're very happy with where we are with SIM, and we're very happy with preparing for the new metric C-Max switch, which we assume Ofwat will confirm on the 13th of December.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Sorry, on the cost to serve piece on that, the household retail aspects. And so, we did a lot of work for the last business plan and saw the date share that went on at that point and with Ofwat as well. And if you exclude the bad debt costs, then we were one of the most efficient companies in terms of our retail cost to serve. Obviously, we've been now focusing on the bad debt aspects. And as I said in the presentation, bad debt costs as a percentage of revenue has now come down to 0.9%. And at the end of K5, it was at 1.7%. So you can see that's heading in the right direction.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So any more comments or questions? Yes, James? (inaudible)

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

James (inaudible) from Deutsche Bank. Just one question, do you see yourself as having reached the final status quo in terms of the funding position for ERFs? Obviously, you highlighted today that you have visibility not just in the volumes but also on the price side for very long time. There's a lot of infrastructure fund money that is interested in investing low-risk assets. The moment, you've got all the debt on the balance sheet pretty much, apart from the JVs. Is that something that, as they say, has reached a status quo, or something you'd be looking at options in the future around that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So that's a good question. So in terms of our funding for ERFs, we're fully funded in terms of the construction and build-out of those. And obviously, we will be looking at the refinancing and when that gets to the end of the program.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I thought it's might have been an imaginative way of asking the old question, are we thinking of demerging the group? I don't know if that's what you're talking about.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

Certainly not.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Anyway, we'll constantly keep that under review as what we see foresee as the best way for our shareholders at the moment. Sorry, I can't see who is that?

--------------------------------------------------------------------------------

Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

It's Chris Laybutt from JPMorgan. Just one question following on from Lakis' just to come back to the nationalization issue. We understand from the press that members of the industry have met with the Labour Party. Were you part of that envoy? Are you party to the discussions? Do you feel that the Labour Party is being constructive in your initial conversations with them?

--------------------------------------------------------------------------------

Christopher Loughlin, Pennon Group Plc - CEO & Executive Director [41]

--------------------------------------------------------------------------------

I don't know which press reports you're talking about, frankly. But we constantly speak to all of our MPs and other important stakeholders. In fact, I was there couple of days ago, at the House of Commons, talking to MPs of all political persuasions. So I'm not quite sure of the press speculation that you've heard or you're referring to. But clearly, there's an ideological belief within the senior members of the Labour Party at the moment of the way forward. As I say, I've got to say my perspective, the anxiety, the speculation is a little overplayed at the moment and we've had 2 questions about it here today. We're a way off an election. And we're way off understanding who will be a winner of the election. In the meanwhile, we've got a business to run. We need to focus on the business. And if we try to get ourselves too distracted in trying to meddle in politics effectively, which is not our sort of remit in life, we would take our eye off the main ball, which is servicing our customers and providing their needs. So we constantly talk to MPs. We constantly talk to decision makers. We constantly talk to officials about it. And I think one of the things that differentiated South West Water, frankly, over the years is that we've always had a good engagement with political decision makers. We try to influence them. We try to engage with them and at the very, very least, anticipate where the world is moving. I'll say my assessments at the moment is we need to focus on reality.

So any more questions? If not -- I don't think so. So thanks very much for your attention. Thanks very much, I said at the beginning, and thanks very much for giving up your time to be with us today. We do really appreciate that. I know there's many things that you could do with your time, and this is only one of them. So we're, very, very grateful to you to come today. And I know it's a bit early, but if I don't see any of you before the festive period, have a great holiday, and we'll see you in the new year. Hopefully, we'll see many of you before that, but thanks so much for coming today. Thanks.