Pennon Group Plc (PNN) Earnings Call Transcript

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

Thanks, Alex, and good morning, and welcome, everyone, to the strategic update today. So having I completed my strategic review over the last 6 months, I have also now reset the senior team. That team has been part of developing the plan. And importantly, they have bought into delivering it. With the strategic review complete, we are now resetting Pennon and are ready to capture the growth opportunity provided by the reopeners. We have hit the ground running, and we now have a clear path to moving the business forward. We believe we have a compelling investment opportunity ahead of us. Today, we will be presenting our plan to capture it. There will be plenty of time at the end for questions. And with that, let me get underway with unpacking what we are doing and what it means for Pennon's next few years. In summary, during the full year results, I have provided an insight into my initial observations, but after a fundamental strategic review, it is not clear on the path they required to 2030. The review has carefully considered our strategy and delivery plans for [ AMP8 ] based on our projected spend for both CapEx and OpEx linked to our operational performance commitments. This includes our operating costs and opportunities to become more efficient as well as additional investments to support delivering regulatory outcomes over the AMP8 period. Capital investment plan reflects changes to reduce delivery and compliance risk as well as a change in the operating model to ensure successful delivery of our outcomes in an efficient and timely manner for our customers and regulators. We have a clear review on areas of growth on asset health which has shifted our successful bid for cost change '26 with Ofwat and how we will approach the rest of Ambit linked to further investment. This is a significant opportunity for Pennon and for our investors as this approach will not create the ability to reset the trajectory of the business and expedite improvements in our asset base across the remainder of AMP8. It will be supported by a revised funding plan with a $550 million rights issue under rebased dividend, along with debt through the remainder of AMP8. This plan is built from the ground up, having spent 6 months visiting our sites, core assets, call centers and working with our supply chain partners and undertaking a deep dive into operational performance. So I have been very visible in all areas of the business and geographic areas to ensure I understand the different challenges, but more importantly, how I stress [ tests ] that are focused on the right priorities and alignment with business needs. The review of the business with my executive team has demonstrated we have some great people willing to go the extra mile. In some areas, we have performed well. But overall, there are large improvements to make. Due to a lack of leadership and clear direction, a culture with a regular cadence around performance linked to meeting delivery plans for targets, operational grip and a broad range of areas an effective capital delivery team with the correct resource structure in place. The review has clarified the areas of improvement required across the company that are linked to poor performance and action plans are developed to resolve now and into the future. And I've already hired and put in place key people to strengthen our management team and deliver this. Our new plan, coupled with the cost change process, addressing asset health will transform our operational performance going forward alongside the growth agenda. A critical factor in my strategic plan is the role of the cost change process, providing an unprecedented level of additional investment to fast track improvements in asset health. We view this as a critical component of resetting the business, using the opportunity for targeted investments to accelerate improvements in our asset base and on a revised funded basis. The cost change process is a key part of our sustainable long-term group agenda, and we have already secured $230 million in draft determination for this year. And we are targeting a further $170 million of investment across the rest of AMP8. We have also targeted a further $600 million of further investment as well as supporting our transition plan to AMP9 reinvest in efficiencies from the original Ambit plan into new projects that will deliver improved outcomes in terms of operational performance and control. At the outset of AMP8, we plan to deliver 34% in RCV, but based on our revised plans, including Ofwat's new cost change process, we are now targeting at least 40% increase in RCV. I will provide more detail on this additional investment later. The plan looks to reset the business in terms of operations and ways of working, but we have also identified additional investment opportunities aided by the new cost change process, that will expedite delivery and support the health and resilience of our asset base. We have, therefore, also looked to ensure we have a refreshed and revised funding plan that will finance the group through a period of increased growth whilst maintaining a financially resilient balance sheet. Laura will talk more about this later, but at its heart, it is both self-help through the sale of [ Pennon Par ] and the reinvestment of previously targeted efficiencies and new financing through the rights issue and increased debt funding. We are also adjusting the dividend, reflecting the increased growth offered by the plan and ensuring a rightsized dividend across the and that continues to grow in line with inflation. The rest of today follows that logic on operational reset that improves performance, targeted investments that drives growth and a balanced funding package that pays for both together, building a stronger, more resilient and on. If we move towards the operational reset, I move into, I guess, the core element of my strategic update. The reset has 5 key pillars, and each one answers a specific opportunity, the review highlights. So every action is tied to the ODI and performance outcomes we target. The 5 pillars focus on, first and foremost, people and culture; secondly, operational excellence, third, ensuring we have strong asset management and support asset reliability. Fourth, our environmental program and last, but by no means least, transforming our service to our customers. So far, there are a number of areas that have been obvious to action quickly, but we are also setting a vision of transformational activity moving forward. In 6 months, we have established a new target operating model, refreshed the leadership brought critical rules back in-house, reprioritized the capital plan and launched maintenance excellence. Establishing a clear target operating model in 6 months is a foundation for clear accountability, ownership on performance and a building of culture of putting the customer at the heart of everything we do. I will talk to a number of these [indiscernible] in on the rest of the presentation. Technology is a key enabler for better data on modern systems, allowing us to intervene earlier serve customers at lower cost and run the business more ratably. [ Martin Jones ] is our Chief Information Officer and is now part of the executive team to help identify and deliver this technology program across our bid and the transition into AMP9. We are currently in flight with launching our customer and billing platform [ now ]. We have started developing our new planning and scheduling system and we will upgrade our asset GIS system across the next 3 years. Further work is underway to review our operational control center to further enhance this technology and applications for delivering our 24/7 ways of working and decision-making in water and wastewater operations. Beyond on [ bid ], the intention is to replace our asset enterprise system and financial systems to promote improved reporting and decision-making. In the period of 6 months, we now have the leadership team in place to deliver the plan with experienced new hires on existing executive leaders in the rules that matter most for performance, assets, people and water services. Laura, as our CFO has helped shift the change in leadership and been instrumental with myself and the team in developing the outputs from the strategic review and the revised funding plan but also playing a large role in driving forward transformational projects that include Project Fusion. Ian Christie, as our new Chief Asset Officer, has been in the role since the start of May, since starting in has recruited a new leadership team, started to in-source our asset delivery team in terms of program managers and cost management roles to ensure we take ownership of our program of deliverables with a lower capital overhead in the long term. Hazel Hendley started as our new Chief People Officer on the first of October. Hazel picks up from a strong start and help me reship the business functions and will be instrumental in leading on our cultural transformation program across the business. Ian Cain is the former CEO of SES Water and with a strong industry background kicks up the interim water services role to help ship improvement plans for key performance areas that includes leakage and supply interruptions, I am currently recruiting for a permanent lead for Water Services in the coming weeks with an appointment expected in the [ auto ]. Simon Pugsley, is joining as an experienced General Counsel and Company Secretary, we previously worked at Pennon and has significant U.K. water experience. He will start in the next few months. Richard Price continues to lay on the operational delivery of wastewater services and the pollution incident reduction plan Paul Ringham, is now Chief Commercial Officer and I have now consolidated all commercial aspects of the business with pen on par, commercial, procurement and our states areas. Carolyn Cadman is now Chief Environment and Compliance Officer and have aligned our water sampling and wastewater compliance functions under Carolyn to enhance our lines of assurance and regulatory reporting requirements. In terms of Chief Customer Officer, I have appointed [ Kaitan Handacha ] into the interim rule as we complete the recruitment exercise for the permanent role. [ Pennon ] has played a big part in the delivery of our Fusion project, and driving customer improvements across the last 6 months with water and waste functions. [ Sarah Hills ] continues in the role of Chief Strategy and Regulatory Affairs Officer, delivering on our requirements for of cost change [ CR29 ] delivery plans and water reform. So now we have a fully reset executive team and a number of senior leaders have also been appointed in the past 6 months to rebuild our asset management team drive our performance in leakage and leader capital investment program. Moving into operational best practice, I have been fortunate to work in a number of very credible and strong performing water companies that understand strong operational discipline, efficient ways of working and more importantly, ownership of performance. The diagnosis of Pennon has been fast tracked based on my background, an understanding of what areas need to be prioritized along with the support of the team I've been putting in place. The pathway to operational excellence requires strong leadership and desire from our leaders for continuous improvement in performance as a culture. So in a short space of time, I have quickly identified a number of themes that have been actioned or linked with transformational projects. Key areas now actions include refresh scorecards across the operational areas with monthly reviews, recruitment of industry talent to refresh our leadership and approach, leading performance indicators to enhance our decision-making, launched a procurement process to secure our long-term framework partners for our network maintenance. These initial changes have been received well to the teams and demonstrate a new approach focused on ownership and performance. Leakage was one of the first areas to in-source and similar to other areas in the business, it did not make sense having an outsourced model, which was expensive, locked ownership and not delivering the required level of performance. We are in-sourcing our leakage teams now, which means developing our own people who take pride in delivery using data to find and fix more leaks at a lower cost, and this has started in the Southwest where the [ likes gap ] is largest. This change will also be complemented by new senior leaders to refresh the leakage strategy in terms of our suite of interventions to drive down leakage and then deliver with enhanced plans. In time, the leakage performance will see improvements when the delivery plans start to deliver on interventions required. Initial observations were clear that asset management was evolved across the business, lack direction density and inconsistent processes with an outsourced asset delivery model. The centralization of asset management provides better synergy [ 9 ] now to deliver the required outcomes for AMP8 and beyond. The [ asset ] strategy and delivery plans are now fully integrated across the asset life cycle from concept stage with asset planning, the delivery of asset investment on the ground to robust maintenance schedules for improving the reliability of the asset base. Ian has been focused in this first few months on strengthening these functions by recruiting the right senior team in this area on ensuring they provide the required service for our operational functions. The team has been very busy reviewing our asset investment program, and reprioritizing the required outcomes to ensure we can maximize benefits linked to our performance commitments. One exciting area is the introduction of a new capability to the asset management team, which is asset reliability. Maintenance excellence is a framework that provides a detailed insight into our asset base, understanding asset health and creating a maintenance schedule for our field engineers, to service the assets and avoid unplanned failures. This is an initiative that has delivered great outcomes from [ E&Ps ] rules. The business has been in a reactive world with a historic approach to replacing assets at the point of failure, a more planned and proactive approach can deliver improved operational and safety performance, improved buy-in from the operational staff whilst also providing positive impact on asset availability and lowering the risk of asset failures. [ Chris Betz ] is our new asset reliability lead has an in-depth expertise and asset reliability transformation and is already underway with delivering on our maintenance excellence program, which is supported by industry experts. Chris will now lay the foundations for shifting our culture from reactive to proactive across all areas of the business, which starts with our mechanical and electrical asset base. The focus will start in the Southwest region in order to maximize the largest benefit for reducing asset failures and to ensure we expand the asset life, improve operational performance and deliver cost efficiencies over the longer term. Our environmental performance is not where it needs to be, and we are now setting a credible target to improve PPA metrics by the end of the unbid period. In particular, we need to remain focused on the pollution incident reduction plan but also demonstrate improvement in treatment compliance, which forms a key part of the EPA performance framework. We have continued our award-winning upstream management and patent restoration programs to support biodiversity and environmental net gains across our regions. It is clear that the [indiscernible] status now in 2028 is very difficult based on our current position. There are also ongoing challenges in terms of the evolving metrics in the EPA scorecard and we know this will provide new challenges that we will need to respond to. As such, our focus will now be on ensuring continuous improvement across our bid on the EPA measures, reducing pollutions, improving compliance and ensuring our assets have as little impact on the environment as possible. The rehabilitation shows how cost change funded turns directly in the customer and environmental icoms, we have secured $62 million of additional investment in Sea rehabilitation through the cost change process, which will remove excess groundwater entering our networks reducing flows and thereby helping to target lower spills, reduce pollutions and improve sea flooding, whilst also lowering operating costs to treat less storm water entering the system. We also recognize a large opportunity exists for improving our performance on customer and retail satisfaction scores. The [ Cmax ] measure is lagging well behind in the Southwest and SES regions compared with our strong performance in Bristol. Technology is a key enabler for modernizing our systems, and improving digital channels for customer interaction, the application of artificial intelligence and the modern systems interacting with our operational technicians, and supply chain will focus on ensuring first-time resolution on customer jobs. Moving the systems into a digital approach for our customers will also allow us to communicate more often and more locally with our customers, taking a community-led approach to sharing the work we are doing in local areas and ensuring we are communicating more often and more effectively with our customers. A live example of technology implementation is Project Fusion as a modernized customer and billing platform, which will deliver an enhanced service for our customers and an improved system capability for our own customer and billing teams. We are excited for this to take effect as we see it enabling a step change in customer service. better for customers through simpler customer journeys and improved channels of choice, better for colleagues with one system for accessible information on improved processes, better for business with streamlined debt management, lower contract volumes and lower operating costs. The implementation is on track for delivery in the next couple of months. And whilst I'm sure it will -- it [ won't ] go entirely without challenge. We are excited to see the improved outcomes. The new system will help deliver. The approach of setting a time line with clear activities to be delivered and showing progress starts to build momentum and confidence within management and the operational teams, but also with our stakeholders. This slide demonstrates some of the key activities already actioned in my initial 6 months, whilst this slide shows a large range of activities, both now and into the future. I have a strong leadership team from a solid track record. I understand how the action operational change, and it will be delivered. This and the operational reset for the business, I will be tracking our progress on a range of activities to align with the improvement plan required on operational performance, particularly in targeted areas. Accelerating delivery on the asset investment program to complement the improvement activities linked to operational excellence. A view of the next steps on the slide is also important in sharing the vision for transformational activities linked to future performance as a management tool with employees, and I will come back to update on progress for these areas across it. Moving to our operational performance. And following the challenging year we experienced in FY '26. Operational performance has continued to be challenging in FY '27 due to a number of key metrics underperforming that includes the forecast of compliance index and Southwest we'll miss the target for year 2, supply interruptions across operational areas, Leakage and Southwest requires a recovery plan based on the 3-year rolling average. [ Solution ] measures and in particular, serious pollution incidents due to storm [ Grepin ] 2026 and customer and retail measures requiring improvement in Southwest and SES. It is worth noting that we do have some positive measures that we will continue to strengthen which includes internal serofloming, unplanned interruptions and biodiversity net gain. For the rest of the AMP8, we will focus on driving forward our improvement plan for interruptions to supply to deliver performance below 8 minutes. On [ leakage ], the action plan is to close the gap back to target for both SCS and Bristol, but applying most of the focus on the leakage strategy and recovery plan into the Southwest region. On the Wastewater measures, the focus is to drive continuous and steady improvement over the up focusing on pollution and compliance measures and looking at adapting our plans as greater clarity develops on the new metrics. On the customer on retail measures, the [ AM for Cmax ] is to maintain our strong position for Bristol and drive improvement in delivery in SES and Southwest targeting mid-table performance. On [ BRX ], improvement plans to return back to net neutral on DMX achieve net reward across all areas by 2030. Overall, we are not anticipating that operational recovery will take the remainder of the AMP to be delivered with ODI penalties forecast across the AMP, although reducing by at least half of the current level by 2030. The ongoing penalties not anticipated impact on our performance in terms of RORE, both through underperformance and ODI delivery. And because we also consider it is no longer possible to achieve the 4 measures required to access 30 basis points benefit of an outstanding business plan. Moving to cost change. Ofwat has backed our case for more investment and we have been [ allied ] $230 million a draft termination and plans for a further $170 million across the rest of AMP8 clear visibility on the good accelerated growth that then continues through the rest of the AMP period. The scale of the investment will deliver material improvements in our asset base that include enhancing our water quality performance, reduction in pollution spills by removing groundwater infiltration, better resilience and storage capacity for our service reservoirs linked to supply interruptions. The representations have now been submitted on the 24th of September, and the final determination is expected around the 15th of December. However, planning is already underway to mobilize these investment areas linked to a number of initiatives with the operational reset. To demonstrate a couple of examples, the cost change process has allowed for a wastewater treatment side at U.K. do [ not ] be upgraded in order to cope with a wide range of flows based on seasonal demand, as shown with the very popular Board master's music festival. This investment secures our ability to be compliant with our permit into the future. Our asset base also has some very challenging serves as shown with [ Fai ], that are expensive and challenging to replace due to the extreme location in the marine environment. This is a really good example of cost change allowing investment for an asset and per condition within a challenging environment and currently very expensive to replace due to location and marine challenges. The strategic review has confirmed divestment of Pennon Power as the right strategic approach in order to focus on behind the major projects that provide greater resilience, ODI and efficiency benefits. We will complete the remaining 2 sites currently under construction by spring 2027. So we are taking self-help measures as part of the funding plan with Pennon Power to be sold, producing group debt and focusing the group on the regulated water business. The strategic review has demonstrated a significant opportunity for developing renewable energy assets across our own regulatory asset base. We, therefore, propose reinvesting $25 million from the Pennon Power disposal to focus on behind-the-meter opportunities at our high energy sites. Closer to the regulated assets, tangible OpEx savings and a much quicker payback period while supporting delivery of our greenhouse gas performance regulatory commitment. All of these sites are being delivered using our existing Pennon Power team who have a successful track record and delivery. At that point, I will now hand over to Laura, who will take you through our funding plan and financial guidance.

Thank you, Keith. So Keith talk to you through the operational plan, and I'm excited to have been working with Keith in building that plan and now to see the growing momentum and positivity around the business as we start to deliver the reset that's needed. So with that in mind, let me share how we're planning to fund the change and the opportunities that, that brings with it. The strategic review has highlighted around GBP 1 billion of additional investment GBP 400 million of it providing RCV growth through the Ofwat cost change process, while GBP 600 million will be focused on improving performance and compliance in the wastewater and clean water businesses. Together, these factors drive growth in excess of 40% by 2030. As Keith has highlighted, we are now anticipating ODI penalties throughout the AMP. As a result, we need a refreshed and updated funding plan that will support the business both to deliver the increased growth opportunity that cost change and new investment represents, but also to ensure we retain a sustainable and resilient funding structure. Operating cash flows and debt funding would, of course, continue to play a critical part in the delivery of our plan. Whilst the rights issue and wider funding package announced today would also ensure a resilient and sustainable financial position through to 2030. In finalizing the revised funding plan, we've explored extensively different options for funding the plan through to 2030. Our plan, therefore, combines both actions we can take within the group, the divestment of the existing 4 panel power development sites, reinvestment of identified efficiencies as well as support from investors through the GBP 550 million rights issue increased debt funding and an adjusted dividend. The rights issue is the core component of this refreshed plan, providing an exciting opportunity for further growth in our asset base whilst also improving our performance and resilience. It also allows us to continue to target gearing at the water business at no more than 65% and with group gearing a few percentage points higher, but no more than around 70%. ODI performance is creating pressure on key credit metrics which, coupled with wider uncertainty around the sector results in rating pressure. We have had extensive discussions with Moody's, in particular, over the past few months. And Moody's has today confirmed the downgrade to [ Baa2 ] stable on both Southwest Water and [ SCS Water's ] credit baking. An investment-grade credit rating remains critical to our funding approach, and the rights issue will support a resilient and sustainable balance sheet and allow supported growth over the remainder of the AMP. The divestment of Pennon Power is part of our wider funding package and willow reallocation of that capital to reduce debt at the group level. allowing greater focus on capital allocation directly into the regulated water group. We've previously targeted outperformance in terms of [ totex ] delivery we are now looking to reinvest the efficiencies on the core program to instead invest in new schemes that will improve performance and strengthen compliance across our regions, but particularly in the Southwest. And finally, the dividend forms a key part of the overall funding package, which continues to target a progressive and sustainable approach over the AMP. We have deliberated in particular, on the dividend, recognizing the increased growth opportunity the group needs to deliver, but also acknowledging the importance of the dividend to our shareholders. We have taken the prudent decision to rebase our dividend as part of this funding package to ensure solid balance sheet, credit metrics and foundations to unlock the higher growth profile. This means we are reducing the dividend by around 10% or $13 million on the 2025-'26 dividend in absolute terms, reflecting the higher growth levels over the remainder of the AMP. On a dividend per share basis and taking into account the new shares issued as part of the rights issue, the dividend will be rebased to around 18p per share, around 30% dilution as a result of the new shares and issue and the small reduction in absolute terms. We do retain our progressive dividend approach with dividends increasing from this base by CPI8 over the forthcoming AMP. The rights issue will support the business across the AMP and provide a strong and resilient position from which to provide a growth to 2030. The rights issue is fully underwritten and gives every shareholder the chance to invest in this plan on the same terms with results expected on the 27th of October. And for the analysts, among the appendix also contains an illustrative impact on historical financials and the bonus element methodology. Before I finish, I wanted to briefly reconfirm the financial outlook for the year. We remain in line with market expectations, with group EBITDA expected to increase by 5% to 10% for the year. we anticipate slightly higher CapEx than previously driven by the ongoing capital investment program. As many of you would doubtless have seen, we've received judgment in respect of historic environment agency prosecutions on the 29th of September and received a fine of just under GBP 8 million. This, together with a small number of other legacy legal claims will result in recognition at the half year of around GBP 13 million in provisions for fines and legal costs. In addition, as part of the strategic review, we have reviewed the desalination project previously committed to following the 2022 drought. The project is no longer considered viable and an impairment charge of GBP 33 million is expected to be recognized at the half year. Together, this revised funding supports our new operational plan maintains a strong balance sheet whilst we do it and give shareholders faster of CV growth. The dividend will be rebased but grow in line with CPIH consistent with our previous policy and providing an attractive value proposition as we turn around the business and support higher growth into the future. I will now hand back to Keith for his summary.

So let me recap the plans we have outlined today, follow months [indiscernible] data shops with the senior leadership teams site visits, process reviews and engagement with a broad range of our stakeholders. There are actions that were plainly evident and other decisions that we have scrutinized carefully as a management team and board. What we have now is a plan to drive a stronger and more resilient business. We have already embarked on our operational reset with a refreshed leadership team focused on delivery and performance with clear accountability being embedded across the organization. We will accelerate the recovery of our operational performance aligned with the delivery of the asset investment program, complemented by our targeting of additional growth. Looking ahead, we have much work to do. but we have the plans, we have the experienced leadership and colleagues who are passionate and driven to deliver. I firmly believe executing on our plans will deliver better performance for our customers, improvement to the environment, long-term sustainable growth and returns for our shareholders. That concludes the presentation. I will now hand back for Q&A.

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

So [indiscernible] on the presentation. There's lots of questions, so I'll try and limit it to a few in respect to other people. So firstly, I think we all understand why you stepped away from the previous ROE guidance. But without any returns or net income guidance, is it difficult for the market to assess return on increased capital allocation. So can we ask when you -- where you see returns or when you think Pennon will be in a position to guide earnings growth and/or returns? Secondly, on the gearing comment, could we just clarify the slide saying gearing -- group gearing is unlikely to exceed 70%. Can we clarify whether that is before or after the Pennon power disposal, i.e. is not exceeding 70% contingent on selling that business? And thirdly and finally, to the GBP 600 million additional investment, could we just clarify how much of that actually goes into the RCV, if any? And if the ODI performance is effectively linked to that extra investment to turn around the business?

Well, let me start with that, and then I'm sure Keith will potentially want to add in as well. I think we are -- from a -- I think the first question was about RORE, I think we are not providing guidance in terms of ROE as part of this. We obviously have done that before. But given the ODI penalty position, and the need to therefore reinvest totex back into the business to drive that improved performance. At this stage, we don't think that's appropriate. And the ODI penalties are very much a focus to remediate. So on that basis, we aren't providing guidance at this point on that, but we'll continue to keep that under review as we move forward and as our performance starts to see the improvement that Keith has been talking about. From a group gearing perspective, the timing of the sale of Pennon Power should not be issue in terms of the group gearing, we expect it to stay below that 70% notwithstanding the sale of Pennon Power, so it isn't sensitive to that. And from GBP 600 million, it's very much looked at in terms of we are -- we have always been talking about delivering totex efficiencies. We are now instead of simply taking the benefit of that in outperformance, looking to reinvest that money throughout the AMP to improve the performance. Very much linked. I think you questioned with performance improvement, we have detailed plans of where that money is going, what ODI performance that links with and therefore, the benefit it's providing and probably and it would all then work its way through both the efficiency and the new spend through the regulatory mechanism. And you'll see we've guided to the scale of growth in terms of RCV by the end of the period, which is probably the simplest way to think about it. So there is some small benefit overall from that to RCV on top of the GBP 400 million of cost change.

I think what's important to demonstrate here is that the GBP 600 million is very much linked to ODI performance commitments. We have -- as part of that GBP 600 million, a large cohort of that is going into leakage and also some targeted interventions for supply interruptions and compliance. We have a capital investment program where we're closing out some schemes in AMP7 and some major projects and be it very much linked to wastewater compliance that fall in part of that GBP 600 million. We also have some transformational elements in there that are technology-enabled. So beyond Fusion, we're looking to deliver a planning and scheduling system. We're looking to enhance our operational control center. These are all elements very much linked to efficiency, productivity and ultimately, performance. And lastly, there's about GBP 40 million of that GBP 600 million attached to AMP transition. I would suggest we've not transitioned very well in it we will be making sure that the resources we have today for engineering, for modeling, for solution development on AMP9 projects will be very structured and organized as we go into April 2030. So that hopefully gives you a bit of insight into what we've targeted.

Our next question comes from Ajay Patel of Goldman Sachs.

And I just wanted to maybe dig into a few more of the questions that maybe Rob was asking. So the GBP 600 million, I understand that this is financed or funded the payment for that comes from totex efficiencies. But is it the complete amount we are really investing GBP 600 million here to improve the asset health of the company so that we can see better improvements on the ODI side and some of that is covered by totex efficiencies? Or is that fully funded by the -- or fully paid for by totex efficiencies. I won't go into the RAB, won't get any sort of remuneration in the revenue, but I should expect you to say enough on totex to pay for the GBP 600 million? Or if not, what proportion are we talking here? And then just on the return point, just the labor, just maybe not to labor too much, but just to kind of get make sure I have the right framing in my mind. I think you said it was very unlikely to get an EPA 4-star status score by '28. So I assume then that would mean the 30 bps benefit that, that has disappeared. If your ODI delivery is half of what you attained last year, and I think it was a 2% RORE negative last year. That would imply maybe 1.5% negative ODI as an average over the 5 years. And if the totex efficiencies are paying for new CapEx. Does that mean that your return for this period is quite low? And I was wondering do we expect to be below cost of equity for this period of time out to 2030, while you deliver asset health improvements, turnaround that ODI picture so that you're in a stronger position to paint a picture beyond into the next AMP. Can you maybe help me with that, please?

Yes. Let me start, and again, I'm sure Keith will want to pick up. I think on the GBP 600 million, yes, what we're targeting is effectively to fully spend the allowances the final determination and end up broadly flat on totex, materially flat on [ top tech ] by the end of the period, excluding then cost change, which happens on top. So yes, taking in terms of regulatory allowances, efficiencies out those allowances are then reinvested. So the total CapEx, as we see it sitting here today, will be broadly aligned. So maybe to answer in a slightly different way, but hopefully, that gives a bit more clarity. From a return, you're right. We are, as Keith mentioned, seeing the 4-star rating by 2028 as challenging, particularly with some of the uncertainties around some of those metrics and measures. And therefore, we are not expecting to achieve the 30 basis points uplift for the outstanding plan. And I think to the last point, yes, we're in a period where we need to really focus on turning around our performance so that we can return to the out performance levels that you would expect of Pennon. There may be -- and as a result of that, we have -- we're absolutely right. penalties arising throughout the period from we are fully expecting to invest 100% of the CapEx, albeit trying to deliver as much as we can in terms of performance benefit through that spend. And that then just the financing, we have previously outperformed on financing when inflation is higher. Our current projections would use an inflation rate that returns back to 2% during the period. And then we would see less outperformance this period than we would have done historically. But obviously, that would depend on the more macroeconomic circumstances as well.

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

Correct.

Our next question comes from Jenny Ping of Citi.

A couple of questions from me, please. Just on the lack of targets coming back to RORE once again. I guess you are effectively saying you're spending GBP 600 million back into the business without any additional value creation. So to come to the market, without some sense of how long and how visible the recovery is. I think it's very tricky for the market to buy and given the track record of the company. So is there anything you could say with regards to that at this stage? I understand the ODI underperformance point. But equally, I think you see where your shares are and that reflective of the lack of visibility. So anything you can give us on whether it's earnings or RORE, just trying that again because I think that's super, super important. And then just on Pennon Power, I guess, the invested capital of GBP 160 million is what you've assumed in your numbers. Is there any reason why you haven't gone out already with a and some sort of indicative bids or have you? And is this just purely on timing of when the COD of the assets delivery is? And then just very lastly, on ODI penalties you sort of -- on Page 20, you talked about the 50% reduction. Can you just talk us through why it's so difficult to get to a better place, a 50% reduction to spend GBP 600 million on that. Are you being conservative there? How much headroom have you built in or is this genuinely a much worse business when you open the hood of the drug when you arrived? And there's just much more issues with the underlying business.

Yes. Well, let me start and then Keith can pick up. I mean I think on the ODI guidance, we have absolutely at that long and hard and tested ourselves to try and provide as much guidance as possible. We have obviously provided the 40% step-up in RCV growth. There's previous guidance around revenue from a regulation perspective as well as the ODI penalty that we've included towards the end of the AMP. So I guess there are considerations and limitations when raising capital in this way in terms of providing longer-term profit forecast. But there I think we felt that there was information out there, but it's something that we will continue to look at as we move forward to provide as much information as possible and particularly, as I said earlier, around how our performance improves over time so that we can get more certainty around some of the EBITDA measures as well. From a power perspective, we haven't gone out yet again, and I think we've probably discussed this previously. I think it's important that we have completed the 4 projects before we dispose off of them. We want to ensure that we are doing it to maximize the value rather than sell in the short term. So we are looking to run that process once completion of the construction has taken place, which we are anticipating to be in spring next year.

Yes. So I think in terms of the timing, Jenny, the strategic review today, is that point in time where we will start the process for marketing Pennon Power. We've already completed the benchmarking exercise of all our renewable assets across the U.K. and what the price tag is. So all of that work is already complete. Now it's about the procurement and the disposal in line with what Laura has said by making it operational. Look, I think in terms of the GBP 600 million, Jenny, there is over GBP 300 million of that is linked to performance commitments, particularly in leakage, supply interruptions and some of our MAX's measures. There is over GBP 200 million is linked to resolving capital project challenges. Just to be clear on that. And I think, look, what the message is here. I appreciate that 50% reduction may not feel ambitious to you and maybe other investors. But we have a history of overcommitting and underperforming in terms of what we said. And certainly, my intention is to move the business as fast as possible to outperform on that current trajectory that we've demonstrated today. So once we bed into the initiatives and start to see some of the improvements in time, we can clearly give better clarity on that forecast.

Our next question comes from [ Christophe Kelly ] of UBS.