Pennon Group Plc (PNN) Earnings Call Transcript & Summary

Thank you, everyone, for staying connected. [Operator Instructions] I will now hand it over to Chris Loughlin to start today's Q&A.

Thank you very much. It's Chris Loughlin here, and I'm joined by Susan Davy, our CFO as well, and we're here ready to answer any comments and questions. We hope you have a chance to look at the video. Clearly, it's an unusual set of circumstances where we present our results, but I hope the video presentation was helpful. And we're ready and looking forward to having a good question-and-answer session with yourselves. So I think over to you for the first question, I think.

The first question is coming from James Brand from Deutsche Bank.

I have 3 questions, if I may.

My usual, you're only allowed 2, but go for it, James.

Yes, I can ask 2 if that's the...

2 plus 2, yes.

Okay, I'll limit it to 2 then. The first question was on the comments that you made around scope for outperformance in the coming regulatory period for the -- obviously for the water business on Slide 26. And you commented that some comments about how you felt about your ability to generate outperformance. And you said that you were hoping that you might be able to double the base returns as kind of indicated, that scope was there by the settlement if you performed well under the settlement from Ofwat. And I'm not sure -- and I don't want to be tied down too much on that. But I just -- obviously, there are definitional differences between how Ofwat presents its expectations for scope for outperformance. And the reality, most notably, that Ofwat doesn't include kind of embedded debt outperformance in its diagram and also doesn't include leverage differences. So I was just wondering, in that comment that you could potentially achieve a doubling of that base return, if you perform well under the settlement, is that on a kind of like-for-like basis with the way that Ofwat views things? Or is that also taking into account embedded financing outperformance and leverage and things like that? And then the second question was just in terms of the timing around what we should expect around the announcement on return of capital and reinvestment that you'd said in the statement that you wanted to kind of leave flexibility there for value-creating growth opportunities. Should we expect kind of an announcement at some point post the sale of Viridor and those investments to be outlined again in the next few months or whenever you come around to that point and then that's done? Or could you envisage a scenario where you leave some balance sheet headroom and we maybe have to wait until next year or later to find out about what those reinvestments might and acquisitions might be?

Thank you, James, and thanks for 2 comprehensive questions. I'll start with the first one, about the scope for outperformance from Slide 26, and Susan might add some words. But in terms of the timing of any announcements, I think Susan might want to pick up that one. As you rightly say, James, this chart we showed on Slide 26 was just to try and give an indication of the fact that the return on regulated equity has been -- and the base has been reset by Ofwat, and that's where the 11.8% to 9% came from, so on the same like-for-like performance and delivery that we've done in the last 5 years, but reset in the way that Ofwat have reset the price review going forward for PR19 that equates to a 9%. And as you rightly say, Ofwat's assessment is just an assessment, and it isn't really looking at a whole range of actual things that will apply to us in South West Water. So I think we've just given a scale there that is not a million miles away from what we've been doing in the past. Certainly, the split and the deviation between totex financing and ODIs, we wouldn't anticipate to be exactly the same as Ofwat have presented it there. But to give some sort of scope and some -- I think it was this last time to give some idea of scope of where we might be targeting outperformance, we're targeting outperformance in all areas. And we see a potential. But of course, as you know, that's not guarantee, that's not certain, but we see a potential for doubling those base returns, and that's sort of the target that we're setting ourselves. Susan, if you want to add any more detail or color to that one.

Yes. The only I was going to add -- thanks, Chris, and morning, James. The only thing I was just going to add, as Chris touched on in the presentation this morning as well, we have been consistently delivering good returns year on year on year. So our momentum is continuing. And as you know, we kind of report our outperformance on a half year and yearly basis as we go forward. The one thing I did point to in the presentation this morning though around financing, and where I showed the chart that has the hedging that we've been undertaking, given the predominance of floating rate debts in South West Water. And as you know, we hedged that going into a regulatory control period. I said in terms of the rates where we've been hedging, if you think about our effective rate for South West Water, which we reported today for 2019, '20 is an effective rate of 3.4%. We said the hedging we've done so far have been giving us a 60 basis point investment on that effective rate. And obviously, if you compare that with what's nominal at 4.2%, you can see that there's a reasonable amount of outperformance. So given a little bit in terms of the work we've been doing, but as Chris alluded to this morning, our momentum continues year after year, focusing on totex outperformance, financing, to more efficient base and, obviously, ODI performance going forward. So we're in a good place for that. And then turning to your second question, which is around the timing for consideration of the use of proceeds from the sale of Viridor, I think as I said this morning, and obviously, good progress is being made to complete the transaction. There are 3 conditions precedent before completion takes place. Proceeds, obviously, coming to Pennon, we've obviously got 2 of those with the last week's Pennon's shareholder approval and the EU clearance for KKR. The third condition precedent, we're working on and good progress is being made, obviously, to make sure that we can get to completion early summer as we've said this morning. In terms of any announcements around that, obviously, we'll inform the market when the completion has occurred, as I said early summer. We just got that last CP to resolve and get some of those PCG moved from Pennon to KKR, and we are on with that. And obviously, when we complete, we will obviously update the market. I think we said before in previous announcements, we are looking at a number of usage of proceeds. You saw the kind of Pennon balance sheet, as we described it this morning, and you can see the debt levels held at the holdco that have to be used to grow and expand Viridor. So we obviously are going to consider what the balance sheet looks like going forward. There are opportunities in the water sector. We believe, given our position of format water back in 2015, which serves both customers and invests well, the consolidation in the water sector does deliver benefits for all, and we obviously look at that. And then obviously, there will be a return to shareholders. So I think that's what we can say today.

Thank you, Susan. So thanks, James. So do hang on to your third question, obviously, to allow other people to get in. So if you can limit it to 2 questions at the time. So thanks, James. And if you get time, do come back for your third. Yes. Thanks much, James.

The next question comes from the line of Dominic Nash from Barclays.

Yes. Okay. I've got 2 questions, please. So firstly, just sort of following on from James' question really on your Page 26 RORE. You've stated that you're not going to probably doing the same proportion as something in the P90s that the regulator has put down, I think the numbers that you've quoted. But how advanced are your plans of beating the regulatory contract? Like how much is kind of can be baked in now? And has COVID-19 remote working had an impact? And the second question I've got is on your dividend. You say 21p is kind of your underlying dividend ex-Viridor. Can just give me clarity? I might have missed this one, but how did you actually calculate that 21p? And if you end up sitting on your proceeds of Viridor for, I suppose, a whole year, say, for example, does that mean that we could estimate that 21p would be the actual dividend if you did nothing with the proceeds?

Okay. Thanks, Dominic. Two questions, and I'll start off with the first one about the chart on Page 26, which has taken quite a lot of interest, I can see. So how advanced are our plans? I mean, obviously, one of the advantages of having the fast track approval is that this is very, very largely our plan. We submitted the plan a long time ago now. And as you can imagine, as we did 5 years ago, we spent a lot of time going through line by line, detail by detail, what we want to do, when we want to do it. So those plans are very well advanced, and we are -- I think I talked about it at the half year, actually, implementing some of those plans before the end of the 5-year sequence -- the 5-year cycle anyway. So those are very well advanced, and we've got specific schemes, specific objectives to deliver those. And in terms of the coronavirus or the COVID-19 impact, obviously, we had some pause in our activities when the lockdown started. As I said in the presentation, and just now to James, the main sort of essential services where -- went on, continued, uninterrupted. And virtually, all of our sort of activities have carried on uninterrupted, apart from the ones where had to -- we would normally have to go into customers' houses. But there will be some impact on things like ODIs and KPIs performance commitments, as you can imagine. But Ofwat have taken, to my mind, as a very reasonable and sensible position, which is it's difficult to say exactly what the impact will be. So they're going to look back in -- as we get through the coronavirus implications and look back to see whether there may be some need to sort of be flexible about some of the ODIs. And an obvious and simple example is, as you know, a lot of people are now working from home, the amount of per capita consumption in a household setting has obviously gone up because of that. It's compensated by going down the business -- in a business environment. So you can imagine the per capita consumption targets across the whole of the industry may be different, but that's something we can assess in hindsight. So to give you a shorter answer is there's not really any impact to our plans to deliver in the 5-year cycle. We're hoping that, although the impact of the coronavirus may well be long lived, we've adapted exceptionally well, and we're anticipating carrying on and delivering our targets. So dividends, Susan?

Yes. I can -- good morning, Dominic. So in terms of the calculation and where we landed in that split to the '19, '20 dividend, I mean, obviously, the sale of Viridor, I mean, crystallizes Viridor's intrinsic value within the Pennon share price. And assuming that receipt of GBP 3.7 billion of cash and paying down Pennon's debt and transaction cost, you end up with that kind of an implied net equity value of about GBP 2.4 billion, which then translates into a share price equivalent of about GBP 5.70 given the 420 million shares that we've got. So stripping the kind of circa GBP 11 share price between Viridor and South West Water with a 4% yield splits that dividend, and using the '19, '20 base to give you the 22.66p for Viridor and the 21.11p for Southwest Water. So that's how we've come up with it. And obviously, we've done it, so that it can be compared with where we are now, obviously, depending on what we do with these proceeds and depending on -- if there's -- sorry, whether in distribution, how that is returned, that may change the metrics slightly. But in terms of the ability to compare where we are now with what that looks like, that's why I presented it in that way. But it effectively equates to about GBP 89 million, GBP 90 million kind of dividend for the continuing group. Now your question was, does that change depending on what we do with the proceeds -- has long hold on to the proceeds, well, I think the 21.11p base is for the continuing group. So for Southwest Water, Pennon and Pennon Water Services and the policies and to grow from that base using CPIH to 2%. So obviously, with the use of proceeds, if we do something else, then obviously, investors should expect a return for that or with the -- for that proceeds amount to be returned. I hope that answers that question, Dominic.

Yes, you've mostly answered it. But the one question is that if you do -- if your growth in the water -- if you hold cash back in order to grow in the water sector and it takes slightly longer than you anticipated, does that mean that, that cash that you're holding on balance sheet doesn't contribute to the dividend basically? So that 21p will be...

Yes, that 21.11p on it is for the continuing group performance. So you might focus on South West Water and Pennon Water Services. You're quite right, that is the base.

So the next question is coming from the line of Mark Freshney from Crédit Suisse.

A couple of questions. Firstly, when you look at potential organic growth in water, I guess that would mean another very closely adjacent regulated water business. Would you consider, for example, going outside of Great Britain into Northern Ireland, Republic of Ireland and Europe? Or would you intend for any growth to be focused on the U.K.? That's my first question. And my second question is regarding the efficient level of gearing. I think the notional level Ofwat assume is about 60%. One of your competitor companies has raised concerns about low inflation and has effectively caveated their dividend on that. But do you think it might be -- how do you think it -- how do you think about setting post the capital return on organic growth that the dividend at -- or the balance sheet a level of gearing that it needs to be? Would you not choose to owe on the side of caution and go closer to 55%?

Okay. Thanks, Mark. Two good questions. So in terms of the first one, I'll take that one, organic growth in the water sector. As you say, we had a very successful transaction when we, in 2015, acquired Bournemouth Water shares and successfully integrated it to South West Water together. And I should note that in the continuing price settlement, it is prices as one license there and one KPIs and metrics going forward now. Bournemouth Water is actually adjacent to South West Water anyway. There is Wessex Water and Southern Water in and around Bournemouth Water. And I think we've always said that with the investment in technology and remote technology and looking at systems in the realm, that we would -- which we did at the price review before last, I think it was PUROS that we introduced 5 years ago now. That enabled us with remote alarms, remote operations, to have no head office functions in the Bournemouth Water area. It was all sent back electronically to here, and it's all controlled from here in our control room in Exeter. So that means once you've got the technology platform in place, which, as I say, we've had for at least 5 years, probably nearly 10 years, really, that we would be able to look at other acquisition opportunities away from the geographic leverage. You need people on the ground to do things. That's how we're operating between the quarter there [indiscernible]. So that's what we'd focus on. So it doesn't have to be absolutely adjacent to South West Water [indiscernible]. Would we consider opportunities away from the U.K. regulated water? No, we wouldn't. Clearly, in our strategy is that we're focusing on U.K. regulated [indiscernible]. There is a noise on the phone, have you noticed? But I'll hand over to Susan, who will talk about the level of gearing.

Yes, of course. Mark, so I think your question was focused on the water business level. So in terms of the gearing for the water business, our strategy is obviously to make sure we've got an efficient balance sheet and [indiscernible] at the Pennon level. But clearly, the water business, we've had a view that has been broadly aligned with Ofwat's view in terms of what that efficient level is. And for the CapEx period, we've been pretty aligned with the 62.5% gearing levels. And obviously, that falls in K7 to 60% in terms of an Ofwat view on gearing. And in terms of our assumptions for K7 at delivery period and the trajectory of reducing gearing that we can see in the water business over that period. So South West Water's gearing is close to the notional NK fits, notional being 62.5%, and we're just over 63% in South West Water at the moment. And obviously, we will be focusing on that gearing levels, and it's appropriate position given efficient financing that we have in that K6 period. So we think we have headroom for shocks in that sense.

The next question is coming from the line of Martin Young from Investec.

Just getting back to the dividend question, I know it's being debated a little bit. You mentioned in the presentation that you had taken into account dividend cover levels. Just wondered what sort of levels you were thinking about in that respect. And also on the dividend, given Dominic's question, if, for example, you acquire a water business in the regulated space, would that then be a potential delta to the dividend you got up or down, depending on what you do there? And then on your ODIs, I think you've been quite bullish this morning with your Page 26. Just wondered sort of what confidence level you would attach to delivering -- sorry, ODI performance and indeed, other areas of outperformance that could push you to 4% plus on the base level return.

Okay. So obviously, a dividend question for you, Susan.

Okay. Yes, I can take that. Martin, so in terms of the dividend cover, I mean, at the Pennon Group level dividend cover, both have been around kind of 1 point -- 1.4x as we've been building out pivotal. And I think just focusing on the water business and the water business level, which is obviously where we assess the kind of dividend, given the majority of earnings coming from South West Water, the continuing group, that dividend cover is a roundabout 1.2x in terms of the effect that we saw and the scenarios that we have to run. So that's the cover points. And then in terms of water expansion and what that might do in terms of the delta with earnings and returns, I mean, obviously, we would look at growth being accretive. And so you imagine that, that's what we'll be looking at in terms of our assessment for opportunities.

In terms of the ODIs and the confidence levels of Ofwat, and Susan might -- again might want to add or supplement something, I think we've said in previous presentations, Martin, and just to repeat again, that Ofwat have recalibrated the ODIs in the coming price review. As you remember, the rules sort of in this -- company-specific in the previous prices, really, the one just finished, they have put in place common performance commitments, which is shared commonly across the whole industry and on the same benchmarks. And we're on the same benchmark as well, a combination of those and a combination of bespoke ones for our particular case. And I think we've given presentations in the past saying how we are well placed in that regard because we're looking forward to having that common benchmarking. So I think we've always made the case in the previous 5 years that performance that we were making are giving us a very modest reward, whereas that same performance -- sorry, a lower performance elsewhere in the industry was giving a very significant financial reward, and that's all we'd normalize going forward. So I think I just want to stick with the words that we used in the presentation, really, in terms of confidence levels. I think we're well placed. We are targeting outperformance in all areas. We see a potential for doubling the base returns. But as I said, probably not in the ratios that are on that chart. That's Ofwat's assessment, not ours.

The next question is coming from the line of Rob Pulleyn from Morgan Stanley.

Yes, Rob Pulleyn from Morgan Stanley. So may I ask a question that has nothing to do with dividend or Viridor? You'll be pleased to hear. So on the water side, given recent dry conditions since, obviously, the very wet February, do you foresee a risk of repeat of the challenges of 2018? And what did the group learn from that experience that prepares it, if indeed 2020 end up being dry? And to the point earlier Susan made, could this be exacerbated by higher household demand given, obviously, everyone's working from home, whilst, also, hopefully, business demand starts to rebound?

Okay. So water resources -- thanks, Rob. On water resources, our overall reservoir levels, and, as you know, most of our water comes from surface sources rather than boreholes in our service area, our reservoir levels are really very comparable to what they were this time last year. The challenge for the whole industry, and includes us, to some extent, as you say, because people are working from home now, and indeed, with the hot weather we just had in this early part of the spring, the demand at a household level has increased. So the challenge for us all is not necessarily have we got enough water, but can we process it quickly enough and get it distributed to the households quickly enough. That's meant extra pressure on our resources when we've got the coronavirus pressures over and on top of that. But so far, so good. We're doing well in that regard. And in terms of the sort of lessons learned, as we were from 2018, I just would remind you that there is a revenue correction mechanism, as you know, such that the price review -- so-called price review now is actually a revenue controls mechanism. So we have to assess how much revenues we're going to generate from the prices that we're charging. And if that deviates from the assumptions that we made, there is a true-up or true-down on that. It takes a year or 2 to come through to prices, but that normalizes itself out over the passage of the 5 years.

Now Rob, I think you had a question about household demand's view so that's what -- I'll just focus on the household demand. Yes, there has been increases in household demand on average. It's probably around 2%, 5% and 8% at higher. It's anticipated at this time of the year because of the kind of stay-at-home measures. And I think I also said in the presentation this morning, [ with our ] customers, obviously, with the lockdown and the shutting of a number of those businesses, then volumes of the business is down a roundabout due to the lockdown period.

Yes. Thanks, Rob. Sorry, I missed the second half of your question. Sorry about that.

No, that's okay. The second question I had was, and to pick up the baton from an earlier question about the gearing and the trajectory through the next 5 years, obviously, you've got the hybrid call from May. So could you talk a little bit about the pace or linearity of that trajectory of de-gearing over the next 5 years? Is that front-end loaded, back-end loaded, relatively linear? Just to give us a bit of a sense.

Yes. Well, I think our focus on the continuing group with South West Water is balance sheet really. So obviously, what we do at the holdco will be dependent on where we get to in terms of opportunities going forward, et cetera. And that holdco is there -- is being there to obviously support the Viridor business as we ramp that down. So perhaps, if I focus on the South West Water balance sheet, and -- which will you get to there, which if you look at our determination and our business plan, then we have a trajectory of reducing gearing over, probably, linearly, if I could say, over that 5-year period.

The next question is coming from the line of Fraser McLaren from Bank of America.

Just a couple of questions from me as well, please. First of all, just trying to get a sense of scale for how much the pension fund may absorb. I mean on a net basis, I guess, it's a relatively amenable deficit at present. But are there any other liabilities in there that we should take account of? And I guess you still retain responsibility for the Viridor scheme. Is that right? And the second question is just on bad debt. Just wondering, notwithstanding the progress you've made over the last number of years in reducing bad debt rates, could you remind us what happened to the bad debt rate during the financial crisis, both for household and for non-household?

So yes, yes, of course. So in terms of the pension position, Fraser, so in the results, you'll see our IAS 19 net deficit position, which is around about GBP 9 million. And the GBP 9 million position really was a reduction from last year, where we were at a roundabout GBP 61 million on a pretax basis, and that's because of the inflation rates reducing liabilities at the year-end. So I think, perhaps, as we move from the IAS 19 numbers to look at the actuarial valuation, which we've just completed and finished with 2019, which is our tri-annual valuation point, the deficit is a roundabout GBP 53 million and broadly in line with where we were with the previous tri-annual valuation. Viridor represents about just over 10% of the scheme in [ percent ]. So it's part of the [indiscernible], but it is a smaller part. And then with the liabilities to deal with the [ margins ], which we have as well, the net deficit of Viridor on an actuarial basis, it's probably about GBP 26 million on an actuarial basis. So in terms of your question for bad debt, Fraser, so going back to the announcement, if we look to date when we were considering the effective credit loss provision for the 2019, '20 year-end. And our experience from the 2008 recession, whether collection rates were impacted and impacted the provisioning by about 1% -- to kind of 1% and 2% on the provision, so that just gives you a bit of scale for what that looked like back in 2008. However, we've been through quite a change since 2008 in how we managed ourselves at that point. We have outsourced our collections and our collection processes. That is enhanced now. They're in a very different place. And our collection rates on the household side, we started at the beginning of this regulatory period, something like 1.6, 1.7x -- sorry, 1.6%, 1.7% above the turnover. And now it's less than 0.5%. So there's a lot of work we've been doing on that side. So we're a in good place to kind of mitigate impact with the system and process changes that we had in that period.

The next question is coming from the line of Jenny Ping from Citi.

Two questions, please. Just firstly, if I heard correctly, Chris, you mentioned earlier that there are opportunities in the water sector. Can you confirm whether you're actually in active talks with someone at the moment on participating either fully or partially? And I'm guessing, as a majority stake, that you're looking for is a partial participation in a water asset. And then secondly, just going back to dividends. Maybe Susan, if you can give us a bit of a feeling around how you came about the CPIH plus 2%, specifically on the 2% number. Obviously, we've come from RPI plus 4% from the last regulatory period. Should we read this as indication of how confident you are in terms of your outperformance going into the next AMP? Or is it really just purely based on sort of financial metrics?

Okay. Thanks, Jenny. And in terms of the opportunities in the water section, I think I'm going to say what I often say on these occasions, which is we've -- since the successful acquisition of Bournemouth Water, we've been constantly tracking and scaling for opportunities in the regulatory water space in the U.K., and we'll continue to do that going forward. But as you know, these are sort of like, probably an expression, a liquid asset. They're not freely available on the market just to go and buy. You have to have the existing shareholders willing or thinking about exiting their position. So they come along when they come along, rather than sort of constantly being available as they were. So we have that tracking activity continuing. We've had it continuing for a number of years, and we'll continue to do that going forward. So in terms of the CPIH, yes?

Yes, I can take that. Jenny, so in terms of the dividend, to compare it with the RPI plus 4%, which is policy deposit to the financial year '19, '20, so the RPI plus 4% was driven from the Pennon Group, which obviously includes the growth and the returns from Viridor. Obviously, with the same Viridor, we've now crystallized that intrinsic value within that sale. And so the CPIH plus 2%, absent dividend policy, will reflect the continuing group out with Viridor. Now why are we changing the RPI to CPIH? Well, on the regulatory side, aligning ourselves with the regulatory model and the revenues, which will be investing CPI hedge, that makes sense. So that's why we've moved from RPI to CPIH. And the 2%, which is obviously growth above CPI hedge means we obviously are confident about outperformance in that 5-year period. If you look at our run rates and outperformance, both from a [ comp base ] and the embedded financing and some view around our ABIs, and we're comfortable with that policy going forward. And really, it's been an assessment and a triangulation of those factors and looking at the balance sheet that we have to deliver that.

The last question is coming from the line of Lakis Athanasiou from Agency Partners.

Two questions from me. The first one, going back to Slide 26, looking at the outperformance, I mean, finance, you're going to pretty much know where you are, which leaves then totex and ODIs. And if we go with the numbers on that page, back envelope, so it's around 10% totex outperformance and about GBP 150 million ODI. The totex doesn't surprise me, but the magnitude of the ODIs does. But you've got to kind of reach the total of the 2 to get to where you seem to want to be messaging about what your turns are. I mean is that the way to look at it? Or maybe a bit more on totex and a bit less in ODIs, but order of magnitude talking 10% totex and GBP 150 million ODIs. And my second question is on payment deferrals. Now obviously, PWS is saying it's absorbing any payment deferrals within the group when you're not using the formal mechanisms that Ofwat is providing. But nevertheless, it's going to be swings and roundabout some working capital and stuff like that. But are you seeing or expect to see anything on household, particularly when furloughing stops?

Okay. So in terms of the outperformance on Slide 26, I think you're obviously able to analyze the numbers very accurately, Lakis, and you're...

It was the back of the envelope.

Yes. But your analysis is as well as anybody else's, just to be perfectly honest. But I think we don't really want to go any further than what we said, which is we don't expect the shape to be what Ofwat have assessed there. But we are seeing the potential for doubling those base returns. So whether it's a mix of totex and ODIs as have you suggested or some of the mix, I think we'll probably remain silent at this moment. But...

But the total of totex nearly has to be a fairly fixed number given that you pretty much know what your financing outperformance is going to be, and it's going to be swings and roundabouts on that.

I accept that point, yes. But obviously...

Okay, that's fine. Excellent.

I don't want to be drawn further on that.

No, no. I understand. Good response.

Just to go back to what I said on an earlier point is that we had the fast track approval. We've had plans in place for a while of how we will approach this 5-year period. And we're on with implementing those, and we have an element of confidence. But of course, it's very, very early days to say that too strongly. So in terms of household and furloughing payment deferrals, I mean, we did talk about it in the presentation that we're anticipating that customers may well get into difficulties going forward in the household space. And we have made extra funds available to support through our existing mechanisms, broadening the actual support available through the existing mechanisms. And that's how we're approaching it. I don't know, Susan, you want to give any more color or any more detail on that? But that's how we're approaching it, and there's a whole range of mechanisms that we have in place already.

Yes, that's right. And I think, obviously, as I said in the presentation, we've made an assessment for the '19, '20 year-end on expected credit losses, both for South West Water household customers and then for business customers through PWS. And I think I did say in the presentation that in terms of cash collection, that is actually looking fairly robust through lockdown. So April and May are looking robust. Hence, why on the PWS side we've not needed the mechanism to date in terms of payment deferrals. And on the household side, Chris mentioned in the presentation this morning, we have those schemes in place to support customers. And we have funds set aside that we have for every year to support customers who are struggling and are in need.

Yes. Well, that's the mechanism by how you get the payment deferrals. But is it at all possible to make any estimate at this stage of the magnitude of -- as a percentage of total household revenue in the year of what payment deferrals could end up towards the year? And or is it just impossible to state that at this stage?

Well, we've tried -- we try and get you -- with a number of different data points, Lakis. And I'd go back to, I think, the question earlier today around the recession back in 2008 and what happened with collection rates and collection performance then. And I think we were impacted by perhaps 1%, 2% in terms of collection rates, which flowed through to provisioning. But obviously, this is quite different in terms of the pandemic and the impact you've just alluded to furloughing and the fact that people who are at home and have been furloughed, there's, obviously, some uncertainties for them going forward. But our scenario is for lockdown, then easing and lifting those restrictions and sequential returns. So I think we're comfortable with that guidance at this point.

Thank you, Lakis. So I don't know if there are any more questions or indeed, I think I asked people if they had their follow-up questions or more than the 2 to come back. So if there are any more questions, perhaps you can take them.

The last question is coming from Verity Mitchell from HSBC.

My question is just about tax and capital allowances actually going forward because I know that you've got some -- you have benefited from capital allowance from the IRAS. So I believe you've got some capital investment going on in [indiscernible] in this new AMP and I just wondered how we should think about capital allowances and tax for the AMP period.

Yes. Good question, Verity. So I think our effective rate was a bit lower this year than we've had as a run rate as a group, and that would be guiding to a slightly higher effective rate going forward before that. I think it's a mix of investments this time on the variable side, but that's kind embedded into that. But going forward, we would imagine, if we have some investments that are going on forward [indiscernible], but a return to an effective rate, and as we saw last year, is probably more of a sensible positioning.

Okay. Thank you, Verity. I don't know if there are any more questions, but I think we probably need to draw a line there. Are there any outstanding questions? If not, we'll draw the Q&A to a close.

We have James Brand from Deutsche Bank again back in the queue.

James, I did promise to let you come back, so probably the last question. Thank you very much.

' I wasn't going to, but then you highlighted it. So yes, I just came back -- coming back to my third question, which was just on Pennon Water Services and INC retail. And obviously, there's kind of -- there's a lot of kind of turbulence in that area this year given everything that's happening in the Ofwat kind of support schemes, et cetera, et cetera. But it hasn't been -- kind of ex-COVID, it hasn't been a very good business for anyone in terms of profitability in the regulatory period just finished. But I think there have been some improvements put through by Ofwat in terms of, I think, as I understand it, margins -- allowed margins in that business as we go into the new regulatory period. So I was wondering whether -- obviously, in the coming year, it's very hard to kind of separate how COVID from everything else that's going on, but maybe you could comment on the outlook there on an underlying basis would be interesting.

Yes, that's a good question, James. And perhaps we can try and pick it up between ourselves. But as you said, and I think I said as well, it's been a difficult market for many players, and Ofwat have understood and accepted that, I think. And if there is a little silver lining in some of the difficulties that some of the other retailers, as I say, Pennon is in good shape compared to most, if not all of our competitors. If there is a bit of a silver lining in the difficulties that some of our competitors face, I'm sure Ofwat and most that are all going with them will take the opportunity to reflect and consider what is the long-term support mechanisms that are required for wholesalers and retailers, really, because, clearly, the market didn't prove as resilient as I would imagine they would have hoped as it was set up. So I think there is a prospect for a review and reflect from the regulators and involved in the industry as well.

Yes, I think that's like it. I mean it's a tough market, as Chris have touched on. But as he said, kind of water services is really focused on getting itself kind of much fit through this last financial year with its systems and processes. And it's in a good position and has been winning business through the lockdown period. So in terms of relative position, it's in a good place.

Okay. Thanks, James. And I think that's all probably bring us to the end of our questions. Thanks very much for your time today. Thanks for joining the question-and-answer session. And also thanks, Steve, who joined the -- looked at the presentation. Unusual circumstances, and thanks for bearing with us, which is less than a perfect way of presenting results. We understand that. But like I said in the opening remarks, and just to repeat as a concluding remarks, really, is that it has been an unprecedented year for Pennon. A whole range of, what I call, momentous events have washed over as in the course of the year, but Pennon has emerged in a very strong position from all of that. As I say, we've delivered good financial results. We're coping with the impact of the coronavirus very well and continuing to do so. We've released significant shareholder value through the sale of Viridor and also the potential sale of Viridor and also well placed and confident about the future, and that's amplified by the fact that we've announce what is, I think, effectively, a dividend policy of CPIH plus 2%, which compares, I think, favorably to our peers. So all in all, an unprecedented year, but we're emerging in a strong and stable position. And I look forward and confident for the future. So with that, good to say, thanks very much for joining us again. And hopefully, we'll see you face-to-face some time.

Thank you.

Cheers now. Bye.

Thank you, everyone, for joining us on today's call. You may now disconnect your handsets.