Pennon Group Plc (PNN) Earnings Call Transcript & Summary

Hello all, and welcome to the Pennon Group Half Year Results 2021 to '22. My name is Brika, and I'll be today's event specialist. [Operator Instructions] I would now like to hand the call over to our host, Susan Davy, Group Chief Executive. So Susan, please go ahead.

Yes. Thank you, Brika, and good morning, everybody. Thank you for taking the time to join us this morning for our half year results presentation. I'm joined by Paul Boote, our Group Finance Director. So just -- watch the presentation, so a couple of points for me before we move to Q&A. As you can see from our results, robust set at this half year, very much delivering resilient performance underpinned by innovation and efficiency across the group. At South West Water, in terms of its business plan commitment, on track or ahead of expectations. Last year, we delivered 8% in terms of our ODI equipment, and this first half year, 85%. So there'll still be momentum there. Federal Services, our business retailer, also performed very strongly, supporting businesses as they rebound from COVID and winning a number of new contracts, which is [indiscernible] with national retailers, [indiscernible], delivering that EBITDA and PP growth. And going to our second pillar, which is around driving sustainable growth. The Bristol Water acquisition is, as anticipated, working its way through CMA process. We have had some conditional clearance for our investments in the business retail and waters business. But we are still awaiting the regulated water business review to conclude. Having said that, the performance of Bristol Water for the 4 months that we've had for this first half year, very much ahead of expectations. Second point just to raise in terms of sustainable growth and organic growth, our Green Recovery investment of GBP 82 million, which we obviously have approved by regulators and government, is very much underway. Though an example -- great example of organic growth is obviously going to earn base returns and is giving us the ability to tie areas to help drive innovative solutions for the future, whether that's on smarter, healthier homes to customers or in transforming water quality where we focus on 2 pilots and we start undertaking. So we're very well positioned for the future. We've got great tons of people across the business delivering for customers and communities. And we're focused on creating that long-term sustainable value. We have, obviously, over this year, been making sure we're responsibly deploying our capital. We've delevered the balance sheet. We've contributed to the pension scheme, the pension scheme [indiscernible], and we've been reinvesting in UK Water. That's all supporting our EBITDA growth of 14.3%. Adjusted earnings per share is up 14.2%. And it depends on dividend policy of CPIH plus 2%, which results in a growth of dividend of 4.9% this half year. So I'll conclude that in terms of the opening remarks, and we'll go up to Q&A.

[Operator Instructions] And we have the first question on the phone lines from Ruisi Liu of Credit Suisse.

Yes, can you hear me?

Yes, we can.

Three questions from me, if I may. So the first one will be regarding the submissions to the Environment Agency and Ofwat investigations. Are you confident that your controls can capture all the dispute for the investigation? That's the first one. The second one will be, what are you assuming for input cost inflation in the guidance? Will that impact your totex outperformance? And I guess my final question is, is there anything you can give us on the integration costs and synergy for Bristol Water?

Okay. Great set of questions. Thank you very much for those. So we'll tackle them in order. First one, regarding the investigations across sectors from Ofwat and the Environment Agency. I mean it's probably fair to say that it's early days in terms of the review. There is data that I'm sure we'll be asked to submit, and we're awaiting some of those requests to come in from the Environment Agency. But obviously, when that comes in, we'll be submitting that. We work very transparently with the regulators, and we will do [ take ] part in this review. We all ultimately want the same thing, to make sure we understand and reduce the impact on water quality and improve impact from the environment. So early days in terms of review, but we have always been open and transparent with our regulators and shared information around ourselves. We have an annual report that we produce and produced one for 2020. That obviously is on our website and for our stakeholders to see. So we'll obviously be progressing through that review, and we will await the respective regulators to come in. So if we move on to the second question, which is the guidance around input inflation and totex efficiency deliveries, just to say it can be [ from ] our results. We're continuing to deliver efficiently. Very important that we do deliver efficiencies. It helps keep that [ field ] customers as low as possible, both benefits get shared with customers when they're delivered. We have delivered cumulatively, in Page 7, GBP 94 million of totex efficiency. But Paul, do you want to talk about the inflation piece?

Yes. Thank you, Susan. So in terms of inflation, as you rightly pointed out, clearly, inflation impacts us in a number of ways, and costs is one of those elements, and I'll perhaps talk about the other elements as well. And if we reflect on the current environment we're in, we're clearly in a higher inflationary environment than we have been in the past. There are inflationary pressures caused by supply chain issues and consumer demand, all effectively linked to the COVID-19 pandemic and recovery thereof. So I think there are these pressures out there. In terms of our results for this half year, we haven't significantly seen those pressures coming through in those results. However, we are seeing the supply chain signaling those changes coming through. So as we move into H2 and beyond, I would expect an element of that inflationary cost pressure to come through to our cost base, and of course, as you're sort of articulating that, will then flow through to some extent to our totex. I think it's worth noting that that's obviously one element of inflation, and we have other elements to consider as well. So for us, really, revenues are linked to inflation. So the following year's revenue will link to CPIH set in November and also our regulated capital value. As we move forward, it will also pick up and grow in line with that inflation rate. And that will then drive further revenues as we get to the next regulatory period. So whilst there may be a slight increase in costs coming through, we will also have more than [ outlay ] by revenues into the longer term. And then perhaps just considering the final aspect of inflation, that tends to focus also on interest. So we have some of our interest with our debt is linked to inflation. We have about 26% of our gross debt linked to inflation. Therefore, increases in that rate will see our interest costs increasing. That's very much a 1-year impact as that will reset depending on where inflation goes in the future years, but that will also be feeding through into this year. And you can see that already in the half 1 results where we've got higher interest costs. And still with the sector-leading interest rate, we do have higher interest costs on an absolute basis. And we will see that continuing to H2 and depending on where inflationary expectations go to if that continues to rise. And obviously, that will follow that in that trajectory. So inflation is also the other aspect -- sorry, interest is also the other aspect where inflation hits. But in summary, worth remembering the revenues and the RCV fundamentally linked to inflation, and that will more than offset the increases in the cost base and the interest charges that we see.

Okay. Thanks, Paul. I think the last question was around Bristol Water and the integration costs and synergies. I suppose just to note, I said at the beginning, in terms of the CMA process, as anticipated, that's still ongoing. I mean what I will say is that in terms of the conversations and discussions we've been having with CMA and Ofwat, we are submitting the proposals that demonstrate how customers from companies can -- from both South West Water and Bristol Water can benefit from this acquisition. And some of those benefits come from the operational synergies and the financial synergies that we will be making once we are able to merge those businesses. So we will update the market in due course once the Ofwat and CMA review has concluded. But we're not at this stage yet. We are very focused on making sure that there will be benefits that will be derived from that acquisition.

We now have another question on the line from Bartlomiej Kubicki from Societe Generale.

This is Bartek Kubicki from SocGen. I would like to discuss 3 issues, please, with you. Firstly, on volumes, I understand in the first half and probably in the whole 2022, you will see an abnormal level of demand from households. And as a consequence of that, I suppose, in [ T plus 2 ], you will need to return those extra revenues you are getting on extra volumes to customers. Could you actually specify what the extra volumetric impact which will need to be returned in [ T plus 2 ] is? And also, I suppose, once you have higher demand, there's also incremental costs associated to that, which will -- I understand, which will not be recovered in [ T plus 2]. So could you also tell us what is the sort of -- what is the incremental cost of every, whatever, GBP 10 million of extra revenues coming from abnormal water demand? That would be the first one. Second one, on this 4.9% ROE you pointed to from Bristol Water, could you actually split it into ODI, totex and financing? And lastly, since your acquisition of Bristol Water, what are, for the moment, your biggest sort of surprises and the biggest disappointment following the acquisition?

Okay. Great. Well, thank you, Bartlomiej, for those questions. Paul, do you want to pick up the volume point?

Yes.

I mean, obviously, we have been having more volume, as you might imagine, in the southwest. I mean it has been a region where not only we have businesses as a result of tourism since the pandemic began but also have more residents in the region. Many of the homes in the southwest -- I mean 1 in 17 homes are second homes in the southwest, and we have many more residents. So yes, our volumes and demand have been elevated as a result of that. So Paul, do you want to talk about how, what in terms of the revenues and the costs?

Yes. And I think it's -- Bartlomiej, thank you for the question. So I think it's worth remembering that it's very much revenue total that we've looked at in this way from an Ofwat perspective in terms of the allowed revenues that we have. So taking that in mind, yes, it is household demand, but it's also non-household demand. So it's looking at the whole picture and then working out the revenue level. So I think it's worth noting in terms of that demand, we've seen real changes from COVID-19. When I would be here this time last year, we'd be talking about significant changes in the non-household demand substantially, and household demand increased substantially. Now a year on, sitting here again, and it's not quite the opposite that I'm saying. So what we're saying now is that household demand has actually remained at an elevated level. So that has remained high as people perhaps are more in our region. So lots of people, as Susan has already said, have second homes down in the southwest, and we believe they're -- we'll will offer them more actively than in the past and previous year. So we are seeing that household demand being at an elevated level. And then alongside that, we're seeing non-household demand recovering back, which is very pleasing as businesses have reopened following the restrictions that eased back in June and July. So that's just to talk about the demand dynamics that we're seeing. Now in terms of revenue, yes, that does mean we've got higher revenues than perhaps we would have anticipated. And the way Ofwat revenue mechanism works where we do overrecover, as you rightly indicated, we'll be cutting that back. And that, in a sense, is not specifically volume assessed. It is more assessed in terms of [indiscernible] revenue that you actually achieved. But in terms of -- I'll just give you a flavor in terms of the impact of volume on our costs. I believe that was one of your questions you asked about a while back. I think we indicated in our announcement that it's more around GBP 2 million is the sort of figure that we're seeing coming through to -- additional costs because of the volume that we're seeing above where we were previously. As I said, that increase in volume primarily relates to non-household demand when we look on period-on-period. But in terms of the revenue that we passed back, obviously, when we get to the end of the year, we'll be able to assess that compared to the [ FB ] allowance, and then that will flow back over the rest of this regulatory period to tariff changes.

Okay. Thanks, Paul. And the last question was around the RORE for Bristol and to have that 4.9% breakdown. I think the base return for Bristol is 4.43%, and the difference between the 4.43% and 4.93% is outperformance that they are having across all 3 areas, totex, ODI and thirdly on financing. So it's coming from all 3 areas.

We now have the next question coming from Jenny Ping of Citi.

Two questions from me. Just firstly, on the GBP 400 million buyback or the residual of the GBP 400 million buyback, are you still very much committed to doing that as a buyback? Or given where the share price is, is alternative methods of returning the cash on the agenda to be looked at? And then secondly, again, on the GBP 400 million residual, on the M&A element, can you give us an update on how your search is going in terms of any assets that you could be looking at? Just a general update. Obviously, we talked about it at the full year but would be keen to hear where you are on that.

Okay. Thanks, Jenny. Maybe I'll take the last one first and then I'll hand it to Paul for the buyback. So in terms of our growth strategy, yes, it is twin-track, so organic acquisition, hence, the Bristol Water acquisition. And we've always said and we said that before we made the Bristol acquisition that we'll be very measured in terms of looking for opportunities and seeing the potential that there is there and making sure that it's a good fit with the group, and importantly, that it works overall both for customers and the shareholders. So we have nothing to announce today, but obviously, we will continue to update the market if there is anything that we need to in that area. So Paul, I'll hand over to you for the buyback.

Thank you, Susan. Yes, so the buyback that we announced back in June of up to GBP 400 million to be delivered over the period out to 30th of September 2022 effectively remains unchanged in terms of that process and that position. And as Susan has articulated, we continue to look at M&A opportunities and the completion of the buyback will very much be subject to that. To date, we've executed GBP 110 million of that GBP 400 million. So obviously, there's GBP 290 million potentially to go subject to where we may get to. And then you specifically asked about potentially other methods of delivering it. I think when the Board and Susan and I considered the range of options in terms of use of deployment of capital and capital allocation back in June, clearly, we talked also about GBP 1.5 billion dividend that came through as well as the reinvestment into U.K. Water through the Bristol acquisition and repayment of debt at PLC level and increases in pension contribution. So the buyback should always be thought of and seen very much in that lens of that diverse capital allocation that we put together as a package at that time. And now we're just moving through the delivery of that announcement, which, as we keep saying, is subject to any opportunities that we may wish to pursue.

Can I just challenge you on that? Obviously, your share price is at different level back when you decided to do the combination of cash return and share buyback. Clearly, share prices have moved on. I just wondered whether there has been further thoughts about the best way to return that cash to shareholders, the most value for money.

Yes. So we did -- I mean we very much consider that as part of the positioning in June, and that's why we have that split of the GBP 1.5 billion and the GBP 400 million. The GBP 400 million is simply not in the way of like-for-like with special dividend because, clearly, that's been positioned over time. But also when we talk to our investors about the method that they would like to see capital return, we did have, if you like, a split of opinion. Therefore, we are meeting the aspirations of our investments, as you have on us, by splitting that mix of returning some via dividends and some via a share buyback. So there's lots of factors that have gone into assessing the methods and then the appropriate split between the methods, and that's where we've planned it. Now in terms of the buyback, the way we are pursuing that and proceeding with it, we're very much not taking a call on the share price at any particular time. This is about delivering a return of funds to shareholders. So we'll have returned GBP 1.9 billion assuming we do complete this -- the buyback, which, as I keep saying, is subject to other opportunities, we'd have returned GBP 1.9 billion, GBP 1.5 billion through special dividends. So I think it's worth noting that, that all needs to be considered alongside each other. And obviously, we're quite pleased with our share prices right now, but we won't be changing our view in terms of delivery of the share buyback in that regard.

We now have Martin Young of Investec.

I have got a couple of questions, if I can, please. The first is just to sort of tap into your big picture thinking in a couple of areas. The first of those is what the potential longer-term opportunities might be from the ongoing Ofwat and Environmental Agency investigation because quite clearly, there's an element of split responsibility here for these issues. But the problem, I think, everybody recognizes and wants to solve. So to me, that lends itself to a need for incremental investment somewhere down the line. So just wondered what your thoughts on that would be. And then the second big picture question is around M&A. You've made it perfectly clear that you are willing to consider further M&A in the regulated space. But I just wondered what your sort of big picture view of where the water sector will ultimately land in this country. Do we need to be thinking around the migration towards 10 water and services companies and basically the progressive eradication of the stand-alone walks? And then my second question was just a simple one, hopefully around the guidance that you put out this morning, the vast majority was unchanged, but you did indicate that you'd expect operating costs in South West Water to go up versus a flat position as communicated to FY '21. Is that increase being absorbed or more than absorbed by everything that you said this morning on the revenue side of things from increased demand?

Okay. Thanks very much for those questions, Martin. So perhaps I will start with the big picture questions that you asked and certainly around the ongoing investigation that's been undertaken by the EA and Ofwat. I mean, I think in terms of where we see ourselves in terms of water quality expectations, I think, from communities and from customers have exponentially increased. So I think whilst we have assets and networks that obviously fulfill what they're required to do and have basically valves in place for times of storm. That obviously relates to the environment in a way that is authorized. If there is, I think that growing need and no doubt that improving water quality, whether it's river or [ beverage ], become center stage in the minds of the public and especially in our region as well. Recreation like swimming and other amenity requirements around our water are becoming ever more popular. And I think the pandemic has really strengthened that bond. We want to have with open, green and blue [indiscernible]. So I definitely think there is an expectation shift, and that has exponentially increased. So I think there are 2 things to focus on here, what's happening now and make sure that our investments -- and we have significant investments in this instance to improve water quality in our region. We know in our regions for river water quality, we probably account for around 19% of the regions were not achieving good ecological status in our region. And from the investments that we're making in the period to 2025, we reduce that impact by [indiscernible]. Now that's great, and there is more to do, and we will be obviously investing to get that down to 0. But if we're 19%, it means that there's 1% of activity going on in our catchment that are causing that 81% of regions that are achieving good ecological status, some of the landowners and farmers and other industries. Now we are working and have been for a number of years, we are working in our catchment with over 1,700 of our farmers to improve the situation from land use so that the water policy in our region improves. And that has been gradually happening over time. Our pilot around capital management are showing, but we are having reductions in mainly [indiscernible] that are coming from those activities. So if I think about the future in the big picture, then there is certainly exponential expectations that have increased from society around water policy. And we will need to think about how we manage that, how we deal with that and how we achieve that. And so there will be investments that are needed. We have put into our plans for Green Recovery, which is why we did it, 2 pilots for the Dart and Tavy. So the Dart and Tavy are again waters that are used recreationally by many in the region and by businesses. And what we want to do is look at pilots and on those rivers to understand what's happening in the catchment there, what can we do to improve water quality. And we're testing some of the aspects, so thinking about separation, we're thinking about more catchment management to help alleviate the impact on the river and move that to a designated saving water. So that's part of the pilot work that we're doing. And I think taking that approach of testing, piloting, proving [indiscernible], as we've done this catchment management in the past is going to be a way of setting the investment going forward. So that's the kind of big picture around where do I think this is going in terms of water quality. I think society have this demand that directly say that the water quality has improved and that we focus on it. There will need to be a change in the way we think about achieving that. And then we will obviously have to have those conversations about the total investment that goes a lot in it. So that was the question around water quality. I think the second question, Martin, that you asked was around M&A. Now the reason that we have this twin-track approach around M&A and organic is with our experiences with the Bournemouth acquisition, and obviously, we're working through the Bristol acquisition at this point. So we have proposals that we've put through to the regulator and to the CMA in terms of the Bristol acquisition. We think it makes sense for customers. We think it makes sense because we can deliver not just operational synergies and benefits but also service benefits as well. That's what we're really focused on doing. And we did that with Bournemouth, and we're going to do that again with Bristol. So if you ask me, what do I think about the sector overall and where does that go, well, I think if we can and have that step change in benefits that come through, and even if it's an acceleration that you get, then that is worth happening. So I think in terms of an overall sector, it's worth considering. And if you think about the other regulated sector in the U.K., there are 16 comparators in the U.K. water. There are a lot more number in the other regulated sectors. So this idea of how many comparators do you need, obviously, some are regulated in the southeast and [indiscernible], but I do think that we have to weigh up what are the benefits that can be derived from these mergers. And we can see there are benefits, not just in terms of efficiencies, which in turn lower customer bills, but also in terms of operational service as well. So that's our view in terms of M&A. And then the third question, I think Paul would do.

Yes. In terms of operating costs, I think was your question, Martin. So I think if you cast your mind back to when we would have put the original guidance out for this financial year, we would have, again, been in lockdown. So again, it's one of those interesting times is it's hard to work through quite what's going to happen in the year in terms of the levels of demand, which, again, we've touched on to other questions today. So I think the guidance being updated to reflect our operating costs reflects 2 things really. It does reflect the fact that we have seen higher demand perhaps than we would have anticipated when we were in lockdown, obviously, not knowing quite how businesses would come back and what will happen to the population in the southwest and fact that could people go on holiday elsewhere in the world, not really, and that one in southwest is very, very busy over the summer. So we have had this very, very busy period, which has also then put pressure in terms of cost to serve. So therefore, having seen those higher costs in H1 matching the higher revenue, we feel it's right to obviously note that in our guidance and update it accordingly. And then to your point, that has been absorbed by our revenue to date. But I think there's perhaps a separate point about, as I was saying earlier, inflationary pressures potentially coming through in H2. We will obviously see to what extent that comes through, but that is also encapsulated within that guidance change.

But do you think revenue in the second half of the year is sufficient to mitigate the upward pressure on OpEx?

Yes. Well, that's what we've seen to date. All things being equal, we anticipate that being the same.

We now have James Brand of Deutsche Bank.

Congrats on the progress made in the half. Just 2 questions from me, relatively brief ones. Firstly, on incentive performance, you obviously did better this year on ODIs, a little bit worse on totex and kind of similar in terms of your overall RORE. Is that likely to be reflective of what we'll see throughout the period? You don't bet on the ODIs and maybe a little -- obviously, you're doing amazingly well on totex, but a little less well on totex? Or would you expect the totex performance to kind of recover to where it was last year? That's the first question. And secondly, on inflation, do you think -- do you anticipate the sector coming under pressure from government or from the regulator to forego inflationary price rises over the next year or maybe 2 years given that, obviously, it looks like CPIH inflation might be 4%, 5% this year. I guess we'll see the November prints next month, but -- and possibly even next year. I think your real price rises are quite neutral, so maybe you're in a better position to forgo that pressure and others, but just be interested in your thoughts on that.

Okay. Thanks, James, and welcome in Q&A. So in terms of the first question, which was around our performance, whether it's about ODI or totex. So I think you said in terms of ODI, you're absolutely right, our ODIs have moved from our net [indiscernible] in that net reward division in this half year, which is where we want to be. And we are improving in terms of our commitments that we made, which is great, and we're on track for the around the 85% of our equipment that are being delivered. So really a good place for that. In terms of totex, I mean, you did say, yes, we're performing well on totex. We continue to drive that momentum through. Is this forecasted? The one thing we've always said is we don't forecast our -- but we do tell you where we are every year, and we are very confident that we would do very well on the RORE at the start of this regulation period and we're continuing that momentum around the doubling of base returns, and that's very well. And I think in terms of totex, it is this performance, this target performance -- there may be some ups and downs in half year, but overall, newer delivery GBP 94 million of cumulative totex outperformance, which get shared with customers, which is a growth phase space. So bringing back to your second question around inflation and bills and customers. I mean we've been reflecting on this. And there's 2 things really to say. First thing is bills in the Southwest are lower today than they were 10 years ago. So yes, we do focus on making bills as efficient as possible for our customers, and that's why we do focus on totex and totex outperformance that get shared with customers. And unlike the ODI mechanism, doesn't [indiscernible], it actually brings it down when you deliver on those pension to get cut back to customers, which is why it's really important to focus on all areas, whether it's totex, whether it's ODI, whether it's financing. But the one measure that is unique to us work that [indiscernible] is WaterShare. And our WaterShare first scheme obviously is about sharing benefits with customers over and above the regulatory model. And we are ready to share those benefits through our financing outperformance, which we've committed to doing through the regulated period. So we've had our first issuance of WaterShare at the beginning of the period, and we've stated in the results today that we're looking forward to a second issuance of WaterShare. Again, it's about sharing benefits to customers. So the first issuance, customers were able to either get shares in the [indiscernible] off the bill. And obviously, the second issuance we'll be doing the same again. The only difference being we'll be offering that to Bristol customers as well, so they'll be able to get [indiscernible] off their bill. So I think we are unique in that sense. We have fortunately got our WaterShare mechanism, which allows us with our independent WaterShare panel as well to review our performance in the [indiscernible], and we are already delivering for customers both and across the regulatory model, but it is something that we will continue to expect on with our independent panel as we move through this period. But that's the reason we set that mechanism up, something that served us very well. And we have 116 customers to announce shareholders in the business.

We now have a question from Dominic Nash of Barclays.

I've got a couple, although I think the first one is split into 2 subsections, if that's okay. And just kind of following up from a couple of questions we've had on inflation. We've obviously seen -- I think the last, say, RPI is, what, 6% year-on-year as of October and CPIH to 3.8%. So the first question I've got here is the RCV that you quote and is in the final determination, as I understand it's based on the CPIH number with a 1% wedge. What sort of log up, log down are we looking at now if we're going to put through a widening wedge between RPI and CPIH? And does that mean that we -- that the numbers that we're seeing are undercooking what your actual underlying RCV is? And the second one on this is the cost of -- your financing outperformance that you're going to be putting through is going to become quite high with your low cost of debt versus the high inflation allowed cost of that. Can you just talk us through the true-ups and the sharing? So how much of the financing gets shared with consumers? And on the true-up of that, could you just remind us again what proportion of that gets shared with consumers via the regulatory model of the new debt, sort of fixed cost of debt number? So that's your first question. Apologies if that was a bit long-winded. And then the second one, could you just remind me again on the pros and cons of outperforming the 3 main sections of the Ofwat regulatory targets? And why don't you reinvest the totex number -- your totex outperformance to provide a better service for customers and returns through the ODIs as some of your peers are doing?

Okay. Well, thank you for those questions. I'll start with the last one first, and then we'll come back to the other 2. So in terms of our outperformance, we very much have a strategy as we incentivized in the regulatory model, and we're clear in our business plan that we want to outperform across 3 areas of financing, totex and ODIs. So it is great that we are back into a net reward approach in half 1 for ODI. Now I think it's really important that we focus on all 3. I think that gives us the best benefit to the customers. Just to [indiscernible] deliver efficiencies, it's really important to [indiscernible] possible and to delivering efficiently to achieve that is something that we focus on and why we've been looking at the innovations in our business on both the water and the wastewater side. Think about how we can deliver for our customers in a cost-effective way. So definitely we have to focus on all 3 areas. And I also think that in terms of delivering against those [indiscernible], it is a mix of ways of working as well as the investments that we've got in our business fund. If there was a need to reinvest for the benefit of our customers and investments in the future, then we would consider it. But I absolutely believe the right strategy to deliver on all 3 [indiscernible] overall and in fact, the customers overall that you are achieving for 3. That's it for the last question. In terms of the first question, which is around the RCV and what happens from the business plan and the wedge that we see as part of the RCV and what does that look like now with inflation.

Yes. Yes, that will depend on actually when we get to over the 5-year cycle. For example, last year, that wedge was smaller and, therefore, adverse in that sense. And as rightly you're saying right now, that gap is much larger. And therefore, that will lead to us at the end of the answer. It will go potentially up depending on where inflation positions itself over the rest of this regulatory period. So there will be an adjustment to reflect that. And then you talked about the debt and the financing performance and the sharing of that. So as you rightly point out, we're very much sector leading in terms of our financing performance. And in terms of sharing mechanisms that are in the regulatory model this 5-year period, the focus of that is on the iBoxx and where you're setting for new debt issued in the period. Now the regulatory model assumes a new debt in the period, I think, was around about 30%, averaging that over the 5 years. So the vast majority of new debt is not new debt. It's the older embedded debt, and that in itself is simply not subject to those sharing mechanisms in that way. So any sharing is in relation to performance against the iBoxx for new debt. So when we're looking at that performance to date, clearly, that's heavily driven by the embedded debt position that we have. And therefore, the vast majority of that would be [indiscernible].

Can I just follow up then. So the RCV that you actually quote nominal for September 2021 does include totex outperformance, log up, log downs. It's like a shadow RAV number and that doesn't include...

No. So the one we're quoting in the presentation will be the RCV.

So we need to log up for the RPI number and potentially log down a bit from totex and log up for the ODIs basically to get to an underlying [indiscernible].

Yes. And we do put that in the APR every year. But obviously, you'll have to wait for this year.

We now have a final question from Verity Mitchell of HSBC.

I'm just looking at your debt. Very helpful slide. So the GBP 100 million that you've redeployed in the business, looks like it's gone to reduce the gearing in Bristol Water from 69 to 60. And so that brings it into line with regulatory assumptions. I just wanted to just check how much index-linked debt Bristol has. Is it sort of adding to index-linked portfolio? And then the second question is just the very helpful Slide 29. How is the organic growth, the GBP 82 million actually being funded given that the GBP 100 million has essentially been used to repay debt in Bristol and South West Water?

Okay. So Verity, picking up your first question in relation to that GBP 100 million. So I think it's worth noting that GBP 100 million at the moment as yet we put to use in those old companies, and that's why we're showing it pre and post. And it's very much a notional position, clearly, until we do put that money in and put it to work. But the plan is very much just put the money into water businesses in this financial year. And as you've noted, the split of the GBP 100 million really is designed notionally to reset those gearing levels down towards the notion. And obviously, you can see the large impact that has in terms of Bristol's positions. So I think that probably covers the GBP 100 million on the plan there for that. In terms of your earlier question regarding Bristol debt, so yes, they do have a higher proportion of index-linked debt than we see in South West Water. But we've put on the slide the combination of the 2 water businesses together, the aggregate position, if you will, and that shows that we have gross debt of around 26% when we have both together as index-linked.

Okay. And then I'll take the last question was around the Green Recovery investments and how we kind of we've got the injections coming around gearing. But I think just going back to Dominic's question around efficiencies and delivery, then we see we're delivering efficiencies against our business plan. We've delivered GBP 94 million cumulatively so far. The use of having efficiencies on totex is it gives you headroom for options and investments and to manage those. Obviously, with the Green Recovery, we will get it true up at the end of the period, so what we have said, but obviously, that gives us headroom for investments as we drive those efficiencies.

So just to clarify, so the GBP 82 million is essentially being funded in this current AMP through extra headroom generated by totex. But that's not going to be offset. You're going to expect to recover that and pay it.

Yes. So the agreement -- yes, that's exactly what we put forward in order to manage that through the period, we knew we have hedging through delivering efficiency to allow us to do that. So there's no impact to customer sales until true up at the end of the period.

As we have no further questions on the line, I would like to hand it back to Susan for some closing remarks.

Great. Thanks very much, and thank you, everybody, for joining us this morning. So that concludes -- show continuing to deliver for our customers, communities and the environment and whilst we focused on long-term sustainable value for shareholders, and underpinned by our sector-leading policy. Thank you.