Pennon Group Plc (PNN) Earnings Call Transcript & Summary

Good morning, and welcome to the Pennon Spotlight Presentation Q & A. My name is Katie, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Susan Davy, Group Chief Executive, to begin. Susan, Please go ahead.

Thanks, Katie, and Good morning, everyone, and thank you for joining Paul and me this morning. I hope you have had an opportunity to look at our trading statement and listen to the webcast that spotlights our progress on the twin track strategy that covers an update on the Bristol integration, now that we've got CMA clearance, and secondly, how we're delivering a step change for the environment in our region with our WaterFit plan. So just very briefly in summary, Pennon remains on track to deliver resilient financial and operational performance across the group in line with management expectations, and the continued South West Water RORE outperformance run rate. Following the CMA clearance of Bristol for the merger with South West Water, the integration process is underway. We've identified bridges, and we'll be targeting a GBP 20 million per annum efficiency benefit across the group by '24, '25. It was at least GBP 50 million, but it was cumulatively to that 2025 date. And we are also on with our largest environmental investment program in 15 years of GBP 1.4 billion across the broader group, and that's well underway, and we are targeting a range of around GBP 330 million in the 3 years that we now have till 2025, which is focused on achieving benefits for seas and rivers in the South West region. And we are accelerating spend of around GBP 150 million funded by reinvestment of RORE outperformance that's been announced to date. That's all underpinned, very importantly, by a strong robust balance sheet and making sure that our strategy of driving efficiency enables us to be fleet of foot. So our strategy is focused on delivering benefits to all, and we want to see that step change in river and coastal water quality. And we're also going to be accelerating our WaterShare+ scheme second issuance for Bristol and South West Water customers, and this is the scheme that gives customers the opportunity for a stake and a say in the business and amount off their bills, which will come at a really good time for customers, as we continue to support them with driving bills as low as they efficiently can be. We have a bill cut staff of South West Water customers for '22, '23, and the bills are lower than they were 10 years ago for those customers. So with that, I'll open to questions. Thank you.

So we take our first question from Mark Freshney from Credit Suisse.

So firstly, on the bit where you talk about inflation and the impact -- just on the totex inflation element that you talk about. I mean, is that running -- is your totex inflation running at or below the CPIH allowance which it's linked to? And secondly, just on the debt portfolio. I mean, I think there's still some Artesian financing within Bournemouth, which you've already done the first stage of getting that ready for financing and presumably you'd do the same in Bristol. Can you talk about how you're structuring and thinking about proceeding with the debt financing?

Yes. Thanks, Mark. Paul, do you want to take over?

Yes, Of course. So taking your first point there on inflation. Obviously, inflation affects our water business in many ways, as we've probably discussed in the past, coming through in a positive way into RCV growth for the long term and also into in-period revenue increases. So they're very much a value driver for inflation. But in the near term, we will see increases to our cost base, most notably for utilities with a big debt book and index-linked debt. We'll see some increased financing costs, but we will also see some operating costs increase as well as some of the capital costs, it is worth noting. So if we think of those for a moment, that's where your question was focused, clearly power is an area where we're going to see higher costs in coming years. I think that's a clear expectation now from where the markets are. And that's not just in the next year, but potentially for a number of years, depending on where forward curves settle. But at the moment, they remain elevated. And then further to that, on the capital side, we will see higher costs coming through on certain component parts such as cement and metals, which are used in the construction side of the business. So we will see -- on those types of spend lines we probably will see costs going ahead, if you like, of the run rate, CPIH rate, so we will see those higher costs coming through. But as I say, the overall benefit position from revenue and RCV, we expect to offset that. So then moving on to your second question on the debt portfolio, you're quite right in saying that when we acquired Bournemouth Water, that came with quite a significant amount of Artesian debt. And on acquisition of Bristol Water, that similarly has Artesian debt within it. And we deployed our approach to the integration of Bournemouth Water, which meant that our Artesian debt, if you like, was modified to some extent, which allows it to come within the group's facilities, and we would look to have the same approach to Bristol Water's financings over time and make sure that they also can be reflective of the group's position and the group's approach to financing its debt. And then into the longer term, we expect to be able to refinance those debts either at maturity or before, depending on where we get to with any net present value benefits that we can see. But if not before, then certainly on maturity. And on doing that, we'd look to deploy our proven financing strategy where we obviously issue through our sustainable financial framework, and look to get best market rates and our [ child ] debt position set.

Okay. Thank you, Paul. Thank you, Mark.

We take our next question from Martin Young from Investec.

A couple of questions, if I may. Hopefully, one is just a clarification. When you talk about the GBP 150 million, if we put [ 2 ] to one side WaterShare, and we put to one side the fact that obviously the Green Recovery initiative has already been announced, are you effectively just announcing a GBP 45 million step-up in the totex program this morning? And how does that sort of land across the various years that are left of AMP7? And then the second one is around the PR24 process, where you've indicated you will be submitting a combined business plan off the back of an expectation there will be a combined license for Bristol and South West Water, yet you talk about 2 separate price controls. So should I be thinking about that business plan effectively having 2 sets of financial plans, for want of a better expression?

Okay. Martin, I'll take those questions. So the GBP 150 million in terms of the GBP 45 million within that, is that an announcement for extra totex. I think what we're saying is we have been delivering totex efficiency against our [ FD ] loans, and at the half year last year we reported some GBP 94 million worth of totex efficiency. And we are reinvesting GBP 45 million of that, so it's not totex over and above the [ FD ] loan, it's reinvestment with efficiency. And then around PR24, with the combined business plan for what will be the water group with South West Water and Bristol in it. What we have now, Martin, if you look at the business plans and the price controls that come out, South West Water already has a number of price controls within the one business plan, so it has different price controls for water, for waste and fits within that. So this would just be another split within that one business plan for Bristol against South West Water on the water side. So we're already used to having different price controls within the business plans, will just be another price control, but one balance sheet, one business plan, in that sense. I hope that answers you.

The next question comes from Chris Laybutt from Morgan Stanley.

I had one question on WaterFit. I guess you've got this initial investment of GBP 45 million. Do you see this run rate accelerating into K-8? And I guess a broader question, I mean, how much investment do you think would be required to eliminate spills from storm overflows entirely in your region or even for the U.K. as a whole, if that's an easier question to answer, or England? But some sense of the total size of the investment that might be required if that's what consumers want. And then on procurement, I'm just wondering whether you could talk through the strategy from here near-term? How are you going to address layering in hedges? Is that something that you're doing piecemeal, or are you sort of following a wait-and-see approach? I guess just if you could outline your approach to this AMP. And then into next, strategically, are you considering investments to reduce your exposure to this risk? And if so, what might they be? And could you consider using that GBP 200 million pot that you've allocated for the buyback for something like renewals, for example?

Okay. Great. Chris, a few questions in there, but we've got them all down. So take the first one around WaterFit. You're absolutely right, the investments that we're talking about for this 3-year period, the GBP 330 million and GBP 45 million of that is the reinvestment efficiencies, that is making sure that we make a change in terms of [ spend ] performance, and make a change in terms of the number of those committed spills that we have, reducing those down. So in the notes that have come out about WaterFit, you will see that there is a change in those. Now, the government is consulting at the moment on targets that will run between now and sort of them out to 2050 in terms of what customers, communities and regions will want to see in terms of the reduction and impact to the environment and a reduction in spills. And that will, as you say, come as part of the cost, come with a price tag. So we're all very interested to see what customers will feedback with. We're undertaking, as part of this WaterFit launch, a 12-week consultation and review with customers to understand their position as well, to see how fast we need to go. And importantly, what we're doing is making that investment in these next 3 years, so if we should understand the situation and some issues undertake not just investigations but actually intervening in the asset base, as that 200 of assets where we will be intervening to see what difference that can make and make that change now. And that will give us the information about what will need to be done to either reduce substantially or eliminate flows in future. But I mean, publicly, we've seen lots of numbers bandied around for this. I think you honestly don't know until you know what specific for a catchment or for an area, what needs to be done. Whether it's more storm storage, whether it's sewer separation, whether it's some catchment management work to alleviate flows into the asset. And it really is quite catchment-specific. So I think it's quite hard to put an exact number on it, but there are plenty of numbers that have been out there, at [ thrift ] -- I mean, some of them ranging from near GBP 400 million to GBP 600 million in future. And I'm not sure if there really is the robust work that's gone in behind those predictions, and that is part of the analysis and work that we need to do [ at spec ]. But importantly for us, we need to do it in our regions. So it's getting to understand what that will cost will be part of this, the work that we'll be doing, and will feed into that next [indiscernible]. So I think that's a bit on the kind of WaterFit question. Paul, do you want to pick up on the processes?

Yes. So obviously, you're focusing there particularly on power, I think. And in terms of our approach, we obviously have a structured process in place where we look to derisk over time, which means we'll be putting in hedges live now and into the future, and we'll continue to put those in place and we'll look to derisk further as we go forward. And that approach, obviously, looks to hedge mainly the summer and the winter seasons. But we will also hedge more tactically in terms of quarters and months as well, just to make sure we derisk our position further. We don't like to have very much on day-ahead at power, as you might imagine. So it's a very structured approach focused on the seasons, that then morphs into quarters and months, just to better derisk the position before we get to any day-ahead volatility. So that's the overarching approach that we have in place. Now that approach, it does derisk things, but as I've said before, in this elevated environment, it still means to some extent you're seeing higher prices coming through. The higher prices are there in every period as you look along that forward curve, so it is difficult to get away from that fact from a hedging policy approach. So over time, we'll look to derisk, but that will still mean there are higher prices out there. So I think that brings us on to the next point of your question really, in terms of what we can do about that more fundamentally. So that's all about the power that we consume as a business. And we're looking at that as part of our net-zero strategy that we'll have talked about at the Capital Markets Day. And as you will remember, that's got 3 pillars involved in that net-zero strategy, and the first element of that very much focusing on our own operations, looking to make sure we consume only the amount that we need and be more efficient, whether that's in terms of our pumping or whether that's in terms of the actual amount of water we put into distribution. Obviously, the more we can do to minimize our own use, the better. And that's obviously also for the environment as well as the cost of the power. So that's the first thing that we can do. And obviously, we're doing what we can on that, and we're focused on that through the coming years. As you can imagine, it's right up there in terms of priority. And then the second element of the approach there is all about increasing our own renewable generation. And that's something that we're very keen to do and the net-zero plan that we have talked about us getting to 50% self-generation by 2030. And as you can imagine, we're keen to do that as fast as we possibly can, particularly in this financial environment for power prices. So we have underway our first phase of rollouts of solar PV which will increase our own generation, and we're looking to increase and accelerate the pace of that wherever we can, and that's something that we're actively pursuing at the moment. So I agree that we will certainly be looking to increase the investments that we put in place, and it's just a case of finding the opportunities and then accelerating them. And we -- obviously, when we are talking about renewables, particularly in the current environment with power prices, the economics of that are quite compelling. And therefore, commercially, it all makes sense to do. And we'll be looking to do more as soon as we can.

Okay. And Paul, thank you.

Our next question comes from James Brand from Deutsche Bank. .

There are a few moving parts in the update. I had 2 questions. The first one is on the totex and the overall RORE guidance. And you've reiterated the guidance for a doubling of the kind of base RORE, with more of that coming from financing. If I kind of work through what we might see in terms of inflation over the next couple of years, you can kind of get most of the way for doubling just from financing. So I was wondering whether you could just maybe give a bit more color on what you might be looking to achieve from totex and ODIs over the next few years? Because if, as I say, I take your guidance very explicitly -- which is probably not how it should be taken, but very explicitly, it implies not a huge amount from totex and ODIs over the next few years. And then the second question, just a follow-up on the comments just made on self-generation, which seems like it would definitely make sense in the current environment. Could you just remind us where you are at the moment and, you mentioned the 2030 target, maybe where you're hoping to get to by 2025?

Yes, of course. So in terms of that first question you have around totex, RORE, so I think in the presentation, we've set out, probably within some of the detail there, a sort of average inflation rate, the CPIH of around about 3% over this regulatory period. And that's taking just normal market forecasts for CPIH, which expect to actually increase currently and through the rest of this year, before reverting towards 2% for the remaining couple of years [indiscernible], also noting that it was fairly low in the first year of the regulatory period. So we were looking at sort of average of 3%. I appreciate other people may have different views, and obviously that will change over time, but in terms of where we were in terms of thinking about that, that's the sort of figure that was in our mind. So we've always been, as we'll have said before, very keen to achieve our performance in all areas. That's very key to our strategy, whether it's in ODIs, whether it's in totex or whether it's in financing. And we certainly believe that's something we can deliver over the period, and that remains the focus. I think what we're trying to signal at the moment is that skewing as we say in there, and that impact that inflation is having, because it is having an impact on many different line items of the business, as I talked about, in terms of revenue, cost and inflation. It does mean, given our financing position, which is obviously one of the best in the sector, it does mean that we will see good financing performance coming through in this type of high inflationary environment. But conversely, of course, we will see higher costs, as I set out earlier in terms of certain capital costs around concrete and metal in particular, and around power costs. So that will to some extent eat into totex outperformance, but we will still see totex outperformance coming through. And obviously, to date, as at the half year, we talked about achieving GBP 94 million already. So I think the general message is that we still intend to outperform on all those 3 elements, but we can't foresee a skewing into financing given the inflationary environment, though obviously that's got to play out, and who knows quite, in this volatile world, where that will play out. But that's the guidance. So hopefully that helps, but it will depend to some extent on your own assumptions around inflation and costs.

Yes. That helps.

Yes. In terms of your next question around power. So we've got -- I think it's also worth just reflecting and pausing, so if you think of where Pennon's come from, so 3 or 4 years ago, obviously, the group looked very different. And we were a net exporter of power, and we had a natural internal hedge with [ South West Water ] and Viridor, so we're in a very different position. So we've gone from that to where we are now, where now we're a consumer of power. So previously, the group's focus when it was in terms of energy generation, it was obviously -- that study was in Viridor. So now we're -- it gives us the opportunity to focus on South West Water. So South West Water's self-generation is a number probably that's currently lower than 10%, so there is a lot of scope to go at there. And we are expecting to, as I said, we've got a first phase of delivery that's in place for the current financial year -- so financial year '22/'23 that effectively will double that to somewhere just above 10%, and then that will put us in a better place. But obviously, there's a lot more to do, a lot more delivery that we want to do, and we've got a lot of plans in place that we can hopefully look at in terms of solar, wind and hydro. We are looking at all those aspects. And I think that the world is reacting to the geopolitical situation that we have. I think there's probably going to be a larger call for renewable energy more generally. So where, in the past, maybe some wind schemes would have been not quite palatable from a planning position, I wonder if that will change, and we may be able to capitalize on that in the not-too-distant future. So I see acceleration in renewables is certainly something that could well happen over the next 2, 3 years.

[indiscernible] James.

We have our next question from Alex Wheeler from RBC Capital Markets.

So [indiscernible] tagging on to James' call slightly, just when you talked about [indiscernible] innovations at especially water. Can you give us a broad idea of how you expect mix between totex, ODI and then financing? And I guess, what you expect the incremental gains to be in ODI's sort of [indiscernible]? And also, I guess, as well, when we think about financing our performance in [indiscernible] at what point you would expect that to be coming through? And then my second question is around how you're thinking about the synergy numbers [indiscernible] up towards the GBP 20 million in FY '25, and in the context of the overall [ fiscal ] [indiscernible] you guided to.

Okay. It might be the line on our end, Alex, but I think -- we got most of that, and I might have to ask you a few questions, but I think I got the gist of it. So in terms of the synergies that we're talking about this morning with the statement, the GBP 20 million -- or ramping up to GBP 20 million by '24, '25 just to be clear, that is totex, not ODIs or financing, that is totex outperformance. And that will be achieved across the group, so it's not all focused on Bristol Water itself. It is how we will integrate and merge the operations across the group, and obviously start some [ very nice ] margin with those corporate and shared service aspects, and then moving in parallel the operations and customers there we signed as well. So that's how it will -- that's how it will work out as a integration blueprint and that's what we're focused on, and ramping up will happen over the coming months to achieve that run rate of GBP 20 million by '24, '25. So that's what that's focused on.

John, just to touch on the kind of finance aspect, as well. So in terms of that, as I sort of said earlier to a different question, we'll certainly be looking to approach it in the same way we have Bournemouth Water in terms of the Artesian. But it's also worth noting there are other elements of their financing portfolio, and there are different time lines with debt maturing. So the average, I think I said in the presentation, was 14 years, but obviously, some matures a lot earlier. I think they have debt maturing in the coming year, and then obviously, there's some much later. So where we do have that debt maturing, that gives us the opportunity to look at putting in place debt that's slightly more akin to have kind of -- would look to finance South West Water historically. So I think there is opportunity there, but it will take time for the bulk of the debt to come up for refinancing, which means it is predominantly in later regulatory periods. But as we spend more and we need more debt to cover that investment and we refinance debt that's coming up, that gives us the opportunity to do it through the -- through Pennon's financing framework that should give us advantages to where Bristol's been historically.

Okay. Paul, Alex.

Our next question comes from Dominic Nash from Barclays.

So a couple of questions from me, please. Firstly, I'm sort of intrigued on sort of like the sort of top level outlook of the water sector here in that we've got a cost-of-living crisis turning up. We've got inflation that's obviously looking extremely high. We've got articles regularly coming to the press that the water industry has underinvested for a number of years, and these can increase investment, and of course, we've got bills. So the question I've got for you on this area is how are you and Ofwat going to be looking at the balancing of these conflicting sort of aims and ambitions through the end of AMP7 and into PR24? And do you think that the right strategy is to spend your totex outperformance on improving your quality of your assets and the customer experience rather than necessarily sort of customer bills? The second question is the -- you've raised your CPIH up to, I think, 3.1% for the average over the 5 years. Can you just confirm whether or not that will mean that you'll restate the 2021 RORE from your return on equity, and whether that means that the WaterShare numbers will be restated from last year? And just one quick one, a quick one here. On the energy costs, are there any caps to energy costs and whether you can claw back any of this from consumers through some sort of regulatory framework? Sorry, that's probably 3 questions. Apologies.

Okay. No, that's fine. So I'll take the first one around the outlook question that you had, cost of living quite a bit, inflation running high, has the water sector underinvested, and is it the right strategy to think about spending totex outperformance on the quality of the assets? Well, I suppose, just stepping back from that painting that you pictured -- that picture that you painted, Dominic, thinking about the outlook. The important thing is with our plans, and that's what we've always tried to do, is make sure we get the balance right, but also make sure that we are focused on driving benefits for customers and keeping the bills as low as they can be, and having that efficient phase, whether that's through the financing outperformance that we are the only company, I think, that are doing this, sharing some of those benefits to customers, hence, the WaterShare. Hence, last year, customers got GBP 20 off their bill or the shares in the group, depending on which option they took, which helps them. And again, with our second issuance, that will be again another amount off the bills for customers and/or a share in business. So we're doing our bit to make sure that we're keeping those bills as efficient and as low as possible by driving those efficiencies. Now, totex efficiencies do give customers the lower bill and the lower bill [ plays on ], that's what happened with South West customers after the efficiencies that were delivered in the last regulatory period. And I think it's right to strive to achieve those efficiencies. That's what the regulatory framework incentivizes us to do but also it's the right thing to do, to keep bills as low as possible. And again, that's one of the reasons that we've got our customer bills going down in '22 and '23. And again, a welcome respite for them when other bills are increasing. So important that we focus on that. Now, having said all of that, us driving efficiency -- and this why the structure is right -- driving the efficiency gives you that optionality. So it gives you the optionality of either giving the customers the money off the bills or, as we're doing today, announcing reinvestment of those efficiencies in areas that, again, maximize customers and also will help us pilot and prove the case for what might come next for customers in terms of the cost of improvements in the future. But I think it's the right strategy, and I think you should see that with what we're doing with WaterShare+, and the fact that customers benefit from that on the financing side and that kind of companies. And on the totex side, they have obviously benefited from that in the past, but we'll continue to drive those efficiencies and giving us that optionality. So I think it's the right strategy, and it has to be part and parcel of that. so moving to your part of the question, which is about the CPI 3%, and are we going to be restating our RORE rate. I mean, I think, Dominic, that we always have published our RORE rate on a cumulative basis, so that will be part of water as part of that reconciliation when we get to that point. So I think the important thing is, as we have done in the past, we think it's right to average that inflation expected over the 5-year period. We'd rather have that RORE swinging around from year to year, it's important to focus on what we think the base delivery is, then hence, we average it. But yes, the cumulative position will reflect that. And then in terms of your last question, which was is there any potential for, I think you were talking about a reopener, given where costs are going. I mean, I think it's a pretty high hurdle for reopeners and what we used to call the 20% shipment clause and I don't think we're anywhere near that. But that is a reopener if things got to that level. But as we know, the regulatory model with revenues that increased with inflation and certain amounts that goes in revenues, and therefore, in periods, you get recompensed through that. So it's a very high hurdle for a reopener, I don't think we're not [indiscernible].

Our next question comes from Jenny Ping from Citi.

Two questions, one for each of you. Firstly, on strategy, Susan. Just -- you obviously talked about in the past, looking at water sector consolidation and then clearly, Bristol Water is now done and in the bag. But is the strategy going forward now very much focused on integration of the businesses that you do have today, or is there still a thirst for more consolidation in the sector, just the sort of rather bigger picture scale point of view? That's the first question. And then second one, for Paul. Just going back to Chris's question earlier about the GBP 200 million and the use of that for reinvestment within renewables. I take the answer to his question was, yes, we will potentially or we could potentially use some of that GBP 200 million for reinvestment in renewables. Is that fair?

With regards to strategy, our strategy's not changed. We've always said that we believe consolidation in the sector is valuable to customers and that it should go ahead. We can see from what was announced today with Bristol Water and there are indeed benefits to be had from consolidation and integration, and you can see that in the GBP 20 million efficiencies that we anticipate by 2025. So we've got very much done by that strategy, and we'll continue to look for opportunities. We're not on a time clock in that sense, as I just said before, and we've did it before with Bournemouth. If we see an attractive opportunity that we think makes sense, then we would seek investor support for that. So no change in the strategy there, Jenny.

Yes. Jenny. And just picking up on your GBP 200 million point, I suppose in terms of clarification then, that GBP 200 million buyback that we've set out to commence the phases on before September 2022 this year, that's unless we see of the growth opportunities in the U.K. water sector. And principally, when we've been talking about that, that has been along the lines of the discussion Susan's just had there in terms of regulatory opportunities. And obviously, Bristol is our most recent example of something we've done in that space. So I probably would more align it with that, and believe we've probably got the capacity to look at these renewable options as a stand-alone basis, because they are very compelling and those investments just make sense to do, whether it's within the regulatory business. But I think in the Capital Markets Day, I went into a little bit of detail in terms of how we could potentially fund that. So some could be funded within the regulatory allowances that the South Water has. We could look to fund it corporately with Pennon. And we also look to an element of totex reinvestment as well, it's something we mentioned on the Capital Markets Day. So I think they were the funding streams, if you like, more associated with net-zero as opposed to the GBP 200 million buyback that's left to do.

We have a question from Verity Mitchell from HSBC.

Just a couple of small questions. If you could just set out the reasons why Bristol is underperforming its base RORE. Is it related to finance, or what other elements are there from their trading segments? And just on the GBP 45 million and the pumping stations and storm overflow. Is this mostly increasing capacity through concrete, and are you expecting to share this part of the regulatory construct? And is it as easy as just increasing capacity through building additional storage?

Okay. Jenny. Thank you for those -- sorry, Verity. Sorry, Verity. Verity.

Right. We're interchangeable.

Verity. So in terms of those questions, perhaps if I tackle the -- the question that you have around the storm storage and what we're doing to alleviate those discharges. So you're absolutely right. The investments that will be going on across our asset base will include a variety of interventions. Some of it will be greater storm storage, which we talked about in the publications that we put out today. So we will be building more of that. We will also be looking at some sewer separation, and we'll be also looking at some catchment management schemes, which again will help us look at how we work with others in the catchment of alleviate flows that causes discharges to trigger. So there will be a variety of investments going on. And the thing is -- really important part of this is, as we're investigating what works best and then using that for basis for another step change in the periods to come. So that's why we're doing what we're doing. So we know we can we go from [indiscernible] on the shelf, ready to go activities and investments that we're accelerating to deploy and see what works best, so there is going to be a real mix. And every catchment is different. So for every catchment, we have to assess and understand, and that's what we've been doing over the last 12 months. We've had over 650 investigations in our catchments ongoing for the last 12 months, and now we've got some really good information to help us accelerate and make a difference now, so it will be a mix going forward. That's right. And then in terms of Bristol, you asked about Bristol and its performance and why those returns are lower than the regulatory land. And yes, financing, obviously, is a key part of that. In terms of their ODI position, I think they are pretty much net-net in terms of any either outperformance or underperformance, so this is consistent with that business plan. And the totex, I mean, we just talked about this morning, that we will be the last to rival efficiencies across the group and past the integration which will help for the RORE for that. So you're absolutely right, [indiscernible] financing is the area that pulls the Bristol RORE down. Hope that answers your question, Verity.

[Operator Instructions] Our next question is from Ahmed Farman from Jefferies.

My first question is actually on the sort of the operating costs, and you've highlighted today sort of the power costs and gave some details around your open exposure. I was hoping if you could share some details on the rest of the mix of the operating cost base? Labor, staff costs, any sort of raw materials that form part of the operating cost base? What trend are you seeing there, and any details on how much you're hedged, how much is your open exposure? That would be quite helpful. And then my second question is just hoping to get an update from you on where we are in the process regarding Ofwat and EA investigation into the sewer street and works? What are sort of -- what's been the engagement so far? What are the sort of the next milestones? Anything you can share there would be very helpful.

Ahmed. Do you want to take the cost, Paul?

Yes, Ahmed. So in terms of costs, I think you were focused particularly on operating costs. So I mean, water companies do have high energy usage, energy consumption. Water is a heavy commodity to move around the network, and obviously, we use gravity as much as we can. But there are times, given geographies, that we do need to do pumping, and therefore, there is a high intensity in some of that operation. So power cost is a significant element. I think we've talked about our power cost being roughly 20% of our operating costs. And the wholesale element of those power costs is roughly half, so you could see the wholesale power cost is roughly 10% of capacity as operating costs. So that is a big aspect. Employment costs are obviously another big aspect across the group. So South West Water, for example, will have sort of GBP 50 million, GBP 60 million of employment costs every year out of its OpEx base. Obviously, that's a very significant, significant number. And as you can imagine, we have annual pay discussions with our staff, so they'll be ongoing. And they obviously will to some extent be featuring the backdrop of the inflationary environment, as you can imagine. In terms of other costs, for example, chemicals is something that often gets talked about. In that arena, we do obviously have contracts in place, as you can imagine, and they do give a certain amount of price protection. But where there are exceptional price increases, then obviously they will come through. As things get renewed, they will come through. I mean, I think that's one of the things that is quite clear when you look at, say, the power curve. I've said on this call a number of times, there's no escaping. At some point, power will increase. If you're well hedged now, then when that comes to an end, you're going to naturally pick up higher power costs. So hedging is only a temporary delay, if you like, from the higher cost that the world has out there right now for us all. So I think those costs are there, but we obviously manage them the best we can, and we have contracts in place that give us some degree of protection. But as you would expect, they will come to renew, and as they do, we will inevitably pick up the market costs that are present at that time.

And then on the question you had around the Ofwat, EA investigation. I mean, you're quite right, it's still ongoing, and I'm sure it will take some weeks, if not months, before we see our lonesome way through that process. I know there was an announcement from Ofwat a few weeks ago around certain companies that they were asking for further information from. We were not one of those, but nevertheless, the investigation from both Ofwat and the EA is ongoing. So there's nothing to update here this morning on that front.

We take a follow-up question from Dominic Nash from Barclays.

Yes. A couple of ones. Firstly, you say the synergies from Bristol are broadly similar to that that you found on Bournemouth. From memory, I think Bournemouth, you've got a GBP 7 million run rate synergies by the end of the -- I guess it was AMP6 in that case. Were there further -- or could you quantify what the further improvements were on whether ODI sort of best practice transfer, or further synergies beyond the end of AMP6 that Bournemouth -- that we could read across to Bristol? And then the second one I've got is that you [indiscernible] see a blueprint for future acquisitions agreed with Ofwat. Could you give us some sort of color as to what this blueprint for future acquisitions actually is, please?

Yes. Paul, do you want to take the first, I'll get the second?

Yes, of course, so you're right. In terms of the Bournemouth Water comparison through integration, the run rate achieved there was that GBP 7 million that you've referenced. Now, I think in terms of the bigger picture and how that's then played into further value, I think a very good example are the treatment plants we're currently building out in Bournemouth right now. Ultimately in that mill, we're investing in 2 state-of-the-art water treatment works, very much like the Mayflower works, and I know some of you had the opportunity to visit recently at our Capital Markets Day. So that investment obviously drives the RCV growth even further, and it's something that we don't think Bournemouth Water could have achieved as a stand-alone business. So very much a further benefit, if you like, beyond just the totex benefits that were in place. In terms of ODIs, we very much -- in terms of the Bournemouth acquisition, look at it as one acquisition -- one business going forward, so we don't have delineation of ODIs into this current regulatory period. So -- so they have been combined in that sense, slightly different position to where we're going to get to with Bristol. But in terms of Bournemouth, they were absorbed into the South West Water ODIs. So I think that further value, yes, is coming. Continued performance through totex, through ODIs, but also a lot more significant ability to build out and deploy the 2 water treatment works, I think, is something to focus on.

Okay. Paul. So in terms of that blueprint for future acquisitions, similar to what we went through with Bristol. I think it was really important to make sure that we could demonstrate the benefits to Bristol customers on an enduring on-going basis. Hence why, like the Bournemouth acquisition, we've ended up with better price controls and yet we get the benefit of the broader balance sheet for the larger ones by merging those balance sheets and operations. So you kind of get the best of both, you get the operational financing synergies, but then you get the ability to be regulated in separate price controls so the customers can very clearly see the delineated Bristol within that. And so a regulatory perspective, regulators can hold to account for Bristol delivery as well as South West delivery. So in a way, it's a best of both worlds, and that blueprint is obviously a good place for us to then roll out, if there were to be future opportunities and acquisitions. [ That's what ] went into making sure that that would fit for the future.

We have no further questions. I'll hand it back to Susan and Paul for any closing remarks.

All right. Thank you very much, Katie, and thank you to everybody for joining this morning. As I said, a really robust trading statement that we put out this morning, and some great plans that will see us focused on that step change in river increase in water quality. And also making sure we're delivering benefits for all by accelerating our WaterShare+ scheme issuance, second issuance, and making sure that we're keeping bills as low as possible for customers. So with that, we'll close the session and thank you everybody for joining.

Thank you all.

This now concludes today's call. Thank you for joining. Please disconnect your lines.