Pennon Group Plc ($PNN)

So good morning, everyone, and welcome to the Pennon Full Year Results. So I'm Keith Haslett, the new CEO of the Pennon Group, and I'm now delighted to be in the role having joined on the 1st of April. The agenda for today is an introduction from myself, and then I will hand over to our CFO, Laura Flowerdew, and she will take you through the financial and operational results for the year. I'll then take you through my key areas of focus across the next few months and then finish up on sector reform and the cost change process. So in terms of, I guess, my background, I'm a Chartered Civil Engineer by origin after following my father into the water industry. I've worked in the industry now for over 25 years in a range of leadership roles that includes capital delivery, operations and more recently, leading Affinity to be one of the highest-performing water-only companies from a low start point. I'm really passionate about my employees and making a difference for our customers and enhancing the environment through large investment plans and operational excellence. In the past, I've delivered a positive step change in delivering world-class drinking water in our -- for our customers and reaching Blue Flag status for our beaches. I've also enjoyed watching new apprentices and graduates grow into senior influencing roles across our industry today, something I'm very proud of as a leader. In Pennon, I see a huge opportunity as a listed business to really transform in all aspects and drive tangible performance through our growth plans, but also building capability through improved systems, processes and more importantly, our employees. Based on my experience in various roles and companies, I can quickly diagnose and gain an understanding of what is working well and areas of opportunity to improve. As you can see, some of my first engagements across the first 2 months in role is meeting my colleagues across various office locations, hosting Q&A sessions to get a firsthand knowledge of, I guess, the successes, but also the challenges. Site visits to meet some of the frontline to really understand our culture and the ways we work, meeting our customer call centers, which includes our water retail services as well and deep dive sessions into all areas of the business to really understand our current position in order to develop coherent plans for delivery. So I guess, just some initial observations and opportunities. This initial period has already given me some very clear perspectives about Pennon and how we deliver for our customers and stakeholders. I'm very focused on reviewing our group strategy as a priority, starting with the regulated business. It has been very clear from my first day that we have very passionate employees that want to deliver an excellent service for our customers and improve the environment that they all enjoy with their families. We have strong foundations and strategies in a number of areas. Clearly, there are other performance areas that require improvement plans. Outlined plans are now in place after 2 months and more to follow in the next quarter. So I guess, looking at customers' experience here in front of you, it's important to put customers at the heart of our values, our decision-making and our behaviors. C-MeX is a great opportunity for improvement in South West Water and SES to really mirror our performance in Bristol. Similar opportunities exist on D-MeX and BR-MeX, measures based on improvement plans being implemented now and alignment of our resources and systems across the group to be more effective and efficient. Asset life cycle is an area where streamlining the asset life cycle from inception to operation and maintenance is key. Review and asset health to ensure we have clear asset information and decision-making tools for operational improvement and linking that to future price review submissions. Important to have very coherent totex investment plans that clearly link to our performance for AMP8 and beyond into AMP9. Environmental performance assessment is a really important area. I guess, firstly, I'm sure you will have seen that Pennon has been provisionally graded as 1 star on its EPA rating for last year. I just want to be very clear that I don't tolerate or even recognize 1 star rating from my previous performance in delivering 4 star in other jobs in the past. Performance will certainly improve and the bar has been raised to meet the expectations of myself going forward, and my action plan has already started. A number of these metrics are in our control to deliver for WINEP, including the WINEP outputs, really important we deliver these commitments on time. Self-reporting of pollution, we need to improve to meet our requirements on that framework and improving our compliance against permits linked to the investment program ahead of us. So I guess another area just to talk about is really energy management. I've been surprised the size of the opportunity for improving our approach to energy management based on positive step changes I have made in the past. We have an untapped and sizable opportunity for solar generation behind the wire for high-energy sites. This work has commenced using the skills of our Pennon Power team with 5 sites now identified and being implemented at pace. We have an opportunity to optimize our existing asset base to consume less across our water and wastewater assets. And the Bioresource strategy has a great opportunity to centralize 6 of our sludge treatment centers into 1 or 2 to optimize the sludge into biogas, into energy and to create larger efficiencies going forward in the future. So these are some of the initial observations. I will now hand over to Laura for the next section on the financial and operational performance.

Thank you, Keith, and thanks all for your time today. So I'll, first of all, start with taking you through some of our financial performance. So the group has seen a return to profitability in the 2025-'26 financial year with a 55% increase in EBITDA and underlying operating profit more than doubling to GBP 326 million. Return on regulatory equity for the year is 6.7%, with outperformance in respect of financing and totex offset by ODI penalties as a result of operational performance, which I will come back to later. We incurred GBP 644 million of group CapEx in the period as we continue to invest in improvements to our asset base across the water group, whilst gearing for the water group remained stable at 61.8% at the end of the year. We've proposed a dividend for the year of 29.29p per share, in line with our policy. So first of all, focusing a little more on the income statement. Increased revenues provided a material benefit year-on-year, partially offset by an 8% increase in our underlying operating costs, which together provided that 55% EBITDA growth year-on-year. Non-underlying costs of around GBP 20 million include costs from the implementation of our new customer experience platform as well as some restructuring costs, and they also included the closeout costs of 2 regulatory investigations. Firstly, the income statement impact of the Ofwat wastewater investigation for which enforcement undertakings were agreed last August. And then secondly, the Brixham water quality event judgment was received on the 2nd of June with a full fine of GBP 1.9 million recognized in the full year results. Our ongoing capital program has led to increasing depreciation charges and financing costs are also higher as net debt has increased as we fund investment in our asset base. And as I mentioned, our dividend per share remains aligned with our policy and increased by CPIH. So as I mentioned, EBITDA has shown strong improvement year-on-year, and revenue has provided significant benefit with a 23% increase in our water tariffs, reflecting our regulatory determination as well as, to a lesser extent, increased consumption from our customers. The start of the new regulatory cycle has resulted in an increase in our underlying cost base through a reset of regulatory and environmental charges, coupled with inflationary increases. Our focus on commercial, operational and integration measures to drive efficiency savings across the business has resulted in savings in the year and going forward, whilst our commodity price hedging has also provided cost benefit year-on-year. However, operational incidents resulted in around GBP 18 million of cost increases caused by storms and adverse weather conditions as well as the Dousland drinking water supply interruption in April last year. Whilst revenue in our non-household retailers has also increased in line with sector-wide tariff increases, wholesale water costs have also increased in these businesses. A net EBITDA improvement of GBP 2.4 million in those businesses, therefore, results from a strong focus on margin improvement and contract retention and renewal. Pennon Power has also seen its first income with GBP 1.8 million EBITDA this year as a result. Touching on our capital expenditure. Our capital program has continued with a focus across our business on delivery against our AMP8 targets as well as ensuring closeout of our AMP7 deliverables. CapEx has been lower than originally anticipated in the Water Group as we reprofiled spend to ensure robust modeling and clear design across our major projects prior to commencing on-site delivery. Our ongoing investment program is supported by a robust balance sheet with a diversified debt portfolio and strong liquidity. Water Group gearing is flat year-on-year and within our guidance. We raised GBP 635 million in the year to fund our capital expenditure through our bond program and other bilateral or lease arrangements. At a group level, debt is a few percent higher at around 65%. So our outturn position results in RORE or return on regulated equity on a real basis of 6.7% in year, slightly below our 7% target. This reflects outperformance as anticipated on financing costs as higher inflation and new financing provided benefit against the allowed cost of debt. CapEx efficiencies are being delivered as we work through the capital program, although the in-year performance is also aided by timing differences, which we anticipate to reset over 2 years -- over years 2 and 3. From an operational perspective, our performance has been impacted by the adverse weather conditions, resulting in net penalties across our business. This reflects network resilience challenges in water. And whilst we have seen underlying performance improvement in wastewater, we still incurred a net penalty as the last 4 months of the financial year materially impacted on some of the measures, reducing reward and increasing penalties. Overall, this results in 6.7% RORE in real terms despite the adverse operational performance in the year. And allowing for inflation and the actual balance sheet, this would result in a regulatory return of 12.4%. Moving on to next year, we anticipate a further improvement in financial results with revenue increasing by around GBP 50 million to GBP 70 million, whilst Water Group costs will increase by up to 5% year-on-year. Revenues and costs for our retailers will reflect sector-wide tariff changes with EBITDA remaining stable. So overall, this will result in a group EBITDA growth year-on-year of around 5% to 10%. Depreciation and financing costs will continue to rise as our capital program progresses and we'll see increases of up to 10% and 15%, respectively. CapEx is anticipated to remain in a similar range of between GBP 620 million and GBP 700 million. We anticipate the underlying operational performance will improve year-on-year, although with stretching targets and some measures still impacted by the extreme rainfall in the first quarter of 2026, it is anticipated that the Water Group will remain a net ODI penalty next year. So let me talk a little bit more about our operational performance this year. Firstly, as you will recall, we continue to focus on our 4 strategic priorities. These are aligned with the outcomes in our 5-year business plan and are critical to delivering on our commitments across our operating regions. As is clear from the net operational penalties we've incurred, in-year operational performance has been challenging and has been impacted by weather conditions, which have often been localized and extreme, particularly in Devon and Cornwall. This means that whilst the U.K. as a whole has seen lower-than-average rainfall, in the Southwest, we have still seen above-average rainfall, and we have also seen extremes with dry, hot weather in the summer and periods of intense rainfall, including 190% of rainfall across January and February this year in Devon and Cornwall. So let me talk you through a little bit more our strategic priorities and our performance measures. Our first priority, reflecting the top priority of our customers is building water resources and improving water quality. We've seen significant challenges this year as the hot summer period followed by freeze soil conditions and heavy rainfall in the winter put pressure on our networks. You can see from the chart that January, in particular, was challenging. There were 5 named storms, including the Red Storm Goretti, which heavily impacted power supplies in Cornwall. This created tough operating conditions and impacted our performance across a number of metrics. Underlying performance outside one-off or weather-related events remains strong, and the operational teams are working hard to bring performance back in line with our ambitious targets. However, this has led to material penalties in terms of supply interruptions, mains repairs and leakage, meaning that network resilience and asset health is an area we will focus on as we move forward. Water quality remains sector-leading in SES with South West Water also retaining a top quartile position and Bristol showing underlying improvement year-on-year. Moving on to our second priority of tackling pollutions and storm overflows. This has been a particular focus given challenging targets in the topography and historic performance for South West Water. As many of you will be aware, this has been an area of continued focus and one where we have seen improvement over the past year. Our pollution incident reduction plan has been key to this improvement with reductions in pollutions to a water course as well as spills from storm overflows. The absolute number of pollutions has reduced by around 1/3, whilst our revised sewer length agreed with the Environment Agency resulted in normalized pollutions reducing by around 53% year-on-year, bringing us within the range of performance for the sector for the first time. We continue to work hard to reduce spills from storm overflows and saw the benefit of 17% lower spill numbers, while spill duration reduced by around 25%. These improvements resulted from our continued focus on initiatives to reduce the underlying number of spills, and we've taken action at our top 5 spilling sites that's reduced spills across those sites by more than 50% through both targeted operational interventions and focused investment. Sewer flooding remains an area of strength. We're in reward on internal sewer flooding, although this is lower than we had targeted as the extreme rainfall in January and February impacted our networks. This increased the number of customers affected and reduced the reward relative to a more normal year. As such, whilst good progress continues, the year outturned with net -- with lower benefit from outperformance and higher penalties resulting in a net wastewater ODI penalty. In addition, and as Keith mentioned, whilst we've made good progress in moving forward our capital program, 4 projects related to our WINEP program were not completed by the year-end, which will impact on our EPA scorecard. Alongside performance in respect of normalized and serious pollutions, this has resulted in a provisional 1-star assessment for the 2025 EPA. We do remain focused on protecting the environment, not only by improving performance in our wastewater business, but also by delivering on a number of initiatives, which will provide environmental gains. We've continued our award-winning upstream management program in peatland restoration to support biodiversity and environmental net gains across our regions. Our renewable investments in Pennon Power saw 2 sites energized in the year with first revenues also occurring. The remaining 2 sites are making good progress, and we're also progressing some behind-the-wire projects that will provide multiple benefits in terms of financial returns, resilience and carbon offset against performance commitments for the regulated business. And then last, but by no means least, our final priority relates to customer affordability and support. With tariffs increasing, the past year has been challenging across the sector, and our customer teams have been managing increased calls due to higher bills, coupled with continued focus on the service we provide as the water industry remains under the spotlight. It's therefore been important to ensure we are communicating, supporting and engaging with customers across our regions. From a support perspective, we ended the last 5-year cycle with support provided to all customers deemed to be in water poverty. And despite tariff increases, our target is to return to this position by the end of the 5-year cycle. In this year, with the step-up in tariffs, it's therefore been vitally important to support customers who cannot afford their bills, and we increased the number of customers receiving support by 11% year-on-year, both in response to customer contact as well as by proactively enrolling customers on tariffs where we think they need the support. We're also focused on ensuring we support all our customers and drive improvements in the services we provide. We listen, learn and respond to feedback from our customers through our program of research and community drop-ins as well as using the feedback we get every day on the services we provide. We continue to work with our WaterShare+ panel to ensure we're putting customers at the heart of our decision-making. Our retailers are also going from strength to strength, engaging every day with business customers across the U.K. We've seen excellent Trustpilot scores, including a step change for SES Business Water. And finally, we're making good progress in investing for the future in our customer service. Both in South West Water and in our retailer business, we're implementing new technology platforms that will drive best-in-class customer service, better functionality to allow customers to self-serve and improved capabilities for communicating and engaging with customers, whether on their bills, on the service they receive or the improvements we're making. With that, I'll hand back over to Keith.

Okay. So thanks, Laura. Look, I'm very focused on now over the next few months, completing, I guess, an operational review that will now deliver material improvements for our customers and stakeholders. So you can see in front of you, there are 5 key areas that will focus me in terms of the regulated business across the next few months that include our customer transformation, our people and culture, our target operating model, asset management and reliability and our capital investment program. So I guess just to unpack that a little bit, there's a comprehensive plan now in progress. Actions are being taken, as you can see, and that's already underway with the team as we speak. Customer transformation is an area where we have a Project Fusion going live for our new CRM system in October, which will transform our customer experience with further capability planned. We are planning the next phase to introduce channels of choice to our customers and using artificial intelligence applications already built into the Salesforce platform. The focus is really to improve our customer experience whilst reducing our cost base through AMP8 and beyond. People and culture. I've completed a survey now with employees and created tangible action plans with our teams. I have introduced a new scorecard from CEO down to the front line to really start to introduce a performance-led culture. I've recruited a new Chief People Officer, who is passionate about cultural transformation in alignment with my approach and ambition. I have elevated the importance of technology and data in our business and our existing Chief Information Officer is now part of the Exec Committee and reports into me. In terms of the target operating model, I'm now introducing a best practice approach from my experience in previous roles to ensure we maximize our capability and performance. I've introduced new clear lines of accountability and responsibility within my executive team and the senior leaders. I have observed a range of excess processes and rules that require simplification to achieve the required outcome. And I've also made a number of structural changes to accelerate our improvement plan within the initial 2 months. So real past to mine is also asset management and reliability. I've appointed a new Chief Asset Officer, who started in May and centralizing all asset management functions, which now includes the capital delivery team. Targeted recruitment now for some of the best asset leaders in the industry, and they are due to start in the next few months. Completed a review of our asset management structure and required deliverables for AMP8 and beyond and introduced a new capability for improving asset reliability with a clear focus on asset performance to mitigate and remove the unplanned failures of the past, building our picture, I guess, on asset health for current and future investment plans, including the cost change submission. And lastly, on our capital investment program, I've completed a deep dive into the AMP8 delivery plan for enhancing our environment. There are certainly opportunities to accelerate the program linked to our performance commitments in an efficient way. And it's important that we map our key dependencies for the investment program to ensure we always deliver on time and to budget. And of course, this will help to improve our EPA rating going forward, as I talked about earlier. So it has been a solid start in terms of progress and more details will follow in the coming months. So just to talk a little bit about sector reform. We continue to be well positioned and supportive of sector reform, and we are engaging regularly with government and regulators. It is clear that government intend to organize for industry reform that includes increasing the team at Defra with a new structure to support reform work streams, the appointment of Dame Julia Black as the Environment Secretary's new Senior Adviser on water reform transition. The Environment Secretary is to be given the pars to appoint the Chair of the new regulator as well as its inaugural CEO. And the transition plan is expected to be published and the clean water bill introduced by the end of the year. So in terms of cost change, today, we've announced that we submitted just over GBP 250 million in 2026 cost change claims as part of the reopener process with Ofwat with in-AMP funding requested as part of that submission. We have targeted most of the -- sorry, most of the investment to asset health with a focus on sewer rehabilitation, network storage and rapid gravity filters for water assets. We also put in a discrete growth claim for U.K. sewage treatment works and a claim for cybersecurity. This represents a carefully prioritized investment package to deliver benefits to our customers and the environment earlier based on customer research and engagement with our WaterShare+ panel. So in summary, the first year results of K8 demonstrate a positive shift in profitability, but our performance must improve across the regulatory commitments for both customer service levels and improving the environment. I can assure you that my current observations have identified key areas of opportunity, have refreshed plans to target improved performance and have set clear accountability for delivery. Pulling all of that together, I look forward to sharing my operational and strategic update in late September. I would like to take this opportunity to thank everyone at Pennon for welcoming me, and I look forward to engaging with all investors and stakeholder groups across the coming months and years ahead. So that's it for the end of the presentation. We will now take questions from the room.

James Brand from Deutsche Bank. I was hoping I could ask 3 questions. One is more of a clarification. Firstly, on the 4-star requirement for the 30 basis points uplift to your allowed return on equity, is it still a target to -- I'm not sure that's 4 star or 5 star now, but is that still a target for the group to try and hit that? Or is that looking too difficult now? That's the first question. Secondly, on the totex outperformance that you delivered, you mentioned that phasing had an impact on that. Is it possible to kind of strip that out or to give an indication of how that -- if it hadn't been for the phasing, how that would have impacted you? Would you have still been outperforming on totex? Or would it be more neutral? And then thirdly, on the nonregulated businesses, it looks like your guidance is to go into a loss or certainly for profitability to move backwards over the course of this coming year. Could you just explain a little bit what's causing that? Because obviously you got the Pennon Power investments, which are stepping up there.

Okay. Look, thanks for the questions. I'll take the first one, and then I'll maybe just pass to Laura for the last 2. Look, I think in terms of the 4-star rating, clearly, there's a number of components within that framework for the assessment. As we sit here today, clearly, it's not been a good year 1, partly because of what we talked about with WINEP deliverables. We are very sort of, I guess, focused from my perspective on what the challenges look like ahead to get there. From my perspective at the minute, certainly, pollutions and treatment compliance are probably the 2 big challenge areas that I see over the next number of years, and there will be a couple of other measures introduced as well between now and 2028. So for me, it's really a bit more time required over the next few months to really do a deep dive on those areas to really understand where we are. But look, it is a challenge, okay? So where we are at the minute, we need to deliver what we're in control of, and I think we can definitely improve on that. But there are a couple of big challenge areas that we'll have to think about over the next few months.

If I move on to the more financial ones, James. So the totex, yes, we would still have been in outperformance without that phasing, but there is a little bit of timing difference, too. So it's broadly split between some of it being timing difference and then some of it being efficiencies. As I mentioned, we are driving through the capital program, but will happen across the 5-year period rather than it all landing in the first year. So some of that reverses, but over the 5-year period, we're still very much targeting outperformance on totex and would have seen some of that crystallize despite the timing differences. On the non-underlying, they're broadly flat in the underlying retailers and then power comes into benefit. So we can work through numbers in due course. But no, they are not loss-making.

It's Mark Freshney from UBS. If I may ask about balance sheet. We had an equity raise, which people subscribe to 18 months ago. Since then, I think the ODI incentives weigh quite heavily on things like EBITDA and some of the credit metrics. There isn't a plan to sell the solar assets that you've communicated today. If anything, you're talking about investing more. So I just wondered whether having spent time, and I know your capital delivery operations is your background, Keith. But are you happy with where the balance sheet is? And do you think it can handle all the things that you're talking about for the next 4 years?

Yes, look, I'll maybe let Laura come in a second. But yes, I'm comfortable at the minute, Mark. I think we are going to do a review across the group, including Pennon Power across the next period. So I think it's just important to maybe hold off on that. We are deploying that skill set internally at the minute to do bigger things behind the wires as I talked about in the presentation. But as we sit here, we're certainly very confident in the balance sheet. Maybe Laura might want to come in on that as well.

Yes. I mean I think the power assets that we're talking about behind the wire are a much smaller scale. We will -- we are obviously working together, Keith and I, as he looks at the operational performance, looks at what we need to do to remediate that ODI performance, and we will come back in September to talk about the strategic review, the operational improvements and what that means in terms of the financial outlook as well.

It's Jenny Ping from Citi. A couple of questions, please. Just firstly, on the reopeners, you talk about 65% gearing with the reopeners. Can I just ask what the assumptions behind that. Do they include asset disposals is the first one. And then secondly, linked to that, Keith, I think you talked specifically about AMP, in period AMP funding has been requested. Does this mean that you won't do it if there is no in-period funding? Because what I'm hearing from some of the other water companies is that Ofwat is less inclined to allow in-period funding for the first reopener, in which case this may be pushed back into future periods. So that's the first on reopeners. Secondly, just on strategy, and I know we have to wait for September to hear the full version. But I was intrigued just that you said starting with water, I think, when you talked about the strategic review. Obviously, the operational side is needless to say. But are you also open to looking at asset disposals given your 3 very distinctive geographies in terms of the regulated business. I'll stop there.

Do you want to take the first question?

Yes. Let me start on the reopeners. So absolutely, we have said in our submission to Ofwat that, a, we have asked for in-period revenues; and b, we have caveated to say that if we don't achieve those, then we do not need to progress. I think it's also worth saying that we have put in a submission that whilst we believe they are the right priorities for the business, I'm sure that they will need discussion and debate with Ofwat. And there are certainly some areas of that as well, which are probably less likely to be fully funded this year, but we thought it was important to put forward a need to start that dialogue with Ofwat as well. So there's quite a long way to go on all of those reopeners to understand where we end up through the process by December with Ofwat in terms of what the outturn investment might be and to understand the funding position of that as well. So that is something that we will obviously update on in due course. But I think early at this stage to make any confirmed positions in respect of balance sheet and so on. And I think we felt strongly that it was important to make the point about in-period funding given the importance of investability and financeability. And that was obviously a theme coming out of Cunliffe and the white paper and so on as well. So that's probably everything from me on the reopeners.

So I think, Jenny, on the strategy, certainly, my focus initially is, of course, in the regulated businesses and just getting a real sense of where we are. Look, I've been very impressed with SES and Bristol. I think there are lots of strengths in those business geographic areas and the teams there are really committed. I think the performance actually in SES is really strong with Bristol, we have a little bit of work to do on interruptions to supply and just getting back on track with leakage, but again, strong. So actually, when you look at the asset base, pretty much 2/3 of the asset base is clean water only when you include South West in that. And I think that's important for the group and the portfolio and how we perform going forward. And then, of course, really focusing on wastewater performance and where we can really try and get some quick wins whilst we put the investment plan in place. So as I sit here, obviously, we will look at Pennon Power and how we try and move forward with the water retail businesses as well in that update, hopefully in September. But for now, I've been really pleased with what I've seen with certainly the clean water assets in SES and Bristol and of course, South West.

Sarah Lester from Morgan Stanley. Keith, welcome. It's great to have you in the seat. Two questions from me, please. The first one is back to the FY '27 guidance. The biggest delta to consensus looks to be the OpEx and the key driver of that year-on-year change looks to be inflation. So just wondering, is it fair to say that most of that, all of it could be trued up at a later stage in revenues by the energy true-up, i.e., NPV-neutral noneconomic? And then the second question, maybe one for Keith. This is a turnaround story. It's a very exciting turnaround story. There's a lot of metrics that we can be following on that turnaround story. So just wondering if you were to narrow it down to 2 key metrics that the market can watch and track, what would they be?

Shall I start?

Take your question. Yes.

Yes. I mean I think there's a lot of different movements going through in OpEx. I think certainly, what we're seeing coming through power, we're in a good position. We're well hedged and that should give us a good position as we move forward. But you would hope to see coming through the regulatory mechanism, any variances in that across the relevant index. And obviously, if inflation is higher, we will certainly see some benefit in that true-up over time as well. I think we are very focused on delivering operationally. So we do see some costs coming through from things like leakage and so on as we move forward. And then we have a program underway to make sure we minimize all those pressures as well. So there's a whole group of things. But I think, Sarah, you're right, the inflationary protections that we have in the regulatory mechanisms as well should help support that position as well going forward.

Great. So I think in terms of 2 metrics, I would prefer 5 or 6, but I'll take 2, Sarah. So look, I think if I pick water, I would say interruptions to supply. I think we've had a bit of a surprise there in year 1. It's not something I recognize from my past in that space, particularly previously at Affinity, where they're sector leading in that. So that will be one metric. I think the second metric, I would say, treatment compliance. I think from my background, I have got the 0 in this space from a culture of maybe 6 or 7 fieldworks each year. That's where we need to get to as a business. And I think there are components attached to that, whether that's operational performance or capital investments. So those would be the 2 at this point I would pick.

Pavan from JPMorgan. I have 2 questions, please. Firstly, following up on Mark's question on the balance sheet. I just wanted to pick on a particular area in terms of how you see the dividend versus growth. I think one of the attractions of the Pennon story relative to listed peers has been a higher dividend yield. And I was wondering if you could share thoughts on how you think of balancing that versus the growth opportunities that you're seeing, both in terms of cost change and maybe looking ahead into AMP9. That's my first question. And then secondly, I wanted to inquire about the RORE target you had previously guided to a 7% RORE target over AMP8. Is that something you're comfortable reiterating? Or is that also under review?

So I think on the dividend yield, we will -- we've declared a dividend for the full year in line with our policy. And as we progress the strategic review, obviously, the overall position will be part of that, and we'll confirm when that ends up at the end of September. On RORE, I'm going to say something similar. Obviously, the operational performance has impacted this year. We've outturned at 6.7%. But I think in looking with Keith through our operational performance, our financial performance and the targets for the period, that will be one of the components that we look at and come back to you in September.

It's Alex Wheeler from RBC. Just one for me, please. Just on -- well, I don't have the data in front of me, but it feels like weather and the extremities in weather are becoming more common in the sector. I just wanted to get your thoughts on, I guess, how you think about that and whether that should lead to a little bit more conservatism in how you guide on operational performance. .

Yes. Look, I could probably name every storm going back the last 10 years that I've been involved with and they've had different impacts, right, across corners of England. I think what I would say to you is that from Storm Goretti in January, it feels like the extremities in Cornwall is where we probably need to focus on some of our resilience in that space, both now but probably really focus on PR29 and what else we can put into that space from the lessons learned of that red warning. Look, we are really strong actually on internal sewer flooding, which is always a difficult metric for other companies to tackle. I think from that perspective, making sure we put the plans in place with our drainage water, water management plan and how we sort of look at the risks of flooding and those aspects around storms that you referred to. So look, I think the investment going in is definitely going to help in terms of how we reduce spills, how we deal with power outages, how we deal with getting water to customers 24/7 in more of the extreme parts of Cornwall and Devon. And that's going to be the focus really in AMP8, but definitely in AMP9 as well.

This is Laura Marconi from Barclays. Two questions from my side, please. I'd like to follow up on your GBP 250 million reopener. Could you give us a bit more color on what the proportion of different investment areas would look like? What would your priorities in that be? And the second one is on the EA court hearing. I believe that one has been rescheduled to July. Do you expect that date to be a clearing event? Or do you think we'll have to wait a little bit longer for an actual decision?

Okay. So look, I think in terms of the reopener that I was involved with pretty much from day 1 in terms of the process behind that. It's broken down into a number of areas, as I talked about at a very high level. We've got around GBP 45 million in our asset health category for rapid gravity filters. We have about GBP 23 million in the space of wastewater treatment works. In asset health, we have about -- I think in terms of sewer rehabilitation, we've got probably around about GBP 62 million. And then you sort of move down into the categories of water storage and treatment works, and there's probably about another, I think, GBP 85 million in that space. So cyber picks up about GBP 12 million of that at the end. So that's kind of the high-level breakdown. I think in terms of, I guess, end of July and the process, I think it's very important to just note that we're in a process at the minute with, I guess, that court case. We have to respect that process. We can't really comment on I guess, that outcome and how we lead up to that at this point in time. Look, we have regulators that will continue to regulate, inspect and challenge, I guess, how we perform. And that's exactly what we expect of the Environment Agency and drinking water inspectorate and others associated. So we will continue to improve our systems, our processes, our capability and our people to make sure that we learn from the lessons of the past and make sure we put some proper plans in the future. So that's really all I can say at this stage. Must be one more question now.

Keith, can I just clarify rather on the 6.7% RORE, is that at the 55% notional gearing? Or is it at your actual water company gearing of 62%.

It's on -- 6.7% is on the notional real balance sheet position, the 12.4% is on the actual nominal.

James Brand from Deutsche again. On the ODIs, obviously it's a pretty big penalty, and you mentioned the weather and there were some kind of adverse effects. But as we look forward, is there any kind of -- it's obviously not formal guidance, but any kind of commentary you could give us in terms of what might be a reasonable expectation for how the ODI penalties might evolve in, say, '26, '27 and in the medium term? Is it possible to get that down to a less material negative number?

Obviously, our target will be to reduce that penalty write-down. There will be some lag effect from last year. And as I said, the first quarter of this year where we saw the red storm will impact because it's in the 2026 environmental period. We've got the calendar around the financial years. That said, obviously, what we're doing at the moment is working through the detailed plans in terms of how to improve that operational performance and what that would look like. So I sound a little like a broken record. But come September, we will give you more, James.

Yes. I think what I would say there is that we've got some really strong performance as well. So it's how do we further that. And there are 5 or 6 key metrics that I'm very focused on over the next few months to really put a plan in place that's going to make a difference. So we'll see that in a few months. Okay. So I think we're going to conclude there with the Q&A. Thank you for attending. Look forward to seeing you in due course. Thank you.