Severn Trent PLC (SVT) Earnings Call Transcript & Summary

So we're going to go straight into it. You've had a chance, hopefully, to catch the video and all of the documents. So we'll just go straight into Q&A, if that works hopefully.

Brilliant, straight in Pavan. Thank you very much. Straight to you.

I have 3, please, if I may. So firstly, can you talk us through the impact of recent macro moves and sort of equity markets on your pension position? Should we expect the deficit today to be higher than the 128 million that you reported? Secondly, clearly, the push for windfall tax has increased over the past few weeks, focus on oil and gas, and more recently, electricity generation. I was just wondering what your thinking was on any potential risk of a windfall tax on U.K. water companies given that elevated inflation will be feeding into RCV and feeding into builds from April of next year? And then finally, on a related note, can you talk us through what you're doing to help customers through the sort of cost of living crisis? And have you seen any impact on collections or bad debts yet.

Brilliant. Thank you. 3 brilliant questions. So I'll take -- I'm going to hand #3 to [ Jude ] and a second to both parts of and James will be desperate to get into pensions, it's his favorite topic. So in terms of the windfall tax, I mean, I think it's very, very different when you cross compare energy to water. So we've got a 5-year revenue situation in terms of revenue cap. So it's not like we can suddenly make excess money in this period of time. Yet we have inflation on the revenue. But I guess, as Helen will be happy to talk about later, we've also got significant cost pressures coming through in terms of the capital program or our day-to-day procurement. And I think from a U.K. government perspective, I'm sure they look at the results from the last year of the sector, and don't forget only 3 of the 17 companies actually made above the base return. That's a fundamentally different position to what you're seeing in the energy market. So I just think badging all utilities together in this windfall tax conversation, I think it's the kind of thing that just -- you might read about it in the press. I don't believe that treasury or yourselves as utility analysts would have that same perspective that you're talking apples-to-apples. I think it's a very, very different climate. So James, pensions.

Yes. So thanks Pavan. So on pensions, the short answer is no. If I ran the numbers today, you wouldn't see a significantly increased pension deficit. In fact, it may actually be lower. And that's because we run a very effective hedging management strategy. And as that deficit has come down, what we've looked to do is reduce the volatility going forward by actually increasing the level of hedging assets. So our assets very much reflect the impact of those macroeconomic events on liabilities. So yes, short answer is no.

Very good. And Jude, over to the 2 parts on cost of living.

Okay. Yes, thanks for that question. Of course, you'll have seen that we're launching our new affordability scheme today. So we're intending to help another 100,000 customers. And by discounting their bill to social tariff, we are beginning to hear more from our customers in terms of their needs. And so we think this is the right time. We've also, as a sector, committed to eradicating water poverty. So we want to get a head start on that. With regards to bad debt, we haven't seen an impact from the current cost of living crisis just yet. Of course, we are tracking all of our leading indicators in that space to try to make sure that we get ahead of any changes. A little bit like the work that we did during COVID. But we think that we've got the right bad debt journeys in place to intervene early and the affordability scheme actually is a really good lever to intervene earlier also.

Very good. Does that answer all the questions then Pav.

All very clear.

Very good. So moving to Mark, I think you'll handle is up next.

Just firstly, on bad debt provisions. I mean clearly, you didn't use what you provided for over the last couple of years, hence the release. But given the coming cost of living crisis, how wise do you think it is to release provision now? And do you envisage a situation where you'd have to put the provision back on or increased provisions later this year? And is that driven more by technical accounting than -- because any finance director would rather leave the provision now? And just secondly, regarding supply chain. Can you talk about the general -- aside from power and chemicals, the general cost pressure what it's running at? And also the availability of resources because pricing is one thing that as we've heard recently, getting materials to site, in some cases is very difficult.

So I'll hand it to James for the bad debt provisions and I quite liked your analogy of no FD likes relief money, that entertained me. And then I'll hand to Helen to talk about supply chain and availability.

Thanks, Mark. So I think when you step back and look at how we performed on bad debt, I think we've got a really good story. So we've been through a couple of really tricky years with COVID. And you will have seen last year that we sort of -- we set aside about GBP 12 million in anticipation of higher unemployment, the concern was that would feed through in our customers' ability to keep up with their bills. And thankfully, we haven't seen that. And actually, cash collections from our customers has remained healthy. I think we've got 1 of the lowest bad debt charges in the sector, which I think is a really good place to be going into. What you've rightly pointed out as coming into a period which will be difficult for some of our customers, particularly those who are on a lower income and are going to struggle to pay. And that's why I haven't released all of that COVID provision. I've effectively repurposed it. And there's still GBP 8 million on the balance sheet as a provision that's in excess of our ordinary bad debt allowance, if you will, for precisely that reason. So I feel we're well insulated going into this new period of higher inflation. And of course, the additional work that we're doing on affordability, I think will also help to make sure that our customers can continue to pay their bills.

Very good. Helen, supply chain.

Yes. So there's no doubt, it's tough out there at the moment and particularly in construction, as you say, with materials. But we've done a lot over the last 2 to 3 years, which puts us in a really great position in terms of supply chain availability. So you remember we broaden our supply chain base at the start of the AMP. So we moved from sort of big Tier 1s to Tier 1s and Tier 2s and Tier 3s, and that's really enabled us to have a broader access. We also did a lot of in-sourcing. So we've in-sourced our designers. So I have around 200 designers that is a constrained resource in the market at the moment and having in-sourced that, it really gives us security of supply of design resource. And in terms of materials, we -- about 18 months ago, we did advance procurement, so for around 70% of our waste schemes, we advance procured some components. At the time, there was lower inflation. So we've avoided inflation there. And also, there was manufacturing capacity. So we did get better pricing. And it's -- we've got those components now. So we are a good 18 months ahead of others in terms of having access to those materials. So although it is tough out there, I think we -- the calls that we have made has meant that we have put ourselves in a good position.

Very good. Mark, does that answer all the questions? Excellent. Okay. On to Martin.

Yes. morning to everybody a couple of questions, if I can, please. The first is around the affordability issue. Can you just remind us what sort of flex you have in deciding when you take the revenue, obviously, you've alluded to deferment of the ODIs or part of the ODIs is that it? Are you mandated to take the inflationary increases? Or can you push those a little bit further down the line? And then secondly, you talked in your presentation about your performance and ambitions on the CSOs. But could you just update us on where you feel the broader investigations from Ofwat and the environment agency office?

Brilliant. So Shane, there's all of our charges. A little breather. I'll get Shane to talk about how we think about those things.

Yes. In terms of the flexibility we have, so I guess probably just step back a bit. First, we have a number of different components that drive tariffs in our revenues. So obviously, the K factor, the revenue adjustment, we've got green recovery, we've got inflation and we've got ODIs. And I think we've found over the last probably since AMP6 ODIs provide us the best flexibility to manage bills so the others can provide a degree of flexibility. But I think ODIs is the key because we also get an adjustment for time, value, money, inflation there when we defer them. So I think our preference is to manage our build volatility through ODIs. And hence, we deferred 2/3 on ODIs, which is about 62 million in today's prices. So I think looking forward, inflation is going to be higher and the green recovery is going to be higher as well. So we're going to manage ODIs through deferrals -- sorry, those 3 deferrals.

Well, and I think the key thing there, I think, Martin, is we're very conscious of this cost of living. And we're very conscious that we're in a good position at the moment. It feels balanced that we're able -- we've got the second lowest bill in the land, which is a good start point. We have got inflation going on top of that bill, but we can manage the ODIs to make sure that we're not giving customers a higher increase than we think is right. But then also, it's about every customer be able to afford that bill. So having a bill [indiscernible] a day that somebody is still struggling with isn't helpful for us or for them. And that's why the scheme that Jude outlined, has been a brilliant piece of work between Jude and James as teams to identify a way that we can put together a GBP 30 million funds which supports all of the customers we now believe that are struggling. So good flexibility, and we think this is the right next stage is this balanced approach in terms of an affordable bill. In terms of the CSO investigation, so it's the FFT investigation, actually. So as you know, it's the full float of treatment that both the environment agency and Ofwat opened conversations with the sector about and a bit of progress since we last spoke is that we've not been named as 1 of the companies of what's going to continue to do the next wave its investigation and enforcement action against. So that's 1 bit of progress. In terms of the EA situation, it still in data collection stage. So it's right at the start of the process. So it's just in those early phases. So unlikely to hear much for a decent period of time. Does that answer the question, Martin? Very good. Okay. Dominic, we can see your hand in the air. We can't see you, but we can see a hand next to your name.

[indiscernible] but I think it's kind of bit funny. So if you could see 2 of me. Couple of questions, please. The first one is coming back to, I think, Martin's question about restructuring the revenues for ODIs, but obviously sort of moving into a more sort of philosophical question, which is to date you've always basically said that you thought that your consumers want better quality and better ODI sort of outputs over a lower bill. And so you're reinvesting your Totex outperformance into ODIs. Do you think that if we have a cost of living crisis and affordability moves up the agenda, the slightly better sort of shift would be to not investor outperformance in your Totex in order to share some of those benefits with lower bills with consumers? So that's question number one. Question number two, I mean, treated on what could be a growing theme, which is labor costs. Have you -- what's your sort of feeling on discussions with your employees and your unions about potential rises in wages and sales going forward as they start to see higher living costs themselves and whether or not we're going to start to see that becoming embedded into your sort of annual thought process? And then just final one for the debt book. I think some of trend is one of the shortest term debt books and variable debt rates in it. If we're moving to a world where potentially interest rates are going to sort of structurally move up, what's your feeling about sort of fixing longer-term debt in at these sort of rates, which you think you're going to carry on with your sort of current sort of shorter sort of term and more variable rate debt book?

So I'll take the philosophical question. I'll hand to Neil to talk about us as an employer and making sure that we've got well-managed people. And obviously, James will be desperate to jump in on his debt thesis for the future. So I mean I think philosophically, our strategy and our belief is that looking at the average bill is actually, no customer should struggle with their bill. So that's our thesis. And on that basis, we want to make sure that we help anybody who's at that lowering income end who is struggling. And so all of the research we do with customers and it might be helpful for Shane to chip in with the research, the most recent research to what coming out from customers as to what they do once versus you and I philosophically thinking what they might want is I think the analysis we're seeing is that we need to make sure that every customer can afford their bill. And that's why moving today was a big thing for us. We've done a lot of time behind the scenes in the last 6 months, identifying meetings, whereby we could help an extra 100,000 customers. And that number is really important because that makes it 315,000 combined, which is exactly the number that the Council of Water CC water judges to be the amount of people that need our support. Now I have to keep an eye on that, of course, will over the next year or 2 is where that changes. But we think this gives us a really good process and a really good setup to have a very different conversation long term. So broadly at the moment, we think actually customers do want outperforming service, a stable build profile, so not spiky bill increases, but also full support for anyone that's struggling. Shane, you want to comment on this?

So in all the different pieces of research we've done probably over the last 9 years, we've never seen any evidence that customers would like to trade off a lower level of service for a lower bill. So even the research we're doing now to inform PR24 still coming out strong as improvements to the natural environment, improvements to drought resilience, reducing, obviously, the use of CSOs and things like that, and customers are willing to pay for that. So I guess the key point that Liv said is helping those that can't -- they struggle with their bill whilst the rest of customers can afford to pay for these service improvements.

Good. And Neil, we like to be a good employer. We are proud of it, do you want to share some thoughts on that?

Yes, of course. So particularly in terms of pay. So we did a 3-year pay deal, which we're now in the third year of and we're a real living wage in player -- payer. So obviously, we see that move each year depending on the independent verification of what the real living wage would be. When it comes to general engagement with the workforce. So our trade union relationships are pretty excellent. If I tell you honest, we have a very good relationship with them ongoing conversations around the impact on their members and the workforce, and we see that come through in our engagement scores, which are really great versus the sector and the country as a whole. Obviously, there are going to be pressures that we see on our workforce. And so we're talking to them on a regular basis and seeing how we factor that in. But things like the long-term pay deal that went through COVID is a really good factor in terms of protecting them against some of those issues.

Very good, and James?

Yes. Thanks. So yes, our overall debt portfolio has an average maturity of around 13 years. And of course, there's going to be some stuff that I'm looking forward to refinancing, which is maturing soon. And when I look at what we're replacing that with what we're refinancing, I still think there's good value at the long end of the curve. It's important to keep in mind that even with interest rates going up and yields going up, as you've seen, there is a good degree of protection from AMP7 onwards in terms of the cost of debt allowance will increase. We're still raising debt below the iBoxx level. The iBoxx has got an average of around 18 years, and I'm not straying too far away from that kind of level of maturity when we're doing new debt. So still good value at the long end, still outperforming for the debt that we're raising. So I feel like still in a good place when it comes to that opportunity to refinance.

Very good. Dominic, does that answer all the questions?

Just a follow-up on the labor cost then. So is it a fair assumption for us to assume that the labor cost component will go up in line with inflation going forward? Is that kind of a sort of a fair play based on your loss of 3 years?

If you look at the journey of time, right, it doesn't exactly mirror. I don't think it's the key thing. So for example, when we've had inflation down at 0.9%, we still chose to give 2.5% because it just didn't feel right. Likewise, we've had high inflation, we've not necessarily matched the high inflation. So to be honest, it's not as like-for-like stat. We've also got an all company bonus scheme as well, which we also know makes a big difference. And a lot of our people, they are on allowances on call out some different things. So if simplistically, you want to put a number in your model, I can see why that will make it simplistic. I don't think it will be an accurate representation of the end results. But I guess -- I can't give you -- I can't tell you a different number, but it doesn't normally mirror is the only thing I would say. Very good. James, over to you.

So I had 2 questions. The first question is a bit of a multipart, so apologies for that. The first question is trying to understand Slide 9 a bit better and your self-generation position. As you obviously highlighted some quite a few metrics on that slide. I just want to understand, I guess, first of all, so are you roughly 2/3 of your self-generation being nonregulated and 1/3 being regulated? Secondly, is it all in by resources and green power so that's not reported within the regulated entity? Because I know that you've changed the positioning a couple of times in terms of how you've defined the split there? And then thirdly, is all of that self-generation market exposed? Or is some of it on a long-term fixed-price PPA? That was the first question. And then the second one is, I think, you've mentioned earlier that only 3 of the companies in the sector are outperforming on -- I'm not sure that's a comment on ODI incentives or more broadly on ODIs and Totex. But obviously, a lot of companies are underperforming on both metrics. And I was just wondering how you thought the regulator saw that because you could interpret that as we've been too tough or you could interpret that as [indiscernible] a lot better, but kind of feels like the first reaction might be more intuitive, but I was just wondering whether there was a recognition that perhaps some of the targets have been set too tough?

That's really helpful. So I'm going to get James to have a chat through the specific of these questions, and you might also just get Helen just to talk about where we're going next in terms of Green Power. And then I'll start off on what I think regulator does, and I'll get James to bring out just the reality of what it feels like to actually run some of these measures, which might explain some of the concepts as well.

Yes. I think I think when you step back and look at Severn Trent, I think it is one of our differentiators, the level of self-generation that we do have. And I think it is certainly, in today's environment, when you're seeing very volatile and rising energy prices, it has stood us in good stead. And I've been really pleased to see it as part of the portfolio because it has served that very helpful purpose of managing the overall kind of volatility, particularly on the return on equity level. So the specific questions you asked in terms of what the balance is. So it's about 275 gigawatts in each of our Green Power business and our bioresources. There's a very small amount of energy generation that isn't in bioresources, but it's negligible. The main drivers and the main kind of generation or in bioresources and Green Power, which is -- as you know, have got kind of different sharing mechanisms to kind of the sort of the consumption area. So that's the key point. It's not all -- so there's a small amount that's hedged going forward. And some of that will be to do with, say, for example, in Green Power. We've got some long-term contracts with counsels and so some of that will have been locked in for slightly longer. But in the main, what we do is we seek to manage that balance and hedge both our consumption and our generation on broadly the same level. So we do get an effective kind of hedge. So if we've got consumption that's on variable rates, then will have matching generation at the same level as well, taking into account that kind of self-generation economic hedge we have.

And Helen, do you want to talk about the future for Green Power, just to give a flavor?

Yes. I'm really, really delighted this year with Green Power as a business. I really -- I just love the business. It's absolutely fantastic. And we've done a lot of work this year in terms of integrating Agrivert completely. So we now have 1 operation. And we've had brilliant utilization performance of our assets. So we run the assets at around 95% utilization, which is really high. And we make sure that we continue maintenance on our assets to enable us to maintain that. And we're also looking to invest in the current year in where we can expand our current asset base, we're looking to do that. We've restructured our commercial team who get in the food waste for us. And they've been really successful at getting in not only the long-term contracts we do with local authorities which are great, but also a lot more commercial waste. And obviously, with COVID recovery, that's been much greater volumes this year. So I think you'll continue to see great things from Green Power.

Very good. And I guess, just jumping into the kind of outperformance point. I think if I was a regulator and I was to look at the sector, I'd rather be a regulator that had some winners, some losers and probably more losers and only a few winners. Maybe that's my mindset of ambition, but that's what I'd probably want to create as a regulator, and I wouldn't want to be a regulator that was facing into whole set of outperformance, I'll be thinking gosh. That does not reflect so well on me in terms of scale of ambition. So I'm sure Ofwat loves last year's APR returns when they realized that so few people were in the winning camp, and a lot of people are in the struggling camp. I think it shows them to be a strong regulator, to be driving hard for consumer outperformance, to be making sure the bills stay low for customers for the long term. But at the same time, the people that did win, there is still that opportunity. So it's not an unfair regime. It's just a rate here that requires it to be more creative and to probably be more ambitious. Now James [indiscernible] some every day having to deliver our stellar outperformance on a yearly basis. Give us a sense of, I guess, when you look at the ranges and your perspective of how hard it is to get to land some of those performance measures.

It's a great question, James. And I think what we very early unhooked into is the fact that our ODIs are effectively what our customers are telling us is important to them on a day-to-day basis. We managed to really build that ethos into the organization. We backed that up with a very performance-driven culture. The culture itself really focus on metrics on a daily basis at a local level right up to a weekly basis around the exec table. So I enjoy my weekly conversations with my colleagues around where my performance is slightly up or not. But that performance culture in the organization, the real link to customer expectation is what's driven us from an ODI perspective. I think off the back of that, we've seen some really strong results. When I look at things like water quality performance, in particular, we've delivered now 5 or 6 years of improvement on the balance and 20% reduction in this sample loan. So I think that just is a small indicator of how we brought in the company's to ODI performance.

Very good. Does that give you a fulsome answer, James? Very good. Over to Verity then next.

I've just got Three very small questions. The first one is on Hafren Dyfrdwy. If you could give us an update on what's good there and how you're performing? Secondly, on interruptions to supply, and just -- do you think you were just not simply allowed enough money to fix this problem at the [ S Dee ]? And then just a bit of commentary on how all increased revenues in non-household retail have flowed through and how you see the business?

I'll take number two. I'm going to hand number one over to James Jesic, and then I'll hand number three will go to Jim Bo. So I mean no, it is our fault that we're not delivering introductions to supply. So please don't believe that we are in any way confused by that. This is not that Ofwat didn't give us enough money and we do struggle to live within the price control on water. But nonetheless, other people manage it. And when you cross-compare our year 1 performance versus others, it wasn't good enough. And I'm sure when you cross compare our year 2 performance to others on the particular measure, it definitely isn't good enough. So we are very clear. So we've got brilliant performance overall in the ODIs. 88% of the measures are green. The ops teams and James, Helens and Judes done an awesome job, but there are 3 metrics that are still not as good as it could be. Once they close, so we were pretty tight on one. We feel good about that, and we've have been green on it before. Another one was not good enough, and we've been green on it before so we know how to deliver it and supply interruptions was definitely not as good as it should be, and you will see us get better this year. We're confident. But yes, it's definitely firmly in our camp and nobody else's camp. Good. Now actually on a day-to-day basis, James and I don't run Hafren Dyfrdwy. We gave that task to Helen and James. So James Jesic is the MD of HD and Helen is the FD of HD. So I'll get them to comment on what's going well and there have been so many good highlights.

Thank you, Liv. I'll give a quick overview on performance and then perhaps let Helen cover off some of the financial side of things. Effectively, Hafren has been on an improving trend now for the last 2 years. And this year, I'm really pleased with where we were on performance perspective. We've delivered over 70% of the ODIs, which Hafren is measured against green, which is great news. There's still areas we can improve on across the piece, which we're doubling down our efforts on in terms of improving those over the coming years. We were able to take some learning from Severn Trent and bring that into HD in terms of how we drive that performance and vice versa as well. We've brought some good stuff from HD into Severn Trent. But I'm really confident that with the performance that we're driving from an operational perspective, the improvement we've seen in retail, around complaint reductions, I think we're going to have a better year this year than we did even last year. So very much an improving trend. I don't know if there's anything you want to add financially in?

I think all I'd add is that the capital investment program in Hafren is large. We're going to deliver really strong RCV growth, I think one of the strongest in the sectors for the AMP. And the program is progressing really well, and that will help support the performance next AMP and at the end of this AMP for Hafren. I think in terms of finance, it's obviously small. The energy costs are obviously impact on Hafren. So we -- all I say is we have to run a very, very tight ship that between James and I, we do that quite successfully, I would say. Even if I do say so myself, there is very good...

And James, want to know what on household.

Yes. So the -- so the increase in revenue, there's probably around GBP 60 million of increase in revenue that you could probably attribute to essentially being in a lockdown world to a nonlockdown world in the year just passed. And that's a net number. So what we actually saw in real kind of consumption terms is that in lockdown, you saw a bigger reduction than that in non-household and businesses. And then, of course, when more people are at home, during lockdown, we saw slightly higher consumption. So the net number is around GBP 60 million. And there's also another GBP 5 million actually from -- so we've been running quite a successful void incentive scheme with our retailers, which actually encourages them to go and find properties that are listed as voids that are actually being occupied. And that's added an extra GBP 5 million. So overall, about GBP 65 million, a little bit more than that in terms of the recovery in business, a little less coming from household consumption, but those are the kind of the net numbers that have impacted revenue.

Does that Verity all good?

And has that flow down to operating profit or loss?

It pretty much -- I mean, remember, it's a recovery from the prior year. And of course, our revenue across the whole of the 5 years is set. But in the individual year, it will flow down into PBIT because fundamentally, it cost us more or less the same amount to produce the water from 1 year to the next.

But we would have predicted that recovery. So it's not like it's an extra, do you see what I mean? It was predicted that's the next wave of revenue that comes this year?

And Okay. So I'm just -- so what is that -- how does that flow through to operating profit? I mean, what is the operating profit that you're recording in non-household?

We don't actually kind of separate out the profit within Severn Trent water between household and nonhouseholds. It's all kind of like within the wholesale kind of price control.

But in terms of the JV contribution.

We thought you want to know on non-household and the regulatory business but now clear. Okay. So in the JV -- different answer -- get ready for the Mark 4.

Yes. So Water Plus has been on a journey of recovery, I would say. And so you know that it was -- all the retailers in the COVID era were massively impacted by COVID because frankly, businesses stopped -- they closed, and that did impact their consumption. You saw that we -- our share of the losses was quite significant for Water Plus last year. I'm delighted to say that actually, things are much improved in Water Plus. And actually, our share of their losses for last year was [ GBP 2.2 million ]. Now we're still absolutely focused on getting that back into the black, and that's our intention and our ambition for the year ahead. But things are looking much more positive. And I think their cash collections have improved. Operating margins have improved. So it is an improving picture for Water Plus going forward. Sorry for not understand your question Verity.

No, that's all right. I probably phrased it really poorly.

Jenny, over to you.

Two questions, please. Liv firstly, can you -- just give us a sense of what you're expecting in terms of the up and coming methodology paper from Ofwat, I think is end of July, we're expecting that. Obviously, there's a bit of continuity with David Black being in charge. But is there any meaningful areas of change that you are expecting? And then secondly, for James, just looking at your presentation slides at the back. I think you've got something like GBP 1.3 billion worth of debt coming up for renewal for the rest of this AMP. Can you just give us a sense of what we're expecting in terms of improvements on that refi on the interest line?

Very good. I mean, we'll find out more in July. I think the 3 things I'd say is evolution, not revolution because we have got the same senior team, right? So it's not just David. If you look David's senior team [indiscernible] in place, and they would have been working on this place -- a seamless situation for the last period of time. So that would be the first thing. The second thing is July won't be December and it won't be the final determination. So I've lifted a few of these prices now. I did AMP5, I did AMP6 and now I did the next one. So I guess in that sense, you got to expect that there'll be some stuff we like in July. I'm sure there'll be some stuff we don't like in July, and we'll have to continue the conversation. So I think always remember that, that it's a journey from whatever comes out in July. And the third thing is, I think the fundamentals of the business in terms of value creation, it comes from, first of all, long-term investment. And I think this is going to be a long-term investment AMP. It comes from the ability to create winners and losers in a sector, and they got what is firmly reiterated that they want to have ODIs, maybe more commons and less disposed, but they want ODIs. They want people to push the boundaries. And I'd be surprised if affordability and build size and shape and companies being really strong social purposeful companies isn't right at the heart of it, considering the wider mood. And that plays to everything we believe in to be fair. So in the fundamentals, I suspect our opinions are aligned, it doesn't mean I like every last mathematical point or disagree with a few things. But I guess we'll make those views clear.

Yes. So on the refinancing opportunity. So still got about GBP 2.5 billion to raise over the balance of the AMP, and as you rightly say, about GBP 1.3 billion of that is refinancing. I would say probably about a third of that is what I would call high cost, and I'm quite looking forward to frankly getting rid of which is good. So that does represent a real opportunity, I think, to reduce the overall cost of interest. But as we've mentioned earlier, interest rates are rising slightly. So compared to this time last year, probably my new refinancing is going to be at those slightly higher rates than they were a year ago, which is going to temper the benefit, I think, of the refinance. But it's always important to remember that we do get compensated for that through the true-up. So yes, some good opportunities on about 1/3 of that debt, and that's coming in the next couple of years. And then the balance will still be at competitive rates, beating the iBoxx but probably slightly higher than last year, but there is protection in the true-up model for that.

And just -- sorry, just as a follow-on in terms of your definition of high costs, I'm assuming this is 5-plus percent territory?

Well, yes, some of it is around about that rate. And then some of it is quite expensive RPI linked. There's 1 that's coming up in the next sort of 6 months as RPI linked, but I'm quite looking forward to getting rid of as well.

Very good. So I think we've got the tiniest photo ever. I think it's Chris. But gosh, it's like a postage stamp.

That's my head popping up at the bottom. Apologies. Two questions from me, very high level, though. In terms of RoRE, you've got a very stable RoRE trajectory so far this AMP but your IFRS earnings clearly are impacted by volatility driven by inflation. Just the outlook for the remainder of this AMP? Do you expect your -- the trajectory of RoRE to remain stable? And how do you see that playing out over the next couple of years? Any guidance you can provide us would be helpful. And then in terms of RCV growth, I think you're leading the charge across the sector in terms of RCV growth and your guidance is clearly very strong. In the past, you've spoken about the possibility or potential of pulling some RCV activities or some growth activities from AMP8 into AMP7. Just wondering whether you can provide an update on that. Is that still something on the agenda? Or are you focused on PR24 and then accelerating further in AMP8 and you're comfortable with the level of growth that you've got for seen over the next couple of years?

I'll start with the second one, and James and I [indiscernible] first. I mean we've already accelerated a good chunk of growth into December. I remember, we started the AMP with a growth rate of about 3% real RCV, and we're now 10.8% real RCV growth. So we've moved quite a chunk already. And as part of that, we did accelerate our AMP8 WINEP spend already into AMP7 so we already have the upside of that benefit of being allowed to progress that. And I suspect because there is such a large top of conversation about the environment, we stand ready that if at the point in time in the next couple of years, it became relevant that anything extra that was AMP8 nearly brought forward into AMP7, we've got a fantastic setup in our capital delivery that I know Helen will be delighted if I said to a good news, opportunity to do even more. I know that she'd give me a lovely smile and say excellent news. So I think there is -- that's the remains. I think you're talking small numbers. Because I think the wage transition sensibly works is you're talking a couple of hundred million pounds, not GBP 1 billion. So to give you some sense of scale, there are a few things we think where acceleration would be helpful, but it's not scale, scale, scale numbers. So I think it's rounding edges versus our RCV growth. I don't think AMP, I was clear cut [indiscernible] I think really, if you get yourself in a strong shape in your capital program, and then if you get yourself in a good position by talking about it with regulators, I think that gives you an opportunity that you get comfortable knowing what your likely underlying base spend is going into the next AMP, you can begin organizing the contracts, prebuy, procurement activities, hiring resource, all the stuff that we did, a little bit at risk at the end of the last AMP, which has put us in such a fantastic position for this AMP, which allowed us to escape the impact of COVID because we've pre got ourselves ready. We would be doing some of that. Your base spend is a really large number before you get into the enhanced activities. We ready got one eye on how do we best deliver most efficiently for customers that base spend going into the next AMP. So you should assume it's not going to be the hard stop, it's already going to be a constant activity plan, where we've already got one strong set of eyes looking at the future. In terms of guidance on RoRE, I mean, it's 3 component parts. So I'll let James talk about financing. We've given you pretty good guidance on RoRE in terms of Totex that we expect -- and then in terms of ODIs, we've given you, you know what the first 2 years are, we have given you an indication for the third year. And we've always said that the final year does have an extra kick when it's about GBP 50 million based on end of at measures. That is as much as we're going to give you in terms of definitive guidance.

I guess the balance is what happens on financing. And I think I've described in my presentation that actually we've outperformed on the last 6 years on financing. And what you see is that when inflation is high, we typically do better on the RoRE line. And when inflation is low, and we have had a couple of years within those 6 where it's been low, we still outperformed. It just isn't quite so much. I think when I look at the year ahead, if inflation stays at it is, I'm pretty confident that we're going to outperform on financing. We're going to be neutral on Totex because that's our ambition to spend what we've been given as an allowance. And of course, the ODIs will be reflect the guidance that we've given. So I think on balance, I feel confident that we'll continue to outperform, but inflation will play a part in terms of how much that outperformance will be, particularly in years 4 and 5, where I have kind of less visibility in terms of what's going to happen to inflation.

Is that fair enough, Chris, does that answer the questions? Bartek, over to you.

2 things, please. Firstly, I was wondering this high inflationary environment somehow impacts your thinking about the ODIs and Totex outperformance trade-off that maybe you would probably push for more Totex outperformance and less ODIs. And then whether there's -- I mean you just said you will be -- you will try to be neutral on Totex, but I wonder if actually there is a risk that you may underperform on Totex given where inflation is. So that will be my first thing. And second thing, on self-generation. Do you think the current situation if it prevails going forward, it could somehow unlock the wave of third-generation investments in the sector in the future, especially in AMP8, whether the regulator would be happy to see more third-generation investments. And in terms of your thinking, would you prefer if you were to invest more in third-generation to actually have those assets under the regulated scheme or actually do it on sort of a merchant basis and probably get more Totex outperformance in the future.

Good questions. I mean to start the generation, so the regulator has created the [indiscernible] charge control. And effectively, it wants a market forcing compete situation. It doesn't want to just straight fund activities. It doesn't want you to add things onto the RCV going forward for resources. So it's basically saying that if energy costs are high, the market should create the investment situation. So it's encouraging more non-reg investment, not necessarily reg investment. That's definitely the strategy. And I can totally see their point. And actually, in a high inflation situation where energy is expensive, if it does make the business case better from a non-reg situation. So they're right to push that way. And we feel good about the fact that we've made a lot of choice investment over the last period of time that now looks better value than what we made, which is great. It was already good double-digit IRRs. We made most of the investments and now it looks even better. So I think you should see non-reg investment not necessarily reg investment. The one exception to that, which you might be worth touching on is I think Bob just talk about a side topic relevant, which is around net zero. Because actually, when you begin to look at the future to get to net zero could be some regulatory orientated investments that actually also helps in the space in terms of efficiencies and less energy use. So I'll get Bob just to give you a bit of a hint to the future about that. So that's -- I think we've tipped off generation on that. In terms of how we think about it, I mean, personally, and I know the team are in the same place, is that we want to deliver what our customers want. You run a monopoly, then you have to deliver what the customers have asked for more than anything else. And our customers have made it really clear what they want more than anything else is great service on those metrics that they chose to put financial reward against. So I think it would be inappropriate to genuinely for us to be saying as a team, actually, we'd rather make more Totex outperformance and less ODI investment. And we'll balance it. That's just not the right call. Our customers want us to deliver amazing service. And so our plan remains the same for the next few years, which is to absolutely outperform big style on ODIs to live within our means on Totex. And there might be some investment cases towards the very tail end of the AMPs getting ready for next AMP we might choose to actively invest more money. But as it stands for delivering our current commitments, we'll live within our means, and that will require us to make more efficiencies because say, some underlying costs will go up. We are choosing to create, for example, the funds for the extra 100,000 customers we've talked about today. But I suppose we're quite a creative team, many of us have come from other sectors. And we're clear that there are always different ways you can skin a cat and actually through hard times right now when some of the costs look a bit harder to deliver, you find new ideas that stands to be in fantastic shape for the future, and we're going to be looking for some of that creativity to come out in the next year to solve some of the underlying cost increase. But I'll get Bob to talk about net zero because it's quite an interesting situation for where energy will be less necessary going forward.

Great. So I guess if you think about our journey as a landlock water company where we couldn't dispose our sewage sludge to see back in the day. In the 1950s, we set up on our anaerobic digestion journey, I guess, thermal hydrolysis come apart -- come along 10 years ago or so. And so we've invested GBP 200 million in thermal hydrolysis, which means we squeeze much more energy out of our sewage sludge already. And I guess the next stage of that journey has always been around pyrolysis and gasification, and I was just in the Global Water Summit just last week in Madrid, where that's really starting to take off, actually, especially in some of the continental companies. So that's going to be the next place. Gasification and pyrolysis where we put a lot of innovation efforts at the moment.

Brilliant. And I think it just gives you a sense that actually don't assume that the next AMP is just a repeat of the past. I think it's very likely to quite different. So you'll probably see one thing similar THP investment you might see movements towards pyrolysis, which is brilliant for net zero, but actually also good on an energy game again. Thank you very much, Bob. That's all the questions we currently have. And with that, well, that was really good. Thank you very much for so many totally different questions, and we look forward to catching up with many of you over the course of the next few months. That's it over from us.