Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Good morning, and welcome to the Severn Trent results presentation and the Q&A live session. I've got myself and James at here and the whole of the senior team in the room so we can answer any questions. So as you know, how to answer it, you can do them online, you can put your hands up all the various electronic means. And Pavan, you are the first person, you win the first person out the block today. So over to yourself for the first question, if that's okay.

Congratulations on this incredible [indiscernible]. So, I have 3, please. Firstly, we saw last week that you decided to defer around GBP 39 million less ODIs than the interior drop determinations. So can you walk us through the thinking behind that in terms of your thoughts of bill volatility? That's my first question. Secondly, can you talk to us more about bill volatility in general? And do you expect to fully pass through this November's inflation into next year's bills? And then my last question is just asking for brief thoughts into your expectations for the final methodology for PR24 in December. How your conversations have been with the regulators since the draft, -- anything we should be keeping an eye out for?

So, 3 questions. So I'll take the second and then definitely, I'll probably hand over to James actually for number 3 and 1, right? So we're very conscious of the volatility. We've got the second lot fan in the land. So our bill is about GBP 1 a day, as you know, and that's an important point. And we're seeing bad debt holds, and we're seeing customers still comfortable paying the bill as it stands today, right? So we are conscious of this, but again, a strong backdrop. So we decided that we're not going to put through as [ inflation ] cost, so we'll go a couple of percent below whatever inflation is, and we've been open about that, and we'll be open today with the media if they ask a similar question. And the thought process is, is that it's right to put some of the ODIs on, and that's what James will run through our thinking about it. But at the same time, it's also right to make sure that it's below inflation. There's a lot of costs hitting families right now. So it's managing that balancing act. So James, do you want to answer the so conversations go forth [indiscernible].

So Ofwat's Draft [indiscernible] she raised a question about how much we're deferring and rightly so because we've got a lot of RCV growth at PR24 and onwards. So we're able to reduce some of the deferrals, while still keeping bills at least 2% -- around 2% below inflation and Ofwat signed up on that decision most recently. We also follow a lot of lead metrics as well. And so we are expecting, of course, take through the full inflation and green recovery as well. So we just published our draft charges, and we're publishing our final charges shortly. So in terms of the conversation with Ofwat on PR24. So been constructive, as usual. We obviously have made proposed some changes to the draft methodology, notably including past performance in how they assess business plans. Having publishing the final methodology on the 13th of December, and so we look forward to seeing that. So whether they take into account past performance and just having the final certainty on the timetable and the common performance agreements in particular.

Very good. Does that answer all your questions, Pavan?

Yes, that's all very clear.

Very good. So Jenny, you're next up.

Just 2, please. Firstly, when we look at the double-digit RoRE numbers that you've indicated, -- are you able to narrow it down a little bit for us? I mean double-digit can be a very wide range. And I guess, a big part of that is coming from the financing outperformance. Can you give us a sense of the extent that part of the life of the [ payers ]? And then just going back on kind of longer-term outlook for specific non-inflation, obviously, Ofwat has been very clear in terms of allowing the full inflation through [indiscernible] and retaining on balance sheet. But is there any discussions already about the next one on how inflation is going to be treated because my understanding is of [indiscernible] is looking to go down with corridor room at some stage where you have a capital floor. Are you having those types of discussions with Ofwat?

So I'll take those. So no conversations around that with Ofwat. And just again, we've had a long period of low inflation growth. So yes, we've seen this year and next year has been slightly different. But I mean, we, for a long period of time, had a very strong efficiency situation in the water sector. We've had RoRE returns on average being very low. And if you look even today in a high-inflation era, most companies are not making the base return. That's very, very different to Ofgem. In an energy situation, most companies are making 10% to 12% rate for a long period of time. Most companies in the water sector are making 3% to 5% RoRE in that same period of time. So I think it's important to get the context of the regulator to work out what decisions they might take and base returns is very different in energy sectors. So that's the first point. I don't know James if you want to add into that? And then on the second one, so double digit does begin at 10%. So we're not going to give you more guidance than that, I guess, Jenny. The 3 things that are the levers is the firstly -- and I'll pass to James to give a couple of points on financings. The first lever is can you do for the [indiscernible] allowance. And I think one of the big announcements we are making today is that we're confident that we do run a good ship. We have negotiated where Almost importantly fast start and some good decisions on in sourcing resource means that we are calling to be within our topic allowance. So we're not going down on that we're holding. Second thing is ODIs, really strong showing from our social team to be landing on a third year of ever-tightening target, at least GBP 50 million after pretty record-breaking weather this summer is a strong performance. So I guess calling ut of course, would like to be slightly higher as to have at least GBP 6 million. We'd love to see what we can do over the next 6 months. And the last thing then is financing, as you say, that is the largest of the 3 buckets for this year. So James, any thoughts on financing?

Yes. So yes, double digit, RoRE. I mean, I think my colleagues have done a fantastic job on ODIs and totex, but the reality is it's financing. In a year of high inflation, then it is financing that kind of drives that additional RoRE performance. And of course, remember, that is because in a year of time inflation when you've got only sort of 25% or so of debt index linked, then that means that you do get that extra kicker in RoRE terms when inflation is high. So financing is doing a lot of the work to drive that -- when you look at -- compared to the rest of the sector, we'll be -- I'm confident to give you that confidence to give -- sorry, I have the confidence that it's going to be double digit. That's against the backdrop when a lot in the sector are struggling to make the base return. It's going to be more than last year. So I think overall, we're very pleased with the kind of performance as we look ahead to what's going to prove to be a really strong year for RoRE.

Well, we're not going to give any more than double-digit of rate, Jenny, so we're not going to give any closer guidance than that. Very good. Anything else Jenny, or is that okay with you?.

Thank you.

Very good. Dominic, over to yourself, next.

A couple of questions from me. Firstly, CSOs, I know it's not necessarily an issue for yourselves. But it does seem to me that the regulators are starting to regulate themselves. There's an investigation into the EA. And when you look at the sort of 5-plus water regulators and then the environmental regulators we've got out there. It does seem to me that there might be a shift in how the water sector sort of shapes up going forward in like, for example, if you doing more and more in river qualities. And I'm not [indiscernible] the remit of Ofwat. But how would you see -- how would you see the shape of the regulatory regime going forward in light of the investigations into the regulators and we to do the banks who are paid for. And the second question is on WACC, which is I think Ofwat going to be published in a number in December alongside the final methodology. In light of the sort of high volatility that we've been seeing in the market, do you think they're going to go for a spot rate -- or do you go for a range? Or how do you think they're actually going to sort of navigate around a number that sort of wildly difference at what it should be?

So for a long period of time, we've made a call that we're not going to predict WACC. And we're not very good at the crystal ball. It's not a skill we have developed so far in Severn Trent. So it might be as early as December. I don't know whether it is December, but is in early December, that we see a draft WACC, then great. I mean I'll hand to Shane. Shane -- I think it educates -- it's in the round. And we've said this consistently now for 2 AMPs, so it will be third AMP we've said that in a statement. The WACC is one number, but it is just one building block, an important one, but one building block. So Shane, give us a sense of the whole in the round settlement, and then we'll come back to the other regulators.

I guess just using PR19 as an example. So we had a number of different components. We have the incentives for the IP. So for Fast Track, there's an uplift there. We have obviously totex, cost sharing in terms of which they apply and the ODIs and financing as well. So I think just the other point on your position. We've got a number of different drivers of outperformance there. And at PR19, they did give a range for the early view I guess if the past will put the future, that's the pathway that might go.

So I think we're thinking if it is early December, you might get to see a range. But whatever the range is, there's still a long way to get the right work. It's early than they gave a number last time around get still a long way -- a long runway until the end.

At every pricing, they always move from the early view as well. So right up until the farm termination. So it is literally just an early view.

Very good. On the other point then. So it's not by chance that we're in good shape on CSOs. And I'm going to hand to James for a second, Jesic to give a sensible work we're doing now even to go even faster. Our performance for this year to put in the RNS is that we're definitely on track for our end of our commitment, which is a regulatory set target to be at an average of 20. And actually, we're ahead of track. And we've got a year-on-year improvement from last year to this year. And yes, we've got a bit of that has been helped by weather, but we've also got an underlying year-on-year improvement based on our own efforts as well. So I'll hand to James to talk about all the stuff that we have done and will do on CSOs to bring that average activation level to home. And then I'll answer your specific question about, okay, but what do you think you get action to paper, what would you do?

Thank you, Liv. So across our estate, we've been really scrutinizing the performance of each individual CSO. We've got some really good data there. So over 90% of our CSOs are fully monitored and that will be 100% by the end of the year. So we've been really focused on gathering that data. That's allowing us to really scrutinize that level of performance and understand where we can make interventions. So for instance, some [ of these ] CSOs, we can look at what treatment options we may have for those. Others, we can look at the capacity of the network to really reduce any particular activations may have from that area. And others, we're able to make different changes to our network to actually eradicate the need for that CSO. Notwithstanding, we're not going to be able to get rid of every CSO. I think the numbers that have been publicized reflect the actual challenge of doing that, but we're well on with our journey to achieve an average of 20 activations by the end of the AMP or fewer and certainly on track for the government target of 10 by 2050.

So in terms of regulators, I think it typically works quite well to have quality regulators slightly separate to economic regulators. I know that this is our view. And we -- if you take it to some more quality, I think having a DWI, which is a group of, say, 20 people, 25 people, tight organization, but they are absolute experts in more quality, it works really well. We quite like having expert conversations, quite geeky conversations. So we have that with EA on the environment and over the quality, we have it with the DWI in terms of thinking water quality and we have with CCWater to cancel of water in terms of customer engagement and how we need to manage affordability and [indiscernible]. So we quite like that niche quality conversation. And then, of course, it's all got to come together into a total bill. And that's where Ofwat, I think does a good job. And whilst I think we are seeing a new trend of more analysis on regulatory performance, which is good and then everything is going to be scrutinized, particularly in the world of increasing bills doting happen is really scrutinized. But I said, the new course compared to Europe just take 2 facts. So typically, you'll see bills are probably a dramatically lower in the U.K. versus Europe, so average GBP 1 in Birmingham, if you were to be one of our customers versus GBP 3 a day in Berlin and GBP 4 a day in Copenhagen. And if you were to look at, say, drinking water quality, which is so the DWI really let it. I mean the only country with better actual water quality that you drink out the tap in the U.K. in the whole of Europe is Ireland. So it actually has worked over a long period of time. So I'm not saying that there won't be a new regime, but I personally will be less keen on everything going into a single regulatory body because you would lose some of that to expertise. Quite like the fact and we don't -- we think we manage that reasonably well as an organization. Here's the expertise and let's get our experts to work with those experts. So I probably wouldn't create mass change to the black sheet paper. Happy, Dominic to answer your questions. Good. Okay. Martin, over to yourself next.

A couple of questions, if I can, please. You've talked about affordability, particularly in the video that you shared earlier today. Where are we with the likelihood of a social tariff on a national basis in water. I understand some discussions have been going on. So maybe you could provide an update on that. And then the other question is picking up on your GBP 1 a day, if you live in Birmingham for water, I think it's slightly more than GBP 1 a day nationwide. But nonetheless, not the biggest number out there yet, the water sector does attract a degree of criticism. On one hand, comparative regulation works very, very well if you have a good sense like yourselves. But ultimately, there is a broader industry out there and some of the narrative hasn't been great. What collectively can the water industry do to get itself in a better place in the eyes of well, certainly the media and potentially the wider public as well.

Great question. So I'll start with the affordability one. But I might then hand actually to Jude just to flesh out what we're doing even more than since we last spoke to you. So I mean, on the national tariffs, I think it's tricky to see it playing out as smoothly as maybe you thought a year ago. A combination of the less legit time and it does require more actions than government. I think it's also taking in the context of the fact that everybody builds in other areas have gone up [indiscernible]. So I think it's less attractive for government now to look like it's sharing a social tariff across people that live in different parts of the country. So I think personally, it looks like it's got quite a high bar to cross. Now that's -- so whether it occurs or not, is a bit impossible for us to tell a bit crystal ball ask. What we're doing though is we passionately believe with the principles and so I think the principle of it was spot on, which is that nobody should fear their bill arising. And at the moment, there is a little bit of a post lottery, but some companies do lots and some companies do less. And what we want to do is to set the bar. So if it does arrive, it would always be seamless for us because we already have done more than is being asked. But I'll get Jude to talk about how we're seeing that's working and what we've announced since the last time we spoke at affordability.

Absolutely. So we felt we really got the timing right in May when we announced the expansion of our schemes. And we're really on target now to hit that 315,000 people by the end of the AMP that will endeavor to support to water poverty and out. So we've been -- 2 things, I guess, that we've done since we last had a really wide -- a region-wide campaign and that included in-community events included right here, working with a lot of partners. And just as importantly, actually, we've changed the threshold for qualification for the scheme. So we've made that easier more of our financially vulnerable customers to qualify and what we've seen is an increase in uptake there. And as Liv said before, we'll continue to look at that. If we feel that the need is growing and not shrinking, then we'll reassess how much more we can help.

Really good. And on the second part, I mean I think the narrative for us anyway, and I'll ask Neil to comment as well since he looks after some of our comments and reputation stuff. I think the narrative for us is probably some clearer that we're not all the same. So fundamentally, there are behaviors and performance in the sector that we couldn't necessarily defend. And actually, I think there's been some really good honesty from the chief executives of those companies that say openly, that they're not comfortable with that for us either and the that their history isn't acceptable, and they intend to fix it. So I think that's a really good honesty that we are seeing in that sense. So we can only deliver our job as the first thing is to do evidently well. And that's why some of the big things we announce today are important, 85% of the measures are green on track for the fourth year of 4-star status. No one's asked that question yet, so I'll put it in, but that is a real price point to be calling that at this stage of the year. The best ever position performance in our history, on track for having, and that's obviously one of the big topics of the day. On track for the off-target on CFOs, which other people are probably fighting against the target, we're embracing the pledges on track for March, they're still setting the standards for the sector. So I think we kind of say, plan A is do all the stuff in our own but then plan B, of course, is to try and improve the sector apitation. And I'll pass to Neil for any comments you want to make around that.

Yes. So I think that's broadly right. I think the narrative is that the sector is all the same, and we know through the performance and the measures that, that isn't the case. And why is it important? Because high performance should calling out a high performance and calling out good performance should drive others to improve as well. But I think it's also important to try and broaden the narrative the way the immediate particularly being focused on 1 or 2 small things. And I think some of the work that we're doing around the multiple stakeholders. So the work that we're talking about today in terms of community and society is really important as well because it shows that regional companies like Severn Trent can try at a bigger role. And I think broadening that out and being specific about the difference between high and low performance is really important.

Peter, over to yourself next. Oh sorry, I see you're on mute. [indiscernible] 2020. There we go. Oh, no. He's like, literally, that's it. Peter has left the room. Okay, we'll see who's next. That's an old handsome Martin. There we go over to Mark very good. Hello, how are you?

Firstly, A question for you, James, on the amount of refinancing that you've got to do over the coming 2 years. I mean, clearly, I think on the slide, I believe it was Slide 12 where you put up some key indicators. But in terms of how much issuance you need to do? And I accept that's within the cost of debt tracker, but just looking holistically at how much you need to hit the markets for? And secondly, a question for Shane, just on real price effects, I accept that you talked -- I think you gave a statistic 70% of the totex is fixed out. You went early to the supply chain secured resource, but costs have gone up and they haven't gone up just in line with CPIH. So could you give us an indicator of what if you were to reprice your totex program today, what, if you like, the real price effect and the real inflation that you would be seeing certainly as you move into the next AMP.

Very good. So let's start with James, the refinancing number?

Yes. So we've already raised around GBP 2.5 billion already this amp in the first 2.5 years. Has gone extremely well. We raised GBP 400 million in the last year alone. When I look ahead over the balance of the amp is about -- it's just under GBP 2 billion of new debt to raise for the balance of the AMP. And of course, as you point out, that is more expensive to borrow money today than it was even a few months ago. But the iBox allowance for new debt does give you a really good sort of protection from a regulatory perspective. So even though our cost of debt is rising, the iBox allowance that we get is rising as well. And as I pointed out in my presentation, so far, this AMP, we've actually been outperforming the iBox by around sort of 24 basis points our sort of new debt has been around 24 basis points under the eye book. So I feel confident looking ahead that we can continue to deliver our performance on financing for our investors for the balance of that new debt that needs to be raised.

Very good. And if I take your question, Mark, the second question, I divide it up in 2 ways. So I think there is, how does the regulatory model work? If prices go up, then what happens and then Shane can talk to that. And another thing it's important to understand that I'll get Helen to position the next part, which is I think your question is, if you -- yes, we went early and so actually we looked within the kind of the cost allowances, I don't think it's quite -- I mean, that's true that it's 1 of the 4 reasons that we've done well is get a fast start. There are 3 other reasons why we're still managing the dividend the cost allowances. And we're still confident that we within whatever the cost allowances are for the next amp as well. And we'll talk through the stuff that we've done together on that shape, I'll ask Helen to cover those off. So Shane.

Yes, just briefly, the base models rely on the whole premise of the past is particularly in the future. So Ofwat's cost models used cost since 2011, '12 wholesale and 2013, '14 to retail. So the higher costs that we're seeing at the moment in energy, chemicals, labor and obviously, capital will flow through into the cost models. So we calibrate the models for PR24 or use these higher inputs and that will flow through into more generous base allowances Everything else being equal.

And it's also true that if others overspend in the sector...

Is it doesn't differentiate between what the source of the higher spend is. They look at it in aggregate and then use expensive variables there, like [indiscernible] and other things.

And Helen, what are we doing rather than just being a bit lucky by going early? What are the things that we're actually doing to manage our [indiscernible].

So not only did we go early in respect to fast track that we also, you remember, we accelerated design during COVID. We continued delivering on site where we were present, and we also fast-tracked some of our design because of this capacity in the market because a lot of it stopped. So that was to our advantage. The advanced procurement that's mentioned in the video, that's something which we -- again, we went very early on. We bought critical components like 10 [indiscernible] rigs that we use in water and in waste and secure the manufacturing slot, which protects our program as well as have saved us money. In-sourcing of design is a huge benefit to us. And the reason for that is because there is a lot of capacity in the market. So again, we've got a resource that we can do. But importantly, in this current climate, it's enabled us to value engineer our schemes in a way that would be much more difficult to do, if you were outsourcing that design. And I worked my team have worked very closely with Bob, our Chief Engineer to do that, and we can probably talk about an example of that Bob. And importantly, we have also significantly expanded our supply chain. We did that at the start of the AMP, but we have then gone further. We're developing Tier 2 and Tier 3 suppliers, which gives us more capacity, but also they tend to be smaller, lower overhead and therefore, cheaper. And we've also created a new framework of around 50 to 60 suppliers to enable us to access more delivery capacity and again, bring more competition into our commercial negotiations. So there's a whole host of things that we've been doing to not only deal with the cost issue, but also ensure that we deliver our program.

And then a quick -- actually hand over to Bob you an example because if you think about next mark, then you've got to make sure you can still deliver even if inflation would stay high, you can still deliver. But also, we're expecting to see long-term RCV growth and that long-term at it requires delivery. It requires a supply chain. We want to be able to step up, having seamlessly gone from the core program to recovery. We now have to go from an AMP7 rate to whatever is the AMP8 investment rate, which is likely to be higher again. So Bob's really is an example of value engineering.

Yes, sure. So we've got a really good [indiscernible] actually with James', Jesic's operational team, Helen's Capital Delivery team and our Chief Engineer team. So I guess an example, we're somewhere like lower corn storage works, where the standard solution was going to be to close it down and pump it to a nearby larger work. But you may notice that the pipeline costs are huge at the moment, HSD and all that stuff. So we reframed the problem. We got our process experts involved, and we found a way of actually reusing our assets on site using some of the innovation from our test bed internal. So it's been a really good example. And we do that quite a lot.

Brilliant, does that bring to life the answer mark?

It does. Just a follow-up for James. So the 2.5 -- so there's a lot of notes that I was taking. GBP 2.5 billion in the first 2 years, so you've got another how many GBP 2 billion for the rest of the AMP, does that include the at the end of this AMP that you would need to raise for 2026? Or is that just GBP 2 billion you'd need to raise in the next 18 months to keep yourself finance for this review and sign going concern and keep your headroom, et cetera.

Yes. That just covers AMP7, so it's for the remaining GBP 2.5 billion.

But the reason we do that is because you've also got the GBP 1 billion RCF that you can call off. So effectively, the way we view it is rather than thinking about, okay, you've got to do this amp and another GBP 1 billion for the year of next amp, we don't think of it that way because you've constantly got the prenegotiated RCF call down. So think of it not quite as a hard stop. I think we sometimes get obsessed with the AMPs as being a hard stop. I think it bleeds a bit more cost...

And I think over the next -- over the next sort of 18 months, we're going to get more visibility about what AMP8 is looking like and what the investment plans are going to be. And I think the treasury team will start rolling into action when we start to see those plans in terms of thinking ahead into AMP8.

So need to do GBP 2 billion. Would be nice to have GBP 3 billion, GBP 3.5 billion.

I think you said you need to move 2. And if sometimes we go slightly less the market is more favorable. And sometimes we can use the RCF and [indiscernible]. What we've proven is listening of and that what James has done a brilliant job. Regardless of the market conditions in a no inflation era, James outperformed market, in a high inflation area James outperforming the rest of the sector. So we're confident we've got a very active treasury management and that will take this right strategy for the right moment. You remember, we floated for a while when that was good. We're then 16, we lower index linked. So I think assume that we've got an active conversation rather than there is a set plan to an argue that. Very good. And Peter, I'm going to try again. Is it going to work?

I'm hoping you can hear me this time. Sorry about earlier. So 2 questions, if I may, on power price exposure. So first one, your technical guidance implies that the net GBP 50 million impact from higher power prices. Is it unchanged since you reported full year results, and that's despite a doubling of the costs for your regulated business. I'm wondering how you've achieved that because your power sales, I think, are only half of your power consumption volume. So I get you've got an economic hedge, but I'm just wondering how you've managed to keep P&L neutral in terms of your technical guidance? The second question on liquidity in power markets. Are you actually still able to hedge? Or do you have a larger amount of spot exposure, both on the cost and revenue side as we go into next financial year? And then finally, wondering if you have any visibility yet whether you'll be impacted at all by the windfall tax on power generation that was announced last week.

Very good question. James?

So on the tech guidance, I'm really pleased. So at the beginning in May, we kind of gave some guidance and said that we thought the net impact when you take into account all of the kind of various moving parts through the P&L would be around GBP 50 million. I'm really pleased to confirm despite probably one of the most interesting years so far in terms of energy prices, really pleased to be able to reaffirm that guidance at the half year stage. And the way we do that, of course, is I know, as you said, we do have around 50% self-generation. And that really is the differentiating feature that Severn Trent. We do have that high level of self-generation. Of course, that provides us with a really significant amount of protection, both for our investors, but also it gives us that base protection when we look at the impact on the P&L. And of course, what we then do is we top up using hedging in the market or financial hedges to make sure that throughout the year, we can protect that P&L position. And that's why the guidance hasn't moved, albeit revenue slightly higher and costs are slightly higher, but that GBP 50 million delta this year to next year in terms of the PBT impact has remained unchanged. So it's all to do with that.

And it's also because Green Power has had its best year.

Yes, absolutely. Green Power had a fantastic year. If you look at our Business Services division, it's delivering GBP 31 million of EBITDA, a large chunk of which is the -- is what's happening in Green Power. And there'll be more to come in the second half, hence the guidance. In terms of liquidity, can we still hedge? Yes, that's -- the short answer is yes, we can. And in fact, we started, I think, this financial year, 90% hedged for the year we're in currently. And I think when we look into the next year, we're already at around 85% hedged for next year. So there hasn't been any issues hedging forward. I'm not particularly light in the pricing. It's probably -- it's certainly more expensive than it was last year, but we're well covered for next year. When I look at the windfall tax, really good question. So we've only seen guidance so far, but a couple of takeaways. I guess I'll share with you. So the first thing is, the good news is around 3/4 of our energy generation absolutely isn't in scope. And that's because a large chunk of what we generate is now in gas format. And of course, gas is excluded, it's electricity levy, not a gas levy. And then we've also got a large amount of actual genuine self-supply within the boundaries our works and of course, that's out of scope as well. And the remaining quarter, we're still kind of looking at it. And I think it depends on the definition of biomass and renewable energy and where the food waste is in scope but that, we think there are some good reasons why it should be treated differently. So too early to give a definitive answer until we've seen the sort of the full sort of technical information. But yes, it's certainly not impacting the quality of our economic hedge going forward.

Over to yourself, Dominic?

Yes, I'm quite happy to be after anybody else has got questions, but just another couple for me, please. I mean, first one, is able to give us some color around your pension position, particularly in light of the LDI issue in this autumn and whether or not you manage to get through that one. I'm so unscaled. And we're not comparing your pensions with your peers. Could you explain why your life expectancy sort of 3 years less than it is safe for the other water companies? That's why. And then the second question, I got kind of Jenny's question, I think, at the start, which was on the cap collar and the IRRs and all the rest of it. We obviously look at everything in real terms but in nominal terms, I presume you can be making returns closer to 20% plus on equity. And I think Unite, the union came out a couple of days ago and said before there should be a windfall tax on electricity networks. Is there anything out there or conversations that you're having that actually in nominal terms, these returns look pretty high and then the actions of sharing with consumers to compete we had.

I will take the second one. And then -- and I know that James will come in on pensions. I mean, I think it goes back to fundamentally, it's very different in energy in terms of the returns. If you look at the super nominal returns that are seen by any format, they got was like the same money cost the same basis of life and then extraordinary returns. We are not seeing that. So if you look at our year this year, then energy is our second highest cost. We're having to swallow what is dramatically higher energy costs, dramatically higher chemical costs a tight supply chain market still and actually then help customers more than affordability I think the returns being made are very different in water to energy, which is where the conversation is the same. And even when we look at the [indiscernible], we look at it, it's our first read is that it doesn't actually impact the same reasons because you don't have a super [indiscernible] even in food waste, which is based in the electricity. Actually, the food stock is different, the cost of running is different because of energy. So even then, it's quite a different proposition. So no, we're not in any conversations with anybody about that. And I think actually, the evidence is quite strong that the model holds in all the scenarios have seen so far, but it's still acquiring lots of management. And I think probably unfortunately you've seen just our results today, when you see the whole sector's results over the course of the next period of time, I think that will put those results and stocks in [indiscernible] as well is that the good companies might be performing very strongly. The vast majority of the sector is struggling to make the base return and particularly in this high cost base era. James, I think we actually came through on skate. So that's I think actually decent 7 ounces to.

It was. It was an interesting a couple of weeks. It feels like a long time ago, but yes. So I mean, I think the key takeaway for us is that I think the big news from my perspective is to agree the 2022 valuation. So that is really good news. That gives us certainty certainly over the next 3 years until the next triennial valuation and then beyond that as well, I think we've got really visibility. I mean, we've come a long way on pensions, right? If you go back to the 5 years post kind of the Brexit vote when our deficit was in the GBP 700 million. I think we've come a really long way. And we're continuing on that steady progress towards getting to a position where it is that the deficit kind of has come down to nothing and we're on that journey. And I think we're now looking ahead at a situation where it could well be it's likely because of the way they actually sort of prudence works that actually we could be in a position where there is -- where the actual the scheme has got moved into a surplus. And what we've done is we've agreed heads of terms to make any contributions that we make in AMP actually returnable in the event as and when the fund moves into surplus. So I think that's a key kind of improvement we've made for this triennial valuation. So that's something to look forward to, I guess.

Very good. Thank you very much. It's there. We've not had you before today or for questions. Over to Verity.

Just a couple actually. And the first one is on non-household retail. You've broken even. So is this the beginning of a much higher trajectory or are you now going to run into recessionary pressures on non-household customers? And then secondly, just an observation on costs. I noticed your harden contracted are up 80%. So is this one of the tools that you're using to kind of get your labor costs down, which obviously were down 5.5%. So is that one of -- is that just because of the dry summer or is that a tool that you're using?

Very good. I mean that's IRE investment and isn't it? James, do you want to cover off on the hire and contracted?

Yes. It will be a combination of hired and contracted. I mean, you can see that there's quite a lot of activity going on across the piece in terms of green recovery, lots of HS2 diversions work. So there is quite a lot of additional work. And when some of that is temporary, we will use hired and contracted to sort of fill that gap.

So where are we thinking -- so I think the way I'd view about it is overall costs are in good shape, hence, about the totex is in shape. If we think it's a permanent cost, we're going to rather in-source. So we'd rather have those people ourselves. And if we think that it's for a period of time, so recovery investment is a good answer. And likewise, I think some of the work on biodiversity, we've spent quite a bit of money on the biodiversity OTI this year. That, again, is standing trees, it's kind of work of that ilk, which is necessarily a permanent resource activity for us. So you're seeing those types of costs and it was also expected that we would spend more ROE. So if you look actually at the profile we set at the start of the AMP, we were meant to spend more this year, but we do buy in metal work on the waste network, and that was always predicted to be in this year to get ourselves in great shape. The end of AMP operates like James said before, the ODIs do get harder every year. And as they get hard up, some years, you kind of like give a step change in a couple of measures to get some of the right run rate for the future. And certainly, we've got a couple of measures we're not having a formal on as we said openly, [ 20s and 33 ] green still to work on, and we spent a bit more money on those in the first 6 months to get them on to a better trajectory. On the first question, then, I mean, the non-household market, we've always said, and James always said it's tiny, right? It's a tiny percentage value of the overall business. So it's great the world plus is now into positive. But gosh, in the same way as when it wasn't positive, I get reassuring you it's a small percentage. It is kind of like a well-managed situation that is just a frustrating market dynamic. Please don't suddenly get wildly excited about it because they have broken into that positive territory. It's still a very, very small part of our business.

It was. We were pleased to see it return to profitability. I think the thing to keep in mind, it is a pretty low-margin business. As Liv says, it's a very small part of our business, but it is quite low margin. And as you rightly pointed out, I mean, we are, I guess, looking into recessionary time. So I don't think it's going to be tough times, I think, for all retailers, including Water Plus looking ahead, and that's just because the economic environment is looking like it's going to get a bit tougher.

Very good. Okay. So is nothing that looks good. I think we're going to so I can't get on to squeeze. It is Ahmed next.

Yes. A few questions from my side. I was just hoping if we could get some sort of thoughts from you on the operating cost trends for next year. So as I see your guidance for this year implies about, I think, GBP 100 million increase year-on-year. And I was thinking if there's any commentary you can share how you expect this to be in the next financial year. Then just secondly, interested in some commentary from your side on bad debt collection and if there's any change in the provisioning policy behind it? And then finally, just a follow-up question on the power cost because as I understand, obviously, you are -- you have a short position or you are net user of power, but you're obviously able to keep the guidance -- the previous guidance in tax -- is that because of a mismatch between hedging policy? Or is there some sort of financial overlay, some sort of training optimization as a result of which you are able to sort of keep those costs constant versus the previous guidance.

I think the last one, I'll just end on the last one, and then I'll let James jump in the 2. I mean so we are probably slightly cautious in our first guidance, right? It's probably where it is. So we've probably benefited a bit from James slightly cautious on the first number we gave. Definitely given the team's operational team a lot of help in coaching on user power you've seen how expensive tariff. So there's been a big campaign when across the organization. So there's been original usage numbers we've definitely been able to bring down, and we're confident in keeping that down going through the winter. There's probably a bit of confidence that some of the campaign activity and investment we've made in the first half of the year will continue to flow through for the rest of the year. There's a bit of that. Helen's team has done a really good job to make even more, which held for hedge upside in terms of what we thought we could get out of the asset to the green power stuff. So it's a kind of a combination of a few things, which means that you might have thought that the power gods going to change and actually it helps there's a combination...

Yes, I mean, the hedging we put in place is precisely to maintain that PBIT position. So that's what we do. We have a combination of that self-generation, which gives us that kind of base hedging, if you will, that gives us significant amount of protection for our investors when you look across the whole group. But in terms of the PBIT for the year, we work hard with our hedges and our self generation to make sure that we can hold that guidance throughout the year. And that's despite really, really significant volatility in energy prices. So it's working absolutely as intended. We're not giving any guidance just yet. You have to wait until May until we kind of look ahead into costs. I think there's some fairly big moving parts at the moment that we'll be working through, and you can look forward to guidance on next year's cost when we come back and see you in May.

The only ones you have given, just to manage, I guess, expectations is that we said we're confident in our totex budget over the course of the amp, right? So I think what we're saying is you can expect that energy is likely to stay up for the rest of the AMP, but we've managed that with an economic hedge. We're confident that we're able to manage. And don't forget, we do get given the inflationary costs. So when we're giving you this kind of sense of yes, you can expect the moving parts and yes, you can expect there's still going to be some likely high cost we are given an inflationary increase by Ofwat and the vast majority of those costs that do tend to move up are covered by the inflation Munich. So I was -- the 2 things I would take as the macro is the first thing is we are good at managing costs. We've got a strong factor that. The second is we're calling confidence for the 5 years still, I'd take confidence on that. And then, I guess, in terms of specific guide items, you will have to wait until May to begin to break it down for you in that we'll break it down in terms of as we normally do. guidance that we normally give. And on the bad debt I mean, that continues to be a good role.

So collections have remained healthy throughout the period. I mean one thing to keep in mind, we do have a kind of a built-in benefit. Our bills are very low, as we've said, they're around GBP 1 a day, which I think means that in terms of household expenditure, they are a much smaller component of the kind of utility basket than energy and gas, for example. And we work really hard to make it easy for our customers to keep on top of their bills. And that's one thing that we have, I think, really done well on over the last few years. If you take direct debit penetration, for example, which is a really good way to keep on top of your bill. Around 75% of our collections are done through direct debit. And we also, of course, work really hard to make sure that we help our customers before they get into difficulty. And I guess I'll hand over to Jude to talk about some of the things that we've been doing over the last year or so to really make that difference?

Absolutely. I think in the debt space, in particular, we've got a really maturing approach to how we handle that. So we've really focused on customer journeys and segmenting our base and making sure that we have the appropriate treatment for the group of people that we're tackling really worked very well for us. So we'll continue to do that. And as James said, preventing our customers getting into debt is our primary focus, and we believe the affordability scheme that we expanded earlier on this year has gone a long way to keep out of that some of our most vulnerable customers. So no extra provisions planned as it stands now. We feel we've got ourselves properly covered and we're in a prudent position about it.

Very good. Okay. I think that might be it for questions. Is it very good. So one last second just to see, there's nothing popped up online. So in which case, a massive thank you very much for dialing in today. And we look forward to seeing all of you soon and appreciate the hard work from the team around the table over the last 6 months to land what I think is a really robust operational and financial performance. Thank you very much.