Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Good morning, and welcome to the PR24 Final Determination Results Call. So I'm Liv Garfield, Chief Executive of Severn Trent. And I'm joined today actually by first of all, Helen Miles, our CFO; Shane Anderson, who looks after regulation and strategy. and James Jesic who looks after our capital delivery program, amongst other things. Now in terms of the call today, we're going to run through 3 things, and then we're going to open for questions towards the end. We're going to talk to you, first of all, about the key changes that arrived in the final determination. We're then going to bring to life the entire AMP8 plan, now the final version of that plan. And then we're going to talk about how we're ready to really get started and make a success over the next AMP. So I'm going to start off, and I'm going to take you through, first of all, the highlights of the final determination as we see it. And we basically see there as being probably 5 or 6 key elements that came live yesterday morning at 7:00 a.m. The first thing is around RCV growth, and that's now growing at 45% in real terms, which takes us actually to GBP 17 billion RCV size by 2030. The second big piece of news was that actually, when you think about that, that's GBP 3 billion improvement on the draft determination. We've also seen quite a range of target improvements across the ODIs, and we'll talk a little bit more about that later as well. We've seen more cash flow coming in, partly due to the WACC, but actually due to changes in how Ofwat's treating energy and business rates. And the context for all of this is our bill still remains the second lowest bill in England, which we're pleased about for customers in terms of value for money and their ability on an affordability basis. If I jump on now and begin to talk about what that means in terms of scale support from Ofwat over the last period of time. We represented on 5 key areas, and we're really pleased that we've had a very constructive conversation with Ofwat over the last few months, and we were pleased to see movement across these 5 key topics when the final determination went live. And the first area that we talked about was around totex. We felt that we had really good evidence, and we've seen a considerable step-up in terms of bioresources, and that was a key area of concern for us. But also, as we'll talk about a little bit later, we've seen some improved enhanced activities where we felt there was strong evidence on Ofwat supported that case. The second area we said is that there were a couple of ODIs in particular that we thought needed some different targets. And you've seen some improvement across quite a range of ODIs, but in particular, the couple that we really were energized about was External Sewer Flooding and greenhouse gases, and we've seen movement on those 2 critical measures. We've also seen extra cash come through, in particular, on adjustments to how they're treating energy and business rates. And added to that, we've seen some meaningful improvements in terms of the treatment of the WACC, both in terms of the cost of debt treatment, but actually also critically on cost of equity as well. And Helen will take us through a little bit more detail later on in the presentation. Now what we tried to bring out live on this slide is actually how the totex has evolved. And I think it's quite a simple illustration of the fact that we had a start point of the draft determination. We've then seen movement on the base costs, and we've tried to bring to life exactly what that means. Typically, that some of that is energy and its business rates, but it's also bioresources specifically for ourselves as well. You've then got a chunk of totex, which has come from original enhancement spend that we thought we'd evidenced strongly, but clearly, we needed to do more evidence with, and that's actually being reassessed by Ofwat. And following that extra evidence from the regulatory team, we've then seen improvements in that space and probably GBP 300 million in water resources and an extra kind of GBP 100 million on WFD are the main parts. And then the third bar that you can see on the slide is then additional investment that we asked to be covered, which has been approved as part of the final determination. And about GBP 400 million of that was around increased kind of wastewater growth as we see population growth come into our region over the next period of time. And then an extra GBP 100 million on PFAS, which as we know is a particularly large global topic, and we felt there was more evidence to actually do some earlier investment in some of our water sites on that basis as well. If we move on now to talk about the evolution of the ODI framework. Now what this slide tries to bring out clearly is kind of the significant areas of change and what that means, we think, for us. So we've seen quite a lot of movement in terms of the measures themselves where Ofwat have looked across the sector, and they've taken a lot of feedback from the sector on board and decided that actually it probably was a little bit too punchy in terms of the draft determination situation. So we've seen a range of the targets change. We've also seen though the incentive rates change as well, and we need to digest and work our way through that. If we look at the specific measures that we actually really talked to Ofwat about, you would have seen the ESF, External Sewer Floodings has had a significant improvement, actually probably a 50% change in the target when you look at the 2030 target from a Severn Trent perspective. If we look at greenhouse gases, both water and waste, there were some inconsistencies in how that had been calculated at the draft determination. That's all been resolved by the final determination. If we think about pollutions, this was actually probably the most -- I think, the most complex for the sector in terms of both the rate and actually the targets being set. And whilst it's absolutely mission-critical, and we are massively committed to making major progress, nonetheless, Ofwat have looked at that and done a start point that I think is more in line with the outcome across the sector. And then discharge permit compliance, they've actually aligned to the environment agency targets on this critical measure as well. So that's the broad summary of the big changes on ODIs. And then one last comment from me before I hand over to Helen, I think, to talk about the AMP8 plan as it now looks. So cash and risk and returns is another area that has also improved in the final determination. Now when you think about the WACC for Severn Trent, the number you should have in your mind is 4.16%. And that's because you've got the -- obviously, the cost of equity of 5.4%, but then you've also got to factor in the 30 basis points for outstanding for ourselves as an organization when you're thinking about the WACC number. Now we were pleased to see that the WACC did improve between the DD and the FD. But as we've consistently said, we view this as an entire package in the round, and that's the way that we'd ask everyone else to look at it as well is to think about it in those terms. Now the higher WACC, combined with some of the other cash flow activities means that actually, that's one of the reasons that the RCV growth has also improved. It's worth about 2% in terms of RCV growth is the fact that we've actually also seen an adjustment in the levers. And again, it's perhaps something worth covering later. Now with that intro in terms of what are the changes, I'll now hand over to Helen, and she'll take us through what the kind of final version of the AMP8 plan looks like for Severn Trent.

Thanks, Liv, and morning, everybody. I'll take you through what those changes mean for AMP8. So RCV will be growing by 45% in real terms, the second highest growth rate in the sector, which is a really strong result. That will take our closing AMP8 RCV to GBP 17.2 billion, adding around GBP 5 billion over 5 years. You can see from the chart on the left, this growth rate not only far exceeds the 12% real growth we'll be delivering this AMP, but also the 28% in our draft determination, thanks to the additional GBP 3 billion of totex that Liv touched on earlier. Importantly, this growth comes with certainty. Thanks to the support of our shareholders, our AMP8 plan is fully equity funded and we have the green light to start spending immediately. And to illustrate that point, James Jesic, who runs capital delivery, will be briefing the supply chain on a call immediately after this one. Looking beyond AMP8, given the approval of all of our enhancement cases, we've got increasing visibility over a multi-AMP investment program. Our plan has a broad-ranging investment program, which will deliver outcomes our customers really care about. And this is best evidenced by our enhancement spend of GBP 6.4 billion. You can see here the broad range of areas that we'll be investing in this AMP. We now have GBP 1.5 billion on the critical issue for the sector, storm overflows, which will have spills by 2030. There is GBP 1.1 billion for upsizing our assets for population growth and over GBP 300 million to improve raw water quality, including the impact of PFAS. We are the sector leader on ODIs and have been for a decade. And this slide shows that of the 22 financial ODIs, 16 of them we measure today and are extremely well understood across the business. In fact, we will have delivered our targets on every one of them at some point during this AMP. On the 6 new measures, we are either reporting performance now or have totex in the plan to support delivery of the ODI or both. A great example is spills. We've already reported this extensively in the business and externally and have a comprehensive delivery plan, which is already well underway. Lastly, I wanted to highlight one of the clear features of this price review, which is the protection Ofwat have put in place to safeguard the record investments we'll be making, reducing risk for both investors and customers. On totex, we've seen enhanced sharing rates, including a 50-50 sharing ratio on base costs, which is a benefit from our outstanding rating. On business rates and enhancement spend, customers share 90% and 60%, respectively, of over or underspends. Energy costs have been high in recent years and the new true-up mechanism protects us from big spikes in energy prices. And where the cost of materials, plant and equipment rises above inflation, we will be reimbursed for the difference. On financing, Ofwat have maintained the cost of the new debt true-up, so the new debt allowance is indexed against the iBoxx. And finally, I'm really pleased to see the introduction of a reverse halo, which adjusts new debt costs upwards by 30 bps. Now back to you, Liv to talk about our organizational readiness.

Thank you very much, Helen. Now we've been working very hard, as you know, during the course of AMP7 to get ourselves into a really strong shape, right, so we can guide seamlessly into AMP8. So first of all, we've done some really strong in-sourcing, which we believe gives us the opportunity by having those skills in-house to go after more digital and more automation. We've been investing in plug and play, which allows us to be more efficient, but also deliver the capital schemes faster. We've been working to expand our supply chain quite significantly. And as Helen said, we've got a call later today straight after this actually to brief our supply chain on the new enhanced program. And we actually benefited from green recovery and investment in transition spend to make sure that we get ourselves into exactly the right run rate to be able to really get our organization primed to make a real success over the next 5 years. So we've done a lot of hard work. We've also got -- I think that evidence actually was well received by Ofwat. They could see that we were actually in a very strong position to be able to handle what is a considerable step up again in terms of our capital program. And that allowed us the confidence to put in a big plan in the first place. I think actually, it also allowed us the confidence to be able to increase our ask between draft determination and into the representation phase that as we could see new requirements coming out from different statutory bodies, we felt confident that we could once again further increase our RCV investment. And it also means actually that we see PCDs, the price control deliverables as an opportunity rather than a risk. So moving on then, I guess it's quite nice to talk about how we're going to support customers because I guess the clear reality is having bigger totex means a bigger bill. And it's our job to make sure that, that bill is absolutely affordable. And it certainly helps to start off with the second lowest bill in the land at the start of an AMP, but we're really pleased that our strong track record on efficiencies means that actually, we do end the next AMP also with the second lowest bill in England, which is really important for our region. Now we are really conscious that we want to make sure that we keep ourselves to be quite a small percentage part of the disposable income for our customers, and we'll end the AMP at 1.4% of their disposable income. But we want to make sure that there's not a single Severn Trent customer that is fearing the arrival of that bill. And that's why we've put in such a really, really large support package. So we're investing GBP 575 million, which will help 1 in 6 households with bill support. Now we worked very strong with our customers when we began to look at the investment programs to really understand where they wanted the money to go, but also their views on the size and scale of the investment we're putting forward. And we have the highest acceptability rating in the sector with 81% of our customers supporting this large investment program. And we know that, that support plus the work that we do on affordability helps keep ourselves with a very, very strong performance on bad debt, which, of course, is also a helpful thing for a long-term successful business. So moving on now, I guess, let's think about ODIs. So operational outperformance is something that we've been proud of for the last decade. And I guess we want to make sure that we deliver against these metrics because these are fundamentally the targets that our customers care about most. So strong performance on ODIs is actually mission-critical for us to make sure that we're delivering against the areas that customer is truly passionate about. And we feel in good shape actually, in particular, against the 5 metrics that we know customers are most energized about. So we know, for example, as you can see with the kind of purple boxes on the slide, these are the 5 key areas that customers really, really want us to do well on. And then our strong track record over the last period of time means we're primed to be able to go again and to perform strongly on these particular metrics. Now it's not by chance, the whole organization has in their DNA, the desire to focus on ODIs. We've done the hard yards on in-sourcing. Every single person in Severn Trent knows the targets that we're shooting for. We've got an ODI center of excellence that's giving us an extra level of insight, an extra level of analysis on how do you go that extra mile and begin to do a further step change in some of these key metrics. And of course, because we know the metrics so well, as Helen talked about earlier, we've been shadow reporting all of these now for a good year. And now that we've got the actual targets, you can rest assured that as soon as the organization comes back, I guess, we'll be straight there, really pushing hard in Q4 to make sure we have a strong start in the first moment of AMP8. Now in terms of financing, the organization has done a good job. So I get to praise Helen and her finance team for their strong performance over the last few years, and we feel in excellent shape on financing performance for the future. We've got a good track record. We've actually outperformed every one of the last 8 years. And we've seen some high inflation years. We've seen some low inflation years. And nonetheless, the team have been able to manage both of those scenarios particularly well. And all of that work with the finance team means that we go into AMP8, we're already outperforming on the embedded cost of debt, which is an allowance that is set from day 1. And as you can see on the slide, we've got a strong performance versus the rest of the sector, in particular on that embedded performance. But of course, we're going to have to raise new debt. That will be a sector-wide activity with this kind of growth rate on RCV. And the strength of our balance sheet is what makes the real difference at that stage. We've got real confidence that we can continue to raise debt at or below the iBoxx and that's what we've done every single issuance in the last period of time. So every single issuance in AMP7, we've achieved that strong track record. And that again puts us in prime position to perform strongly as we go into the next 5 years. So a bit of a summary. You remember that we've actually read 2 final determinations in the last 24 hours. We've obviously called through the Severn Trent one, but we've also had a good look at the Hafren Dyfrdwy one. And we've also got James Jesic on today's call who runs Hafren Dyfrdwy, so be able to answer any questions you've got on it. And one of the things that we've been able to look at is to really look at the RCV growth, specifically from Dee Valley when we bought it through to Hafren now. And that one single metric is broadly that we've over doubled the RCV in that period of time, which gives you a sense of the strength also of the extra Hafren Dyfrdwy business that we also own. Now in terms of the kind of summary of our initial view of the price review, first thing is positive movements in all 5 key areas that we represented on strongly between the draft and the final. We've had a strong constructive relationship with Ofwat, and we think they've created something which is fair in the round for ourselves. It will mean record RCV growth, and that's because the areas that customers care about most are areas that we are in a position to deliver strongly against. We have the supply chain lined up, and we've got an organization that is ready to go and we're fully equity financed. And last of all is that we are confident of continuing to be an outperformer in our sector, and we feel the organization is ready to be able to once again deliver that in the 5 years that are coming. Now we'll move to Q&A in a second, but one shameless plug for our Capital Markets Day is please do join us for our Capital Markets Day on the 5th of March in Coventry. It promises to be a corker and will bring to life a whole range of activities that we're excited about for the future. And now we're going to open ourselves up to questions. I've got Helen, James, Shane and myself all ready to go.

Good. So I guess, John, you're first in.

So look, the headline numbers, I would say, certainly seem to look good at first glance. You probably had maybe a few hours to comb through some of the details. Is there anything you would flag as a disappointment or a downgrade versus the draft determination? Again, at first glance, it doesn't look like so. And probably you've been really busy, but is there anything in other firms' final determinations that you would have liked in yours? Second question, if I can as well, what do you think of Ofwat's outturn adjustment mechanism? I think they've come up with an annual adjustment separate for water and wastewater. And I think they've got some sort of 50 basis point dead band for the sector median. Do you think that will actually be used considering the dead band? And maybe the last one. So look, you've got a pretty big increase in totex, I think 26% versus the draft. That's pretty big. Do you think there's a likelihood that you could get a Green Recovery 2 program maybe midway through the AMP? And when do you think perhaps that could come if you think it will?

Very good. A good number of questions there. So I'll start off, and then I'll hand over to Shane to talk about a couple of the points as well, right? I mean, price view is meant to be in the round. So I suppose I can definitely sit here and list out some things that I don't like. That's the nature of, right? But I suppose if I liked everything in the price review, then by nature, that probably wouldn't be a fair situation across the piece. So I think if at the end, you've got kind of a fair balance situation where a company thinks they've got what they need to do a good job. They've got everything they need to be able to deliver against the priorities customers wanted and they're confident that they can perform strongly against it. That's about as good a result as you can get in any price review process. So I guess I'm opening on record of saying I would have liked some more risk reward on some of the ODIs and I would have liked some improved rates on some of those. So yes, equally, there are lots of other companies in the sector, probably pretty much every other company in the sector that wanted lower risk reward on the ODIs. And so I suppose it probably ends up being about fair across the piece. So that's probably that. I mean we've done a really good job of reading all of our plan, and we've had kind of mini army in Severn Trent Centre for the last 24 hours falling through every last page. We have not touched any other company's plan. So I'm afraid you'll have to await their feedback for any other insight on company plans. Severn Trent and Hafren Dyfrdwy, all good. I can't comment on anybody else's. Shane, should we just touch base on the OAM and also on the totex because of Green Recovery.

Yes, you're right, John. There is a 50 basis point dead band. So it's difficult to say if it would apply in AMP8. But what we do know is that have existed with the dead band today. It only applied once to wastewater and twice to water in AMP7. So it's probably going to have less impact in AMP8, particularly given the change in ODI rates. That's the first point. And the second point about Green Recovery 2, there is actually a document. I think it's called Roadmap to Asset Health in the PR24 documents, which perhaps opens the door to Green Recovery 2 or Green Recovery 3, I forget which one we're up to at the moment. And this isn't about enhancement spend. It's about base spend. So over the next couple of years, Ofwat is going to be working with companies to get a better understanding of asset health and a data inventory, and then that might lead to a cost adjustment claim for the sector in '27, '28 or it will feed into PI29. That doesn't necessarily mean cash upfront. They flagged in this document that it could be through an RCV adjustment, some kind of true-up. But Ofwat is clearly thinking about how they can improve the understanding of funding of asset health. So yes, I'd refer to only a 15-page document as well on the suite of documents.

Perfect. We'll go to Sarah next.

Happy, happy, Friday. My voice sounds a little bit like yours, Liv. So I'm going to premise this question with the fact that I completely appreciate you have only had 36 hours with this. So honestly, it is high level. But I think it's flying under the radar a little bit, the longer-term derisking that this price review does provide. Ofwat mentioned it last night. You've definitely highlighted it, but I don't think it's truly appreciated. So I've got 2 questions, please, on this. Firstly, wondering if you can just talk through a little bit more where you see the greatest derisking to longer-dated investment schemes? And then secondly, and this is the one that is genuinely high level only, do you see anything in the FD at this stage that may materially change the projections in your long-term delivery strategy?

Very good. Thank you very much. So I guess put a combination of Shane and I, I guess, that we get into it. So I'll get Shane to run through kind of like the regulatory mechanisms first off in terms of the derisking, and there are a number, as you say. And then I'll come back on and talk a little bit about the LTDs, the long-term delivery strategy, and I think what this indicates towards it. So Shane, do you want to jump in with derisking?

Yes, I think it's a really good point, Sarah, because there are a lot of mechanisms that are designed to derisk the price review. So in terms of the long-dated enhancement program, so I think our math is around 70% of enhancement in totex is covered by one of the true-ups, so whether that's through COPI, so the plant and materials, whether that's through wages or energy. So 70% of the enhancement side is now protected in terms of not through inflation, but if those costs rise faster inflation or a different rate. So I think that's really good. But on top of that, we have a lot of other mechanisms as well. So Ofwat's talking about -- sorry, not talking about, they are introducing 3 notified items. So for PFAS, for cyber and sludge to land. And basically, what this means is we've got new legal requirements or change in statutory guidance, we can go to Ofwat and request additional funding. And they're going to be consulting on the iBoxx, the interim determination process next year to reduce the materiality threshold from 10% to 2%. So that means if we have a GBP 50 million cost on one of these items, then we can go to Ofwat. And I think the process is to go by November to get additional funding. So you've got the RPUs, i.e., plant and materials, energy and wages, you've got these 3 notified items. And then on top of that, we've got different cost sharing rates. So we have even more cost sharing rates. So as Liv and Helen talked about, we've got 40% cost sharing for enhancements. That means if we overspend by GBP 1, we absorb 40%, customers absorb 60%. But actually, for some other costs, the sharing rates are even greater. So business rates, we only absorb 10% of the extra cost. On IED, we absorb only 25% of the extra cost, similar with abstraction charges. And then IED, we absorb 25% of the extra cost. So there's a few more like that, that overall reduce the enhancements -- sorry, reduce the cost risk of our AMP8 program.

Very good. And just jumping on to the second part of the question then in terms of long-term delivery strategy. So the way that I think about the long-term delivery strategy is that what Ofwat's given today is they've effectively given the green light towards the fact that they want more investment on the areas that customers care about most. So long-term water security, whether it's river health or whether it's activities like, for example, population growth and climate change and the fact that needs more capacity of the sewage treatment works. And I think that's probably the subtle point, Sarah, that you're getting at is all of those large investment areas have now been approved. All of those are multi-AMP and all of those will continue now for the next 20 years. So yes, they might individually go up and down in a 5-year period with particularly more water resources created in one 5-year period and maybe slight less in another and vice versa. But this is a change in the investment profile in water for the next 20 years. And I think that's what certainly Ofwat conveyed, I think, in their call, and that's certainly a really good point to bring across in ours is that, that is what we know the infrastructure in the U.K. needs across all utility sectors is long-term investment for the future. And I think this is a step change in exactly that space. Very good. Thank you very much. We're going to Laura next, if that's okay. Very good. Thank you very much. We're going to Laura next, if that's okay?

I just wanted to ask about the 30 bps ROE uplift that you were given by Ofwat. So is it down to any requirements that you still need to fulfill? Because I think it was down to some ODI targets and also your EPA score. And in relation to that, what are your thoughts to the ongoing EPA consultation? And also second question, if I may, what do you think about the Hafren ODI situation? I know you guys are very well positioned, but how does it look like for Hafren?

Very good. Thank you very much. So we'll do the half one first, I think. So James, do you want to comment on the Hafren ODIs.

Happy to. Thank you very much for the question. From a Hafren perspective, I mean, the principles of how we run the business within Severn Trent has been translated into HD as well. So there's a very strong performance-led culture within the organization. Last year, around 80% of the performance metrics were on or ahead of target. And with the ODI profile that's put ahead, again, we're looking forward to facing into those challenges and delivering against them. And we're confident that we can sustain our environmental leading performance within Wales and also our water performance as well.

Very good. And specifically on the first thing, you're absolutely right. There are 2 metrics that we need to deliver at some stage in the next 5-year period. So we need to evidence that we do deliver a year of 4-star status, and we also need to deliver 14 and under on CSO spills. Now we've known about those for quite a while as part of the outstanding conversation a few months ago with Ofwat. And rest assured, Laura, the whole business is primed to make sure we deliver against those. In terms of spills, then we've put in actually already over 1,200 solutions have now gone in. Capital investment solutions have gone in now. It was 900 as of results a few weeks ago. It's actually passed 1,200 now as we head into the Christmas break for those particular teams, which is great performance. And we're confident that makes a massive step change towards delivering 14 spills and under. And then on the EPA rating, there is a consultation live at the moment. We don't quite get the results yet, but we'll obviously look closely at that. But fundamentally, we want to be an environmental leader. And so we need to look at whatever comes out of that EPA consultation and make sure that the organization is set up to deliver. And we now have a fair result in terms of totex investment spend as a result of the final determination, and that puts us in strong space to be an environmental leader. Very good. It's Mark next -- sorry, Laura, is that okay?

Actually, if I may also ask do you know when we will get the EPA consultation results?

Do I know when you will get, what, sorry?

The EPA consultation results.

So sometime after Christmas, right? So late January, we believe, but I think there's not a set date. So it's sometime January, February. So -- but it doesn't take effect, remember, until 2026. So next year, it's the same 7 metrics are in place. So year 1 of the AMP is the same 7 metrics as we've had for the last 5 years. And then in year 2 of the AMP, the EPA goes live. So it will be sometime in January, February to start on the 1st of January of the following year. Perfect. Okay. Mark, over to you.

Firstly, I think it's pretty implicit there's no CMA appeal for Severn Trent. But Hafren Dyfrdwy, can you rule out going to the CMA with that price control? And then just secondly, to pick you up on when you talk about the plan being fully equity funded, are you comfortable that the existing business plan is on what you know now is funded with the existing equity base? And thirdly, James, just on the totex plan, which is absolutely huge. It is just a plan. I know these things move around. How are you thinking about phasing that plan given other various constraints? And what can we expect to see on the profile?

Very good, right. So I'll take the first one. I'll give Helen the chance to comment on fully equity funded and then get James to talk about how we're going to make sure we deliver this totex in the most efficient manner possible. So we've done one eye reading. One eyeball has looked at every single page of the Severn Trent and the Hafren Dyfrdwy plans. And before we take to the Board our full recommendations on CMA for both companies, we do a 3-ye review, right? So effectively, we're not going to comment today on either Hafren or Severn Trent. But on first reading, the plans look fair. So -- but we will just do that full review, and then we'll take our recommendation to the Board in late January. So that's the way that we always do it is to run that. What we didn't want to do, though, was go into Christmas, not giving you guys the chance to ask questions. So we've kind of put the call in pretty promptly afterwards to give you a chance to ask any questions. You can go into Christmas with your sense of where we are. Helen, do you want to give Mark some reassurance on his full equity funding question?

Yes, Mark. Look, when we look at the FD, we obviously look at the actual company. We do that in a prudent way. So I'm very comfortable if I look at both the regulated business and at a group level that our credit metrics are all in good positive territory. You'll have seen, obviously, that we had our ratings reaffirmed recently by Moody's. And we won't give guidance on gearing, but also very comfortable the gearing levels for both as well. And whilst the totex has increased significantly, the cash flow is actually improved based on our representations that we made to Ofwat. So we're in very good shape. There's lots of reasons for that. Energy and the rates changes are part of that, the higher WACC, obviously, our outstanding status, the pay-as-you-go rates. So lots of reasons to feel very comfortable around our funding.

And also the support that we've had, we've done 2 equity raises in the last 5 years, right? So this is not by chance, right? We've raised GBP 1.25 billion with really, really strong support. And the idea behind that was to get ourselves ready to be good through to 2030. And I guess this plan is one that we've created with all of that full knowledge in place. James, do you want to talk about what you -- I guess, how you're thinking about phasing of the totex plan?

Absolutely. Now if you look across the sector, Mark, and you will have seen this, typically, what you've seen is quite a lumpy spend profile. Now we've worked really hard during the last few AMPs to try to eradicate any lumpiness in our profile and try and keep it as flat as possible. Now you've seen that this with a big focus on transitional spend, and we're projecting to hit around GBP 450 million of transitional spend by the end of this year. That's allowing us to get on a really good run rate for the AMP and make sure that we sustain the delivery rates that we've currently got going into the rest of the AMP. And we're not far from the profile that we need for the rest of the AMP in terms of a year-on-year delivery. Now in terms of what that profile might look like, we've got our PCDs and that, of course, sets us some interesting targets. But we look at the PCD profile, and there is an opportunity for early delivery against those. So over the next few weeks, we're going to be looking at what that profile looks like and where those opportunities might exist. As has already been mentioned a few times today, we're already engaging with the supply chain. We've got a follow-up session, as has been said straight after this one. The supply chain already engaged for our transition program, and this just allows us to get on that profile. So I think it's going to be a very good year, a very good AMP for us in terms of our spend profile and a good chance to get into some of the efficiencies that we need to deliver.

And to give you one example, actually, Mark, just whilst I was listening to James talk, if you think about CSO investment, there's GBP 1.5 billion on CSOs, particularly. So if you look at one of the big chunks of enhancement, it is in that space. And the fact that we've gone so quick and so early on CSO investment, you can imagine that certainly, that's one of the areas that we front-end loaded will be CSO investment. Very good. We're going to get to Pav now, if that's okay. Pavan, questions from you.

Congratulations to you and the team on getting this over the line. My questions were on power costs. The -- can you give a bit more detail, if you can, on the improvements that you've seen? Because when we've spoken post DD, I think there was some comfort that there was going to be a real price effect, but also some uncertainty that those cash flows will be matched. So are you comfortable now with the power cost mechanism? That's my only question, actually.

Very good. I think, Helen, I think we'll go to you on this one.

Yes. Yes. So we've seen a real uplift, Pavan, on the energy costs across the AMP. And the way Ofwat have looked at it, they've looked at the historic energy prices over a 10-, 14-year period, something like that. And then they've -- and they've looked at energy prices in the recent past and applied an uplift factor and they front-end loaded that so that it comes down, that uplift factor reduces across the AMP. So to bring energy prices down to a more normalized level, which is what -- when you look at the forward curves for energy pricing, that's how that forward sort of matches with that forward curve. So yes, really comfortable, delighted to see the uplift and also really pleased that Ofwat looks at our -- they looked carefully at the methodology that we'd put into the representation through the query process for the -- for how we should look at energy costs. So pleased about that as well.

Very good. Thank you very much, Pav. We're going to get to Bartek now, if that's okay?

Just maybe a follow-up on Pavan's question. Are you able to calculate the funding gap you had at DD related to energy cost? I think you were mentioning GBP 600 million after the DD. The second question on financial outperformance. If you look at your cost of debt and especially the embedded debt and the allowance Ofwat, Ofwat is giving you, what do you think the potential for outperformance will be during AMP8? And consequently also, what do you think the average performance of the water sector will be versus the allowance? Do you think the sector will be underperforming? Or do you think the allowed cost of embedded debt is fair? And yes, and the third question was on the -- if I look at the requested totex from the sector from the business plan or before the DD and now, there's a 7% increase. It's like I think, GBP 8 billion increase versus the before DD request of totex. What is -- what do you think is the main reason for such a relatively significant change between the totex request before the DD and the totex request before the FD of the sector?

Very good. So a few -- I'm not sure we're going to give you as much insight as you'd like, Bartek. So I guess I'm afraid. So I'm just going to caveat that upfront. So I think on energy, they are very different mechanisms. So it's quite hard to do apples-for-apples comparison. But I think what we're saying is that the methodology of what' settled with at FD looks to work fairly for the sector. And what Ofwat were trying to do was to create something that was not putting -- I mean if you look at this 5-year price view, the Ukraine situation has put undue pressure on the sector inadvertently. And so what they're trying to come up with is something which is more fairly reflect future energy pricing and puts fair risk back into the sector. So I think we'll watch it play out, but it feels to be about right in terms of the fair shared risk, I think, is what we're saying on energy. So it takes that off the table as a big risk. In terms of financing, we can't give you guidance on our outperformance, and we definitely can't get you all on what we think is going to happen to the rest of the sector. We wouldn't be best placed to do that. We haven't looked into that situation. What we can see over the last 24 hours is the comparisons in terms of the start point and embedded cost and the model for raising new financing. And certainly, for us, with our gearing, with our balance sheet and more importantly, with the way that the rating agencies view us, this looks to be in a strong position, but we wouldn't be well placed, I'm afraid, to comment on everybody else's because it depends on a whole variety of different activities, isn't it right? And then in terms of why is there such a big difference between DD and FD I think there's 2 things. So partly, for some companies, there were additional statutory requirements that arrived between before the original plans were submitted and by the time that the representations had to be in. So some of it is the words more clarification came from some of the other regulators. And there's a bit of that for us as well. And for some of it is Ofwat quite rightly has got to be really strict in making sure that every pound that it gives out is a pound that customers genuinely want to be invested and is efficient. And if they weren't comfortable with the evidence provided at DD, it's quite within their rights and their role is to then say, I don't agree with that amount, showing the extra evidence that either it has got strong support, it is a regulatory requirement and that it is efficient, and they take that view. And that's what they certainly did for some of our schemes was highlight that what we haven't provided was good enough, strong evidence of the DD, but we were able to do that by the FD, and that's actually how the regulatory process is meant to work. And they said that themselves actually. If you look at the very rich Ofwat slide at the DD, they did indicate that you expect movement to happen between DD and FD on that basis of evidence and more insight. Very good. Hopefully, that answers enough of your questions. Very good. We'll go to Jenny next. Very good. Hopefully that answers enough of your questions. Very good. We'll go to Jenny next.

Two questions, please. Firstly, just going back to energy. I just wondered whether -- what the derisking implications are in terms of asset ownership. Obviously, you've held a lot of generating assets to hedge against any volatility in the power market. Does this now change that perception or at least the need to hold these assets? So that's my first question. And then secondly, in terms of the ODIs on spills and also, I guess, the EA submissions you will be making for the last 12 months on spills. Are there any discussions in terms of these data being weather adjusted? Because obviously, it's been a very wet year looking back 12 months and the numbers might look -- well, will look at terrible even if you've made progress. So can you just talk a little bit about how the regulator, but also the environmental agency will look on the weather side?

So let's start with the weather one first. I mean our job is to manage any weather type, and that's what we need to do. So we just need to get better at managing that as a sector and as an organization. So it's clear that climate change is real. It's clear that means often longer drier periods during the summer, not necessarily this year, but it has meant that in the last 5 years for cert, and we need to be able to handle that. And you'll see a really good investment case that was approved by Ofwat as part of this price review process for more resilience in terms of peak demand, and that's leaning into climate change is real in that sense. Likewise, it's going to mean that if we don't do more investment and we don't invest in our assets in both growth of the wastewater treatment works, but also in terms of spills and storage and treatment that you are going to see more spills. And that is absolutely not what any of our customers want, and we need to make sure that doesn't happen. So you won't hear any excuses from us when we report our numbers this year on spills that says it's weather related because that is our job to manage. So we need to get better year-on-year and meet those targets in all weather types. And when we look forward to the future, what we've been looking at certainly when we've given our commitment next year that says we're confident of being 18 or below on spills for next year. That assumes this year's weather and a bit worse. So we're kind of assuming that the way you look at life now is you assume it rains as much as it did the year before and even worse than that when we're setting ourselves up. And that's why we got ahead and we've done the 1,200 interventions is to make sure that we can improve from what was last year's number, which was broadly 25 spills a year to what is going to be the 2025 number, which we said is 18, even with trickier weather types. So that's where we need to be. And when we talk about our ambition to get down to 14 and below, that is assuming a degradation continuously of weather that is still within that basis that we're talking about it. So that's that. The next point, I'll go back to your first question then is we invested in the renewable assets for 3 good reasons. And one of those may be slightly less relevant in the next 5 years, but the other 2 still firmly remain. So we invest in them because we think that they are good returns. So they were good IRRs when we bought into them, and they give good dividend cover for the future. That was the first reason as a non-reg asset. The second reason we invested is because they're part of our net zero story. We've got a commitment to be operational net zero on Scope 1 and 2 by the time we get to 2030, and they also contribute towards that aspect. And the third reason is they did also give us some good natural hedge, certainly at the group level in terms of looking at energy prices, which have been volatile in previous years. So you're right, with the energy hedging now from Ofwat coming through in terms of this 5-year period, number 3 is less relevant, but numbers 1 and 2 still firmly play in. So we still see that as a core part of our business as it stands today. Very good. Thank you very much. Going to [ Macon ] now. I'm not sure if you've got a video or not, but handing over to [ Macon ].

I was hoping that you could provide a bit more information on this 30 bps reward that you have received. Is that applied directly to WACC? And is it applied with a lag? Or how should I be thinking around that?

Perfect. Thank you very much. Shane, do you want to talk about the 30 basis points outstanding?

Yes. It was applied as an RCV -- sorry an RCV adjustment, and it's being applied as revenue now spread over the AMP. So it should be flowing through in cash.

So we're going over to I think it's [indiscernible]. I'm not sure whether that is your name...

It's [ Alessandra ], sorry. I don't know why it shows up that way, it's [ Alessandra ].

There we go, [ Alessandra ], yes.

Three questions for me. So the first one is a follow-up on one from earlier. On the totex increase that you had, how much comes from additional statutory requirements and how much comes from the extra evidence that you provided to the regulator? Then the second question is on social tariffs. Just trying to understand how are these funded? Is this -- do you have a specific allowance? So ultimately, the cost is borne by all consumers or it's funded directly by the companies by Severn Trent in your case? And then the third question I had is on the rewards you earned on AMP7. How much of those will be paid in AMP8?

Very good. Good questions, [ Alessandra ]. So I'll do the totex one. I'll hand over to Shane to talk a little bit about how it works in terms of the support for customers. And then I'll get Helen to comment on the rewards that we carry over from AMP7 to AMP8. So the best way of seeing it is on Slide 7 of today's presentation, we kind of represent it there that shows a chunk of the totex improvement is base costs. A chunk of it is then enhancement spend, which is restated and a chunk of it then is additional investment identified, some of which is statutory and some is some of the stuff that we've identified ourselves during that period of time. So broadly, the numbers we've listed out there is GBP 1.2 billion is base costs, GBP 0.7 billion is enhancement spend restated once we gave better evidence and GBP 1.2 billion is additional investment identified. And we've given some examples underneath each of those. That's probably the easiest way to look at the totex increase, if that makes sense. And it's that -- in that chunk of the GBP 1.2 billion of the additional investment, some of that is new statutory requirements coming through. Good. So that's the first of those. Shane, do you want to cover off the conversation in terms of how we manage support for customers?

So there's 2 strands. The social tariff is funded by customers. So there's -- I think it's roughly an extra GBP 25 on the bill. So we do this each year, so we've done a few times now over the last 6 years, where we engage with customers to understand what level of cross subsidy they would be willing to pay. So that comes from other customers. At the same time, we also have a shareholder contribution. And in AMP8, that's going to be GBP 50 million, which we'll use for bad debt matching and things like that. So we have 2 strands, social tariff and a shareholder contribution.

Very good. And then over to Helen, just to talk about carried over ODIs.

Yes. It will be around -- we'll carry over about GBP 100 million. It will be a combination of what we've earned in the last 2 years of the AMP. So it will be around that order of magnitude. We can get a precise number, but that's a good assumption.

Perfect. So that's -- we're now going to move to -- I've been receiving quite a few questions coming through online. So I'm just going to go through a couple of these before we time out. So the first question then is from Ahmed, and he's got a few questions here. So I'll ask each of them in order. So the first one then is so we've had a substantial increase in totex allowance between the DD and the FD, and he's asking for a little bit more insight in how much of that is scope where we've actually got new things to deliver and how much of that is actually an increase where we were given an efficiency or unit cost improvement. So Shane, do you just want to talk about a couple of examples where it's kind of increase in unit efficiency costs versus new scope that we need to deliver?

Yes. So I think probably want to drill on is bioresources because we've got all 3 strands there. We've got increased funding through base because it was uncapped. So that's an extra GBP 350 million for not doing any extra obligations. We've also got an extra GBP 75 million for IED, which is new obligations, and we've also got around GBP 75 million for the WINEP framework, which is responding to the efficiency challenge. So that's just on one price control. If you broaden out, I think we've covered in some of the slides, we've got a similar story in terms of -- some of it will be responding to the efficiency challenge from the draft determination. Other is just extra funding, for example, through Dream Works growth where we got an extra GBP 400 million of funding.

Very good. The next part of Ahmed's question is around, Helen, how comfortable do you feel about the balance sheet and the gearing ratio with a much higher FD growth?

Yes. We -- as I said earlier, are very comfortable with the credit metrics, both at the regulated business and the group when we look at the actual company, obviously, the Ofwat publications are all for the notional company and very comfortable with gearing. Obviously, I won't give guidance on that because there's so many moving parts. But again, for both the group and the regulated business, very comfortable with that. We've seen the increases in cash flow that we wanted to see, and that's helped us with the increase in totex. So very comfortable overall.

And the last of Ahmed's question then is around ODIs. It's been a key part of the equity story in the past and how do we feel about outperformance in the future. And the key thing here, I guess, at a top level is that we know all of the ODIs, right? So they're either friends that we've had for a period of time, so they're known metrics to us or they're ones what we've indicated for a long period of time were coming. Now of course, devil's in the detail. So we've got all the start rates, we've got the targets, and we now need to set the organization on. I mean, what I always say to people, and this is my third positioning of going into a year 1 of an AMP is that typically year 1 is the year that is a bit lighter on ODIs. So you've got new targets, new rates, you require a new step change. So we're confident that we will be an ODI outperformer during the course of AMP8. And we're confident we've got some good ODIs there, things such as leakage strong for us traditionally, CSOs, storm overflows, we think we're confident will be strong for us. We're the sector leader on pollutions and also on external sewer floodings, all areas that we need to now make sure that we push on and do a further step change. But typically, the first year is slightly lower than the years thereafter as you begin to get into your mojo and begin to land more improvements for customers over that period of time. Very good. So they were Ahmed's questions. We've now got a question on -- from [ Martin ], which says -- [ Martin Young ]. So I appreciate the package needs to be looked at in the round. So I think, Helen, this is one I'm going to send to you, just to warn you. But seeing out the cost of equity, I wondered if you could share some thoughts as to the reasonableness of the cost of equity given the global competition for infrastructure capital, the representations made by the industry in draft responses, Ofwat's range in the RIIO-3 and the requests, he's put in inverted commas, recently made in the transition business plans. Helen?

Thanks, Liv. Yes. So I think, [ Martin ], you're absolutely right that we do look at it in the round, and we look at the ODI package, the totex along with the WACC and cost of debt allowance and all of those things to -- is how we assess the package. So we won't look at just one number. We're fully equity financed, as we've said, and that's because of the support our shareholders have shown us when we did the capital raise last year. I think that demonstrates that there is equity available. And we've got really attractive growth. If you look at the FD, we've got 45% RCV growth, and that is attractive. So -- and the other thing worth adding is that we have demonstrated consistently that we can outperform the base return. So we look at that as part of the return that we deliver. So that's how I think about it. And of course, I haven't even mentioned there the 30 bps that we get for outstanding as well.

Very good. So we just got literally a couple more minutes. There's a chance for the last 2 questions I've got literally that have come through here, and then we're going to wrap it up. So a question from Pav again, which is what are our thoughts on inorganic investment or M&A? I mean, Pav, I think we've got quite a lot to be going along with, with 45% LTV growth. So I guess, plans right now is definitely to deliver this price view. So that is absolutely firmly our focus. But thank you for that, trying to give us more homework on the-do list. We'll stick with this. And then one question from [ Chris Daly ], which says, Shane, as you're going into Christmas Day, what's your kind of like overwhelming thought in terms of the price review now being settled as you head into Christmas Day?

I think the overwhelming thought is it removes the uncertainty. So we've had -- we've got clarity on what we have to deliver and how much funding we've got for the next 5 years. And what we all enjoy as a team is actually delivering, not developing the plan. So we're excited. So we'll wake up 1st of January 2025 with clarity on what we have to do and what we have to deliver for our customers and the environment. So very good.

Thank you very much. So that wraps up all of our questions. So one final comment for me, which is a massive thank you to all of our teams over the last 24 hours, which has been busy to crawl through the documentation and to get ourselves in a position to share some first impressions today. Now what we have said to them is that whilst we're an operational business and all attention now moves towards running a strong Christmas period for customers, certainly for the strategy and reg teams, the finance team, the Investor Relations team and other teams like that, we want them to kind of wrap up and get a bit of a break. So I suppose any last questions anyone on the call does have probably need to come through in the next hour or so. And then we are going to give those teams a little bit of a festive Christmas downtime after an exceptionally busy period. So that's it for me. Thank you very much to Helen, Shane and James for their assistance today and have a lovely Christmas when it finally arrives to everybody on the call. Thank you.