Hello, and welcome to the Pennon Group plc acquisition of Sutton and East Surrey Water. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you'd like to remove your question, you may press star two. I hand it over to our host, Susan Davy, CEO. Please go ahead. Thank you very much, Alex, and good morning to everybody. Thank you for your time this morning. I'm pleased to announce the acquisition of Sutton and East Surrey Water, and alongside the acquisition, an equity raise, which we are undertaking this morning. That equity raise is there to ensure that the gearing levels for the water group remain within our well-established 55%-65% gearing range. In terms of Sutton and East Surrey, it is a quality asset. It's a well-performing water-only company serving around 750,000 customers in parts of Surrey, Kent, West Sussex, and South London. The acquisition follows Pennon's twin track strategy of acquisitive and organic growth, and this will increase the proportion of water-only assets in the business. Sutton and East Surrey has robust operations and is a top performer for water quality at leakage and supply interruptions, and all the measures you would expect from a water company. In terms of scale of the acquisition, it represents around about 7% of the current water business measured by RCV, so a useful incremental growth for the group. We obviously have a history of successful acquisitions by Pennon, Bournemouth Water in 2015 and Bristol Water in 2021. We obviously take a very measured, diligent approach to assessment execution, and delivery of those acquisitions and putting them into the Pennon group. In terms of the pricing, the pricing that we transacted at reflects a premium to RCV of around about 6%, so an attractive premium relative to other M&A in the sector over the last decade. The acquisition will be subject to regulatory process with Ofwat and the CMA. Obviously, we have undertaken those processes previously with the CMA and Ofwat, and we will look forward to going through that process with our regulators in due course. We will obviously seek to deploy our proven integration blueprint, and look to seek opportunities to maximize synergies between SES and the existing water group that we have. So in summary, this is a good acquisition. It will be earnings accretive from the first full year of ownership, and as I said earlier, alongside the acquisition, we are launching an equity raise to ensure that we remain within the 55%-65% gearing range, pre-acquisition. And with that, I will open for questions and come back to you, Alex. Thank you. As a reminder, if you'd like to ask a question, you can press star one on your telephone keypad. Our first question for today comes from Dominic Nash of Barclays. Dominic, your line is now open. Please go ahead. Good morning, and congratulations on this deal. I've got two questions, if I may please. The first one is SES is operationally quite good, as you pointed out, but on the RoREs that it's achieving, it's quite a weak performer on Totex and on ODIs. And so the first question really is, what are you going to do to turn around both the ODIs and the Totex RoREs on that one? And the second question is that clearly Sutton and East Surrey is in the southeast of England. There's a myriad of highly levered, small water-only companies in that part, in that region of the country. A lot of them have got high levels of leverage and increasing investment needs. Do you think that there's gonna be an increasing sort of theme of sort of consolidation of the water-only companies in this part, and will you be part of it? Thank you. Thanks for those questions, Dom. I want to introduce Steve Buck, who has joined as CFO pre-Christmas. Steve is with us this morning, and obviously, we've got Jen Cook on the line as well, in terms of being an IR manager. So, in terms of those questions, perhaps if I start around the RoRE, and then I'll hand over to Steve, and then I'll pick up the last question that you had around just where SES is positioned and other companies in the locale. So in terms of SES, as I said, in the opening comments, operationally, with the areas of leakage, water quality, supply interruptions, you know, performing well, but you're very right to point out, Dom, in terms of RoRE, there are pressures there. So we have diligently worked through that and looked at what's driving it and what we think we will have as a pathway through to turning that from where it is now to obviously a positive and an outperformance point. So perhaps if I hand over to Steve, he can walk through our plans, what we're focused on doing, and walk through the three areas of RoRE, so Totex, ODIs, and financing. Yeah. Steve. Thanks, Susan, and good morning, everybody. Yes, Dominic, you're correct. They've got a depressed RoRE at the moment. The causes of it are threefold. Totex is the first cause. As Susan indicated, we'll deploy our integration blueprint and confident that we will be able to address the underlying causes of those overspends, 'cause that's basically what the sort of downside on Totex is an overspend. I think we've got a plan that we can address that. The other factor that's dragging it down is the cost of financing. They're highly geared. They have some quite expensive debt. Now we are not allowed to touch the debt book until we've got regulatory clearance. We can provide solvency support to keep them going during the regulatory process. But once we've got that clearance, we see that there's about a third of the debt book that we can remedy pretty much straight away, 'cause it's RCS, and it's overdraft and near-term settlements coming up. That will leave us with an index-linked debt, but it will put us in a position where we can start to address the financing cost. In terms of the ODIs, as Susan said, the fundamental ODIs are in good shape. The one where they had difficulty in the year that we're talking about is on asset health to do with water. Basically, the ratio of burst mains to thousand kilometers of mains. That was to do with the hot weather in that particular year. When we've looked at them, their run rate before that, they actually had double the amount that they've had, before that. They had double amount in that year versus their run rate. So I do, I do think that's a spike that will then, then return. So, so we can see a roadmap to how we're gonna resolve that or we get it back to, as it should be. But just to be clear, what we can do is we can, we can plan for it, but we can't actually execute it until we've got that regulatory clearance. Great, thanks, Steve. So in terms of the second part of the question on around the where it's positioned, geographically and then other companies. Well, first thing to say around consolidation in the sector and, you know, I've said this for a while, I do think there are real benefits around consolidation in this sector. I think benefits accrue to customers. You know, we have proven that with the acquisitions we've made previously in sharing benefits with customers, you know, reducing their bills and continuing with service whilst investing at rates that they wouldn't have had with standalone companies. So there are real benefits that come to customers from this, and there are benefits that accrue to shareholders who share in those efficiencies that are delivered, and who share in the upside, as Steve's just been talking about, how we will get the RORE from where it is to a good performing company. So very much believe in consolidation. The one thing I said at the beginning, which I will reiterate, is we have a history of successful acquisitions, but we do take a measured, diligent approach to assessment of them, execution and delivery. We have to very much understand where we think we can add value, and where we think we can make a difference. So it's with that lens that we look at all opportunities, and we will continue to look at opportunities. If we see those that would be accretive, then obviously we will look to transact, which is what we've done here today. Thank you very much. Thank you. Our next question comes from Mark Freshney of UBS. Mark, the line is now open. Please go ahead. Hello, thank you for taking my call. Susan, just, well, a question for Steve and a question for Susan. So Susan, I mean, you're effectively opening up another front here, just as you've got over the hump in the Bristol acquisition, you've got storm overflows to deal with in South West Water, and now you've got operating performance to deal with in Sutton and East Surrey. So can you talk about... You know, I know you've bolstered your management team, but can you talk about what gives you confidence that by opening up another front, you can manage both effectively? And secondly, a question for Steve, just on the debt. I mean, you mentioned the expensive debt and that there's about a third that you can deal with. What is the fair value adjustment on the debt within Sutton and East, East Surrey? And what would the premium to RAB be that you mentioned? I think you mentioned 6% after adjustments. What would, what would the premium be if you put the fair value through? And I guess further to that, can you talk about the adjustments between the headline RAB premium, which I think is 8%, and the 6% that you mentioned in your release? Thank you. Okay, thanks for those questions, Mark, and good morning. In terms of your first question around distraction, this is not a distraction. This is a benefit to the group, and a benefit to the organization, and I don't say that lightly. You know, as I said, we take a diligent approach to this. We take a measured approach about what we're doing, about how we're growing the group. And we look at opportunities where we can see benefits that will play across the rest of the water group, as well as for the acquisitions that we are making. First thing to say is, Sutton and East Surrey we do have a strong management team in place, and they are obviously staying in place. And as we said earlier, in the key metrics for SES, they are performing very well. So, this isn't a distractor. We're actually gaining by getting another good management team into the group. So that's the first thing to say, and all the things that you mentioned around our plans for the wastewater side of South West Water, with our WaterFit program to tackle storm overflow and solutions, that's not affected by this. That's still being deployed, that's still obviously going to be delivered. So it's not a case of it being a distractor at all. We see it as an opportunity, and indeed, for Sutton and East Surrey, they've done some digitization on their 3,500 kilometers of network, which is really interesting to us, which might be something that we deploy further across the rest of the group, which then gives the group other benefits in terms of deploying operationally. So always see these as benefits, but we're very measured in terms of making those assessments and looking at the targets to see which ones will give us those opportunities, and this is one of those. But I think you had a quick question around fair value of debt and what that does to premium. I mean, the one thing to say before I hand over to Steve is Steve very eloquently went through the fact that there is a debt portfolio. Obviously, we are looking at what we can do with a third of the debt portfolio, which we can obviously affect in due course and see some value from doing that, that has no kind of make-whole costs or any impact in that sense. The two-thirds of the debt, which is the securitized wrapped index-linked loan, we've unwrapped these before. You're right, there are fair value aspects, but we're not retiring that debt. So in terms of looking at a premium to our CV, you know, that's not something that, we would take into account because we're not changing, that debt, and it rolls off naturally in 2031. If we were to, though, in terms of that fair value adjustment, you know, we're looking at, you know, very low, in terms of, premium adjustments. I think the fair value, quantum, is, you know, around about, low... Well, just high - I think it's a high single digit adjustment, but we can, we can double-check that. But I think it has, you know, a percentage point on, on the, valuation, if you're going to look at it in that way. But like I said, we're not retiring debt, so we wouldn't. Steve, do you want to talk a little bit more about the debt piece? Yeah, I mean, Susan, I think you've covered most of it there, which is that, I mean, our approach to this debt book is that we will basically settle debt when it becomes due or whether it makes economic sense to do so early. So we're not in a position where we need to retire it. And even on that 2031 bond, that's the RPI bond, there will be accretion payments starting in 2027. If there is some flexibility where it makes good economic sense to start making those payments early, we'd like to do so. But if not, then we'll wait until they become due. And in terms of the obviously, the Assured Guaranty, I've got an interest in that particular bond. We have experience of working with them. They know us well, and we know them well. We're already engaged with them, and we'll be having a conversation about how we can sort of unwrap that debt. But fundamentally, we're looking at the cash flows and value. Thank you very much. Thank you. Our next question comes from James Brand of Deutsche Bank. Your line is now open. Please go ahead. Hi, good morning, and congratulations on getting the deal done. I had two questions. One was circling back to incentives. So I can see from just looking at the 2022/23 Ofwat financial resilience documents that SES was underperforming on kind of Totex, ODIs, and retail. And I was just wondering whether that—whether you could just kind of fill us in. Is that something that's been kind of sustained over the last few years? You mentioned on ODIs that there was, you know, one area that things have gone maybe particularly wrong recently. So if we look back for prior years, would we see a slightly better ODI performance than we see when we look at the 2022/23 report? That's the first question. And then secondly, on timing, what's the rough timing for the approval process from Ofwat? And do you think the investigations will slow that down at all? Thank you. Steve, do you have a quick update? Yeah, yeah. Yeah. On the RoRE one. So, you're right. What you can see in the Ofwat report is, there's a downside to do with retail, and there's a downside to do with Totex. But basically, they're both overspend, so when you aggregate them, you just get a net overspend. And so as part of the due diligence process that we do have one or two questions, whether they got the allocation right between retail and Totex. But actually, when you add them together, it doesn't matter, because it's either in one or it's in the other. So what we're seeing is that there has been for the last three years a consistent overspend on retail. That the overspend on Totex has been a little bit more recent. And ODIs, if we strip out that mains repair issue they've got, they've been pretty close to being neutral as a run rate. Thanks. And I think the second question was around the timing of approval process. I mean, obviously, the timing to a certain extent is out of our hands, in the sense that it's an Ofwat CMA process. You know, as we have walked through these processes before, obviously we will share all the information and give all the required assessments through to Ofwat and CMA. We have had the opportunity to have some conversations ahead of transacting. And as I said, I anticipate it to be a similar process to the one we walked through for Bristol. That's what I've concluded from the conversations that we have had. In terms of timing, if we think about what happened with Bournemouth, what happened with Bristol, anywhere between kind of 6-12 months. Great. Thank you. Thank you. Our next question comes from Martin Young of Investec. Martin, your line is now open. Please go ahead. Yeah. Good morning, good morning to everyone. A couple of questions from me. The first is just a continuation of what you were saying in response to James' question about conversations with the regulatory authorities. Can I infer from what you were saying that the mood music is positively disposed to this acquisition? And then secondly, Southeast of England is a somewhat water resource-constrained area. Is there anything that you feel can be brought in a positive way, given your experiences in another water resource-constrained area in the Southwest to help out with all things in the Southeast? Yeah. Morning, Martin. Thank you for those questions. So in terms of the mood music, you said in terms of Ofwat, CMA, in terms of positive space, I mean, I obviously can't really comment in the sense that you know, there is a process to walk through. You know, it is. Ofwat needs to have a robust regulatory regime, and as part of that assessment, they'll want to understand what a loss of comparison means. So, we have had a very constructive conversation pre-transaction, but you know, I wouldn't really want to comment in terms of the regulatory process itself. That's just got to obviously work its way through. All I can say is that, you know, we have been through these processes before, and we work very openly, transparently, and constructively with the regulators to get to the end of that process. In terms of the water resources aspect, you're quite right, Martin. Obviously, we've got experience of working certainly through the drought in Devon and Cornwall, speed to look at water resources. And one of the things we did there was, you know, look at repurposing disused quarries. Just so happens that SES themselves have a disused quarry, Godstone Quarry, which we think is quite an interesting aspect to the of the something that we can look at for plans going forward. And they have this Bough Beech Reservoir, which again, you know, there may well be opportunity to upscale and upsize that, which will be important for that region. So yes, that has been part of our review when we've looked at the business and the assets that they've got. Okay, thank you. Thank you. Our next question comes from Jenny Ping of Citigroup. The line is now open. Please go ahead. Thanks very much. Good morning, everyone. Two questions, please. Susan, I guess the first one, just looking at the transaction today, obviously, you've been talking about wanting to do M&A in the sector and consolidation for a while. So does this mark the end of you being out there looking for more, until the full consolidation is done and then maybe out again? So, M&A beyond this, for at least for the near term, is off the table. And then secondly, I just want to check the GBP 180 equity raise that you've announced today, that is going to be almost exclusively going on to the SES business for the equity and the de-gearing. Almost what happens to the core business, depending on what the outcome of the regulatory review is, is independent of this capital raise today, and that will be dealt with, I guess, once you know what the final outcome looks like, and therefore can make a decision on dividends and equities, et cetera. Is that a fair way of looking at it? Thank you very much. Good morning, Jenny. Thanks for those questions. Yeah, starting first with the M&A point, are we looking for more? Does this rule us out for the near term? As I said, we do take a measured approach, very diligent in terms of what we look for in terms of opportunity. You know, part of that is making sure that we're comfortable that we can see value add. So wouldn't rule in, wouldn't rule out. It's when these opportunities, you know, come to the table and we can see that there is a benefit for us as a group. So, you know, the timing, you know, obviously we have Bournemouth in 2015, Bristol in 2021, and now we've got SES 2024. The timings are really just reflective of, you know, the stars aligning, let's call it that, on the various opportunities. So, you know, we will look to see, you know, what opportunity there is there and whether we think it makes sense to us as a group, and whether we think, you know, we can transact at a price that makes sense. So that's, that's really the way we look at these things. In terms of your second question, in terms of the equity raise, yes, you're absolutely right. This equity raise is in respect of putting ourselves back to the position we would have been in before this acquisition. It is not about our positioning for the rest of the water group and the water assets that we have. We put our business plan in back in October. And obviously, we were comfortable with the position that we've put forward, and we didn't see the need for equity at that point. We've got a process to walk through this year, but this equity raise is absolutely about the acquisition, and it is independent of what else we're looking at on the water side. Thank you very much. Thank you. Our next question comes from Mark Freshney of UBS. Your line is now open. Please go ahead. Hi, thanks for taking my follow-ups. Can I just follow up on... And this is very unfair of me, Steve, so I apologize in advance. I know you've only been in the building for six weeks, but just on the group credit ratios, I know you do a lot of work with one rating agencies to provide an attestation to Ofwat. Clearly, this deal throws a spanner in the works, but with regards to getting two credit ratings and making sure you're well above the minimum threshold, how is that work going, and how does that—this deal today change that? Yeah, so I mean, first of all, I've probably got a slightly different view. I don't think it... Personally, I don't think it does throw a spanner in the works. So, I mean, the whole point of the equity raise is that we keep the group at its current gearing level. We've got an obligation to get credit ratings for the regulated business, which we will. So that work is in progress right now. We've got this year to get it done, and I'm confident that we will get it completed. Okay, thank you. Thank you. Our next question comes from Pavan Mahbubani of JP Morgan. Your line is now open. Please go ahead. Thank you. Good morning, everyone. My question is just on any clarifying assumptions or details you can give on the earnings accretion estimate that you provide. So you say you expect the transaction to be earnings accretive from FY 25, and I just wanted to get some more details and clarify. Is it the case that you're assuming earnings accretion, post-equity raise, and pre-synergies? And can you give any details on any assumptions you make, if any, on ODIs or Totex or anything else? Thank you. Yeah, thanks for the question, Pavan. In terms of the accretive point, obviously, we've as you might imagine, we've modeled the impacts of the acquisition. We have the regulatory process to walk through, and then it's from that point, we're able to, as Steve outlined in terms of the financing and as we outlined in terms of our blueprint, we're then able to make adjustments both for SES and the rest of the water group as a result of that. So we will start to get those efficiencies coming through. So the accretion, yes, it's modestly accretive from the first full year of ownership, so just be really clear about that. We expect the regulation process to take between six and 12 months, and it will be following that obviously we will start to get through the benefits, and we'll see that accretion point from then. Thank you. Thank you. As a reminder, if you'd like to ask a question, you can press star one on your telephone keypad. Our next question comes from Dominic Nash of Barclays. Your line is now open. Please go ahead. Thank you. Thank you for taking my follow-up question as well. I'm just sort of running the rule over your synergies numbers. I just wanted to sort of, sort of like a couple of questions there. So firstly, if I go back into your history, I think you quoted GBP 27 million of synergies in Bournemouth over K6. Yes. Could you just let us, in hindsight now, how much synergies were enduring, or what other benefits did you actually get, e.g., no ODIs and stuff from the Bournemouth acquisition? And then following on from Bristol, I think you quoted 15% synergies for Totex. I think that's the number. And when I've just put it up, there's GBP 11 million that you're quoting for this one. I think it's coming to 20% based on a AMP7 baseline expenditure or AMP7. So I just wanted to know whether that synergy number could, what's the endurability of these synergies going forward, particularly into AMP8 and beyond? And are there other synergies above that GBP 11 million that we will see coming through other ways, like, you know, ODIs and stuff? Thank you. Okay, thanks for the follow-up, Dom. In terms of the synergies, for Bournemouth, yes, we did quote numbers of around GBP 27 million for that cumulative position. That wasn't a run rate, that was a cumulative position over that 10-year period. Yes, in terms of enduring, because obviously we changed the way we were operating, not just for Bournemouth, but for the operations for Devon and Cornwall as well. So those were lasting changes that were made, so they are enduring. And yes, if you looked at the performance of the ODIs for Bournemouth, those did improve quite significantly over that same period, if you go back in history. Now, we don't report Bournemouth separately. We are reporting Bristol separately, and we are reporting, I'm sure we will end up reporting SES separately. I think it's probably the right way to go. And you will be able to see those improvements and benefits coming through from that. In terms of the percentages, I quoted a 15% Totex benefit, but that was based on kind of future business plan numbers. So yes, you probably do get a slightly higher percentage if you look at the run rates from last year. And the 18% is the Bristol piece. So yes, percentages are about right, Dom, in terms of what you're talking about. Okay, thank you very much. Thank you. At this time, we currently have no further questions, so I'll hand back to Susan for any further remarks. Thank you very much, Alex, and thank you for everybody on the call this morning. Thank you for joining us. As I said, SES is a quality asset, performing in some very key areas, operationally. Yes, we have a good blueprint in terms of our plans for supporting the business, making changes that enable it to be the company it needs to be going forward. It's a great acquisition, and alongside it, we're launching an equity raise to ensure that as a group, we remain within the gearing range that we have traditionally had, that we have, that has served us well. Thank you very much for joining this morning. Thank you for joining today's call. You may now disconnect your lines.