South West Water Business Plan 2020-2025 Empowering customers

Presentation to 17 September 2018

Summary Empowering customers of our plan their say their community their their plan stake

Empowering our customers – New Deal • Most thorough customer and stakeholder engagement ever Waterlevel c. 1 million customers engaged News from Spring 2018 • Moved from engagement to empowerment • Customers have the opportunity to be in control Over 27,000 customers directly Read our proposals for 2020-2025 providing feedback • Customers to share fairly in our success

Sally Mills For every person Crossword welcomes you that responds we Your chance to win * to this special will donate £2 £100 High Street edition of to shopping vouchers! Waterlevel Page 7 Page 7 • Ambitious radical plan – New Deal for customers AB17-J7841 SWW Waterlevel AW.indd 1 14/02/2018 14:51

Prices • Historically number one issue for South West Water £300m totex outperformance • 11% / 9% reduction in real prices from 2020 driving down prices • Lower in 2025 than 2010 in cash terms (nominal prices) • Our totex efficiency continuing to drive real price reductions SWW plan (real prices) BW plan (real prices)

• Our prices mean we will no longer be an outlier 2019/20 £477 2019/20 £139 • Eliminate water poverty by 2025 2024/25 £418 2024/25 £127 • Dual bill all remaining unmeasured customers, giving choice of bill and removing 10,000 11% lower 9% lower customers from water poverty 3 Summary of our plan continued

Delivering our promises • Delivering all our PR14 commitments, delivered Board pledges – track record to trust PR14 commitments and Board • Includes delivering promised improvements to SIM and environmental performance pledges on track to be delivered • Delivered integration synergies – better industry comparator • Achieving tough PR14 Outcome Delivery Incentive (ODI) targets • Ambitious PR19 plan – set tough service, cost and efficiency targets again

Straightforward transparent financials • Simple listed structure Driving frontier efficiency • Natural PAYG / RCV run off rate 3% opex efficiency Contributing to society through a responsible 5% capex efficiency • Transparent dividend policy – endorsed by the WaterFuture Customer Panel approach to tax March 2018 • Further ambitious totex efficiency targets – stretching ODIs • Innovative sustainable financing framework – environmental and social capital markets • Transparent tax strategy following customer consultation

Innovation and markets • National Innovation Centre for Water, Waste and Environmental Resilience – partnership with University • Roll out ground breaking Mayflower WTW to Bournemouth area • Unique ‘internal market’ developed for water resources • Isles of Scilly ‘Smart Islands’ exemplar

• Paid eco systems services market embedded since 2006 OF • Unique customer ownership plan – first of its kind in UK • Customer behavioural change incentive programmes roll out

4 Fair rewards and sharing our success c. £20m unique PR14 benefit expected • Principle of not retaining ‘unearned’ outperformance to be shared with customers in 2020 • PR14 pioneered sharing new debt outperformance Similar quantum of benefit to be • Extending to sharing embedded debt outperformance shared post 2020 from embedded • Outperformance financing – facilitates WaterShare+ debt sharing (new mechanism)

Customer support and stakeholder engagement 92% of Bournemouth Water 1.1 categ

• WaterShare has transformed relationships customers accept plan Continuous challenge and scrutiny by independent WaterShare panel • 88% of South West Water • Highest ever customer trust and highest customer support of our plan customers accept plan • Customer engagement on £50 government contribution – led to solution

South West Water Customer Challenge Group Report on the SWW PR19 business plan • Strong support with and without £50 government contribution 3 September 2018 55 WaterShare panel meetings

New deal for customers • Customers hold us directly to account • Customer AGM to hold WaterShare panel and company to account • Tangible stake in business – past and future outperformance provides free customer shareholding option • Set new benchmarks for service and efficiency • Completely eliminate water poverty by 2025 • Ambitious and radical plan

Empowering customers 5 South West Water Business Plan 2020-2025 Our Board pledges to 2025

We will deliver Target zero customers in water poverty by 2025 efficiency, keeping In real terms average customer bills are forecast to fall by 11% (South Board areas bills as low as West Water) and 9% (Bournemouth Water) by 2025 of scrutiny possible and South West Water customer bills are forecast to be lower in 2025 than address water they were 15 years earlier and lower than they are today Sharing success with customers poverty Continue to focus on cost control and the use of innovation and markets to drive efficiency. Bill level in 2024/25

We will provide Target excellent service performance across all areas and sector Bill profile to 2024/25 outstanding leading C-MeX performance customer service Meet stretching service performance commitments in the areas which Scale of affordability support matter most to customers Addressing lessons learned Continue to provide a resilient service for now and the long term, from Storm Emma regardless of any challenges faced Deliver major drinking water quality enhancement programme to Ambition on pollutions deliver wide scale benefits for customers. performance

Smart metering policy We will deliver 100% wastewater compliance environmental Strive to eliminate harmful pollutions to the environment and reduce Direct procurement leadership minor pollutions to record lows in the industry and markets Upstream Thinking programme improving 80% of our catchments

6 Targeting industry leading leakage, delivering 15% reduction from 2020 Our largest environmental improvement plan for 15 years to deliver region wide benefits for the environment and economy.

We will empower Share the benefits of success with customers fairly and transparently, our customers developing our transformational WaterShare+ framework by giving them Evolve our sharing mechanism for customers to continue to benefit a stake and more from financing gains of a say in our Receive oversight from the independent WaterShare+ panel business Introduce a first of its kind customer share ownership option from 2020 Hold customer annual general meetings where customers can vote Hold quarterly public customer meetings chaired by independent WaterShare+ panel.

We will deliver Invest over £1bn in the region to enhance the communities and our promises, environment we serve supporting Deliver key projects to protect rivers, bathing and shellfish waters for the regional our customers, tourists and businesses who depend on them economy and Invest in two new water treatment works in the Bournemouth region our communities Extend our area of operation to include the Isles of Scilly Provide new employment opportunities through our regional investments Use our regional supply chain to support regional economic growth Invest in people, skills and personal development, including our apprenticeship programme.

Empowering customers 7 South West Water Business Plan 2020-2025

Supplementary information

Prices 10

Address water poverty by 2025 11

Delivering our promises 12

Stretching service and efficiency commitments 14

Innovation and markets 16

Straightforward and transparent financials 18

Customer support and stakeholder engagement 20

WaterShare+ 22

9 Prices

South West Water bill waterfall 2024/25 average bills Customers have told us that keeping £489 bills low is a key priority for them +£4 -£98 South West Water (with £50 GC) Focus on efficiency has +£71 +£12

kept costs and customer bills £539 as low as possible

Legislative Legislative (without £50 GC)

obligations South West Water £550 Isles of Scilly £539 £493 South West Water and Inflation Bournemouth Water customer bills Efficiencies £145 lower in 2025 than today

Bournemouth Water South West Water customer bills

Average Average household bill Average household bill Average household bill South West Water plan (real without inflation) lower in 2025 than 15 years earlier 2009 /10 2019 /20 2024 /25 2019/20 £477 88% customer Established as a ‘normal’ 2024/25 £418 acceptance 11% lower company, in the pack 2024/25 bill (£)

Bournemouth Water plan (real without inflation) Average £394 449 423 417 418

409 2019/20 £139 393 382 378 92% customer 345 2024/25 £127

327 acceptance 9% lower

South West Water plan without £50 GC Customers currently receive a £50 government contribution (GC) 2019/20 £527 80% towards their bill. We have tested customer 2024/25 £468 acceptance customer acceptability at a higher WESSEX THAMES ANGLIAN

SOUTHERN bill level, and 80% still find the YORKSHIRE DWR CYMRU DWR

NORTHUMBRIAN plan acceptable. SOUTH WEST WATER

10 Address water poverty by 2025 Long track record of providing Tackling Water Affordability in innovative solutions to address Tackling Water Affordability in Partnership Findings from South West Water’s partnership working with Social Housing Providers and other third party organisations Partnership June 2017 affordability 86% Reflective of regional characteristics partnerships with of social households in our of low incomes and high bills Social Housing region reached through 1212 Providers partnerships • Social tariff Strong and extensive network • Dedicated affordability team of partnerships • WaterCare+ 16,000 • Restart • Freshstart Enhancing our industry leading older customers and carers reached through partnership working • Social housing partnerships support measures • Data sharing and analytics £43 • Water affordability app Dual billing – metering all additional benefits per realised for those remaining unmeasured properties, eligible through offering choice of bill and removing WaterCare + week Regular pop-up 10,000 customers from water poverty advice surgeries held in Income maximisation checks and 7,000 wider roll out of WaterCare App customers helped through the Water Debt Gateway Removal of benefits cap from social 21Job Centres 21 tariff allowing greater access 1,0001,000 Data sharing and mapping customers helped Behaviour changing financial WaterCare assistance schemes advisor with app

Empowering customers 11 South West Water Business Plan 2020-2025 Delivering our promises

RoRE Water Performance review group Through extensive Board oversight we are on track to deliver all 12% ODI Executive Wastewater Performance review group the stretching PR14 commitments led Board on service and cost 8% Retail Performance review group All elements of RoRE outperformed 4% Extra scrutiny (426 challenges 0% Financing during 55 meetings) by independent ODIs Totex WaterShare panel and WaterFuture -4% Base return Bournemouth Water Customer View Customer Panel has held us to Keeping customers at the heart of the company account from 2014 THAMES ANGLIAN SOUTHERN YORKSHIRE DWR CYMRU DWR SEVERN TRENT

WESSEX WATER WESSEX South West Water NORTHUMBRIAN UNITED UTILITIES All Board pledges have SOUTH WEST WATER been delivered Customer Panel PR14 Board pledges delivered REaV sub group Ambitious cost efficiency targets Keep price rises well below inflation have been met

LREI sub group Deliver efficiency through innovation to keep c. £300m totex efficiencies costs and customers’ bills as low as possible anticipated, keeping customer bills low Share the benefits of success fairly between WaterFuture Customer Panel Report

1.1 categ

customers and investors Well evidenced Forefront of efficiency Make significant improvements to frontline Balanced customer services Affordable

Acceptable to customers South West Water Customer Challenge Group Report on the SWW PR19 business plan  Deliver service and environmental improvements 3 September 2018 In line with legislation and regulation Support sustainable regional growth

12 Integration with Bournemouth Water Pollution incidents – category 1 and 2 (number) Stretching service level targets have been delivered Wholesale and retail synergies of £27m Target Actual/Forecast Sharing of best practice Successful integration of Return of small company premium 7 Bournemouth Water Better industry comparator Creation of better comparator for 4 the industry (service and cost) 3

0 0 0 0 1 0 0 Significant retail savings delivered 1 • PUROS operation 2015/16 2016/17 2017/18 2018/19 2019/20 & remote control WATER Long track record of providing a • Upstream catchment Resources management reliable and resilient service even Service incentive mechanism (SIM) • Innovative water in extreme conditions treatment solutions 87 87 WATER 86 86 • Leakage 85 Treatment 84 84 Metering • 82 82 82 • Discolouration & interruptions WATER 79 • Resource sharing Distribution 75 and inter-connection SWW BW INDUSTRY AVERAGE SWW BW INDUSTRY AVERAGE SWW BW INDUSTRY AVERAGE SWW BW INDUSTRY AVERAGE

2014/15 2015/16 2016/17 2017/18 • Scale synergies Household • Optimised customer RETAIL service package

1 Phase Utilisation of Remote Operating Systems (PUROS)

Empowering customers 13 South West Water Business Plan 2020-2025 Stretching service and efficiency commitments

Outcome Delivery Incentives (£m) Pollution incidents – category 1 - 3 Robust customer research and 50 0 engagement has informed proposals 45 Clean, safe and reliable supply of drinking water 22 9 40 Reliable wastewater service 48 48 Targeting ambitious service and cost 35 performance in the areas that matter Available and sufficient water resources 59 58 30 25 most to customers Resilience 3 2 20 Responsive to customers 3 1 15 Forefront of cost efficiency Protecting the environment 31 20 10 and service 5 Benefiting the community 15 16 0 – Industry leading customer service Fair charging and affordable bills for all 0 0 – 3% p.a. operating cost efficiencies WESSEX THAMES

Outcome incentives – max range 181 154 ANGLIAN – 5% capital cost efficiencies SOUTHERN YORKSHIRE DWR CYMRU DWR

C-MeX / D-MeX 31 31 SEVERN TRENT NORTHUMBRIAN UNITED UTILITIES

SOUTH WEST WATER Most extensive customer valuation data sets triangulated to inform plans and ODIs Internal sewer flooding (absolute number) Pollution incidents – category 1 - 3 (number) 1800

1600 Only company to comply with

1400 169 EA guidance on environmental ODIs

1200 133 1000 Strong incentives driving 800 improvements customers want 600 72 and protecting them from 400 60 poor performance 53 47 40 200 33

2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 Innovative customer behavioural change incentive programmes on WESSEX THAMES ANGLIAN SOUTHERN YORKSHIRE

DWR CYMRU DWR water efficiency and sewer blockages SEVERN TRENT

NORTHUMBRIAN 2019/20 UNITED UTILITIES to reduce need for investment

SOUTH WEST WATER 2024/25

14 Per capita consumption interruptions (minutes) Environmental leadership and 145 14:00 lowest levels of pollutions industry

140 12:00 has ever seen

135 Average 10:00 130 Highest water quality, zero water 08:00 125 restrictions and industry leading 06:00 120 levels of leakage and 15% reduction 04:00 115 from 2020

110 02:00

105 Increased protection from flooding and drought WESSEX WESSEX BRISTOL BRISTOL THAMES THAMES ANGLIAN ANGLIAN AFFINITY AFFINITY SOUTHERN SOUTHERN YORKSHIRE DWR CYMRU DWR DWR CYMRU DWR SOUTH EAST SOUTH EAST PORTSMOUTH SOUTH STAFFS SOUTH SEVERN TRENT SEVERN TRENT Community resilience improvement NORTHUMBRIAN NORTHUMBRIAN UNITED UTILITIES UNITED UTILITIES SOUTH WEST WATER SOUTH WEST WATER projects SUTTON & EAST SURREY SUTTON & EAST SURREY 2019/20 Direct procurement scheme for 2024/25 Innovation Centre for water, waste & environmental resilience

Environment Plan Environment Plan to 2050 to 2050

www.southwestwater.co.uk

Empowering customers 15 South West Water Business Plan 2020-2025 Innovation and markets Innovative, efficiency driven, customer focused culture firmly embedded into our business Technology to deliver services Markets embraced to deliver further Control technology Catchment tangible benefit to customers and the use of management remote sensing Supporting Innovation 80% Bournemouth Water merger catchments agricultural bill excellent example of use of capital Customer Industry covered engagement structure – objectives markets to deliver significant and service markets service and cost improvements Information only a merger can deliver sharing and data analysis Paid eco system services market embedded since 2006

Unique first of its kind in the UK South West Water internal model Our interactive customer share ownership plan water resources video System operator Internal markets approach for water resources developed Payment for Payment for Payment for water resource N+ services wholesale services (less leakage) services Successful entry and operation WaterCare in retail non-household market advisor with app and transfer of learning to Water Water Retail household business resources network plus Innovative customer engagement and behavioural change programmes

16 Cost saving (net present value) Proposing direct procurement scheme for water transfer to Southern Water post 2025 £412m Region wide deployment of Customer saving £130 - £300 behavioural change programmes on £235m water efficiency and sewer blockages – twin aim of engaging with

£101m customers, positively changing their behaviour, reducing their bills and DESALINATION DESALINATION BW TO SWS helping long term resource planning A B WATER TRANSFER OF Isles of Scilly smart islands project (subject to NAV application)

Stretching and ambitious service Innovation Centre for water, waste & improvements delivered innovatively environmental resilience e.g. LIDAR and WPD helicopter

Research Research & Innovation Centre for Water, Waste programmes Managing Pollutants & Risks innovation Enhanced Experimentation & Automation e.g. micro-plastics, anti-macrobial resistance, and Environmental Resilience soil contamination, flood risk reduction principles and approaches Environmental Monitoring & Modelling will provide significant benefits Managing Supply to the whole sector e.g. catchment management, climate change adaptation Circular Economy & Ecosystem Modelling

Managing Demand e.g. consumer behaviour, agricultural irrigation, abstraction

Improving Efficiency & Productivity e.g. leak detection, bio-remediation, water treatment

Empowering customers 17 South West Water Business Plan 2020-2025 Straightforward and transparent financials

Outturn 2020/21 2021/22 2022/23 2023 /24 2024/25 Key points to note are: prices £m £m £m £m £m • PAYG and run-off rates reflective of PAYG (operating costs including retail and IRE) 258.0 263.2 262.2 262.7 263.1 underlying cost profiles and asset lives Pension deficit repair costs1 10.1 10.5 - - - • Pension deficit repair costs aligned with RCV run-off (including post 2020 additions) 176.9 179.7 182.9 186.2 188.9 our agreed funding schedule • Returns consistent with Ofwat’s base cost Financing costs2 of capital assessment Return on RCV 97.6 100.4 103.6 106.7 109.4 • Taxation reflective of an effective rate of 15% Residential retail margin 4.3 4.4 4.3 4.4 4.4 • Interest costs reflective of cost of capital and Tax 18.2 19.0 20.5 20.3 19.7 rising in line with debt requirements • Dividends rebased reflecting lower returns (9.5) (9.7) - - - Revenue legacy adjustments to 2025.

Total building block revenue 555.6 567.5 573.5 580.3 585.5

Grants & contributions recognised in revenue 9.5 9.7 9.7 10.1 10.1

Total appointee revenue 565.1 577.2 583.2 590.4 595.6

Capital expenditure 189.6 204.4 210.1 203.0 186.4

PAYG ratio 58.5% 57.2% 56.1% 57.0% 59.1%

Regulated Capital Value 3,465.2 3,545.7 3,632.8 3,711.8 3,775.4

Notional interest charge2 89.9 92.4 93.8 94.9 95.6

EBITDA interest cover 3.67 3.72 3.68 3.66 3.64

Base dividends 55.0 56.7 58.4 60.2 62.1

Average household bill – South West Water3 486 490 489 490 489 1 End of Trustee agreed deficit recovery plan in 2022 2 Average household bill – Bournemouth Water 142 144 145 145 145 Based on notional 60% gearing (actual average 63%) 3 Net of government contribution

18 Appointee totex 2015-201 2020-251 • Continuing focus on delivering cost efficiency: 2 Totex allowance 1,924 1,978 • Cost assessment focused on achieving Base efficiency (before outperformance) frontier efficiency Operating costs 2.5% 3.0% • Investment driven efficiencies Capital expenditure 5.5% 5.0% • Significant reduction in retail costs – building on K6 delivery.

2015-20 2020-25 Blended average • Returns reduced – aligned with Real returns based on:3 RPI RPI CPIH (CPIH/RPI) Ofwat’s guidance Wholesale vanilla cost of capital 3.7% 2.3% 3.3% 2.9% • Blended returns calculated from apportioning Residential retail margins 0.1% 0.1% 0.1% 0.1% the RCV between CPIH and RPI multipliers Equity return 6.0% 4.0% 5.0% 4.6% • Financeable – financial covenants and key ratios met Cost of debt 2.59% 1.33% 2.32% 1.9% Range for RoRE – opportunity of doubling Notional gearing 62.5% 60% 60% 60% • base RoRE. Return on Regulated Equity (RoRE) 2.1 - 10.5% 1.5 - 8.8% Financeable

Regulatory Capital Value (RCV) allocation to revenue controls RCV allocation • Evolution of RCV over period to 2025 4,000 2.5% 4.1% • By 2025 60% of RCV inflated at CPIH. 3,500

3,000

2,500 50.9% 2,000 RPI 42.5% Water Resources 1,500 CPIH (including additions) Network Plus Water Network Plus Wastewater 1,000 1 2017/18 prices Bioresources 500 2 Before totex outperformance adjustment 3 0 Assuming nominal returns of 5.37% 2020 2021 2022 2023 2024 2025

Empowering customers 19 South West Water Business Plan 2020-2025 Customer support and stakeholder engagement

Customer leakage Record high customer Built on step change in engagement Customer Service Customer leakage co-creation workshops – case study 88% March 2018 co-creation workshops acceptance of our plan customer during PR14 South West Water acceptance Customer engagement into every day Record high customer activities and Board directly involved 92% in engaging with customers entit alire Sei old and egular Pantone 21 2 1 Pantone 21 customer acceptance of our plan acceptance Bournemouth Water ICS Triangulation report Best practice and innovative behavioural economics engagement techniques applied across entire customer base enhancing robustness of research data

Triangulated with customer data and played back to customers Our interactive water resources video Co-creation workshops giving customers the chance not only to inform what we do but also how to deliver it

Independent expert peer reviews

Proposals and Choices Waterlevel 2020-2025 Proposals News from South West Water Spring 2018 and Choices Step change in conversations – 2020-2025 making sure everyone has a voice

Read our proposals for 2020-2025

Sally Mills For every person Crossword welcomes you that responds we Your chance to win * to this special will donate £2 £100 High Street to edition of shopping vouchers! #getintowater Waterlevel Page 7 Page 7

AB17-J7841 SWW Waterlevel AW.indd 1 14/02/2018 14:51

20 WaterFuture Customer Panel Report

1.1 categ Independent WaterShare panel

Well evidenced oversight since establishment in Customer Panel Balanced 2013 has changed nature of customer relationship and discussion Affordable

Acceptable to customers South West Water Customer Challenge Group Bournemouth Water Report on the SWW PR19 business plan  3 September 2018 Extensive scrutiny of engagement Customer View In line with legislation and regulation with customers provided by Keeping customers at the heart of the company independent WaterShare panel, WaterFuture Customer Panel and South West Water Customer View Group

Panel engaged directly with NEDs “The package as a whole independent of Executive REaV sub group demonstrated great ambition from the company.” 426 challenges during 55 meetings Richard Lacey Chair, Customer View Group LREI sub group “This is a super package that the company should be proud of. I would be very surprised if this affordability and vulnerability package was not industry leading.” Steve Meakin Chair, Research and engagement sub-group “I believe this is a good package.” David Heath Chair, Consumer Council for Water Western Region

Empowering customers 21 South West Water Business Plan 2020-2025 WaterShare+ Customers want to see benefits of success fairly shared I think it gives people options - 2019 /20 First of its kind customer share for those who like shares they can TOTAL CUSTOMER SHAREHOLDER keep them, if they don’t they can ownership scheme cash them in. Cum. Cum. Cum. PERFORMANCE £m £m £m c. £20m unique benefits expected to Driving cost 300 150 150 base efficiency be shared with customers by 2020 I usually don’t trust Delivering outcomes 20 10 10 with an option of shares shares, but this would be Other factors 20 20 - Total 340 180 160

an occasion where I would SHARE Customers will have additional keep them, and therefore Net costs carried forward - - - powers through attending a customer take an interest in the Benefits available 340 180 160 AGM and being able to vote Total 340 180 160 company. Attendance at quarterly public WaterShare+ meetings of customers support customer I think this would be a great 79% share ownership plans because Further sharing of gains and share idea. It’s showing that the they want to share in our success ownership options post 2020 company is investing in its customers and not just lining 87% of customers offered shares WaterShare principles applied to others pockets. would keep them Bournemouth Water customers Evolved cost of debt sharing Good idea overall. Community schemes were the least mechanism to 2025 expected to Will make people feel preferred customer option deliver similar quantum of unique benefits (c. £25m) they are part of the Eligibility criteria mirroring £50 company. government contribution 100% of ‘unearned gains’ returned to customers 22 Notes

Empowering customers 23 South West Water Business Plan 2020-2025