U.S. markets open in 3 hours 41 minutes

Edited Transcript of UU.L earnings conference call or presentation 22-May-20 8:00am GMT

Full Year 2020 United Utilities Group PLC Earnings Call

Warrington May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of United Utilities Group PLC earnings conference call or presentation Friday, May 22, 2020 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David H. Higgins

United Utilities Group PLC - Chairman

* John Russell Houlden

United Utilities Group PLC - CFO & Executive Director

* Philip Anthony Aspin

United Utilities Group PLC - Group Controller

* Steven Lewis Mogford

United Utilities Group PLC - CEO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Dominic Charles Nash

Barclays Bank PLC, Research Division - Head of Utilities Research

* Fraser Andrew McLaren

BofA Merrill Lynch, Research Division - Director

* James Brand

Deutsche Bank AG, Research Division - Research Analyst

* Jenny Ping

Citigroup Inc, Research Division - Director

* Pandelakis Athanasiou

Agency Partners LLP - Equities Analyst

* Robin Jenner

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the United Utilities 2020 Full Year Results Call. My name is Rachel, and I will be coordinating your call today. (Operator Instructions) I will now hand over to your host, the Chairman, Sir David Higgins, to begin.

--------------------------------------------------------------------------------

David H. Higgins, United Utilities Group PLC - Chairman [2]

--------------------------------------------------------------------------------

Thanks, Rachel, and good morning. Welcome to United Utilities Full Year Results Presentation. This is the first opportunity I've had to speak to many of you since becoming Chairman of United Utilities. I'm sorry that we can't meet due to the current social distancing restrictions, but I look forward to seeing you at future events.

Inevitably, the immediate focus of many people is the impact of COVID-19 and how it's happening on the company's operations and the world economy more generally. Teams right across the organization have worked tirelessly throughout this period in order to maintain service, support customers and protect our colleagues, and we're very proud of the resilience and adaptability that they've demonstrated.

Whilst a significant degree of uncertainty remains in relation to the extend and duration of COVID-19, it's also important to reflect upon the strong performance we have delivered in the year. Having accepted the final determination in January, this closes out the 2015 to 2020 period in which we've reinforced our position as the leading company and given ourselves the best possible start to achieve our targets in the next period.

Recognizing this, the Board proposes an increase of 2.3% in the final dividend, in line with our policy. This takes the total dividend for the year to 42.6p per share.

Thank you, and I'll now hand over to Steve.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Chairman, and good morning, ladies and gentlemen, and a warm welcome to United Utilities Full Year Results Presentation for the year 2019/'20. Before taking you through the results, I'll briefly touch on the unprecedented circumstances in relation to COVID-19.

Here at UU, we've been focused on supporting customers through these difficult times, offering the widest range of assistance schemes to help those struggling to pay their bills, whilst continuing to deliver water and waste water services vital for public health. None of this would have been possible without the incredible team at UU, and I'd like to pay tributes to the hard work and dedication of colleagues throughout the crisis. Their loyalty and commitment has never been more needed, and I feel tremendously proud that customer service has been maintained through the lockdown.

The year itself has been about delivering on our promises for the last regulatory period, AMP6 and preparing for the next AMP7. And we've made tremendous progress on both. Customer satisfaction is up. Operational improvements has improved for yet another year -- operational performance has improved yet another year.

And we start AMP7 with all the benefits of achieving fast track status for our AMP7 business plan, having invested GBP 100 million over the last year to get a flying start against our AMP7 targets. This has been achieved whilst maintaining a strong balance sheet, healthy liquidity and a pension scheme in surplus, a great place to be as we start AMP7.

I'm extremely proud of the UU team and what we've achieved in delivering a transformation in business performance. The journey we started together in AMP5, ensures that customers across the Northwest can be confident they're being served by 1 of the best in our sector, sensitive to their needs and continuously improving our service offering. This team has delivered over GBP 1 billion of outperformance over the last 2 regulatory periods, sharing over GBP 600 million with customers through reinvestment in our services.

But what I find so exciting is that we know there's so much more that we can do. Our innovative Systems Thinking approach has been a key enabler for many of our improvements, but we're still early in its development with new tools and technologies to improve customer service emerging every day. We know that we lead the sector with Systems Thinking and we intend to continue pushing ahead in this area to the benefit of all of our stakeholders.

Moving to the next slide and turning specifically to COVID-19 and how we've continued to provide a great service to the customers through these challenging times. None of our employees have been furloughed with around 80% of our total workforce designated as key workers. Around 60% are currently working from home, and those attending work are following government guidelines regarding social distancing, sanitation, and PPE.

Nonessential tasks have been postponed, but construction activities have continued where possible and whilst protecting people safety. Recognizing that some of our employees face challenging financial issues within their own families as a result of changing circumstances, we created a staff outreach scheme to provide one-off grants through a confidential application process.

We recognize that many of our customers are suffering as a result of the economic impact of COVID-19, and we've increased the number of customers eligible for social tariff support and made $3.5 million available immediately for those most in need. We've accelerated payments to our suppliers and as a leading player in the sector's incident response team, we're paying particular attention to the more fragile elements of our critical supply chain.

The most pressing issue for the sector has been the business retail market, which was subject to the introduction of competition from 2017. The closure of businesses under locked down is interrupting payments to retailers, and we've worked closely with the market participants, including Ofwat, which has now shown its intent to cap the exposure for both retailers and wholesalers.

However, there remains a possibility that 1 or more retailers won't be able to refinance their business in these circumstances. And we have about 80% of our non-household wholesale sales to our joint venture Water Plus. And Russ will cover the implications for Water Plus in more detail later.

The future is uncertain, but we'll continue to implement our delivery plans, adapting as necessary as a clear view emerges. We're a significant employer in our region. We're supporting customers through a variety of assistance schemes we offer, and we look to accelerate our AMP7 investment program as we did successfully in AMP6 playing our part in the recovery of the Northwest economy.

Turning to the next slide. Whilst our attention is turning to AMP7, I thought it would be useful to close out AMP6, where it's clear that our strategy for AMP6 has been a success. A relentless focus on customer satisfaction has transformed the culture within the business.

A key strength is our workforce who demonstrate high levels of engagement well above the utility sector normal. Our approach to innovation and specifically Systems Thinking, alongside accelerating investment has delivered improvements in performance and efficiency that underpin our AMP7 business plan, securing fast track status in PR19.

As a result, we've delivered outperformance against all areas of the regulatory contract. And as a consequence, we've shared that outperformance with customers through reinvestment of $350 million, a GBP 100 million of which has given us a flying start against our targets in AMP7. But I'm also proud of the way in which we've delivered performance.

Scratch the surface of the business, and you'll find our values and beliefs. They've always been there, and they drive everything we do. Integrity is key as is transparency and openness. And our employees recognize that customers deserve respect and the best possible service.

Our relationship with the environment is so very sensitive and will become more so as climate change continues to bite. So we must continually balance the impact we have on the environment with continuity of the vital service we provide, and we must balance all these needs with those of our debt or equity investors, who deserve a return for their support to the business. Our approach is clear and enduring. We simply refer to it as behaving responsibly.

Moving to the next slide. Now part of behaving responsibly is our track record of delivering the next to best possible service for customers. Throughout AMP6, we continued on the improvement path that began in AMP5. By the time we hit the last year of Ofwat Service Incentive Mechanism, or SIM, we have upper quartile in the sector and awarded a SIM reward.

It's been pleasing to see our operational improvements reflected in year-on-year reduction in complaints, but we're particularly pleased that the transformation of our service offering is being recognized by many different organizations looking at excellence across multiple sectors in areas which include customer service, collections and debt management with us winning 25 awards in this space and 3 accreditations.

The SIM incentive scheme ceased at AMP6 to be replaced by C-MeX, measuring domestic customer satisfaction, and D-MeX, measuring developer satisfaction with the service they're receiving from water companies. Ofwat has been piloting C-MeX over the last year of AMP6, in effect, the shadow year, to refine the process before implementation in the first year at AMP7.

The AMP7 incentive rate has been increased for C-MeX over SIM with a maximum potential reward now being GBP 66 million available over AMP7. We're very pleased to have ranked third out of the water and wastewater companies overall across the shadow year with ongoing improvement resulting as being first overall in both the third and for the fourth quarter surveys of customers who've contacted us. There's a long way to go, and we should expect an upward trend in sector performance over the AMP, but our performance to date gives us confidence that we can achieve reward territory in AMP7.

Next and turning to our impact on society. We have a wide range of schemes, many of which are first for the industry, to help those customers who need it most. A number of examples are shown on the slide, including our Hardship Hub, developed with experts, including citizen's advice to give those advisers supporting the public a one-stop shop for local assistance schemes. This is more important than ever as we help those customers who are facing financial difficulties as a result of the COVID crisis.

Around 120,000 customers now benefit from what is the sector's most comprehensive range of affordability schemes, and we're delighted to extend the eligibility for social tariff support to include an additional 35,000 customers. We led the sector in establishing our priority services scheme designed to provide additional support to customers with health, mental or financial difficulties during an incident. Over 100,000 customers are now registered for this support with more joining every day.

Over AMP6, we contributed over GBP 35 million to our communities by a variety of schemes and we've committed to provide GBP 71 million from profit to help customers in difficulty over AMP7, as I mentioned earlier, GBP 3.5 million of which has already been made available in advance of the worst effects of the pandemic. It's motivating to work for a responsible, successful company, and we were, therefore, delighted to be voted one of the top 20 places to work in 2020 by past, present and prospective employees.

And as you've hopefully already recognized, we have a long-standing commitment and track record in delivering the environment. We've reduced our carbon footprint by 73% since 2005/'06, and this is ahead of the target we set ourselves for 2020, frankly, no small part to 95% of our electricity usage being generated from renewable sources.

For many years, we've led the sector in our approach to catchment management, firstly, through our award-winning Sustainable Catchment Management Program or SCaMP, and now taking this further with Catchment Systems Thinking, working with the environment agency and other stakeholders. This approach delivers the best water quality and environmental outcomes in the most efficient way possible. And in the EA's annual assessment, we've been a top performer over the last 5 years, with particularly strong performance in the way we minimize pollution.

Moving on, looking at ESG. Good governance is in our DNA. Our annual report continues to win awards in array of investor indices, some of which are shown on the slide. We're particularly proud to have achieved world-class status in the Dow Jones Sustainability Index for 13 consecutive years. We've a strong track record on the trust and confidence that customers and regulators can place in the quality and transparency of our reporting. And we place great value on financial resilience. We have the strongest credit rating in the sector and a pension position that compares favorably to the most, if not all companies in the FTSE.

We talked much more about the transformation of our operational performance over AMP6 at our Capital Markets Day earlier this year. And I won't, therefore, repeat those sessions today, but have just selected a few examples, which you can see on the slide. Our focus on investing for resilience has paid off. Significant water quality incidents are down 69% across the AMP.

And as you can see on the slide, interruptions to water supply have been reduced by 39% through use of Systems Thinking innovation and investment in a large fleet of tankers or water on wheels. This is a critical measure under our AMP7 ODIs, and our performance in this area gives us an excellent start against this tough target.

I've spoken previously about our West Cumbria pipeline project, which is changing our raw water source for this community from Ennerdale to Thirlmere, and I'm delighted to report that we hit or beat all of our AMP6 ODI targets on this hugely complex project, earning a reward of GBP 21.6 million.

Moving on to wastewater. This business has also transformed. The net AMP6 ODI reward for wastewater, around GBP 45 million is an improvement of over GBP 130 million on our most likely outcome at the start of AMP6. We've been the top-performing company alongside Wessex under the Environment Agency's annual assessment with a top 4-star rating in 3 of the last 4 years. And we're a leader in our sector in reducing pollution and have delivered a 95% reduction in hydraulic internal sewer flooding. This is another key ODI measure for AMP7, and we're planning to do more in this area across the next 5 years.

As you know, our AMP6 ODIs represented a significant challenge being heavily skewed to the downside. When we started the AMP, the most likely net outcome was a penalty of over GBP 100 million. A combination of determination, innovation and huge employee engagement to achieve better has turned that around and delivered a net GBP 44 million reward. We have, on the whole, performed very well against our wastewater ODIs. And while some of our water measures have suffered from significant one-off events, we performed well and have been particularly pleased that our use of innovation has delivered strong performance against our leakage and average minutes lost measures, both key ODIs in AMP7.

As I mentioned earlier, the delivery of the West Cumbria project has not only earned us a GBP 21.6 million reward, but also through major investment in a new pipeline and treatment work, we've been able to establish a new benchmark for the advanced operation of a water system using Systems Thinking. Overall, a fantastic achievement on the part of the whole team and our performance for the AMP is likely to place us in the upper quartile of top ODI earners in the sector.

At our Capital Markets Day, we're able to go more fully into how Systems Thinking is giving us a competitive advantage as we transform the business. It provides us with a framework against which to prioritize those investments in processes, technology and people, which deliver the best return for customers, shareholders and the environment. Fundamental to our approach is the strong innovation culture we've developed, which ensures that we actively search out and rapidly test new ideas for application against our framework.

One example of breakthrough technology that we've recently developed in partnership with a global supplier through our Innovation Lab is the use of mobile sensors for leak detection, rather than relying entirely on fixed sensing that can become obsolete, 3 mobile sensors could mean searching at 1 end of the water network and extracted at the other. As they flow through the system, the 3 sensors triangulate, sending a reading every millisecond for analysis by artificial intelligence software at our Integrated Control Centre to pinpoint leaks and determine the likely severity.

Leakage is a key focus for the industry. And this is a low-cost, highly accurate and efficient technique that supplements others we're already using. Over AMP7, we have a stretching target to reduce leakage by 15%. And using innovation like this gives us the best opportunity to perform well against the ODI that carries a reward potential of up to GBP 15 million.

Now over to Russ.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Steve, and good morning, everybody. I'll start as usual on Slide 16 with the underlying income statement, which we believe is more reflective of business performance. The reconciliation of reported income statement is included in the appendix of the presentation, and I'll discuss some of the adjusted items in more detail on the next 2 slides.

Revenue of GBP 1.9 billion increased by GBP 41 million, largely reflecting the allowed inflationary impact on our regulatory revenue profile. Underlying operating profit of GBP 744 million was up GBP 59 million. This largely reflects the increase in revenue and lower ROE, which I'll cover on the next slide.

Underlying profit before tax of GBP 492 million increased by GBP 32 million. This is due to the increase in underlying operating profit, partly offset by higher underlying net finance expense due to higher RPI inflation applied to our index-linked debt and the share of underlying losses of joint ventures.

Our underlying tax charge of 13% is lower than the headline rate of corporation tax of 19%. This reflects the change we've previously signaled in how we derive our underlying profit after tax and EPS figures. We now present our underlying profit measures excluding the impact of deferred tax as is consistent with our listed peers.

The slide shows the prior year numbers restated on the same basis for comparative purposes. On our previous basis, including the impact of deferred tax, our underlying tax charge for '19/'20 would have been 19%, in line with the headline rate. Overall, another strong financial performance with underlying profit after tax of GBP 430 million, up GBP 22 million, giving an increase in underlying EPS of 5%.

So now on to Slide 17, which shows how COVID-19 has impacted the income statement. The revenue reduction of COVID-19 has been relatively small in 2019/'20 at around GBP 5 million, as a result of retailers marking business premises as temporarily vacant towards the end of the financial year, and therefore, reducing the wholesale charge. The ongoing uncertainty restricting businesses' ability to operate suggests that the revenue impact for UU is likely to be more significant in 2020/'21 as revenues from non-household customers are lower.

By way of illustration, for every 1% annualized reduction in consumption from non-household customers, we'd expect revenue to reduce by around GBP 4 million. At this point, of course, it's difficult to predict the likely volume reduction. And so we'll provide further update as the situation becomes clearer. It's worth remembering, however, that any shortfall in revenue is recoverable in future periods under the revenue control mechanism.

In addition to the revenue impact, we've incurred incremental costs totaling GBP 56 million in relation to COVID-19 that have been excluded from the underlying profit measures as an adjusted item. Of this, GBP 17 million relates to an increase in the bad debt charge recognizing the higher risk of future nonpayment of household customer bills. Our underlying household bad debt, prior to any COVID-19 impact, was 1.8%, in line with the first half results. This is down from 2.1% last year and 3.6% at the end of AMP5.

The impact COVID-19 has had on the ability of business customers to pay has resulted in a far more challenging operating environment for Water Plus. As a consequence of an impairment charge and higher bad debt expense at Water Plus, we've written down the value of our long-term interest in Water Plus to nil and have accounted for an expected credit loss of GBP 5 million on our loans to Water Plus. A further GBP 1 million has been recognized in relation to other non-household retailers.

So if we now look at Slide 18, this shows the adjusted items in deriving our underlying profit after tax and categorize the adjustment as either of those that are not expected to recur or those which will recur because they are presentational adjustments, which we consistently apply, positive or negative, every year. As flagged in our pre-close trading update, GBP 83 million of the adjustments not expected to recur relates to the accelerated depreciation of Bioresources assets that have been taken out of use. This does not have an impact on cash or on future revenues.

And as discussed on the previous slide, there is a further GBP 56 million of adjusted items in relation to the costs associated with the COVID-19 pandemic. The remaining adjusted items on the slide are all consistently applied presentational adjustments, a full description of which can be found in the announcement that accompanies this presentation.

Moving to Slide 19. This focuses on our underlying operating costs. In our view, we've again managed to maintain tight cost control on our underlying cost base, which is consistent with our AMP7 regulatory allowances. Total underlying operating expenses decreased by GBP 18 million. This largely reflects a GBP 22 million decrease in IRE primarily due to a planned reduction in the IRE program and phasing of capital projects with a significant element of IRE and the GBP 19 million decrease in property rates, primarily as a result of an GBP 8 million refund received in the year and an GBP 8 million reduction in accrued property relating to wastewater assets, partly offset by a GBP 10 million credit in the prior year resulting from the settlement of a historical commercial claim and a GBP 9 million increase in power costs, largely due to electricity price increases.

Moving on to Slide 20, this shows the statement of financial position. Property, plant and equipment was up GBP 358 million, and net debt was up GBP 294 million, reflecting expenditure on our ongoing capital program. Net debt is also impacted by the prepayment in April 2019 of GBP 103 million of the agreed funding deficit repair contributions in relation to the group's DB pension schemes, thereby increasing net debt.

Our IAS 19 retirement benefit surplus has increased by GBP 270 million, largely reflecting the GBP 103 million deficit repair contributions and a further GBP 130 million as a result of a temporary spike in credit spreads at 31st of March, 2020, due to COVID-19. This resulted in a temporary decrease in the valuation of liabilities as has been evident across most other U.K. pension schemes.

Cash and short-term deposits increased by GBP 189 million, and gross borrowings increased by GBP 547 million mainly due to additional finance raised in the year. Derivative assets increased by GBP 129 million, and derivative liabilities increased by GBP 64 million as a result of falling interest rates and a weakening of the pound in the year.

Other noncurrent liabilities have increased by GBP 381 million, of which GBP 317 million relates to an increase in the deferred tax liability. This reflects the allowable tax deductions on our capital expenditure and pension payments and a GBP 136 million tax adjustment due to the reversal of the planned reduction in the rate of corporation tax from 19% to 17% from the 1st of April 2020.

Retained earnings of around GBP 2.1 billion were GBP 147 million lower, largely reflecting retained profits of GBP 107 million and remeasurement gains on our DB pension schemes of GBP 155 million, more than offset by dividends of GBP 285 million and GBP 159 million (sic) [GBP 157 million] of tax adjustments taken to equity, including the impact of a change in the rate of tax at which deferred tax liabilities on our pension schemes are measured.

So now let's turn to the pensions thermometer on Slide 21. As I've said before, when valuing company's pension schemes, looking at 5 years of cash flows is inadequate and normalized IFRS currently gives the best indicator of relative value. The valuation difference between fully normalized IFRS and making no adjustment is 141p per share, and it's clear this is still not fully reflected in share prices.

The numbers in white show the progressive appreciation of this point by the sell-side analysts. The recent consultation from the pensions regulator is now crystallizing this issue, and I, therefore, hope to see more analysts incorporating a full normalized IFRS position in their relative valuations going forward.

So Slide 22 gives the pensions regulator's perspective. For over a year, we've been highlighting the direction of travel of the pensions regulator in challenging companies on how they address the risks they carry in terms of funding DB schemes. In March this year, the pensions regulator published its DB funding code of practice consultation that set out more clearly than ever its expectations of trustees and employers. It has proposed to increase the transparency and accountability of the risks being taken with TPR having more scope to act when its expectations are not met. Scheme valuations will be assessed as either fast track or requiring bespoke valuation based on a balanced assessment of the 9 criteria shown on this slide with a fast track assessment, reflecting best practice pensions and financial risk management.

So on to Slide 23, these ticks show where we think we'll be. The consultation is helpful and supportive of the actions that we have taken in recent years to derisk our pension position, and I would, therefore, be highly confident that we'll be assessed as fast track with no regulatory action needed. Our scheme is invested in low-risk assets and is fully hedged for both inflation and interest rate risk, and therefore, has minimal reliance on the company in order to meet all of its liabilities.

In other words, based on our 2018 valuation, we've already achieved self-sufficiency or to use TPR's latest terminology, low dependency. This is an important development for U.K. pensions. We're in a strong position, and I would not expect us to be required to take any further action in order to achieve low dependency.

Turning next to our robust capital structure shown on Slide 24. We continue to operate with our RCV gearing within our target range, supporting the A3 stable credit rating with Moody's on UU water. Our RCV gearing, taken together with our pensions position, gives us an extremely robust capital base, providing a high degree of resilience.

We'll complete this. I'll now consider the cash flow statement on Slide 25. Net cash generated from operating activities was GBP 810 million, largely reflecting operating profit adjusted for depreciation. Net cash used in investing activities was GBP 594 million due to net capital expenditure in the regulated water and wastewater investment programs. This excludes IRE, which is treated as an operating cost under IFRS.

Net cash used in financing activities is GBP 28 million, largely resulting from dividends paid to shareholders, partly offset by net proceeds from borrowings, reflecting the timing of finance raised in the period.

Slide 26 gives an update on our financing position. Over the 2015 to '20 regulatory period, we had a financing requirement totaling around GBP 2.5 billion. This was fully funded before the AMP, with subsequent finance raised prefunding our AMP7 requirement and providing a comfortable liquidity position. In total, we expect to raise GBP 2.1 billion of debt in AMP7, including refinancing, of which we plan to raise between GBP 500 million and GBP 800 million in 2020/'21.

We remain 1 of the sector leaders in the issuance of CPI-linked debt, increasing the CPI linkage in our debt portfolio to GBP 515 million through a GBP 50 million tap of an existing public bond that was simultaneously swapped to CPI. We've raised a further GBP 250 million of nominal debt through a public bond issue with an 18-year maturity. And we've also renewed GBP 50 million of committed bank facilities for a 5-year term and extended GBP 100 million of facilities out to 2026 under our GBP 800 million rolling bilateral program.

And Slide 27 gives an update on our cost of debt and hedging. As a reminder, our inflation hedging policy is to target around 50% of net debt to be maintained in index-linked form. The average cost of our GBP 3.5 billion RPI-linked debt is 1.4% real, and the average cost of our GBP 0.5 billion CPI-linked debt is 0.2% real, with the most recent issuances at lower rates reflecting the current interest rate environment.

With regard to interest rate hedging, our policy is to fix interest rates on our nominal debt on a 10-year reducing balance basis, thereby replicating a 10-year trailing average used by Ofwat. Our nominal debt portfolio, March 2020, amounts to around GBP 3.1 billion and is fixed, in line with our policy at an average rate of around 2.9% nominal.

The low-cost of debt that we've locked in has delivered significant financing outperformance in AMP6. And this, together with our strong credit ratings and treasury excellence provides the potential for delivering further outperformance in AMP7, subject to outturn inflation.

Now Slide 28, which shows the maturity profile of our debt portfolio in each year of AMP7. As you can see, in the first 2 years of AMP, we have GBP 1.1 billion of debt maturing with the vast majorities already covered due to our current robust liquidity position.

As I mentioned earlier, we aim to borrow a further GBP 500 million to GBP 800 million in this financial year to supplement our current liquidity position. The debt capital markets have been receptive to investment-grade corporate bond issuance underpinned by Central Bank buying programs, and we're, therefore, highly confident of achieving this target.

So finally, Slide 29, and to summarize, this is another good set of results in which we've continued to maintain tight cost control, while delivering high-quality service. The responsible stewardship of our pension schemes mitigate risk for pension scheme members and shareholders. This is a significant component of economic value and will become increasingly more important in the near term.

We maintain a strong balance sheet and robust capital structure with a responsible level of gearing, underpinning financial resilience for the long term. Our treasury excellence has delivered significant financing outperformance, and the low-cost of debt that we've locked in places us in a strong position for AMP7.

Thank you very much, and I'll now hand you back to Steve.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Thanks very much, Russ. I'd like to take the opportunity, before moving on to the final section, just to really say thanks to Russ for everything he's done over the last 10 years. As many of you know, Russ has decided to retire from United Utilities after the AGM at the end of July. And so this is really the last opportunity that we'll have to thank him amongst the financial community.

I think, for me, he's left us in a great position with AMP5 and AMP6 have been transforming for the business. We've done that, and his stewardship of the business has left us in root health, a good strong balance sheet, excellent treasury operations, great pension position. I think it's an envy really in terms of what we've done.

And I think I'm sure we're going to miss his tutorials over the years that we've had, particularly on pensions, but also ROIC, CapEx and everything else. So I'm not sure how we're going to supplant that excitement but notwithstanding that, he's been a great colleague over this period, and we're going to miss him, and we thank him enormously for what he's done.

I think the big thank you for me is also that Russ has carefully managed a team within UU to ensure that we have a fantastic successor in Phil Aspin and I wish Phil good luck because my luck is tied to his going forward. But thanks, Russ, thanks very much. And I just wanted to say that whilst we're all together. It's such a shame we can't do it face to face.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [6]

--------------------------------------------------------------------------------

Thanks. I'm rather glad it's not face to face because otherwise, you'd see the blushing going on here.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [7]

--------------------------------------------------------------------------------

Yes. Yes, at least the results presentation might be a bit shorter without the tutorials. But anyway, let's just move on. I think in our release this morning, I referred to the unprecedented situation in which we all find ourselves as a consequence of the COVID-19 pandemic. It certainly created a challenging backdrop to the start of AMP7, but I'm proud of the way in which we faced into the issue and supported customers, colleagues and our supply chain partners through the lockdown.

As I said earlier, our strong balance sheet and extensive liquidity give confidence in our resilience to this scenario. I think it's clear that the U.K. has some way to go before we emerge out the other side of the pandemic. And no one can predict what its impact will be on the economy and on our customers.

We're very conscious of the importance of our dividend policy to our investors. They include pension funds, charities, employees and many thousands of retail investors for whom income is never more critical than this time. And so we're pleased that our good performance across AMP6 supports payment of the full year dividend this August.

We set our dividend policy for AMP7 in January. And now is not the time for our Board to consider whether COVID-19 would lead to any change. But we will review the position once the economic situation becomes clearer, in the context of the inflation scenario in particular and the economy more widely.

Moving on to Slide 31. You'll see the acceleration or you know the acceleration of CapEx spend in AMP6 proved to be a successful strategy in delivering early service improvements and greater outperformance against ODIs. Now we plan to do the same again in AMP7, and this slide shows our planned spend in comparison to the final determination.

As I mentioned earlier, we invested GBP 100 million in the last year of AMP6 to achieve a flying start to AMP7, but that's not included in this chart. Fast track status has given us early visibility of our targets. And we've already awarded the first tranche of our capital program to our capital delivery partners at a value of around GBP 300 million, and the next tranche of around GBP 250 million will be awarded in the next few months.

As I mentioned earlier, we've continued with the majority of our construction program throughout the COVID lockdown to maintain momentum on our capital program. We're maintaining a close and constructive relationship with our regulators in addressing any potential issues arising out of COVID restrictions to find workarounds.

Slide 32 shows our ODI picture. And it provides -- this slide provides an overview of our common ODIs for AMP7. These are the ODIs applying to all companies across the sector. And in some areas, we're already a sector-leading, such as pollution and in others, such as internal flooding, that represent a significant challenge for us. We targeted our flying start investment in those areas, which represent the greatest challenge. And we've spent the time since confirming our final determination, revisiting our plans to understand where we can further improve our performance against the ODIs, particularly those that are the most challenging. As a consequence, we're seeing more opportunity for improvement through use of Systems Thinking, supported by innovation -- innovative application of new technology. Again, you'll find more detail on these ODIs and our plans in the material we presented at our Capital Markets Day.

The next slide shows the basket of bespoke ODIs which emerged as being of particular importance to customers as we were formulating our business plan. These ODIs generally provide greater opportunity to outperform where we deliver truly exceptional performance. When we've got more AMP7 performance under our belts, we'll provide guidance on our anticipated ODI outcomes across the AMP. We're excited about the opportunities for outperformance they represent, and the business is very clear about our plans in this area. We're targeting net ODI outperformance in 2020/'21. And we'll update you on our progress against our ODIs and our AMP7 business plan more generally at our next Capital Markets Day in early 2021.

So in summary, as you can see, our strategy for AMP6 is delivered to customers, shareholders and the environment. We're a transformed business, having shifted performance from lagging to leading over AMPs 5 and 6. We've delivered over GBP 600 million of outperformance in AMP6 of which GBP 350 million has been shared with customers through investment in service improvements. We've responded strongly to COVID-19, underpinned by resilient operational performance and a robust balance sheet. We're well prepared for AMP7, having invested GBP 100 million to get ahead of the curve on our most challenging ODI target areas.

Systems Thinking is delivering value for customers and shareholders, and we're excited about the potential for it to deliver even more in contributing to our future outperformance.

And finally, I'm lucky to have a great team in UU with a proven track record with plans to deliver even more in AMP7.

So thank you very much for listening. And I'd now like to invite questions before we go over to those that come through on the webinar.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) So our first question comes from Dominic Nash from Barclays.

--------------------------------------------------------------------------------

Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [2]

--------------------------------------------------------------------------------

A couple of questions from me, please. Firstly, on guidance on 2020-2021, which I know that you've not given us very much. Steven, you've tried and obviously gave us a stab at the volume impact of GBP 50 million to GBP 85 million. And you've given us that 1% consumption is GBP 4 million. But is it possible to give us a view on what the run rate on volume changes, which you've got on industrial and residential are? And what your view is on the impact and -- on the revenues that you get on a run rate basis?

And secondly, on bad debt, what was your bad debt this year? And could you just give us a view of what -- how we should be looking at where your bad debt could go to in various scenarios going forward, please?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Yes. Dominic, thanks for the questions. I think I'll pass both over to Russ to go through the detail. I think I gave you some of that during the presentation, but he'll pick it up.

I think the issue, clearly, before Russ gives you the detail, I think I must just give you a sort of overview. Clearly, the major issue has been the business retail market with a lot of companies actually closing down operations. And that's the area where I think the industry in conjunction with Ofwat has moved quickly to be able to address that and to sustain the retail market. I think in the domestic area, as you've seen, we've provided for increased bad debt, our run rate essentially through the year has been consistent with the half-year position. And I think at this point in time, we're not seeing significant increase in domestic bad debt. We're seeing perhaps changes in the way that customers are paying. So people that might use payment cards are not going out to use them, but we've got many other different forms of payment available which allows them to substitute. So to that extent, I think we might find that we're in something of a bubble at the moment with what we're seeing around furloughing and the degree of support there is. And it might well be that what we'll see once furloughing ends, and we actually see the true impact on the economy from a jobs perspective, that we might see a movement. But Russ, do you want to pick up the detail against those 2 questions?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [4]

--------------------------------------------------------------------------------

Yes, sure. So first of all, on the bad debt point. The underlying rate that we have is, as I said, 1.8%. The reported number that we have is 3.1%. So that difference is -- in household bad debt is an accounting provision that we've made under IFRS 9 expected credit loss methodology. So the expected credit loss methodology in IFRS 9 is something which came in relatively recently. Banks, I think it's fair to say when IFRS 9 was implemented, put that in with a good forward-looking view. Corporates, I think, found that very difficult to do. And so most corporates' bad debt methodology is based on past track record.

We took a view with COVID-19 that the past could not be a predictor of the future. And so we've analyzed that in 3 different ways to come up with this estimate that gives us top-up in the provision from 1.8% to 3.1% at the year-end. That obviously means that provided we stay within that 3.1% was sort of covered going forward.

For the new revenues, obviously, if they were to be in that sort of 1% higher level, that would affect the new revenues going forward. But I think it's very difficult to predict. If you look back at the last time that we had a major turndown, which would have been in the global financial crisis, there was roughly a 1% increase in bad debt at that stage. This is obviously quite different from the global financial crisis, in that, it's a much sharper, shorter shock, and it will all depend on how quickly we recover from that. The other thing that's quite different from the last global financial crisis is that our bad debt collection mechanisms are much, much better now, as you'll have seen from the ongoing trend.

As to the run rate in Water Plus, I mean, I think Steve and Phil are now directors there. I haven't been a director there for the last couple of months, but my understanding is that they've seen quite a lot of businesses take their -- do what they call is a void. It's where the business closes down and they say they're not using water. And so the meter either stops or they take themselves off of -- onto an assumption of no consumption, which then reflects into our wholesale charge. I think that's been quite significant. And I think they're expecting significant failures, particularly in the SME market. But I think as to what that number would be, we're not actually going to give guidance. I noticed that we've had a stab at it yesterday, but we think it's a bit too uncertain to give guidance on that. We should probably come back to that half-year result when we've got a better view of how quickly we've returned from the sort of COVID-19 restrictions and how many of the businesses bounced back to businesses as usual and how many are actually sort of slightly damaged.

--------------------------------------------------------------------------------

Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [5]

--------------------------------------------------------------------------------

So the GBP 4 million or 1% change in consumption, I mean, would it be fair to say that you're probably seeing consumption down of 10% or so in business?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [6]

--------------------------------------------------------------------------------

Yes. Yes. That's reasonable at the moment. But as I say, the going-forward position is very difficult to predict, and we'd like to sort of give you further insight to that once we've got a bit more experience under our belts, if that's okay, Dominic?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [7]

--------------------------------------------------------------------------------

So Dominic, without wanting to prolong it too much, there are 2 factors, I think, that are influencing here. First is, one of the things that we've done over the last few weeks is revisit the issue of social tariff arrangements. And we just secured agreement to an extension of social tariff for domestic customers, which will extend the support we can give on reduced bills for about another 35,000. So that is going to improve the position for us in the context of bad debt, and essentially, we'll be able to help more customers through some form of payment arrangement. So that's a positive for us. And that's really something that will only kick in from here on, which we didn't have that in the last financial year.

I think the other element in the context of the business retail market, a, it's going to be driven very much as to what the impact of recovery after a lockdown is going to be. In other words, how quickly businesses get up and running. And obviously, we're seeing quite a lot of activity now in companies that will start to kick off activity, especially in the construction area. The other aspect, as you're probably aware, is that part of the discussions with Ofwat have been to cap bad debt to retailers and to effectively is fair to be a recovery mechanism over that cap, which, again, has been very useful in, if you like, limiting the exposure that both retailers and wholesalers will have to the market. So all of us, that applies, but there are some positive movements that have been made since we were hit by COVID, which has -- actually has helped in reducing that potential liability.

Okay. Can I move to the next question, please?

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We now have a question from James Brand from Deutsche Bank.

--------------------------------------------------------------------------------

James Brand, Deutsche Bank AG, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

I had 2 questions, please. First is on the dividend. I was just wondering whether there was anything more you could say around the dividend in terms of maybe trying to help us understand what the key crunch points might be. Obviously, if you -- if we go into a deflationary environment for the next 4 or 5 years, it's going to be very hard for any regulator, as you said, to maintain dividends. But is that what you're most worried about? Is it lower inflation? Or are you more worried about retail bad debts? Or any kind of an extra information on, as I say, what you're most worried about there? And how much of a deterioration you perhaps need to start to really worry about the dividend? Is it the dividend? It's already very, very tight and just a small deterioration could push you over the edge? Or do we really need to do something very significant for you to be thinking about changing the policy?

And then -- and the second question is on outperformance in the sense of totex and ODIs over the 5-year period. Obviously, there's a clear impact from COVID on bad debt. Hopefully, that's limited on the I&C side by Ofwat's actions, but a clear risk there. But if we're thinking about totex and ODIs, does COVID change significantly how you're thinking about your ability to outperform on -- in those 2 areas? I guess there are some near-term pressures on some of the ODI measures from everyone being locked down. But over the period, over the 5 years, does your thinking change very much in those areas?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [10]

--------------------------------------------------------------------------------

Yes. Thanks, James. I'll pick those up. Because I think on the dividend, I think it's -- the conversations that we had around the Board table, essentially, having set the dividend policy for AMP7 back in January before COVID. We were -- well, you could -- you might imagine, we've been doing quite a lot of scenario modeling going forward. And as I said, when we talked about the AMP7 dividend, it was about our expectations in the context of the business plan, our targeted levels of outperformance, both in [2020] in all regards, really, financing. But of course, in AMP7, the operational outperformance on both ODIs and totex take a greater proportion of the overall anticipated outperformance and essentially ensuring that we maintain credit ratings and a robust balance sheet as we go forward because, obviously, we've got a -- this is a long-term business.

I think the issue for us in terms of prime sensitivity is as far as ODIs and totex outperformance, obviously, we're seeing what is -- what today looks like to be a relatively short-term impact of COVID in lockdown. So we're having to move people to home. We've got IT costs. There's an element of a cost expenditure associated with it, but also cost savings that you see when you're in a COVID lockdown environment. But what we've sought to do is essentially keep driving to the business plan that we have for AMP7. Essentially, if we can keep construction going, and we largely have; if we keep people focused on delivery of the business, which we largely have, then we can keep a grip on our performance on ODIs and totex. And I think those are areas within our control, and there's nothing we've seen at the moment, which would cause us to be particularly worried about those areas.

There are some ODIs, which patently are very difficult to achieve in this environment. And the obvious example is per capita consumption. The whole industry has got an objective to reduce their capital consumption across the AMP this year. And certainly, the start to AMP7 has helped because obviously, we're encouraging people to use more water for sanitation. But I think that's an area where the regulators said, once we get to a reasonably the other side of this, obviously, there's a butcher's bill to work out for the end of the first year of the AMP. Then they'll look back as an understanding what impact COVID had and whether they adjust or not, I'm not sure, but there are some obvious examples where we should at least talk about it.

So we're less concerned about ODIs and totex at the moment, and you've seen the short-term impact of COVID. I think the principal driver here, and it's not unique to us, it's obviously, as you say, it's a model issue in the way the business model works for utilities is inflation. And clearly, when we set our AMP7 dividend target, we had a range of potential outcomes associated with inflation. Nobody really knows where inflation is going to go. Some commentators say it's going to fall. Some commentators say it's going to go up. But I think we thought that it was only appropriate and balanced to essentially point to inflation as the principal driver outside of our control, which may cause us to at least take a look and potentially revisit the policy. But there is no information or evidence, it's too soon to do that. And so it's likely to be something that emerges as part of a review going forward rather than something that we actually think is necessary today. But we felt that it was appropriate to at least flag that issue so that you could understand it. I'll let Russ or Phil pick up specifically that item.

I think -- so I think I've probably covered off both of your questions there in terms of the overall impact, yes? Russ, do you want to add any color to that in terms of inflation? You might be on the mute button.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [11]

--------------------------------------------------------------------------------

Sorry. Yes, you're right, I was. Inflation obviously is relevant to the dividend and to the totex because our allowances for the totex go up with inflation. And on the dividend, of course, as James rightly said, all companies in the utility space will find it more difficult with very low levels of inflation. So I think you really covered it, Steve, if that's okay?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [12]

--------------------------------------------------------------------------------

Yes. So that was the -- that's the background. But at this point, James, there just isn't the data or the evidence to reconsider. So we'll review that probably before we get -- I mean, we've clearly got a half-year review in November. And then I think where -- with the full year, it's probably more likely when you get a better picture. I mean November is actually quite close in the current environment.

Okay. Any further questions?

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

We now have a question from Jenny Ping from Citigroup.

--------------------------------------------------------------------------------

Jenny Ping, Citigroup Inc, Research Division - Director [14]

--------------------------------------------------------------------------------

A couple of questions from me. Just a follow-up from the previous 2 questions. One, just on dividends. In terms of the time frame for division, I mean, you're right at the end there. Steve, you mentioned half year or maybe full year results is timing for review. Is that full year, I guess, is where we will have better visibility on when you can communicate and commit to the dividend for the remainder of the AMP? First question.

Second question, just in terms of going back to the volume, can you tell us what is the net volume reduction in April and May that you've seen both in terms of meet domestic and nondomestic?

And then just lastly, just to understand the power price impact. I note that you've had a step-up in terms of power price in the reported figures today. But how should we think about the fall in commodity prices as we look forward into AMP7? How well-hedged are you? And if you can say something a bit on -- of what allowance where -- versus where your hedging positions are? That would be great.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [15]

--------------------------------------------------------------------------------

Okay. Thanks, Jenny. I think I'll pick up the dividend question, and I'll let Russ or Phil pick up the power issue.

As far as dividends are concerned, yes, I think you're correct. I think half year is probably going to be too soon to review the position. I think none of us really know what the position has been, but it's likely that having a year under our belt and understanding whether we're going to see a short-run effect or a long-run effect of COVID, I think, we'll probably be more likely. So I suspect that it's more likely to be around full year that we'll have reviewed it in the context of what's going on in the U.K. and global economy. I do think when we've looked at it half year is very, very close now and unlikely to be a point at which you could really start to take a view of what the world looks like.

As far as volume is concerned, Russ, do you want to pick up on that? I know we've already talked about it, either Russ or Phil? Who wants to -- Phil, do you want to pick up?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [16]

--------------------------------------------------------------------------------

Yes. Give that one to Phil. About April and May, I mean, basically, domestic consumption is up and household -- and business is down. So we've got the numbers right, April and May.

--------------------------------------------------------------------------------

Philip Anthony Aspin, United Utilities Group PLC - Group Controller [17]

--------------------------------------------------------------------------------

I think, Jenny, just to sort of start off, I think, it's probably worth citing that clearly, volumes are linked to meter reads in each of these cycles. So obviously, you need to go through a period of time to build up that means that we can have sort of information to get the clarity of the data. We are clearly seeing an increase in household consumption. So household consumption is up modestly, although, of course, about half of our household space is metered, half of them are metered. So the feed-through to revenue is relatively muted.

In non-household space, clearly, many businesses actually shut down for the lockdown process. So we are seeing sort of volumes down sort of probably in the order of 30%, 40%, and I think that the challenge for predicting the full year position is really trying to understand how businesses come out of lockdown and how economic activity picks up. So that's really the key challenge in estimating the full year's position.

--------------------------------------------------------------------------------

Jenny Ping, Citigroup Inc, Research Division - Director [18]

--------------------------------------------------------------------------------

Sorry, when you say modestly for domestic, you mean what, 5%?

--------------------------------------------------------------------------------

Philip Anthony Aspin, United Utilities Group PLC - Group Controller [19]

--------------------------------------------------------------------------------

That's the order of magnitude, yes.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [20]

--------------------------------------------------------------------------------

Yes. I mean if you look at the overall production of water, which is probably a good measure for us, then we are producing more water at the moment to meet demand, notwithstanding the reduction in industrial consumption or business consumption. So yes, we -- and that will be all supported largely by the domestic base. Power, Phil?

--------------------------------------------------------------------------------

Philip Anthony Aspin, United Utilities Group PLC - Group Controller [21]

--------------------------------------------------------------------------------

Yes, in...

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [22]

--------------------------------------------------------------------------------

In power prices, obviously, the oil price momentarily went negative at one stage, but it's bounced back quite a lot. Our view on electricity hedging, it is electricity rather than oil that we deal with, is to have a hedge policy to basically try and beat the regulatory allowance. Our policy is to hedge over 80% for the current year, over 60% for the following year and over 50% for subsequent years. But you should bear in mind that only about 50% of electricity prices can be hedged, i.e., the commodity element, whereas the rest can't be hedged by the use of transmission distribution systems, climate change, levies, et cetera. Our actual position as of 31st of March was compared with that policy of 80%. We had 86% of electricity hedged for 2020/'21, 72% for '21/'22 and around 50% for the rest of the AMP.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

We have one more question from Fraser McLaren from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [24]

--------------------------------------------------------------------------------

Just 3 brief questions, please, if I may. First of all, has there been any political or regulatory pressure in relation to the steer that you're giving on the dividend?

Secondly, could you confirm, please, how you will account for volume variations this year? Will they be included in the underlying numbers, a pending recovery later?

And then finally, just on your remarks on inflation. I mean you run a relatively high proportion of index-linked debt in order to provide a hedge against inflation variables. Just wondering why that's not providing you with more protection than seems to be the case?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [25]

--------------------------------------------------------------------------------

Okay. Thanks, Fraser. And yes, we are all well. Thank you very much. I hope you and yours are too. As far as the dividend is concerned, then, no, we've not had any political pressure. I mean, clearly, we've not been subject of any government support in this. We've not furloughed anybody. We've not been accessing any government support at all. And so essentially, the position that you're seeing today is entirely the decision of the Board without any form of pressure or interference. So we're satisfied there. Russ, do you want to pick up on volume variation and inflation, the debt issue?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [26]

--------------------------------------------------------------------------------

Yes, sure. On volume variations, yes, they would go through underlying. You may notice that on revenue, we, I think, never have adjusted items in revenue. We only tend to look at cost items where there's a clearly identified unusual cost. Only those tend to be adjusted items.

And then finally, on the inflation point, I mean, you're quite right. We do have a higher inflation hedging policy than some others in the sector. And that's why I said in response to James' question about inflation. But yes, we would expect others in the sector to be affected as much, if not more so, than us. So if you look at our RCV, we've got about GBP 12 billion of RCV, and we've got about GBP 4 billion of index-linked debt. So about GBP 8 billion is sort of exposed to inflation one way or another. And I think if you do that calculation for the others, you can see their sensitivities. So yes, this is a sector issue, absolutely. And yes, we are slightly better protected from inflation than several others in the sector.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [27]

--------------------------------------------------------------------------------

Okay. Fraser, does that answer your questions.

--------------------------------------------------------------------------------

Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [28]

--------------------------------------------------------------------------------

Okay. Thank you.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) We have a question from Lakis Athanasiou from Agency Partners.

--------------------------------------------------------------------------------

Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [30]

--------------------------------------------------------------------------------

Just a couple of questions. First one on prospects for deferral of payments by households. You don't seem to be saying that as that's going to be the major issue. Okay, there's going to be bad debt, 1%, 2% whatever. But you're not seeing any pressures from large-scale household deferrals. I mean is that correct interpretation?

The second thing is just on the outlook for your operations this year, 2021. I seem to be picking up, I just wanted you to confirm you're really going to be pretty much in line on OpEx and CapEx given you're a bit of jiggling around on projects. And I think you also mentioned that you'd expect a little bit of outperformance in ODI coming through for 2021.

And the final thing is your interest charge, not really sure I understand what your concerns with inflation are. Certainly, in the near term, a year or 2, if inflation drops, you're going to have a massive drop in your interest challenges this year. I mean, massive. And lower inflation won't really feed through to revenue until '21, '22. So I can't really understand why you're concerned about inflation so much?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [31]

--------------------------------------------------------------------------------

Okay. Thanks, Lakis. Good to hear you're well. I think in terms of -- I'll pick up the first 2 questions, perhaps pass the interest charge to Russ so that he can pick up that with you and sort of give you a better understanding.

I think as far as deferral is concerned, you're probably aware that we've had within our sort of range of schemes, we've had things like payment holidays or payment breaks running for some considerable time. It was very important here in the northwest because we were one of the first areas for rollout of universal credit. I think as you remember, in that situation, people were struggling for a number of weeks until the revised credit benefit arrangements came through. So we started introducing payment breaks or deferred payment. I don't think we're seeing -- that clearly we are seeing people coming through, and we are actually talking about payment holidays because it does actually help people deal with debt if they know that they can defer a payment to a later date. It also means as far as we're concerned that we actually keep them on a payment plan rather than lose them as customers, and they just become -- we become another creditor in that sense. So I don't think we're seeing a very significant movement in that at the moment over and above what we would see sort of washing through the business as different impacts apply. So not a particular concern there.

I think as far as 2021 is concerned, yes, you're right. We've very much set in our minds to looking to deliver our plan. We have seen areas of opportunity for accelerating CapEx spend, as I said earlier. We've shown you how that sits against the final determination. And that's really all about actually getting earlier benefit into the business for either customer service, or more particularly, for ODI performance. And yes, you're right, we are targeting, as you call it, a small outperformance on ODIs in year 1. I think it's important for us that we have the confidence that what we're doing is delivering value. So yes, I -- your interpretation of what I've said is correct. Russ, do you want to play through on the way Lakis has looked at the time impact of these different factors? I think you can...

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [32]

--------------------------------------------------------------------------------

Yes, I think, Lakis, you're quite right, of course.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [33]

--------------------------------------------------------------------------------

Russ, just before you do that -- sorry, we're not in the same room, Lakis, which is why we occasionally cut across each other. I think the issue for me is, Lakis, you've identified there's a number of moving parts here, which is essentially why the Board has flagged that we need to look at it, but effectively, not now. Because as you say, there are a whole series of factors at play here. But Russ, pick that up, please.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [34]

--------------------------------------------------------------------------------

Yes. So I mean, you're quite right, Lakis, in the short term, the inflation isn't a huge problem if it drops. And our inflation hedging policy actually puts us in good shape because of the -- we've got about GBP 4 billion of index-linked debt, 1% inflation drop, that's GBP 40 million of the interest charge. And when you look at revenue, a 1% increase -- reduction in inflation of about GBP 18 million off of revenue with a lag effect. The effect on revenue, of course, is cumulative, and the effect on inflation is sort of the same amount every year. So if you roll that forward and you imagined a 1% inflation reduction for the whole of the 5 years, then the revenue numbers would accumulate whereas the inflation was just the effect on interest, which is GBP 40 million every year. So that's kind of how those 2 numbers play through.

There's also, as I said, there's an impact on your totex allowances that makes your totex a bit tighter, if there's low inflation. But it's also impacted through credit metrics, but also has impact on RCV growth, et cetera. So one -- so when you model it all through, which you can do that way, you'll see that if you keep the inflation significantly lower than the regulatory allowance for the whole of 5 years, then it starts to get a bit tight. And it's our sort of abundance of caution really that we are reflecting in our statement because we can see that, and we think it's right that you should see that. It's not a UU-specific thing. It's something that should be relevant, I'm sure, for many companies in the sector. But we think it is appropriate and prudent to flag that given that nobody really knows the long-term impacts of COVID. And I think, that's why we're saying let's wait see. We'll be in a better position, I'm sure, at the full year. Maybe we'll have further insight at the half year, but I suspect it will be the full year before we've really got a good feel on the effects on inflation in the long term.

I mean it's fair to say that over the past regulatory period, the regulators' assumption on inflation has been pretty close over a 5-year period. And so if inflations were significantly below the rate of allowance for the whole of the 5 years, that would be a new territory. So I think you should see it in that context, buckets, and hopefully, that enables you to sort of triangulate between the different ways that you can look at this inflation issue.

--------------------------------------------------------------------------------

Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [35]

--------------------------------------------------------------------------------

So you're saying it's more a long-term issue rather than an immediate 1- or even 2-year issue?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [36]

--------------------------------------------------------------------------------

Yes. If they were expected to be a long-term issue, then I think that would be something which would make a number of us have to think.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

We now have a question from Robin Jenner from BEA Systems Pension (sic) [BAE Systems Pension].

--------------------------------------------------------------------------------

Robin Jenner, [38]

--------------------------------------------------------------------------------

I just wanted to give you a slightly bigger-picture question. I guess, although we don't know the exact shape of recovery and so on, I'm just interested whether you start thinking about how much the change in the ways you're working and being forced to work will have persistent impact on the business. But -- and you may have found things that worked better than you expected and you want to do more of it in the future. You may have -- it may have exposed issues in your business that you didn't really know you had. So I'm just wondering have you started to think about some of these new ways of working persisting, either by force or you want to? And whether that's an opportunity or a problem?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [39]

--------------------------------------------------------------------------------

Okay. Thanks, Robin. So was that BAE Systems Pension that you're with?

--------------------------------------------------------------------------------

Robin Jenner, [40]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [41]

--------------------------------------------------------------------------------

All right. Okay. Good. My best wishes for the future as an ex-pensioner. The -- I think the -- it's a really interesting question, I think, that's actually challenging a lot of organizations. As I mentioned earlier, we've moved to about 60% of our population working from home. And obviously, what we have is a skeleton of people working in our center, in our integrated control center, and then obviously, all of those individuals that are on operational sites and in the field. Certainly, moving such a significant number of people to homeworking, I think, has firstly accelerated what you would potentially see as being sort of digital evolution of your business. And I think it's opening up opportunities to consider, actually, what would your work business model be going forward in terms of the mix between office-based and homeworking. And I think the questions we're asking there are about how -- what would we keep doing going forward that we're doing today and what would we revert back to some of our previous arrangements. And I think one of the principal questions for us is, with such a significant homeworking base, how does one measure productivity in the context of understanding the productivity you're getting in a home-based environment as compared to work. But I think what it's also doing is showing us that we potentially can create more flexibility in the labor base available to us if we can use a greater proportion of homeworking. So I think that's sort of 1 component of what we're doing.

It's clearly causing us to rethink the way that we go about operating, and certainly, some of the management processes that we have with the flow of data. I think actually, we're becoming more efficient because it's such a pain doing everything over a phone. And so we're getting more focused on the things that we're doing. We're more focused on our management reviews, et cetera, et cetera. I think the bigger impact, in turn, for us in terms of change is really the all part of this drive for Systems Thinking, where we've made a very significant shift in the use of technology in the way that we monitor our business.

I think I've mentioned before, when I joined the sector, which is nearly 10 years ago now, I was quite surprised coming from a technology-based industry. And you probably know, I started my working life in BAE Systems. I was quite surprised that the way that the technology that almost passed the sector by in terms of use of information, what we're finding now with the cost of sensors falling so much, with the rapid growth in the use of machine intelligence, not just the growth in the use but also the agility of machine intelligence and how quickly one can produce applications that allow you to use the data that you have, that is making a very significant transformation. And to give you a good example of that, I've said today and before that the challenges we have around sewer flooding are very difficult. And we've -- on 2 price reviews, we've been talking to our regulator about special allowances to take into account the circumstances we have here in the Northwest, most of which have been unsuccessful. And so we had one of those moments where we said, well, look, we're just going to have to think of a completely different way of doing it. And I have to say the team has been marvelous in literally taking Systems Thinking approach and looking at how one would take a radically different approach the way that we manage our sewer network.

So there are -- so I think there are combination of factors that are driving what I would see as a broader strategic direction for the sector. But I think certainly, COVID has accelerated the digital environment for companies like us, probably by several years by needing to do what we've done in implementing contingency plans. And I don't think businesses as it was will be -- will apply. I think we will have new norms as we go forward. And we have a team that is currently looking at the return environment and what would we do differently. So yes, I think it's a fascinating subject. And I think it's one which is actually -- which is, I wouldn't say testing, but is an opportunity for most companies to look at what they've learned and what actually they've discovered they can do as a consequence of the pandemic. Thanks for the question. It's one that we -- I'd love to talk about for hours, but we don't have time.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

We have a follow-up question from Fraser McLaren from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [43]

--------------------------------------------------------------------------------

Just 1 brief follow-up, please, if I may. You mentioned that inflation was the primary variable. Just wondering where on your risk list, bad debt features?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [44]

--------------------------------------------------------------------------------

I think it features, but we see it as relatively small compared to other risks arising out of COVID. I think, as we say, there's been a huge amount of work with the regulator and with industry to address the business retail risk. But if you look at the consultations and decisions that have been taken there, the risk to both retailer businesses and wholesaler, therefore us with Water Plus and UU Water, is capped. It's the repayment timescale for that, that is now the issue that we are resolving with the regulator.

And as far as domestic is concerned, so far, as I've said, the impact has been relatively small in terms of bad debt. And I think we just introduced tools, which allow us to address that. So they're not significant compared to the impact that inflation might have.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [45]

--------------------------------------------------------------------------------

Just to add...

--------------------------------------------------------------------------------

Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [46]

--------------------------------------------------------------------------------

Can I just -- I am sorry, Russ, you can go.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [47]

--------------------------------------------------------------------------------

If you looked at the sort of middle bit of our RNS, you'll see that we've got quite an extensive section on risk, and it's actually gone further than in the past because we've historically shown principal risks, which cover -- the 10 risks that cover the whole of the business. We've also shown some detail from our risk register, which is event-based. And bad debt per se is not one of the top 10. The top 10 are mostly relating to operational matters. COVID-19 has pulled out, and it's obviously an emerging risk, which is obviously crystallizing at the moment. There's a bit of commentary on that in there as well.

--------------------------------------------------------------------------------

Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [48]

--------------------------------------------------------------------------------

So as a shortcut, can I just ask what would be #2 on your risk list after inflation? What would you worry about most after inflation if bad debts is much farther down?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [49]

--------------------------------------------------------------------------------

Well, if you look at our event-based risk, which is -- which I think is the best way of looking at it because that is actual things that could actually happen in a short space of time, if you know what I mean, the one that we've put top of the list of event-based risk is around failure of water supply systems. Now that's not what we particularly think is going to happen right -- here right now, but it would have a huge impact. And so we call that out as our biggest operational risk.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [50]

--------------------------------------------------------------------------------

Okay, Fraser. Thanks very much. And any other questions?

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

We currently have no further questions. So Steve, I'll hand back to you.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [52]

--------------------------------------------------------------------------------

Okay. Thanks, Rachel. I think we'll move on to the webinar. We've got a number of questions there.

The first was from Martin Young at Investec. And I'll read them out. But I think -- so that everybody can hear the question and answer. But I think the first question was your friends at Severn Trent referred to a temporary spike in credit spreads as a contributive factor to a lower IFRS pension. Has your IFRS position benefited in the same way? And if so, by how much?

And I think we actually addressed that in the presentation, Martin.

You have classified COVID-19 as adjustments not expected to recur in your bridge to underlying PBT and retail bad debts are part of that. Surely, there's a risk of elevated bad debt levels in FY '21 and beyond and potentially above the assessment you've made today. Given this could have your -- could have multiyear implications, should it not be included as an underlying item? Do you want to address that, Russ?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [53]

--------------------------------------------------------------------------------

I'll certainly take that. So COVID-19 only really kicked in, in the last 2 weeks of the year. And it's really kicked in, in terms of provisioning at the end of the year. And so we've got a very, very specific set of numbers, which are directly related to COVID-19. And we believe that the whole purpose of underlying operating profits to allow a fair comparison year-on-year, and by stripping out those provisions that are done at the year-end, we've got a good comparison between 2019/'20 and the prior year. So we think that's the right thing to do in these results.

You're right that going forward, there could be either higher or lower than we've assumed. But we think that's likely not to be treated as an adjusting item next year because it's going to be quite difficult to untangle that from what is actually happening as a consequence of our ongoing business.

Now clearly, if we didn't need the provision at tools, then we could reverse it back through an adjusted item. But if it was there or thereabout, I don't think we'd make an adjusted item. And if there was an ongoing high level of bad debt, I don't think that would be an adjusted item either. So I think it's -- that's why we said we think this is not likely to recur. We don't expect to do an adjusted item in the coming year. But obviously, our final judgment will have to be taken in the light of the knowledge that we have at the end of the year as to what were the actual effects? Are they substantial? Are they clearly distinguishable? Or are they just sort of mixed up with a normal stream of business?

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [54]

--------------------------------------------------------------------------------

Okay. Thanks, Russ. Martin had a third question, which is given Russ' comments to reinflation, do you have any scope for requesting in-period regulatory changes if financeability becomes stretched?

I think, Martin, I'll pick that up. The -- certainly, in the conversations that we've had with Ofwat, then Ofwat has effectively acknowledged that clearly COVID will have an impact on the sector. I think they've given an undertaking that as we approach the end of the first year, in particular, they will look back to see what that impact may have been again on a sector basis. So I think we have that. We don't know what that's going to evolve. But obviously, as I said, there are some ODIs, which are, obviously, undeliverable in this situation.

But I think the other element, of course, is if the companies find themselves in extreme difficulty, then you do have a regulatory mechanism for effectively appealing to the regulator. But that is in very extreme circumstances, and I think, is really used. But I don't think at this point that we see that as being necessary. But yes, you're right. There are aids undertaken by the regulator as a consequence of COVID, and then there are more formal appeal mechanisms anyway, which exist in the framework -- in the regulatory framework.

We have a -- we have 2 questions from Deepa at Bernstein. First is what do you see is the impact of bad debt under various COVID scenarios as a percentage of revenues? My calculations of 1% to 2% on revenues adds to additional bad debts of GBP 18 million to GBP 36 million. Russ, I think you'd probably picked that up, didn't we?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [55]

--------------------------------------------------------------------------------

Yes. Yes. I think we've said that at the last credit crisis that we had in the TSC, it is about a 1% effect. So I think if you're going for 1% in your model, I can't really disagree with that.

At this stage, we might have further insight when we get to the half year or the full year. But -- and yes, your calculation of multiplying that up by the revenue is correct. Obviously, part of that revenue is household and part is non-household, and the non-household has some sort of protections around it and also, of course, the revenues have protection through the revenue correction mechanism and so on. But yes, I think in simple terms, 1% on the bad debt as GBP 18 million isn't a bad estimate at this stage, given that there's a lot of uncertainty.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [56]

--------------------------------------------------------------------------------

Thanks, Russ. The second question from Deepa was, could you comment on the cautious statement on AMP7 dividend policy due to COVID uncertainties? What specific uncertainty concerns you most? And could you help us contrast with Severn Trent's message yesterday?

I can't answer for Severn Trent. I think they are clearly taking their own view. I think as far as we're concerned, I think we've been through that deeper in terms of where we are. It's principally inflation. And I think we've talked through the details of that.

We then have Verity from HSBC. One question to Russ. The pensions consultation is certainly interesting, but don't you think the COVID-19 crisis will mean that companies will be given a stay of execution before implementation? And with the supplementary, also is GBP 71 million that I referred to in terms of helping customers going to be administered through the trust fund as the GBP 3.5 million comes from it?

I'll answer the second question first and then let Russ pick up the pensions issue.

On the second question, the GBP 71 million is actually a compilation of many different component parts, with a lot of that going into help-to-pay schemes, payment matching schemes, et cetera. So it doesn't get administered through the trust fund. The trust fund is a relatively small component of that overall GBP 71 million across the 5-year period. Russ, can you pick up the consultations point?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [57]

--------------------------------------------------------------------------------

Yes, sure. It has been suggested that pensions might be a bit of a soapbox for me. And once I'm gone, it will go away. Well, I hate to disappoint you, but I suspect that Phil will take my soapbox and then continue to bang on about this issue because it is really, really important.

TPR, would they give a stay of execution? Well, recent company failures have shown a light on poor pensions management by some companies and TPR has to address it. And I believe that TPR has actually been asked that very question. And they have said that COVID-19 makes their consultation and their direction of travel even more important than ever. So I'm not expecting a stay of execution of any substance. I mean whether it pushes back the results of the consultation by a month or 2. That's kind of neither here nor there, but I think the direction of travel is very, very clear.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [58]

--------------------------------------------------------------------------------

Okay. Thanks, Russ. We've then got questions from Mark Freshney at Crédit Suisse. Can you please talk about the bad debt recovery mechanisms for wholesalers from the B2B suppliers? And recovery of bad debt by UUW, if B2B suppliers go bankrupt? That's question number one.

I mean, essentially, what's happened here, Mark, is that the regulators have done a number of things. The first is that retailers were struggling with working capital as a consequence of many suppliers, either not paying or essentially avoiding, and so what wholesale has agreed to do was to extend the liquidity to the retailers for a period up until about July this year in order to get them over the hump. That's point number one. That liquidity, which essentially is a credit from the wholesalers, is then due to be repaid over a defined period. So that was one measure that effectively kept retailers liquid.

The second issue is that the regulators felt that bad debt in the market was retailers' responsibility to address. And therefore, what they did was they increased the degree of bad debt, which they expected retailers to bear at their liability from roughly 1% to 2% of revenues, beyond 2% of revenues of what are now putting their minds to over what period and how will bad debt above 2% be recovered. And that is likely to be through some form of pricing adjustment for retailers in order to be able to recover that bad debt. So that's actually is what happens there.

As I mentioned, there is the risk that, notwithstanding all of this, there may be some retailers who are unable to continue even in that supported environment. If that happens, then what Ofwat has done is effectively capped the risk to wholesalers of a retailer ceasing operation, and essentially, they've capped it to what effectively is a month's charges from that wholesaler to that retailer. And I think that's important in the context of Water Plus as being our principal retailer. I said about 80% of our business retail revenues come through Water Plus there. That's so effectively our own business. And the majority of the balance of our revenues are divided in relatively small chunks amongst the -- a large number of other retailers. So I think in that sense, your liability is capped to a month's charges for that particular retailer. So that's essentially how they've done it. That's something that has been a result of intense consultation. It's obviously something which has been done very quickly in order to maintain support to the retail market.

Second question from Mark, can you please run through expected savings that might be made through front-end loading the CapEx plan? And what might the ODI and efficiency savings be?

I don't think today, I can give you all of the details of that. All I can tell you, Mark, is that the way that we go through our profile for capital expenditure is if we are -- essentially, we have a number of programs, which in themselves will be capital programs to deliver quality outputs largely for our environmental program. Those are benefiting from the arrangements we've got in use of competitive tendering and what effectively is a risk-and-reward arrangement that we go through to understand what is the optimum solution. So that's basically a benefit that builds in across our plan. The other component is that we will only approve accelerated capital expenditure if we see a benefit, a greater benefit, a greater return on that capital expenditure during the period, either in higher potential ODIs or in cost savings. But I can't give you the full detail of all of those things because it's an absolute multiplex of different items.

Third question from Mark. A large amount of index expense is long-dated and expensive. It's also monoline-wrapped and consist of a complex setup via swaps, tax structuring and money market funds. If I recall correctly, would you consider buying back some of this debt to reduce finance costs or is it not possible to do so given the complexities? Russ, that's all Russian to me. Do you want to deal with that one?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [59]

--------------------------------------------------------------------------------

Yes. First of all, I don't think it's fair to say we do tax structuring. We don't. We have a very prudent approach to tax. But you're right that there is quite a lot of complexity in terms of how we set up the debt, how we sort of fixed it and sort of floating and all that sort of stuff. And therefore, there is sort of a large number of swaps involved. The derivatives are in the money. So we could do something within the money derivatives, but we haven't got anything like that in mind at the moment. But I wouldn't rule out doing something with derivatives.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [60]

--------------------------------------------------------------------------------

Okay. Thank you. And we've got 2 more questions, one from [Shute] at HSBC. Just further on the inflation point, have I understood correctly that a deflationary environment will lead to a full immediate reduction in cash interest charges? Could you please clarify how this fits in with inflation accretion paydowns, which I understand were intervals, not medium?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [61]

--------------------------------------------------------------------------------

Yes. No, that's not the impression I was trying to give one answer to Lakis. Lakis' question was about the income statement, and in the income statement, as inflation reduces, then the interest charge in the income statement reduces on the index-linked debt. That is an interest charge, which is an accounting item, and it's not the cash cost. The cash cost is not affected in that way. So the reduction in inflation does, as you sort of rightly say in the part of your question, it effects the accretion of the capital, not the cash cost of the interest.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [62]

--------------------------------------------------------------------------------

Thanks, Russ. And the last question from Ahmed at Jefferies. Can you please provide some granularity on your accounting policy for recognizing bad debt, i.e., how overdue accounting receivables have to be before you start impairing them?

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [63]

--------------------------------------------------------------------------------

That sounds like a top topic for Phil, who actually divides this mechanism, which is based on the aging of debt. Phil, do you want to run through that?

--------------------------------------------------------------------------------

Philip Anthony Aspin, United Utilities Group PLC - Group Controller [64]

--------------------------------------------------------------------------------

Yes. Thank you, Russ. I guess the short answer is that the aging isn't massively material to the expected credit loss. You've got to look at what you think the future events are going to be like in terms of cash collection activity and how that's going to impact. So our extra bad debt charge in the context of COVID-19 and sort of how we look at the stress scenarios to cash collection, and that's what's led to the impact, not a deterioration in the aging profile.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [65]

--------------------------------------------------------------------------------

So I didn't hear the question as being just about the ECL top-up fill. I thought that might have been a question about the generality of our underlying bad debt provisioning policy as well.

--------------------------------------------------------------------------------

Philip Anthony Aspin, United Utilities Group PLC - Group Controller [66]

--------------------------------------------------------------------------------

Yes. The generality of the policy is about the forward-looking cash collection activities. So it's not about -- the aging is a convenient way we look at sort of provisioning for the balance sheet. But what underpins all of that is the expectation around future cash collections. So that's what drives the policy.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [67]

--------------------------------------------------------------------------------

Exactly. Exactly. Okay.

--------------------------------------------------------------------------------

Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [68]

--------------------------------------------------------------------------------

Okay. All right. Well, that concludes all of the questions on the webinar and over the phone. So once again, can I thank everybody for coming on to the webinar this morning. And please stay safe, and best wishes. Thank you.

--------------------------------------------------------------------------------

John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [69]

--------------------------------------------------------------------------------

Thank you very much.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.