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Edited Transcript of UU.L earnings conference call or presentation 20-Nov-19 9:00am GMT

Half Year 2020 United Utilities Group PLC Earnings Call

London Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of United Utilities Group PLC earnings conference call or presentation Wednesday, November 20, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* James Bullock

United Utilities Group PLC - Strategy & Regulation Director

* John Russell Houlden

United Utilities Group PLC - CFO & Executive Director

* Rob Lee

United Utilities Group PLC - Head of IR

* Steven Lewis Mogford

United Utilities Group PLC - CEO & Executive Director

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Conference Call Participants

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* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* 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

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Martin C. Young

Investec Bank plc, Research Division - Equities Analyst of Utilities

* Nigel Bligh Spencer Hawkins

Hardman & Co. - Utilities Sector Analyst

* Pandelakis Athanasiou

Agency Partners LLP - Equities Analyst

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Presentation

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Rob Lee, United Utilities Group PLC - Head of IR [1]

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Good morning, ladies and gentlemen. I'm Robert Lee, Head of Investor Relations at United Utilities, and I'd like to welcome you to our half year results presentation.

Before we begin the presentation, I'll run through a few points of housekeeping. First, there were no planned fire drills today, so if the alarm does sound, please, can you exit the auditorium using the door at the back where you first came in. Second, can you ensure all mobile devices are either switched off or turned to silent. And finally, I'd ask that you view any forward-looking statements in today's presentation in the context of the cautionary statements in the presentation packs.

Thank you, and I'll hand you over to the Chief Executive.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [2]

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Thanks, Rob. Well, good morning, ladies and gentlemen, and can I add my welcome to our half year results presentation for the financial year 2019- 2020. As you'll see over the next few minutes, we're delivering everything we said we would in AMP6 and more. We've worked hard to transform the business to an efficient, high-performing company, delivering for all of its stakeholders. Customer service has been central to our strategy and we delivered year-on-year improvement, while simultaneously reducing cost to serve and bad debt.

We began the AMP with a very significant efficiency challenge, and we've exceeded those targets in delivering totex outperformance. And we'll start AMP7 as sector-leading efficiency. You know that our ODI targets get tougher year-on-year, and we're delivering our best ODI performance in the last 2 years of this AMP, setting a strong start point for AMP7. Our Systems Thinking strategy, underpinned by innovation culture is delivering high levels of operational and service performance. And all this has been done responsibly with a strong sense of our accountability to the communities we serve and the environment in which we operate. The efficiencies delivered ensure that customers have benefited from builds that have fallen by 10% in real terms since 2010, with further double-digit real reductions anticipated in AMP7. We're supporting over 120,000 customers with our financial assistance schemes more than double the number anticipated in our original AMP6 plan. Our employees and shareholders benefit from a pension scheme that's in surplus and self-sufficient. And we're sharing our outperformance in AMP6 between customers and shareholders. And finally, we'll end up AMP6 as we started with a robust balance sheet and strong credit ratings.

Here are the headlines for this morning. We ended the AMP6 performance period at upper quartile under Ofwat Service Incentive Mechanism, or SIM, for customer satisfaction, which makes us eligible for a reward. In AMP6, we're investing around GBP 1,300 per household and having delivered our efficiency targets, we're confident of delivering around GBP 100 million of totex outperformance against our AMP6 scope.

Our expectations on ODIs have improved, and we're now on track to deliver a net ODI outperformance of around GBP 50 million for AMP6, and we'll have reinvested GBP 350 million of our outperformance in this AMP, bringing the total reinvested in the period 2010 to 2020 to over GBP 600 million, GBP 100 million of which is targeting specific areas in order to achieve a flying start to AMP7. And thanks to our well-managed pensions position. Cash contributions into our defined benefit schemes are expected to be GBP 344 million lower in AMP7 compared to AMP6. So we're in a very strong position to perform in AMP7.

When I joined UU 8 years ago, I was told by several of our stakeholders that they saw the company as a sleeping giant, content to be a sector laggard. This slide shows the transformational progress we've made across the business in recent years. I won't go through every metric, but you can see why in AMP6 we've been awarded the Environment Agency's leading 4-star status for 3 out of the last 4 years, having been ranked seventh amongst the WASCs in 2010. The drinking water inspector has identified United Utilities as most notable for a continuous year-on-year improvement over the last 4 years in reducing the risk of a water quality event.

This slide shows a 79% reduction in events from 29% in 2008-'09 to just 6% last year. We're not complacent, however, and we know that there's more we can do, particularly in areas such as properties flooded, where we've seen 46% reduction since 2008-'09. In AMP7, we have tough targets to achieve, further reductions in properties flooded and customer minutes lost. And these are areas where we're using the GBP 100 million outperformance reinvestment announced earlier this year to give us a flying start.

This transformation of our operational performance has underpinned a complete turnaround in customer satisfaction. When we started this journey, we were the worst performing company in the sector for customer satisfaction by a country mile. As you can see on this slide, a cultural shift across the business has meant that we've now moved to upper quartile on Ofwat SIM score. We've now completed the 4-year measurement period in AMP6 for SIM, and this slide shows that we finished in third place overall for the fourth and final year. As a consequence of our strong performance in AMP6, we're eligible for a SIM outperformance payment of at least GBP 6 million and we expect to be advised of the actual amount in our PR19 final determination.

SIM is only one measure of customer satisfaction we use to address our performance relative to others, both in and outside of the sector. But on every measure, our determination to put customers at the heart of everything we do shines through. Our complaint volumes are well below industry average. And when we do get things wrong, we resolve customer complaints at the first time of asking for 97% of all written complaints.

As a proof that good service costs less, our retail costs have been reducing through AMP6. Our bad debt charge reduced to 1.8% for the first half of the current year, down from last year's charge at 2.1%, and almost half the bad debt charge at the beginning of AMP6. We've worked hard to secure cash from those customers who can pay with over 72% of customers now on direct debits and further 11% on other payment plans. This sector-leading performance means we can focus our efforts on those who won't or are struggling to pay. Encouragingly, we continue to be recognized externally. So last month, we won further 4 awards at the Utility and Telecoms awards for our leading approach in credit management, comparing performance across a range of sectors. And a key factor in driving down our cost of service being our digital transformation. A customer signs up to the UU app every 12 minutes. And our app is currently one of the top-rated utility apps and on par with John Lewis.

Our overall cost base in retail is on track to hit the cost to serve allowance for AMP6, and we're well placed for AMP7. Ofwat recently published the ODI results for the sector for 2018-'19, and this is replicated on this slide. You can see that we led the sector with a net outperformance of just under GBP 20 million. And you'll recall that our ODIs for AMP6 were heavily skewed to the negative and set against performance targets, which got progressively tougher over the AMP. Our strategy was, therefore, to accelerate investment ahead of our original business plan to secure performance improvement early and to drive the adoption of technology and new ways of working through our Systems Thinking approach to deliver even better outcomes.

We also took benefit from progressive reinvestment of our outperformance, mostly financing to accelerate improvement in operational performance for the benefit of AMP6 and thereafter. And this strategy is delivered, although we know there's more we can and will do. We expect to build on last year's achievement and deliver an improvement in our cumulative net outperformance for AMP6 to around GBP 50 million. We're particularly pleased that our outperformance is a reflection of improvement across the full range of our ODIs, reflecting the transformation I've talked about earlier.

Based upon the information in the public domain, this outperformance positions us as upper quartile in the sector on ODIs. More importantly, hitting those tougher end of AMP targets positions us well for the further improvements we're targeting in AMP7.

I'd just like to take you through a short case study demonstrating how Systems Thinking has transformed our ability to main service to customers in the event of a burst and is contributing to our improved performance against ODIs. This slide shows a real example of a burst we experienced on a water main earlier this year and that had the potential to impact the water supply to 32,500 households. Under the industry's traditional approach, we wouldn't have been aware of the burst until one of our customers informed us of the loss of supply, leading to an investigation of the cause and ultimately a repair. And this would have led to the loss of supply to affected households for around 7 hours and, ultimately, an ODI penalty of just over GBP 10 million. Adopting Systems Thinking, a network sensor alerted us to the issue with our response coordinated from our integrated control center. Resource was deployed to the scene within the hour. The network reconfigured and our fleet of water tankers dispatched to pump water into the network to maintain continuous supply to all of the customers, while the repair was made. Our fleet of water tankers have proved invaluable during this and similar incidents and have already paid for themselves several times over with others now in the industry now emulating this approach. As a result of our Systems Thinking response, none of our customers were impacted with no ODI penalty incurred and contributing to our ability to earn an ODI reward against customer minutes lost, which is a key ODI in AMP7.

Our Systems Thinking capability is a significant factor contributing to our improved performance in AMP6 and will continue to be so as we mature our capability further in AMP7. One of our larger ODI rewards is in relation to our West Cumbria project that I've mentioned to you in previous presentations. This is a complex GBP 300 million project going through the National Park. It involves building a new pipeline, treatment works and associated infrastructure in West Cumbria, which will allow us to stop extracting water from the environmentally sensitive (inaudible). In view of this sensitivity, we're incentivized to deliver the project early with a significant ODI benefit available for doing so. The project has been very successful with innovation driven through planning, procurement and stakeholder management. And as a result, we've successfully delivered against several milestones over the AMP, but the ODI associated with the programs only secured when the last AMP6 milestone is delivered this financial year. And we're currently on track to earn a GBP 22.5 million outperformance payment on this project.

Before handing over to Russ to take you through the numbers, I wanted to touch on a subject that runs through the core values of our business and that's our purpose of social contract. As you've seen so far today, we had another strong year. The high level of performance has been delivered with regard for all our stakeholders and the value this creates for them. The slide shows some of the external accolades we've received for our strong performance in areas covering the environment, society and governance. And this is important in terms of the trust that can be placed in companies and contrary to some stakeholders' perception, trusted water companies is consistently high, second only to the health service.

Over the last 10 years at UU, we've reinvested over GBP 600 million into the business to improve services and to become more resilient to the extremes of weather that we now see. We're working hard at tackling affordability in our region and supporting those in vulnerable circumstances. We work in collaboration with other stakeholders to incentivize better practices and improve the environment, and this approach is standard practice for us in finding optimal ways of delivering outcomes. We're delivering leading performance, and we're doing it responsibly.

I'll now hand over to Russ.

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [3]

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Thanks, Steve, and good morning, everybody. I'd like to start with the underlying income statement, which we believe gives the most reflective position of business performance. A reconciliation to the reported income statement is included in the appendix in this presentation as normal. Revenue of GBP 936 million increased by GBP 19 million, largely reflecting the allowed inflationary impact on our regulatory revenue profile. Underlying operating profit of GBP 392 million was up GBP 24 million. This reflects the increase in revenue and lower IRE, partly offset by an increase in depreciation. Underlying profit before tax of GBP 244 million, increased by GBP 4 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 a share of small losses of joint ventures.

Our underlying tax charge of 19% was in line with the headline rate of corporation tax. And in July this year, we were delighted to be the first water company in the FTSE 100 to secure the fair tax mark. Overall, another strong financial performance with underlying profit after tax of GBP 198 million, up GBP 1 million, giving a small increase in underlying EPS of 1%.

Now let's look at our underlying operating costs. In overview, we have again managed to maintain tight cost control on our underlying cost base, which is at a level commensurate with our cost proposals for AMP7. Total underlying operating expenses decreased by GBP 5 million. This reflects a GBP 13 million decrease in IRE, primarily due to the phasing of capital projects with a significant IRE element and an expected GBP 8 million increase in depreciation from the increase in asset base. Remaining cost base has remained flat as the impact of a credit in the prior year resulting from the settlement of a historical commercial claim has been offset by a property rates refund in the first half of this year and smaller net reductions across the rest of the cost base.

Turning next to the statement of financial position. Property, plants and equipment was up GBP 206 million and net debt was up GBP 279 million, reflecting expenditure on our ongoing capital program and the impact of IFRS 16, which results in the recognition of a GBP 55 million lease asset and corresponding lease liability. Net debt is also impacted by the prepayment of GBP 103 million of the agreed funding deficit repair contributions in relation to the group's DB pension schemes, increasing net debt and contributing to the GBP 215 million increase in the IAS 19 retirement benefit surplus.

Cash from short-term deposits increased by GBP 283 million and gross borrowings increased by GBP 697 million mainly due to additional finance raised in the first 6 months of the year. Derivative assets increased by GBP 207 million, and derivative liabilities increased by GBP 71 million as a result of falling interest rates and a weakening of the pound.

Other noncurrent liabilities have increased GBP 197 million, of which GBP 158 million relates to an increase in the deferred tax liability. This reflects the allowable tax deductions on our capital expenditure and pensions payments and GBP 125 million tax adjustment due to a change in the estimated rate at which deferred tax liabilities on the potential return of the DB pension surplus are measured. The estimated rate has changed from 17% to 35%, this being the rate applicable to refunds from trusts.

Retained earnings of around GBP 2.2 billion or GBP 64 million lower, largely reflecting retained profits of GBP 159 million, and pretax remeasurement gains on our DB pension schemes of GBP 106 million, more than offset by dividends of GBP 188 million and GBP 125 million deferred tax adjustment that I've just mentioned.

And now to pensions. As at September 2019, we have an IFRS surplus of GBP 699 million, continuing our well-controlled approach that we've had to pensions for a number of years. The surplus has increased by GBP 215 million compared with March 2019 as a result of a significant fall in gilt yields during the period and the accelerated deficit repair contributions of GBP 103 million that we made in April in order to eradicate our funding deficit. The falling gilt yields results in an increase in surplus because our sector-leading, asset-liability matching strategy, which provides a good hedge on a funding basis, whereas liabilities are lower on an IFRS basis.

Our pension 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. This means we have no pension funding deficit and, furthermore, we believe we are one of a very few companies in the FTSE with no deficit on a self-sufficiency basis. To put it simply, this means that the payments we are required to make into our pension scheme going forward should be the ongoing service costs only regardless of movements in interest rates and inflation. This is in contrast to most other companies in the FTSE that may still have deficit repair contributions to make, and we'll almost certainly have further actions to take in order to achieve self-sufficiency. This puts our employees and pensioners in a very secure position and mitigates the risk to shareholders from having to make extra payments as a result of action from either Ofwat or the pensions regulator.

Over the last 2 years, I've explained in great detail, the importance of self-sufficiency, while looking at 5 years of cash flows is inadequate and why normalized IFRS gives the best indicator of relative value. So now, I'd like to use this thermometer to highlight how the market has moved in response to this information. As we've just seen, our IFRS pension surplus is currently GBP 699 million, so if you make no adjustment for pensions in your valuation, then I'll characterize your approach as cold. However, if you make an adjustment for the full IFRS position, you're getting warmer. And this would add 102p per share to your valuation of UU based on our current IFRS surplus. And there's some amongst you who've incorporated the full normalized IFRS position into our valuations. The UU, this would increase the value per share by around another 30p, taking the total impact to 132p per share.

The numbers in white on the left-hand side of the thermometer show how many of the sell-side analysts take each of the different approaches. Back in 2016, I think it's fair to say that most of you either made no adjustment or a small partial adjustment for pensions. As you can see now, there's a range of approaches taken and therefore a range of values in corporation's target prices, and it's pleasing to see a growing trend for the valuations to take into account for this important topic. We believe this is a significant component of economic value and that the benefit to shareholders is substantial, both in terms of reduced risk and a reduced cash call on the company going forward. As ever, we'll be happy to discuss these issues outside the meeting, if that would be helpful to anyone.

Moving now to our RCV. This chart shows the growth in our RCV due to net additions resulting from our investment in inflation. For this regulatory period, the RCV has been updated to reflect the acceleration of our investment program and also the benefit of the additional investment that we've made through sharing our outperformance. Inflation has a significant impact on RCV growth and our debt portfolio with roughly half of our net debt maintained in index-linked form. The inflation effect on this debt impacts the income statement, whereas the positive effect of inflation on our RCV doesn't flow through IFRS earnings in the income statement. It's important not to forget the positive inflation impact on the RCV, as this is a key component of investor returns.

Turning next to our robust capital structure. We continue to operate with our RCV gearing within our target range. This supports the A3 stable rating that we have with Moody's for you, water, in contrast to the negative outlook for the sector more generally. At the half year, RCV gearing has increased slightly due to the one-off impact of the accelerated pension deficit repair contributions and the lease liability recognized under IFRS 16. We, therefore, expect RCV gearing return -- to return back towards the midpoint of our range going forward. Our RCV gearing, taken together with our pensions position, gives us an extremely robust capital base, providing a high degree of resilience and financial flexibility.

For completeness, we'll now consider the cash flow statement. Net cash generated from operating activities was GBP 364 million, largely reflecting operating profit adjusted for depreciation and the accelerated pension deficit repair contributions. Net cash used in investing activities were GBP 306 million due to net CapEx in the regulated water and wastewater investment programs. This excludes IRE, which is treated as an operating cost under IFRS.

Net cash generated from financing activities was GBP 221 million, largely reflecting the net proceeds from borrowings resulting from the timing of finance raised in the previous period, partly offset by dividends paid to shareholders. As I mentioned earlier, cash flow is only part of the picture with the inflation return on the RCV comprising a noncash uplift, which is reported neither as income nor as cash flow. And this is why RCV gearing and its trend over time remains one of the best indicators of a sustainable business model.

Now an update on our financing position. Over the 2015 to '20 regulatory period, we had a financing requirement totaling around GBP 2.5 billion, which is now fully funded with comfortable liquidity position extending out to 2021. We remain one of the sector leaders in the issuance of CPI-linked debt. As I mentioned at the last full year results, we increased the CPI linkage in our debt portfolio to GBP 365 million in April 2019 through a GBP 100 million bank loan and GBP 100 million RPI to CPI inflation swaps. Since then, we've further increased the CPI linkage in our debt portfolio to GBP 465 million through GBP 100 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 a 14-year maturity. And we've also renewed or extended GBP 100 million of committed bank facilities and signed GBP 50 million of new facilities, taking the total to GBP 850 million under our rolling bilateral program.

And finally, 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 about 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 environment.

With regard to interest rate hedging, our policy is to fix interest rates on a nominal debt on a 10-year reducing balance basis, thereby broadly replicating the 10-year trailing average used by Ofwat. Our nominal debt portfolio as at September 2019 amounts to around GBP 3.2 billion and is virtually all fixed in the current financial year as an average rate of around 2.9% nominal. The low cost of debt that we've locked in places us in a strong position to deliver financing outperformance up to 2020.

So to summarize, this is another good set of results in which we have continued to maintain tight cost control, while delivering high quality service. Our strong balance sheet, robust capital structure, the responsible level of gearing and our financial risk management approach are sector-leading and underpin financial resilience for the long term. The responsible stewardship of our pension schemes has eliminated our pension deficit on a funding and self-sufficiency basis mitigating risk for pension scheme members and shareholders and is a significant component of economic value. The low cost of debt that we've locked in places us in a strong position to deliver financing outperformance up to 2020, and we're well positioned for AMP7.

Thank you, and I'll hand it back to Steve.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [4]

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Thanks, Russ. As you know, Ofwat will be publishing final determinations for the sector in a few weeks' time. And although we're yet to see the content, a fast track status gives us the confidence to do a huge amount to prepare ourselves ahead with the start of AMP7. And I now want to talk about a few of the key areas in which we've done this.

This chart shows how our totex has evolved through AMP6 and how our end-of-period run rate compares with our likely totex position for AMP7. As you can see, we're exiting AMP6 at a run rate comparable to our average totex allowance for AMP7. The big reduction from AMP6 to AMP7 is CapEx. And this, in part, reflects delivery of further efficiencies, but it's mostly a consequence of scope reduction. In AMP6, we're delivering a large number of capital programs with an environmental driver. So for example, the West Cumbria project, I spoke about earlier, and a major modernization project at our largest wastewater treatment works, Davyhulme.

In AMP7, we'll be delivering fewer large capital programs, with the exception of our Manchester and Pennines project, which is nominated as one of the new direct procurement for customer project, or DPC. This contract alone is currently estimated at just under GBP 800 million across AMP7 and AMP8 as the DPC project isn't reflected in our AMP7 costs. We're anticipating further environmental drivers of our capital program in AMP8, but these will be the subjective definition and evaluation with the environment agency during AMP7 before becoming components of our PR24 submission.

Delivery of our network activities, such as leak detection, burst repair and mains cleaning is an area where our approach to AMP7 delivers around GBP 100 million of efficiencies that were included in our AMP7 business plan. Our AMP6 contracting strategy was to outsource this work to a single prime contractor. But for AMP7, we're contracting directly with Tier 2 contractors. We've already got this arrangement in place along with the systems and capability to manage the work in this new way. This is now a proven approach, adding to our confidence in delivering our business plan totex in AMP7, along with the customer service benefits we envisage. One of the benefits of being fast tracked at AMP7 is that we have greater confidence about our capital program. We've already tendered and selected our 2 delivery partners for the AMP and awarded contracts of the first tranche of our capital program valued at around GBP 300 million. The majority of these projects are individually small enhancements of existing works to deliver further environmental benefit, but this gets us ahead of the curve in terms of AMP7 delivery, giving our partners time to plan the design phase, and we benefit from greater efficiency in design and delivery and derisking of our output commitments.

At our last full year results, I announced that we'd reinvest a further GBP 100 million additional outperformance this year to give us a flying start to AMP7 bringing our total outperformance reinvestment in AMP6 to GBP 350 million. And I'm pleased to say that we're well on with this with a full spend committed in areas where we have the most challenging ODIs in AMP7, such as leakage, supply interruptions and sewer flooding. You can now see the results of all the work we've done in recent years. At this point, in the last price review, we were presented with huge totex efficiency challenges, ODI skewed heavily to the negative, but also an opportunity to earn financing outperformance. A betting man would have put odds on us using that financing outperformance to offset our totex shortfall. We understood the price for customers and shareholders in driving the performance of the business. And you've seen this morning how much we've achieved through acceleration of our investment program and using Systems Thinking to change the way we run the business.

Our policy of investing in sustainable performance and resilience is delivering results. We've delivered around GBP 600 million in efficiencies against our AMP6 business plan and deliver around GBP 100 million more in totex outperformance. Our net ODI outperformance is likely to be upper quartile for the sector and we've behaved responsibly. Efficiency has not been at the expense of customer satisfaction or our commitment to the environment. Our affordability plans are helping almost double the number of customers that we originally planned for AMP6 and bad debt has been reduced to a record low, and we shared our outperformance with customers, reinvesting in schemes, which improve customer service, improve the environment, but give us a flying start to AMP7. I'm very pleased with what we've achieved in AMP6. And although we're yet to see the detail of the final determinations, we're as well positioned as we can be to go further in AMP7.

Thank you for listening. I'd now like to invite questions.

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Questions and Answers

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [1]

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I think the mic will get to you first, James.

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Unidentified Analyst, [2]

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Good morning. Well on the good results. Just 2 questions. One for Steve, one for Russ. The Slide 27, I thought it was kind of an interesting one in terms of showing the progress you've made on totex. But I was just wondering whether I can inquire as to how to read that because it shows that the vast majority of the progress has come through lower CapEx, and OpEx has been broadly flat throughout the period. So when we're looking at that, should we think that, that's -- it's really on the CapEx side that where you've closed the gap between where you were and the efficient frontier, which you obviously have done. And if that is the case, when we think about the next regulatory period, should we again be thinking that the gains, if they're to be made are more on the CapEx side and you're looking more to repeat performance in the company and just keep OpEx more stable? I suppose, I just want to get some color on that.

And then the second question is just on -- for Russ on the financing position that you're outlining on Slide 24. But I was just wondering whether you could give us a bit of a reminder as the reducing balance in terms of hedging on your debt, how that looks, at the moment? You might not give exact numbers, but how that looks broadly for the next regulatory period that you've hedged most of your interest rates for that period on the nominal debt? Or there's still some to go? And you mentioned the 2.9% nominal rate. If it's possible to give a number? Whether that number also applies to the next regulatory period and what the appropriate number might be for the debt you've hedged for the next regulatory period, that would be useful as well?

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

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Okay. Thanks, James. I think when you look at the cost picture, I think you're correct in saying that there's been a very significant drive as far as CapEx has been concerned in the business. I think when we looked at ourselves in PR14, I think you would have said that CapEx schemes weren't as efficient as they could be in terms of the costs and the means of delivery. And we've done a huge amount to improve efficiency. But also the approach we've taken to delivering CapEx in terms of a much more detailed understanding of the requirement, looking at the options that we have for solving that, whether they'd be operational intervention or capital expenditure. And so I think a very different approach to delivery of our outcomes where CapEx is involved, I think, has given us a very significant efficiency benefits there. I think, as I said, one of the big components of AMP6 to AMP7 is just the sheer scale of the CapEx programs. We've delivered a huge number of environmental drivers this AMP. And there's almost a pause for thought now. I think, historically, we might have leapt into a number of capital schemes, working with the environment agency in AMP7. I think the understanding we have now is that actually, we need to look at the drivers and understand how the best outcomes and solutions might be offered. That's why we see some of these things now being PR24 issues. I think on OpEx, one of the things that we're dealing with, particularly, in the wastewater side of the business is increasingly, as you go forward, your OpEx is being driven up by the environmental outcomes that you're being required to deliver. So there's quite a significant OpEx burden, if you want to use that word associated with delivering higher and higher environmental output. So particularly in the context of energy, in the context of chemical use and the risk boundaries are much, much tighter. And so you're running full chat more of the time in terms of being able to deliver the outcomes that you're required to do in terms of the impact on the environment. So what you'll see here in terms of OpEx is that what we've been doing is containing OpEx when actually there's a natural growth. There should be a natural growth in OpEx as we go forward. And so probably, you're right. When you look at it, it looks like a flat line, but there's been a huge amount of cost elimination over the period to achieve that position.

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

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Okay. On the hedging point, it won't surprise you, James, I'm not going to give you next year's financing cost this year. You might look forward to that perhaps at the full year results. I'll give a bit more insight to that one. But suffice to say that we are pursuing our existing hedging strategy, which is to hedge the nominal debt on a reducing balance basis and we believe that gives the best possible hedge to the Ofwat trailing average is. The other thing to say is that the source of our financing outperformance is due to excellent treasury management and therefore it's important that Ofwat continues to recognize that those who have great treasury management, deserve financing outperformance and those that don't, don't.

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

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Can you pass the mic? Yes, thanks.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [6]

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It's Mark Freshney from Crédit Suisse. If I can ask questions on the 2 important things that come out next month in the FD. Firstly, on the ODI incentive and the parameters surrounding those, I think that Ofwat tightened or moved some of those adversely for you between your fast tracking in January and April and actually July. So I think there is still -- the level of the baseline, if you think, to play for. So I was just interested in what your thoughts and message to Ofwat is on that. And secondly, on the allowed returns, because there is minimal spread between allowed returns and WACC right now, GBP 2.2 billion is on the table, do you think that's sufficient for you to do what you want with capital distribution policies in the next AMP?

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

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Okay, thanks. So I think on ODIs, yes, you're right, there's been quite a lot of movement, I think expected movement in ODIs as Ofwat has looked at all of the companies. Obviously, they looked at the start position with the fast track, and we saw some adjustments to our ODIs coming through when we got our IAP, our initial assessment. As we went through our own draft determination, but more importantly, as we've seen the draft determinations for those companies that weren't fast track. We've seen further movements, and some improvements in terms of what one might expect to be the range of ODI penalties and rewards. Some of you consider to be a deterioration in ODIs in the sense that they're tougher. I think one of the interesting points that will emerge as we come to a final determination is how that picture stands, particularly, in the context of the totex allowances that companies have got because you're now in a situation where some of the ODI targets effectively are unfunded because the action necessary to deliver those ODIs are not in business plans. And so where is the pressure going to continue to be applied? Will we see some alleviation? I don't know. One of the points for us. And I think one of the interesting areas that we are going to see is whether representations that we've made since IAP and then through the year in ODIs are acknowledged in our determination. So we can see areas where the position that we effectively were given IAP and draft determination are actually not as kind, gracious, helpful. As we've seen, I don't know what word I would use actually, that's acceptable. But let's just say, we've seen ODIs in some of the other companies that have been in their draft determinations, which are actually less harsh than the ones we saw our own. So as you might expect, we've made representations to say this needs to be fair, it needs to be balanced. And therefore, we would hope, they're now final determination that we get the benefit of positions that will be given to others. So I think it's all in the mix, there's one hell of a tumble dryer turning at the moment on all the different factors around the final determinations. But we've certainly made representations to say we'd at least expect to be treated equitably when you look across the board in terms of the sector.

As far as allowed returns are concerned, your guess is as good as mine as to what's going to come out. We know that Ofwat is going to take a view on the WACC in final determinations. I think you look at that. I mean we feel that actually, it's gone far enough and we've said that in our representations.

But I think we also recognize that this will be a critical decision taken by Ofwat. In an environment where they've had any other criticism, there's been quite a significant criticism of the regulator over the years in the position they've made around that particular allowance. I think the key point is, again, you've got to look at this in the round. And that the most critical outcome is do you have the revenue through your determination to allow you to do the things that you say you're going to do. So if there's a WACC reduction that we would very much strongly represent that what we would look to see as some adjustments in things like pay-as-you-go, in the totex allowances, where we still have representations on the table. So as I say, there are a number of pieces at play here. And what we're looking for in the round is something that allows us to fulfill the plan that we've got to have the revenue that we need and Ofwat can pull all of those different levers. I mean, it was clear when the draft determinations went in, most companies came back and said, on the basis of what I see today, we're going to -- we're struggling to be financeable. So how Ofwat responds to that, we don't know. We'll see that in the FD. All right. Okay. Okay. I worked my way around. We'll go clockwise.

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Martin C. Young, Investec Bank plc, Research Division - Equities Analyst of Utilities [8]

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Hi. It's Martin Young from Investec. A couple of questions, if I can. The first relates to pensions. Russ indicated a change in the taxation rate that you were applying to the pensions from 17% to 35%. Does that indicate then an intention to seek recovery of that surplus through a refund? And if we then relate that to your thermometer, whether you're at the sort of the British weather part in the middle or the sort of Saharan weather at the top, should you be adjusting that for a 35% tax rate when you think about valuation? And then secondly, following on from sort of Steve's comments about the broader industry viewpoints on PR19. Clearly, the [fast-tracking] companies are in a better place. There are some people who perhaps are more stressed. What's your, sort of, feeling of the likelihood of people seeking recourse to the CNA?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [9]

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Do you want to lead?

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [10]

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Well, I'd say...

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [11]

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Russ has been on the pensions orange box for some years now, so I'll leave him to continue with his trade.

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [12]

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So as I say, the big picture is we see the normalized IFRS is the best way to look at the economic value. And the reason why we've said that is that we recognize, and the IASB recognizes and just about everybody else recognizes, that IFRS is, probably on its own, not the best indicator of economic value, but it's the only one that is comparable. So funding deficits is definitely not relevant for economic value comparisons. Simply because they're all calculated on different basis and you don't know the assumptions that are used, and they will only be a stepping stone self-sufficiency.

One day, self-sufficiency data will probably be available out there, and that will probably become the better method. But we're not there yet. There's a government white paper on it. And it will be a while before that evolves. So at the moment, normalized IFRS is the best method. As to the technical accounting point about deferred tax on the surplus. It's a technical point because it's trying to make an assumption about how would you realize that surplus. And so historically, when the deficit was -- sorry, when the surplus was lower, we assume that it might be recovered over a very long period through lower contributions, and that's why you had a 17% rate. But if it ultimately became a payment out of trust, it would be a 35% rate. So we've just taken the accounting judgment that because the surplus is now so large, it's unlikely to come from reduced contributions. It's more like it's come ultimately from payment out of trust, if it ever were to happen. But in truth, that's all -- [Hans Udervors] will forgive me for describing it as a bit of IFRS fiction and that the real picture is self-sufficiency. And the normalized IFRS as a proxy for that real picture of self-efficiency. Okay.

Okay. The question about the sector at large, I can't really comment on what others are likely to do. I mean, clearly, we've got a -- there's no doubt that this is a very tough price determination for the sector more generally. Yes, there is an advantage in being fast-tracked in the things that we've done, the visibility it gives. And you can see the degree of preparation that we've therefore been able to make so that we go into AMP7 with a huge amount already done. I think the drug, we have to take a judgment on that when we see the FDs, and the extent to which the positions that draft determination are maintained and/or what -- whether Ofwat at some point is then -- has listened to the different representations and taken a view as to how it wants to play all those different levers and getting people over the line. So it's very difficult to call, but it is a very tough situation for the sector as a whole.

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Unidentified Analyst, [13]

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A couple of questions. One about West Cumbria. Obviously, GBP 22.5 million of kind of benefit on the GBP 300 million project is kind of slightly eyebrow raising. So well done on that. But is that something you expect those sort of things to be able to carry over and carry on doing in the next price control? I desperately want to get that [more mover] but I'll (inaudible) and then on the pension. How far are you away from being able to have a contribution on today?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [14]

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Okay. I'll deal with Cumbria. I think it is unusual. It's a huge project. And I think government -- the environment agency was particularly concerned about the potential for infraction proceedings, et cetera, in the context of the pearl mussel population that lives on the end of this particular reservoir or off the end of this reservoir. And so the ideal situation for the government is that, that scheme would have been delivered within this period. And when we looked at it, and we understood the scale of the risk, particularly going through the National Park, that project could have easily gone out to 2024 or something like that. So what we did was we said, we'll take on the challenge of delivering early with all that means in terms of risk, and we'll look for it to be rewarded for doing so. And we essentially gave our best endeavors commitment to deliver this program as fast as we can. And the reward, I think, reflects the level of risk that we've taken in doing that. Now I have to say, our team has done a fantastic job in doing what they've done, we will deliver it early. And as a consequence, we'll earn that reward for the program. I think when you look at others, you don't necessarily -- you don't tend to have the same drivers elsewhere. And certainly, during AMP7, the program that we have, which is significantly bigger, is the DPC program. And we're currently in discussion with Ofwat how that DPC program will work. Are there ODIs associated with it? What do those ODIs incentivize? How might they penalize this? So -- and I think we'll see that DPC because it's so big in the context of the sector, and it's one of the first out of the traps. To an extent, what we're doing is that project is a bit of a pipe cleaner for DPC and I think what we'll see that run at a separate speed to the determination itself. So what you can expect us to receive is a final determination for all but DPC or virtually everything but DPC. And then for the DPC to take its own program. But I do think Cumbria is very -- is unique in its circumstance. Pension. Okay. You give me another chance to talk about pensions.

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Unidentified Company Representative, [15]

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(inaudible)

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

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Exactly. Exactly. It's an interesting question, how far are you from a contribution holiday because perhaps the better question, which is on the point, is how far are others away from making extra contributions that they have not yet disclosed. Because if you understand, self-sufficiency is really the end goal. We're there. Nobody else is. Others will have extra contributions to make that are not yet in any deficit repair contribution schedule. However, I will answer the question for us, but you might like to think about that as a sort of question for others in the FTSE. For us, the key point is we have no more deficit repair contributions to make. Our ongoing service costs have come down because of the fact that we've got no repair contributions to make and because we've restructured our pension scheme. So if you look at 2017, '18, the ongoing service costs within the underlying OpEx in employee benefit expense was GBP 42 million. Last financial year, it's GBP 32 million, probably GBP 32 million is a reasonable indicator for the future. So the ongoing cost has gone down by about GBP 10 million. In addition to there being no deficit repair contributions, which, as Steve said earlier, has resulted in a sort of cash difference of GBP 344 million across down.

No pension contribution holiday as planned because when you understand self-sufficiency, that wouldn't be appropriate. But we do have a very good position, which gives us options for the future that others probably would find very expensive to implement. So we're not planning anything this year or next, but if you look into 2021 or 2022, some of the options that you could consider are longevity swaps, buyouts, buy-ins, captives. So we have all of those options available for us to consider without any significant cost to us, whereas for others to do any of those things would be extremely costly.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [17]

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Okay. All right. We're going to work around the table here we go. You've got the mic again.

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Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [18]

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It's Fraser McLaren from Bank of America. Just a quick one on the JV line, please?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [19]

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Yes.

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Fraser Andrew McLaren, BofA Merrill Lynch, Research Division - Director [20]

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I know that it's moved into negative territory. Can you just speak about what's driving that, please? And the outlook for retail?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [21]

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Yes. I think principally, it's an issue that's common across the sector, probably #1 agenda or item for the sector in the context of business retail, and that's data quality. And what we're finding, and I think this was common to the Scottish market when they opened, certainly very common to energy, the energy market, is just the data quality that the retailers and/or the market is using around things like meters, meter reads, locations, simple things like which meter is yours? Where is it? And like -- before we started this morning, said, "well, why is this different from before?" I think what you're seeing is one of the advantages of the retail market is that you're now getting consolidated billing. So a company that is -- operates right across the country will get consolidated billing. And firstly, that means that you may have a fairly significant bill held up on the basis of one or a few data points, which historically, that company would have received hundreds of bills for each of the different sites that reflect to each of the different sites that they operated. And the other thing is an army of people now working as support to these companies that are actually employed to query the bill, to argue about the bill and all of that is effectively adds to the complexity. So I think what we've seen here is quite a lot of legacy issues within Water Plus in dealing with -- dealing this data issue. But as I say, it's a more general industry problem. And an area where there's much more energy now being put certainly by us with Water Plus in trying to sort out those data issues. And -- but also more generally, an industry issue in terms of doing it. So what you're seeing there is effectively a revenue that we are unable to recover or we can't or we are effectively delayed in recovering simply because of the problems in resolving bills. It will sort itself. We've got a whole series of plans, as you might imagine, Liv and I are all over it and Russ, in terms of the shareholders in Water Plus. So it will sort itself. But I think it's a huge legacy issue that we're seeing alongside many other companies.

Right. Lakis, you did ask, didn't you? Have you given up now? All right. We've -- sorry. I promise to work...

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Unidentified Company Representative, [22]

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(inaudible)

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [23]

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Lakis Athanasiou, Agency Partners. One question and one comment. One question on tax, a comment on pensions. On tax, Tim Boris Johnson talk about not dropping the tax rate to 17% and keeping it at 19 %. What do you expect from -- what would you want Ofwat to do in regard to any adjustments on FD? Or is it too late for them to do? I mean is something like GBP 5 million estimate for you, the 2% difference per annum and in the long run, it doesn't matter because you get the tax true-up. But what would you want Ofwat to be doing for the FD in that regard? And my comment is on pensions. You're saying go to the IFRS discount rate and normalize on that. But you're also saying it's far better to do it on the actuarial self-sufficiency, I think, but you don't know the data. However, you can go to a common discount rate for everybody and very good plus -- with grade with led behind information. We pretty much got what the actuarial valuation is from the information they gave out. And that seemed to be a discount rate of gilts plus and a 40% -- 40 basis points versus the iBoxx of gilts plus 90%. So if we did that with you guys, you probably come down to 0 surplus. Your pension contribution to value therefore is 0, but everybody else is then should be much, much, much more negative. So that seems to be a far more logical theme than to have -- you think you're relatively the same?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [24]

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Yes.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [25]

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You're saying, give us credit, where it seems to me you should be getting 0, but obviously, you should be getting a lot more negative.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [26]

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Okay.

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Unidentified Analyst, [27]

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So it's just a comment.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [28]

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Yes. First of all, on tax. Yes, we would like Ofwat to take it into account. But as you say also, if they don't, and it's automatically covered by the true-up mechanism at the end of the period. On pensions, when we say normalized IFRS is the best method. We don't say which discount rate you should use. So if you want to use that discount rate, that's absolutely fine. All we're interested is getting the right relative value.

Oh, you sneaked in.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [29]

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Chris over at JPMorgan [Proximity]. Two questions, which I'll repeat, it's really -- is there anything you can say about the dividend at this point? We are getting very close. And when will you make that judgment and announcement so we can maybe put something in our diaries to get prepared? And treatment of tax in your adjustment net income we've discussed before. Any updates on the policy going forward?

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [30]

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I think on dividend, no, we can't say anything. Clearly, we are waiting to see the FD. From a timing perspective at the moment, unless you -- we are into coalition negotiations. Then Ofwat I said they're going to publish the FDs on the 16th, if I'm correct, James? Yes, 16th of December. And the only thing I think could delay that is if there isn't a government, and we're still in perdue because people are negotiating coalition. But at the moment, it's the 16th. We then have some time to consider. So our board during January will be considering a -- whether we accept the FD and what its implications are for things like dividend policy for AMP7. So you should hear something from us shortly after that. And Rob is putting a sort of calendar of stuff together for January, February. We're also thinking of having a markets day shortly after that as well. So really updating people on where we are on AMP7, what we're doing in FD, what the FD means. So we'll be doing a markets day as well.

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [31]

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And on the treatment of tax, we're making no changes at the moment. So we have highlighted that others take a different approach using cash tax rather than deferred tax in there. Calculation of underlying profit after tax, and therefore, their EPS and their DPS. That's unusual, but it's understandable in this sector. We're sticking with 99% of companies around the world that don't do that. But we keep the option open, should it be necessary in light of ongoing developments.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [32]

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Nigel Hawkins, Hardman Investment Research. Two questions, if I may. First of all, on the FD. I'm just curious, pensions policy. The GBP 699 million surplus, which in days of your -- would have led to a bid from Hanson or somebody else with such a large pension surplus. Do you rule out using in that surplus, perhaps by the employee -- employer contributions to boost your dividend payments during the years 2020 to 2025? I note that your ODIs at GBP 50 million are well below Severn Trent's figure of around about GBP 180 million. And secondly, on the test area assessments, now you've got a very, very large tick from Ofwat for using the early cost of capital figure that produced a 2.4%, presumably that's the consternation that's been generous to other water companies up West and North Cumbria. But Ofwat did criticize you for your leakage policy, and I quote, the company has proposed insufficiently stretching performance targets for its leakage. I wonder what are your target leakage and secondly, what Ofwat believes your targets should actually be.

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

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Okay. Do you want to do pension, and I'll pick up the other points?

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

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Yes. Sure. On pensions. Obviously, a lot has moved on in the world since the days of Rupert Murdoch and others. But suffice it to say that this pension surplus is an accounting surplus. It doesn't reflect a self-sufficiency basis, which is the best basis recognized by the pensions regulator, and on a pensions regulator, self-sufficiency basis. We have no surplus or deficit. So with that in mind, we do not envisage lower contributions because that would then just create the self-sufficiency there is over time, which would not be a responsible thing to do. So that's not envisaged.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [35]

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I think on ODIs, as you say, Severn Trent have a very large -- it is exceptionally large ODI return when you look at the rest of the sector for AMP6. Well done. They've identified a couple of areas of performance, which have been able to yield exceptional returns. Obviously, we saw that being capped and the consequences of that last year. But I think for us, we're very happy with a situation that, considering where we started, where our P50 position was around minus GBP 100 million. And so we -- one might have expected us to see as an outcome. We're in a situation where we're positive 50. I think the other thing that's important to us is that we're seeing that performance across the board. So we're moving the frontier of performance of the company forward rather than leaving the frontier where it is and focusing on specific items. But it's a big difference. And I think we're just satisfied that on the basis of what we know today, and obviously, we've got some time to run, we're in a performance perspective, from a sectoral point of view against all of our peers, we're in upper quartile position. So just to comment there. I think when you go into AMP7, the ODI changed markedly and AMP6 companies set their own targets. They set very much their reward and penalty regimes. And there was very little calibration or normalization of measures. Means we're going to AMP7, there's been a significant amount of effort to normalize the basis on which we measure performance and to set targets which reflect industry upper quartile rather than just a relative movement on the part of individual companies.

And when we come to the bespoke ODIs, i.e. those which are not industry standard, then the bespoke ODIs have been capped. So that prevents you from effectively runaway returns by focusing on a specific issue and earning runaway returns in that area. So I think ODIs are a very different bag, and we're learning. I think Ofwat's learning, the industry is learning as we go forward. And so you've got to perform in the round. And you can't get runaway in terms of the way it operates. So we'll see where we are. But I think one should take -- we take a lot of comfort from the fact that we started with a very tough position. The team has done a fantastic job, and we intend to have a crack at it in the same way when we go forward. I think on leakage, it's interesting. I think the view of leakage has changed quite markedly in the sense that up until AMP6, the view of leakage was that we should work on the basis of economic level of leakage. So in other words, what is it economic to chase in terms of fixing leaks, where should you responsibly spend customer money, and the conversation we had with Ofwat in PR14 was that our economic level of leakage is over 30%. So it's not efficient to chase leaks below 30%. Our actual economic level -- sorry, actual level of leakage, and we've met our leakage target for something like the last 14, 15 years I think, is around 25%. But when you look at it in the context of the industry and more widely, that puts us as like second or third lowest -- sorry, highest in the sector for absolute level of leakage. As we've gone forward into AMP7, then I think the question for the sector has changed, as well as public perception. Because if you think last year, when we, in the north had a drought, we had very similar conditions across the country, what was everybody talking about? They were talking about leakage. And now we're saying, if we didn't lose all this water in a period of drought, then arguably, we wouldn't have the problems that we have in terms of shortages and fears about hosepipe bans, et cetera. So I think the question for the sector has changed to say when you've got an environmental climate change, and you can see coming down the pipes, excuse the pun, a lot more dry weather, a lot more droughts more frequently, the Met Office is now saying that we could potentially see the weather conditions we had last year, every other year going out into the future. Then you start to look at leakage as a different dimension. And you say, perhaps, it's not economic. It doesn't appear to be economic to chase that leak and find it and fix it. But actually, in the context of resource management, it's very different. And so what -- in consultation with Ofwat, generally, across the sector, we said we're going to reduce leakage by 15% in AMP6. We debated was 15% enough, but effectively, we've got a target of a 20% reduction. So there isn't a discussion and an understanding between us and Ofwat, that we will look -- we will target to reduce our leakage percentage by 20% in AMP7 and that will be part of our ODI set.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [36]

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[I think you said] 25% plays, 20% of that would be Ofwat's target. Can I just ask a FD one -- one question anyway. Have you done any comparison on your self-sufficiency pension calculations? I'm thinking of Britain's most typical utility, British Telecom. Have you done a number on them? Just what their pension deficit would be if you use -- if they use your methodology?

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [37]

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No. We would leave that sort of thing to the analyst community who look across lots of companies.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [38]

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It'd be a very big number, isn't it?

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [39]

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It would, yes.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [40]

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Any other questions? All right. Dominic, back to you. We're going anticlockwise now.

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Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [41]

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Yes, it's Dominic Nash, Barclays. A couple of questions. So firstly, the physical qualities that would be, obviously, manifestos, I think, starting tomorrow, I think. Is there anything in these manifestos that you expect to come out, obviously, beyond nationalization, but on-site environmental protection or river control or climate change that you think could be quite interesting what you would like to see? And secondly, sort of recurring theme here. Russ, I've never seen you so happy answering so many pension questions. But how do you think Jeremy Corbin is going to treat your pension surplus, if you come to nationalization? Because I think on their energy paper, they said that it would take account of pension positions on compensation. I wonder which -- where Corbin would be on your thermometer. [Corbin case] is probably in the red end.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [42]

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I think -- yes, just picking up. What are we seeing? I mean, clearly, we're in the middle of an election. We've got a lot of politicking going on and all sorts of things being said. So I think for us, we're not -- other than the obvious renationalization agenda that the labor have, I think we've yet to see anything emerge, which is very different and obviously, we discuss the tax issue. But what's clear at this point in time is that we don't see, either as a consequence of the election or Brexit, any fundamental rolling back from the environmental or water quality obligations that we're working within. I think most of European legislation is in trying now in British law. I don't think we're going to see any -- the law change to row back from that. And if anything, with some of the things that we're seeing, we might well see that there's a further focus on environment going forward, simply because of the issues that we have around climate change and others. I think, undoubtedly, climate change is going up the agenda. Carbon Zero is going up the agenda. But we already have the public interest commitment that the water sector has signed up to, which is to do a lot of things to address those areas, particularly in things like carbon neutrality. We're all working at that. So I think at the moment, we're not seeing anything that is going to radically change the shape or the way that we deliver, but we'll wait and see. I mean, we've got 4 weeks to go. Four weeks is a lot of promises, isn't it, in terms of between now and then in terms of the politicking? But I think for us, we are -- you've got to just stand aside from that and just run the business as best as you can. We've got a lot to do in terms of finishing the AMP. We've got a lot of work ongoing for AMP7. And I think that's where we're our attention is focused, it's just keep driving that. I think -- I joined United Utilities because there was a huge opportunity for improvement, and Russ did, and over the years, we've just built a fantastic bench strength. You've seen some of the team, you'll see more at the Markets Day, and you can see what we've done. I mean, when we got our fast-track, Johnson Cox rang our Chairman, and basically said, I've seen a lot of companies in the sector, he's obviously worked in the sector. I've seen them, the ones at the bottom and they stay at the bottom. I've seen the ones at the top and they stay at the top. He said, but I've not seen a company make that level of movement you have. And so we've seen phenomenal opportunity. We've grasped that. We've delivered it. But I think when you look forward, there's so much more we can do. And I think the approach that we're making, Systems Thinking is something which is continually identifying new opportunity. They have an innovation that we've now got embedded in the business in terms of grasping new ideas, whether it's what you do around pensions, it's whether what you do around debt management, it's what you do around managing in a burst environment, it's just a different place. But we know there's so much more we can do. And I think that's what we're excited about for AMP7, is having a crack at all the things that we can still do to improve the business and deliver value, for everybody, for shareholders and the customers. And I think that -- so you've got to ignore all this stuff around you, and you just got to get your head down and you just deliver it, and that's the way we'll deliver. And I think we've not cut costs by sacrificing customer sat. You look across the sector, people are cutting costs, but their customer sets going backwards. We've not simply earned for the shareholders and disbursed it and then ask for more. We've -- we, as a community, have accepted a responsible approach is to share our performance. But we've invested in things that actually deliver better service or the better service for the environment. And there's much more we can do. So we'll -- we're ignoring everything that's going on around us, and we're driving a company that we think is what a responsible company in the utility sector should do, and we'll keep doing it.

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John Russell Houlden, United Utilities Group PLC - CFO & Executive Director [43]

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So on the...

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

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Sorry...

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

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Pensions.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [46]

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Next question. On Corbin and the thermometer. I certainly wasn't expecting a Corbin question and the thermometer. But first of all, it's really -- I'm really pleased that this thermometer has helped people to get the point, and I should give credit to one of the analysts who actually said that, "now that you've all that to us, I understand it, but what's that in [P] per share?" And that's what got me thinking stick P per share up there and do the thermometer, so credit to the analyst who got me in that direction in the first place. And as to what Corbin would make of pensions. Clearly, the paper that they put out a while ago, talked about if they were to nationalize, then they would look to adjust for what they consider to be bad behavior. And that might include asset stripping, excess dividends, poor environmental performance, all sorts of things, none of which apply to us. So when it comes to pensions, they would obviously see companies who had stripped their pension schemes as bad behaviors, but bad on the behavior scale and ours was good on the behavior scale. And I suppose the first reaction might be, "well, let's have a look at what's in the books," they might do that. But then they probably be advised by their support staff, and they'll be talking to TPR and others who might then start pointing self-sufficiency, which as I keep saying is, actually, the line of March, and it's actually what everybody ought to be looking towards. And I know it will be 2 or 3 years before everybody's got it because the government hasn't quite got there yet. But I think that's where we're going. So I think there will be some serious negatives for those who treated their pensions badly, the fact that we are self-sufficient. I mean there's certainly no negative, it could be positive or it could be neutral.

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

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James.

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [48]

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James Brand from Deutsche Bank. I just have a follow-up on one of the answers that you gave to an earlier question on the ODIs, where you were saying that there may be some differences in terms of how your ideas have come out and that others may be a little bit less harsh. Given that there is such an important issue, I was wondering whether you could just give a bit more detail on that as to why you thought yours were harsher, whether I presume there aren't necessarily that many differences on the common ODIs, or maybe there are -- maybe there were some calculation differences that you talked about.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [49]

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You're talking about AMP7 ODIs, yes?

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [50]

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Yes.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [51]

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Yes. I mean, if you -- James. We've got James Bullock here, who's Regulation Director, who -- so I'll give you an option. I always surprise you by asking you to say something. A couple of examples for James in terms of the representations we've made.

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James Bullock, United Utilities Group PLC - Strategy & Regulation Director [52]

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Yes, there's quite a number of representations we've made around the ODIs. All of them are in the detail and a lot of the differences that we're sort of calling out are things around sort of caps and collars that have been applied in the draft determination. So for example, on some of the -- it is actually on some of the common ODIs, we see that the cap or the collar that's been applied to United Utilities in the draft determinations, which were set in April are different from the caps and collars that were set for the draft determinations in July. And in some cases, those caps or collars are more advantageous. So a company or less stretching. Now obviously, there's a big gap, there's a time lag between a draft determinations, which we got early, but we're back in April and where we are now in November and coming into December. Obviously, Ofwat hasn't updated that position, and we're going to wait, we're going to have to wait a few more weeks to see where they come out. But I think what we have effectively done, and it's all there on the website. We've published our submissions to Ofwat in this regard. So you can see it's all very transparent. But we have called out a number of cases where we think that needs to be looked at and adjusted.

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Steven Lewis Mogford, United Utilities Group PLC - CEO & Executive Director [53]

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And there are other areas, James, where, for example, we're still, we've made totex representation. So I mean, a good example. If you look at the way the modeling was done around maintaining reservoirs. We have a lot of reservoirs that operate in a chain. So I live near one where, effectively, it's a reservoir system. But essentially, there are 3 reservoirs with a proper bank embankment between them, dam embankment. That and the modeling is dealt with this one reservoir rather than 3. And so you're looking at the costs associated with maintaining a single dam rather than 3 dams. And that's an area where we've said well, we understand how you've done the modeling, but actually, we've got 3 more dams than the model would do. So there are little tweaks and twiddles coming through in the way the modeling operates, where we're saying, great. If you look at the modeling, it actually is very representative of the sector and the way the sector might operate if they're operating single reservoir systems. But when like us, we often have several chains, we need to see. So it's in the detail, and we'll see -- we make representations, but it's a bit like shouting into a cave. And we're waiting to see what emerges from the cave on the 16th of December.

I didn't mean that sound rude, by the way. Okay. We're all done. Smashing. Thanks very much. Thanks for your attention. Thanks for coming along.