United Utilities Group PLC

Good morning, ladies and gentlemen, and welcome to United Utilities' half-year results presentation for the financial year 2020-2021. COVID-19 restrictions mean that once again, we can't meet face to face, but I do hope that this presentation and the Q&A that follows will give you an idea of the great start we've made against our AM7 plans. It's been a unique start to a new regulatory period in having to adapt to the operating conditions necessary to protect customers, employees and supply chain partners. And the EU team has done a fantastic job. And I'm extremely proud and grateful for the flexibility and dedication shown by everyone right across the business. Notwithstanding these challenges, we've remained very focused on delivering our own seven objectives. So here are the headlines this morning. First, we provide a critical service to customers 365 days a year, 24 hours a day. And never has it been more important that customers have access to water for sanitation than in this pandemic. With around 60% of our employees working from home and the rest at our COVID secure facilities, our services have been robust in satisfying the higher water demand we've experienced. The Northwest is one of the regions that's been most impacted by COVID and includes those areas that were first to enter the toughest Tier 3 restrictions as a result of high infection rates prior to the second lockdown. Alongside this, we serve some of England's most socioeconomically deprived communities that can be most susceptible to the impact of COVID and associated lockdown restrictions. And so it's been one of our key priorities to continue to provide support to those customers facing difficulties during these times. Many of the communities in which we operate are struggling, and we've played our part in trying to help. More of this in a few moments. Second, we were well prepared for AMP7. Fast-track status and our early investment in the last year of AMP6 gave us a flying start against our AMP7 targets, and we're doing well. We've accelerated our capital investment plans, spending more over the next couple of years than our original PR19 business plan to secure improvements earlier in the period for customers and the environment, along with accompanying ODI rewards. and contributing to the green recovery in our region. Third, and Phil will take you through the numbers, our financial performance has again been strong over the first six months of this year. Revenues have held up well, cash collection has been good, and our balance sheet and pensions position remain strong. And finally, dividend policy. Again, Phil will give you more colour, but we now have a clearer understanding of the impact of COVID on our business, which remains robust, and supported by a strong balance sheet. This, together with a stabilised inflation outlook, gives us the confidence to reaffirm the AB7 dividend policy we announced earlier this year of growth in line with CPIH inflation. I'll now unpack some of the detail, starting with our operational performance over the last six months. I mentioned that our services have been resilient to the unusual demand patterns we've experienced. Over the first half, we've seen a 3% higher net demand for water, with domestic demand exceeding the reduction in business consumption. At peak, demand was up 22% during the hot, dry spring. Domestic retail cash collection has remained strong due to a tremendous effort by our cash team in working to help customers in difficulty and collecting from those that can pay. Domestic bad debt has therefore been held at 1.8% of revenue over the first half. As COVID restrictions continue, we're seeing businesses make more redundancies, which could impact customers' ability to pay. But as we stand, we're comfortable with the $17 million additional bad debt provision we took at the end of last year. Our confidence is enhanced by the agreement we secured earlier this year to expand the scope of our social tariff. This has the capacity to extend support to up to an additional 45,000 customers who are struggling to pay their bill. The business retail environment remains challenging, but the liquidity support provided to retailers during the pandemic, including our joint venture WaterPlus, has been invaluable. This will unwind progressively by year end. Retailers are now beginning to bill those customers for whom billing was suspended, and off what is currently consulting, on the bad debt relief retailers may be given beyond 2% of revenues, and we await the outcome of these deliberations. I'm extremely proud of the focus and empathy that our customer-facing team has shown during these unprecedented times. We have an extensive range of schemes available to help customers, and so far this year, these have helped over three times more customers than for the same period last year. In total, around 142,000 are currently benefiting from support with their bill, representing about 5% of our domestic customer base. We've committed to provide $71 million in financial support to customers of Ram 7, and we've accelerated payments this year to provide much-needed assistance. We've also sought to play our part in helping the communities we serve get through the pandemic. Just a few examples. During school closures, our education team created a home learning hub which supported teachers and children across the region with material for homeschooling. The resources were accessed by over 7,000 users and our reach even extended to schools in Italy. We hosted the SEPTA's first Social Mobility Summit, at which more than 100 organisations joined us to launch our Opportunity Action Plan, outlining our commitment to the Social Mobility Pledge. Recruitment of apprentices and graduates has continued uninterrupted, along with our youth programme helping young and employed, including our support of the Kickstart programme, offering training and meaningful work placements for initial 250 young people, with scope to increase further next year. And finally, our ongoing charitable support, including the board's voluntary salary reduction, has helped provide welcome support to local communities. One of our donations to the Fair Share charity has supported them in delivering 600,000 meals to half-pressed families via local food banks. Our investment in skills has continued throughout the pandemic. Our Technical Training Academy, established in 2014, has to date provided skills development and certification to around 2,500 employees and includes programs for those individuals not in education, employment or training. I mentioned earlier that we're fortunate to have a workforce that has shown flexibility and commitment to maintain customer services. In surveys, we consistently find ourselves among UK high performing companies for employee engagement. But our employees aren't immune from the hardship that has beset so many families in our region. And so we've established a staff outreach scheme that provides financial support to those whose families are struggling financially as a direct result of the pandemic. Like many other businesses, the pandemic has been a catalyst for the acceleration of our digital strategy, and I can't see us returning to the way we did business before COVID, and we're carefully considering what our new norm will be. I'm very pleased with the start we've made throughout the 7th. As I mentioned earlier, securing fast track status in PR19 gave us early certainty of our targets and time to get a flying start to the new regulatory period. We invested around $130 million in the last year of AB6 in projects that improve customer or environmental outcomes and the opportunity to outperform our ODIs. In AB6, we accelerated our capital expenditure in the first two years to deliver schemes early, and we're doing the same in AB7, with around $500 million of our total expenditure brought forward, mostly into this year and next. Our Ant7 scope has been extended with the enhancement of our wastewater treatment facility in Bolton and work on our critical vernal aqueduct, totaling around 150 million in Ant7. Operational performance in the first half has been another year-on-year improvement, and customer satisfaction remains high and on track for a first-year reward under the new CMEX incentive mechanism. We've maintained our sector frontier performance, with no serious pollution incidents so far this year, and we're on track for industry-leading four-star environmental performance for 2020. And I'm pleased to say that we've successfully completed the replacement of the hall bank section of our Horswater aqueduct. The work was initiated at AMS6, funded from AMS6 Outperformance, delivered on time and within budget, and replaced the section of the aqueduct considered to be most at risk of failure based upon surveys conducted in AM5 and AM6. Our AM7 business plan was assessed by Ofwat as being amongst the most efficient in the sector, and I'm happy to report that following the action we took during AM6, we start AM7 at the target Totex run rate. So we're confident we can deliver our AM7 scope within our final determination Totex allowance, and our plans have us delivering the committed outcomes, investing to drive further efficiencies, and delivering ODI outperformance. Whilst our goal is to deliver Totex outperformance, we will invest Totex where we're confident that we can deliver greater ODI performance through improved customer or environmental outcomes. AMP7 is different to AMP6 in that our ODIs are measured annually and result in a revenue adjustment two years later. We're currently on track for a net ODI reward for the first year of AMP7. As you know, we have 46 ODIs in total, but this slide shows you where we're currently predicting to be at year end for the main contributors to a net ODI reward. The largest rewards are expected for our performance in reducing the risk of hydraulic internal flooding, pollution, and reducing the number of void properties. Against some of our tougher ODI targets, we anticipate being in penalty, although systems thinking is playing a key role in improving our performance in these areas. And we'll be talking more about plans at our capital markets day in the new year. Currently, we expect to earn a net reward of around 10 million this year. Our total outcome will clearly depend on performance in the second half, and we have a winter to get through, but we also have opportunity to do better. Across AM7 in total, we're targeting a net ODI reward in excess of the 44 million, we achieved in AMP6. And finally, AMP7 dividend policy. Phil will add more colour in his section, but we now have a clearer understanding of the impact of COVID on our business, which remains robust and supported by a strong balance sheet. This, together with a stabilised inflation outlook, gives us the confidence to reaffirm the AMP7 dividend policy we announced earlier this year of growth in line with CPIH inflation. Phil, over to you.

Thanks, Steve. Morning, everyone. Having met many of you when I was Group Controller and prior to that, Group Treasurer, I'm delighted to be presenting my first set of results to you today as CFO. This morning, I intend to highlight our strong financial performance and draw out the main financial points in relation to COVID-19. As COVID-19 is now regrettably passed every day alive, we have not made any adjustments for its impact on our non-GAAP financial measures reported today. I will then discuss the robust nature of our balance sheet focusing first on our customer receivables position before covering familiar ground on RTV gearing and, of course, pensions. Having summarised our strong financial performance and robust balance sheet, I intend to provide more detail on the Board's confidence to reaffirm our Amp7 dividend policy today. Lastly, I intend to give you some high-level forward guidance for your outlook. Here are the key financial highlights of the half-year. Revenue of £894 million is down 4.4%, largely reflecting the known price reduction in this, the first year of the new regulatory period. Household value is 1.8% of regulated revenue, which is consistent with the pre-COVID rate in the prior half year. Underlying operating profit of 319 million is down 18.5% as a result of the fall in revenue and planned higher infrastructure renewals expenditure. As a result, underlying EPS of 25.5 pence per share is down 16.1%. Our balance sheet remains one of the strongest in the sector, with low customer deficit risk, RCD gearing of 63%, and a pension scheme that is fully funded on a low dependency basis, all of which supports a stable AP credit rating from Moody's. I'll now consider these points in further detail. On the left-hand side of this slide, we provide a bridge of revenue from the first half of last year to the first half of this year. In summary, revenue of £894 million is £41 million lower, largely reflecting the known price reduction in BITs the first year of the new regulatory period. Now turning to each of the components in the bridge. Revenue in the first half of last year was reduced by £6 million due to the impact of the wholesale revenue forecasting incentive mechanism, which does not apply in the current year. In this first year of the new regulatory period, we had a known reduction in the revenue cap, which in the first half is 40 million, representing a 6.6% reduction in average household bills and a 1.5% increase in CPIH. In the non-household market, we have seen a 40 million reduction in revenue due to lower consumption and businesses being assessed as temporarily vacant during the first COVID lockdown. In contrast, in the household market, we have seen 26 million increase in revenue due to the impact initially of people being locked down at home due to the warm weather in late spring and then many of them continuing to work from home longer term. On the right-hand side of the slide, we set out our market guidance for full year revenue to March 21. In the second half of the year, we expect the impact on non-household revenue to be broadly consistent with the first half, while the impact on household revenue is likely to be reduced as we won't benefit from the increased consumption due to the warm weather. Our current guidance, is that full year revenue for March 21 will be between 60 and 110 million lower than the prior year, with the volume impact estimated at between 10 and 60 million. Under the revenue cap, this volume impact is recoverable in two years' time. I will now talk through three key points on household cash collection and bad debt. The first key point is that cash collections remain robust through the first half of the year, with cash in relation to current year charges in line with last year. The support the government has provided to the job market has been helpful, and although inevitably there remains a degree of uncertainty into the second half of the year, as we have seen with the second lockdown, government policy remains to provide the support necessary to protect jobs. Over recent years, we have focused relentingly on improved data quality, business processes and systems to ensure that we are able to accurately pursue payments in an efficient and timely manner. I was therefore delighted that this was recognised in the 2020 Credit Awards, where our customer team won the best use of technology award for their work on a new debt management system. The second key point is that while cash in relation to the prior year charges is slightly down on last year, this reduction is less than we expected when we got to the £17 million incremental provision in March 2020, which also prudently assumes a low level of cash flow persisted into future years. As such, we remain confident that the balance sheet is adequately provisioned. More on this shortly. Where customers want to pay their bills that have a clear affordability issue, we're available to offer the widest range of affordability schemes in the sector. And as Steve has already mentioned, these have been extended this year with the addition of a further social tariff providing £15 million per annum to support customers struggling with the consequence of COVID-19. The third key point is that household bad debt charge for the first half of the year has been maintained at 1.8% of regulated revenue. This is consistent with where we worked in the first half of last year and the underlying position for the full year from March 20. In the current year, we have also enhanced our credit reference sharing process to include another agency with a greater high street focus. This will further extend our footprint and improve our collections activity. This is just one example of our comprehensive approach to collections activity, supporting our ability to collect cash from customers who have the ability to pay but attempt to avoid doing so. In the current climate, it is doubly reassuring that the customer team's comprehensive approach to collections activity was further recognised, winning the headline award for utilities and telecoms team of the year in the 2020 credit awards. These facts will give us confidence that we will continue to be able to perform well as the job market and unemployment picture evolves. On this slide, we provide a bridge of underlying operating profit from the first half of last year to the first half of this year. underlying operating profits of $319 million is down to $73 million. This principally reflects a $41 million reduction in revenue and a $15 million increase in infrastructure and oil expenditure as a result of ongoing work to optimise the performance of our network, as well as including adverse weather-related expenditure of $3 million. Property rates are higher, largely reflecting an $8 million rates refund received in the first half of last year. Employee costs are $5 million higher, partially reflecting a marginal reduction in capitalised costs, with only 45% of employment-related costs charged to capital programmes. Having ended Ant6 that required Totex run rate for Ant7, we are confident that we can control our costs to live within the Ant7 final Totex allowance. Lastly, we have incurred £3 million of extra COVID-related costs, which along with the £3 million of weather-related expenditure I've already mentioned, have been absorbed within our cost base. In total, this is $6 million of expenditure, which has not been treated as an adjusted item when calculating our underlying operating profits. Focusing next on the remaining key lines of income statements, our underlying net finance expense is $109 million, which is $34 million lower than the first half of last year, predominantly reflecting the lower inflation applied to our indefinite debt. Our share of profits of joint ventures is $3 million, mainly relating to our talent JVs. Our share of Water Plus losses for the prior year resulted in us reducing the group's net investment in Water Plus to nil at March 20. As a consequence, our £6 million share of Water Plus losses for the first half of this year is not recognised in the income statement. Our underlying cash charge for the first half of the year is £39 million, representing 18% of underlying profits, and excludes the impact of deferred tax. all of which results in underlying profit after tax of 174 million and an underlying EPS of 25.5 pence per share. Now looking more closely at financing performance. Over round seven, we have around 2.4 billion of financing to raise. Since our four-year results in May, we have raised around 600 million, taking advantage of attractive rates and extending our liquidity position out to September 2022. Over this period, central bank stimulus has been very supportive of strong investment-grade companies like ourselves, and we expect this to continue to be the case, providing us with efficient access to the debt capital markets in the future. This chart shows our projected debt balance across the AMP, together with the rates that we have locked in. These rates are favorable compared to the price review assumptions for AMP7. In August, we executed our first CPIH swap, resulting in $50 million of debt, now linked to CPIH. therefore a perfect match for the regulatory regime. We believe this to be one of the first CPIH swaps and it's the first step to increasing our CPIH rankings in our debt portfolio. And finally on financing, yesterday we published a new sustainable finance framework allowing us to raise financing based on our strong ESG credentials. We have always had a tangible proportion of funding supporting environmental projects and this historically has been funded by the European Investment Bank. Post Brexit, Funding rates for our sustainable finance framework will replace our green ERD funding and sit alongside our conventional issuance. Now turning to our customer receivable position. Given the uncertainty created by COVID, we anticipate there to be a keen focus on the coverability of household debtors. As discussed earlier, this has been an area of intense focus for us for most of the last decade. The chart here shows our household net debtor position over the last five years. The position has been robustly managed and our strong performance manifests itself in the balance, reducing from £115 million in 2016 to £78 million in 2020. As at March 20, our net debt balance of £78 million was the lowest it has been for five years and is one of the best managed customer receivables positions in the sector. Our bad debt provisioning policy ensures that debt more than three years old is fully provided and as we believe this is the extent of any credible recovery period, And as you can see, the balance sheet exposed to debt more than one year old is just $17 million. Knowing that our customer receivables position was well managed coming into pandemic crisis gives us added confidence as we look to navigate the challenges ahead. This slide bridges the net debt from March 20 to September 20. Net debt of $7.4 billion has increased by $35 million since March 20. This incorporates a change to our definition to exclude the impact of derivatives that are not hedging specific debt instruments and therefore gives a better reflection of debt balances we are contractually obliged to repay. This updated approach is now more consistent with that taken by the credit rating agencies and better reflects the regulatory economics. The change in definition reduces net debt by $178 million at September 20 compared to $135 million at March 20. A full description of the adjustments are included in the appendices to this presentation. The usual movements in net debt are shown in this bridge. The credit rating agency has also made further adjustments to any IFRS pension deficit, which is not relevant to the United States authorities given our IFRS pension surplus position. Now considering pensions in more detail. As we know, pensions can be an absolute risk. While the focus is often on the IFRS deficit that can be observed, the full extent of the pensions issue, measured on a low dependency basis, is unobserved below the waterline. Back in 2010, we did have a pensions iceberg, with an iceberg deficit of just under 300 million. Of what had just concluded the PRO9 price review and had drawn a line on the future funding of pension deficits beyond the 50% support for the deficit that existed at that point in time. Recognising this, we established a joint working group with pension trustees to manage the pension risk collaboratively and within acceptable risk and affordability envelopes. This innovative approach to governance is another example of ESG in practice at United Utilities, driving long-term value for all stakeholders through responsible strategic financial management. The impact is illustrated in the centre of the slide. In terms of the recent evolution of our position, you can see that that September 20, our IS19 surplus was just over £650 million, and that the temporary size and credit spread due to COVID that we witnessed in March 20 has largely unwound. This compares to a fully funded position on a low dependency basis, which means we have no further pension deficit contributions payable. Furthermore, because the pension schemes are fully hedged in interest rates and inflation, we would expect the pension scheme position to be largely insulated from market volatility. Our strong pension position is consistent with the Pensions Regulator's proposed fast-track classification, and we would not anticipate having to take any further action as the Pensions Regulator's approach evolves alongside the current consultation. At a time when balance sheet strength is more important than ever, it is reassuring that we don't have any pension icebergs to contain with United Utilities. I will now provide more detail on why we are confident today to be reaffirming our Ant7 dividend policy. Back in May, the onset of COVID has clearly resulted in a significant degree of uncertainty. There was a risk of sustained low inflation over a three to five year period. The government and central bank response was still in its infancy and the ongoing impact to our business was unclear. Since then, monetary and fiscal policy has been deployed extensively and persistently in support of the economy. The Bank of England retained the capacity to act and provide more support and has been clear that in times of uncertainty, it is best to act aggressively. while UK authorities more generally are committed to maintaining support to the economy as long as it is necessary to do so. So although we're now in the second national lockdown, the picture is very different today than in May. Most businesses continue to operate and COVID-secure ways of working are normal. Policymakers have repeatedly shown they're prepared to act most recently in November with further monetary and fiscal policy support. Median term inflation consensus has reverted to above pre-pandemic levels, and increasingly the risk of these forecasts is to the upside. All of this activity, along with the increased likelihood of max scale vaccines becoming available, remains supportive of the economy, and importantly, inflation over the median term. This positive inflation outlook, alongside our excellent operational performance and our strong balance sheet position, is why the Board is confident today to be reaffirming our 7 dividend policy. This slide sets out our full-year outlook. As already discussed, we would expect full-year revenue to be in the range of £1.75 to £1.8 billion, reflecting a known year-one bill reduction and the net impact of COVID on both household and non-household consumption. Underlying operating costs are expected to be higher year-on-year, reflecting small inflationary increases coming through core costs, alongside higher IRA to maximise performance of our networks. Having ended Amp 6, it will require Totex to run late for Amp 7, but we remain confident we can deliver at our Amp 7 scope within the final determination of Totex allowance. Underlying finance expense is expected to be lower year on year, as the reduction due to low inflation in the first half of the current year is expected to continue in the second half. Cat X of the year is expected to be in the range of £5.96 million to £40 million, reflecting the acceleration of our Amp 7 programme. And although dependent on our performance in the second half, we would expect to earn an ODI reward of around 10 million for the year. So to summarise, we've delivered another strong financial performance in the third half of the year. Cash collection in our bad debt position has remained robust. We have lost in debt at low rates compared with the price of the assumption, and have retained good access to the credit markets, meaning we are well placed at amp 7. We benefit from having one of the strongest balance sheets in the sector, with a leading pensions position and a low level of customer get-to risk. And finally, we have seen inflation forecast stabilised, supported by central bank stimulus and treatment intervention. This, alongside our excellent operational performance and our strong balance sheet position, gives us confidence today to be reaffirming our 7 dividend policy. Thank you, and I'll now come back to Steve.

So thanks, Phil. Before concluding, there are just a couple of areas I want you to update you on. First, the sector has been supporting the government to play its part in the post-COVID green economic recovery, namely investment in infrastructure that will benefit the environment and create more jobs than would otherwise currently be the case for AMP7. And there are four components to this request. The first is that companies should be on track in delivering their current AMP7 commitments, and we are. The second is that companies are encouraged to accelerate existing AMP7 investment plans and we are, to the tune of around 500 million as mentioned previously. And the third is companies should convert potential AMP7 enhancement projects to commitments through engagement with quality regulators, and we have, with around 150 million of additional investment now planned in AMP7. And finally, companies may propose the acceleration of schemes that might otherwise feature in AMP8 within companies' PR24 business plans. We're in dialogue with DEFRA, the Environment Agency and Ofwat regarding proposals in the fourth category. And there's much to resolve in terms of scope, costs and funding, but this presents an opportunity to supplement what we're already doing to contribute to the green recovery, creating jobs in the region hard-pressed as a consequence of the pandemic. More about that when we meet again. And finally, a reminder of our strong performance across the range of ESG agencies. Our approach to ESG has been clear and enduring, and our responsible behaviour in supporting customers, colleagues and communities through the challenges of COVID is more important now than ever before. Earlier this month, we were pleased to once again achieve world-class status on the Dow Jones Sustainability Index, a status we've now held for 14 consecutive years, demonstrating our long-term commitment to ESG. And this level of performance is replicated across the broad range of industries shown on the slide, many of which are used by investors. Some of you will have seen the investor guide for our approach to ESG that we published in September, and we hope you found this helpful. And as Phil has already mentioned, we're leveraging our strong credentials in this area through our sustainable finance framework to raise debt and replace the green EIB funding that's no longer available. So in summary, I'm hugely proud of the job the UU team is doing in maintaining services and providing support to struggling customers, employees and communities in a region hit hard by COVID. Higher domestic consumption is helping to offset reduced business revenues and we're well positioned from a bad debt perspective. We started Act 7 extremely well, having benefited from around £130 million investment ahead of the start to the end and the certainty that fast-track status in PR19 provided. We're driving value for all stakeholders. We're leading the way on customer satisfaction, on track for an industry-leading four-star environment status, and expect to deliver outperformance in year one of the AMP. And finally, we're reoccurring our AMP7 dividend policy of growth year-on-year by CPIH out to 2025. So thanks for listening. and we'd now be happy to take any questions.