United Utilities Group PLC

Good morning and welcome to United Utilities' four-year results presentation. Since joining the company, I've enjoyed the opportunity to speak to many of you and I look forward to continuing to do so, hopefully this year in person. One of the topics that investors have discussed with me is board succession, and I'm pleased to say we've ran an orderly process, as you'd expect us to. With respect to non-exec directors, in July this year, you'll see that both Mark Clare, Al Cid and Stephen Carter, who chairs our Corporate Responsibility Committee, will retire from the board. They both contributed hugely to the success of the company over the years, and I want to thank them for their support. We have a clear plan for their succession, having appointed Liam Butterworth to the board in January and with the appointment of one further non-exec plan for this year. In respect to our exec directors, Phil Aspin succeeded as CFO nearly two years ago and the board is delighted with contributions Phil continues to make. You'll no doubt have seen Steve plans to retire early next year and that Louise Beardmore has been appointed as his successor. Louise has been with United Utilities for over 25 years and she has extensive utility experience. She's been at the heart of the company's transition to become a leading performer in customer service, operational delivery, employee engagement, and was the outstanding candidate in a rigorous selection process, including both internal and external candidates. The Board is delighted to make this appointment and once again demonstrates the strong management team that Steve has built. In his 11 years at Unite Utilities, Steve has led the transformation of the business to become one of the UK's top performing water and wastewater companies. As you'll hear in this morning's presentation, performance over this last year has continued to improve under his leadership of Steve and his management team. Recognising this, the Board proposes an increase of 0.6% in the final dividend, which is in line with our policy. This takes the total dividend to the year to 43.5 pence per share. Thank you, and now I'll hand over to Steve.

Thanks, David. Good morning, ladies and gentlemen, and welcome to the United Utilities full-year results presentation for 2021-22. We've built on our strong foundations again this year, delivering value through high levels of customer satisfaction and further improved operational performance. Inflation and cost of living are important current issues, and through our extensive affordability support schemes, we've continued to play our part in helping those that are struggling most. Controlling our cost base in this environment has been a key area of focus for us, as has responsibly using outperformance. Our anticipated AMP7 outperformance is expected to be significantly higher than previously predicted, and we believe that a responsible approach is to share our success for the benefit of all of our stakeholders. We'll therefore be investing an additional £400 million to deliver even greater improvements in services for customers and the environment, bringing the total investment beyond the scope of our final determination to £765 million. Systems thinking is embedded across the business, supporting our transformation to a digital utility. And we're seeing the benefit of accelerated investment on performance both in this regulatory period and in expectations for future periods. Recent developments in environmental legislation are very substantial, and the government targets currently subject of consultation could represent significant growth in the investment contained within our business plans for PR24 and beyond. So here are the highlights for the year. Our sector-leading package of support, worth around £280 million over AMP7, is providing much-needed financial assistance to struggling households in the North West. We've sustained high levels of operational performance, which together with higher inflation has contributed to a return on regulated equity of 7.9 annual net ODI reward of 25 million. An underlying operational performance enhanced by targeted incremental investment underpins our confidence in increasing our total AMP7 ODI target to 200 million pounds, an increase of a third on previous guidance. With our AMP7 outperformance now expected to be significantly higher than previously predicted, we're responsibly sharing our success through additional investment of £400 million. Including previously announced investment, this takes our total AMP7 investment beyond the scope of the FD to £765 million, driving both sustainable performance and contributing to nominal RCV growth of 21% across the AMP. Central to this is the investment in our Better Rivers Plan that will see us make an early start on provisions with the Environment Act and supports a reduction in recorded spills by at least a third. In total, we've made four pledges to deliver over the next three years. And in doing so, we'll kickstart a river revival ahead of AMP8. We have an important role to play in supporting customers who are struggling to pay their bills. Looking at bill increases across the sector for FY23, we're one of the minority of companies who expect to see no increase in the average bill for households in our region. We've committed to a significant package of support for struggling households worth around £280 million over this amp. Through our extensive range of affordability schemes, we're currently supporting over 200,000 households. And we're leading the utility sector in implementing open banking. And this has helped us deliver even better customer service. It takes a process that previously could have taken weeks down to just a few minutes, allowing us to find the most suitable support scheme for customers quickly. Back in 2019, we worked with the advice sector to develop the Northwest Hardship Hub, a central repository that provides access to all the very latest affordability schemes that are available. It's proven to be an invaluable resource, particularly during the pandemic, and will continue to be as households are impacted by the current challenging environment. There's always more we'd like to be able to do, and we're a leading supporter of the Consumer Council for Water's drive to introduce a national social tariff. This would help to deliver a more equitable sharing of support across the country, so that support will be provided to those who need it, regardless of where they live. Now turning to operational performance, I've said previously that our focus is on investing in sustainable operational performance, and that's what we're achieving. We're delivering better service to customers and once again have performed well against off what CMEX measure, earning a reward for the year. On wastewater, we continue to be sector frontier with low levels of pollution, having reduced overall pollution by a third since the start of the AMP. And our treatment works compliance remains strong, and we expect to remain green on this measure in the Environment Agency's annual performance assessment for 2021. On water, we continue to improve the quality and resilience of our water supply. This is evidence in Ofwat's latest service delivery report, as shown in the chart at the bottom of the slide, where we're highlighted as an industry top performer on reducing water supply interruptions, as well as on reducing pollution incidents. In both of these areas, we're now seeing the benefits of targeted investment that we made in AMP6. Ofwat's assessment shows us at or better than target on the majority of measures, although there are three specific areas where we landed below target. One of these is household water use, where industry targets set at PR19 have been significantly impacted by the move to working from home during the COVID pandemic. The other two areas are the focus of targeted investment, and I'll now talk about what we're doing in these particular areas. The two measures where we fell short of target for the year are internal sewer flooding and water quality, principally appearance. These are both areas of focus and incremental investment. I've previously spoken about our dynamic network management programme. This is our groundbreaking 100 million systems thinking network, the first of its type in the world. We fitted more than 10,000 sensors on our sewer network and linked them to an innovative artificial intelligence platform. And the data produced by this system means we're finding and fixing issues within the sewer system before they cause an incident. As a consequence, customs have seen a year-on-year reduction in internal flooding of a third over the last year, with our performance significantly ahead of the original target we set ourselves. We're also investing $100 million in our water networks to reduce incidents of discolouration experienced by customers. Progress to date has again been good, with more than a 26% reduction in taste, smell and appearance reports by customers in the first four months of this year compared to last. This builds on the broader assessment of drinking water quality, where last year we delivered a 44% improvement in the metric that assesses the impact of water quality events during the year. The investments in both these areas is contributing to the improved ODI guidance for AB7 and will improve our overall AMP8 outlook. I want to talk about how a high level of performance together with investment translates into ODIs. Our strategy for AMP 7 has been to prioritize operating performance and ODI rewards through effective Totex investment. And this year, we've met or exceeded our targets on 80% of our ODIs. We anticipate ODI targets to tighten again in AMP 8, and so maximizing performance this AMP provides an optimum start to the next. We expect our net ODI reward for this year to be around 25 million, our largest single year reward and ahead of our original target for the year. And performance to date, along with targeted investment in areas for improvement, give us the confidence to increase our total AMP7 ODI guidance by a third to 200 million. And I want to look more closely at how we're responsibly sharing with all of our stakeholders the benefits of our continuously improving operational performance and higher inflation. In the current environment of high inflation, the extensive affordability support we provide is critically important. And the fact that households in our region won't see an increase in the average bill for 22-23 will be welcomed by many customers feeling significant inflationary pressure on other household bills. Our improving operational performance, together with high inflation, is increasing our AMP7 outperformance expectations, and so we're responsibly sharing these benefits through 400 million of additional investment in two specific areas that would otherwise be included in our business plan for AMP8. First, 250 million will help us improve environmental outcomes, making an early start on implementation of the government's new Environment Act, including delivery of the pledges we set out in our Better Rivers Plan. Second, we're investing 150 million in additional base and business case driven projects. This will accelerate improvements in service for customers, drive ODI performance, and includes around 100 million that we're investing in improving drinking water quality that I spoke about earlier. The investment we're making now will not only improve service and ODI performance in this AMP, but will also provide a platform for significantly better ODI performance in AMP 8 and beyond, providing further benefit to be retained by the company. I'd now like to take the opportunity to frame this 400 million of new investment in the context of the total investment we're making beyond the scope of our final determination. That now stands at 765 million. So this slide shows how the total incremental investment of 765 million comprises three broad categories. The first category comprises £265 million of approved incremental base investment that's allowed for through regulatory mechanisms established at PR19, plus our green recovery investment. The second category comprises £250 million in relation to business case supported investment, delivering improved customer performance and ODIs. This contributes to our increased ODI guidance for AMP7 and materially improves our ODI outlook in future AMPs. And the final 250 million relates to the investment to accelerate improvements in environmental outcomes, as mentioned on the previous slide. Our anticipated outperformance, together with our financial strength and balance sheet headroom, allows us to fund this investment within our target capital structure and AMP7 dividend policy. In doing so, we're responsibly accelerating improvements to the environment and improving service to customers, while also generating value for shareholders with the full 765 million subject to the regulatory mechanisms that are in place. As a sector leader on environmental performance, we care deeply about our impact on the environment. We constantly strive to raise the bar on our performance and we continue to be actively engaged with EA and Ofwat in their joint investigation into the sector's compliance with wastewater discharge permits. We're determined to maintain our sector leading position on environmental performance, building on our past legacy by addressing aspects of new and emerging environmental requirements early in AMP7. Demonstrating our ongoing commitment to protecting and enhancing the environment, we've launched our Better Rivers, Better Northwest programme to kickstart a river revival in our region over the next three years. It's a four-point plan, with the high-level aims set out on the left-hand side of the slide, with some of the detailed targets on the right-hand side. Our AMP7 final determination included 230 million of investment in environmental improvement. And as I mentioned earlier, we're investing an additional 250 million to make an early start against the requirements of the Environment Act. We've made a great start against our targets, delivering a 28% reduction in spills between 2020 and 2021. I'll now hand you over to Phil to take you through the numbers.

Thanks, Steve, and good morning, everyone. In today's presentation, I will highlight our strong financial performance. Firstly, I will summarise our Rory position before focusing on our resilience in the current inflationary environment and providing further detail on our approach to power hedging. I will then look at our additional investment alongside higher inflation is set to deliver higher RCV growth. And to wrap up, I'll provide some high level guidance for the full year to March 23. These are the key financial highlights for the year. Our performance, together with higher inflation, has helped to deliver a reported Rory of 7.9%, double our base return. Revenue of 1.86 billion is up 3.1%, largely reflecting higher consumption from businesses as activity has returned to pre-pandemic levels. Household bad debt has returned to 1.8% of regulated revenue, consistent with the rate we were achieving pre-COVID. An underlying operating profit of 610 million reflects the increase in revenue, partly offset by inflationary increases in our core costs, including increased power costs. Like many companies, we've experienced inflationary cost pressures on a range of input costs. And as power is a significant cost for our business, we have a progressive policy of hedging to minimise short-term volatility. This has helped to mitigate some of the inflationary impact and puts us in a relatively strong position next year, having hedged over 90% of the commodity price risk. Underlying EPS is 53.8 pence per share, and the total dividend per share is 43.5 pence, in line with our policy. And finally, our balance sheet remains one of the strongest in the sector, with a low customer debtor risk, RCV gearing of 61%, and a pension scheme that is not only fully funded on a low dependency basis, but is also fully hedged for inflation, an important feature in the current environment. All of which supports a stable A3 credit rating from Moody's. So I'll now consider these points in further detail. So first, let's look at Rory, with the chart here showing our reported ROI for the year of 7.9% on a real basis. This reflects strong performance on tax, where we've optimised government tax incentives, and on financing, where we benefit from the higher inflation and rates that we've locked in on our debt portfolio. Our ODI performance reflects the 25 million net reward for the year, and Totec's performance is a consequence of the investment we are making beyond the scope of the FD, primarily on dynamic network management. The benefit of improved ODIs from this investment flows through into Rory in later years. Underlying Rory of 7.7% adjusts for our assessment of the tax impact that will be subject to the tax sharing mechanism. The benefit from capital loan super deductions on the FD CapEx profile, along with green recovery spend, will be retained by customers, whereas decisions by the company to accelerate capital investment, along with investment beyond the FD scope, will be retained by shareholders. So underlying operating profit of 610 million is up 8 million, principally reflecting a 55 million increase in revenue, largely offset by inflationary increases in our core costs. Revenue is 55 million higher than last year, largely reflecting an increase in non-household revenue as business activity has been stronger than expected during the year, partly offset by a fall in household revenue in line with expectations with fewer people working from home. The prior year saw 8 million of additional one-off costs incurred in adapting our operations, such that we were able to operate through the pandemic. As we continue to drive for better outcomes for customers and the environment, we have incurred an additional 17 million of costs targeted at improving performance against specific customer ODIs, such as that spend associated with dynamic network management. Like many other companies, we've experienced inflationary pressures on input costs such as power, chemicals, contract services and labour, resulting in a 33 million increase in core costs. And finally, a recent IFRS Interpretations Committee decision in respect of configuration costs associated with software as a service means costs of 6 million this year are treated as operating costs, whereas previously they would have been accounted for as fixed asset additions. Now, Steve has already covered the extensive customer support we provide for those customers who have an affordability challenge. So I will talk through our approach now to household cash collection against the broader customer base and our bad debt performance. We have one of the highest proportions of customers on direct debit or alternative payment plans at over 80%. This gives us a strong starting point for our collections activity and provides a high level of certainty for a significant proportion of our revenue. Where customers can afford to pay but choose not to do so, we have a comprehensive data-led approach to collections that helps us to accurately pursue payment in an efficient and timely manner. There are a number of techniques that we utilise, including nudging customers who are late to make payment by email or text, using multiple credit reference agencies to establish a financial footprint, and ultimately using credit reporting, one of only a small number of water and sewage companies to do so. Our leading approach to collections continues to receive external recognition, having recently won five external credit awards assessed against credit, banking and utility company peers. The innovation we use in data and technology helps to channel financial support to those who need it most, and coupled with the advancement of open banking, continues to be recognised as best in class. Finally, as I've mentioned previously, it's important to consider the bad debt charge in the context of a risk carried on the balance sheet. Last year, I highlighted our strong customer debtor position, one of the best managed positions in the industry, and with our robust approach to collections, our balance sheet risk remains low today, with only 4 million of our net household debtors aged more than one year old. This is a very strong position to be in, recognising the pressures customers face in a very challenging environment of rising inflation. This all supports our lowest level of household bad debt at 1.8% of regulated revenue. So let's now focus on the impact of inflation on our business. The regulatory model allows for inflation through indexation of the Totex allowance and the RCV, with each 1% increase in inflation across the AMP, resulting in increases of around 150 million in our Totex allowance and around 600 million to our RCV. Let's look first at our Totex position and how we're managing the impact of inflation. On OPEX, we've agreed our pay deal for FY23, broadly in line with inflation last November. Power is over 90% hedged for FY23, and I'll discuss this in more detail shortly. Chemicals represent a relatively modest proportion of our cost base, but we may see costs rise materially above CPI-8 in FY23 as a result of pressures from higher energy costs and the disruption caused by the war in Ukraine. On the capital programme, we have over 90% of the AMP7 base programme already under contract on target price arrangements. This provides greater certainty of supply in a buoyant construction market and ensures both parties are incentivised to manage cost pressures. And so to summarise, we continue to actively manage the impact of inflation on our cost base with the indexation of our Totex allowance providing further mitigation. Looking next at our capital structure and interest costs, around 60% of the RCV represents debt and the remaining 40% being equity. As you know, our hedging policy targets 50% of our debt as inflation linked, meaning that 30% of the RCV is hedged for inflation, while equity benefits from inflation exposure on the 70% of the RCV that comprises equity and nominal debt. As such, equity is leveraged 1.75 times to inflation. As a consequence, the index of the indexation charge for our inflation linked debt is matched by inflation, the inflation return on 30% of the RCV, although this inflation return on the RCV is not reflected in the P&L. Our policy of hedging is one for the long term and has served the company well, contributing a significant proportion of our past financing outperformance. It continues to be a fundamental pillar of AMP7 outperformance while providing increased certainty in an uncertain world. So now let's look at power in more detail. The chart here shows our current estimate of power consumption over the amp, detailing the proportion of total consumption with a fixed price and the balance that we need to buy. For our progressive hedging policy, we had locked in the cost on most of our FY22 consumption before the recent price increases, securing an average rate over the year of £65 per MWh. This compares favourably with the current market rate of £238 per MWh for FY23 and has been fundamental to our ability to minimise the impact on our cost base. Our hedging policy supports the position over the remaining years of the AMP. In FY23, we expect total consumption to be broadly stable year on year at around 800 gigawatt hours. Through self-generation and the application of our hedging policy, we have around 8% or just under 70 gigawatt hours of our expected consumption left to buy, giving us certainty on pricing on over 90% of our expected consumption for FY23. This puts us in a strong position with the vast majority of our FY23 consumption locked in at a rate that is a quarter of the current market price. And as such, we expect only a small increase in power costs year on year. While we still have a proportion of our energy consumption over the remainder of the AMP exposed to the current unprecedented volatility in energy prices, our progressive hedging policy means we're in a strong position, with two-thirds locked in at prices that compare favourably to the current market rates. Now focusing on the remaining lines of the income statement. Our underlying net finance expense is 306 million, comprising 118 million of cash interest, with a balance largely reflecting indexation. The 173 million increase in the overall expense compared with last year, largely reflects the significantly higher inflation applied to the non-cash indexation of our index-link debt. Having optimised the available research and development tax allowances around innovation on capital investment in respect of all open prior year tax positions, alongside the use of capital allowance super deductions in the current tax year, we have an underlying tax credit for the year of 65 million. This excludes the impact of all deferred tax, including a one-off deferred tax charge of 403 million in relation to the increase in the headline rate of corporation tax to 25% from April 23. all of which results in an underlying profit after tax of 367 million and an underlying EPS of 53.8 pence per share. Now looking more closely at financing performance, over AMP7 we have around 2.7 billion of financing to raise, of which we have already raised 1.4 billion, taking advantage of attractive rates and extending our liquidity position out to February 2025. Our effective interest rate for the year is 5.1% nominal. The chart on the right-hand side shows our average locked-in rates over the AMP7 period compared with Ofwat's allowance for embedded debt. As you can see, our rates compare favourably and help to demonstrate the level of financing outperformance we expect to achieve this AMP. And I want to look more broadly at shareholder value and specifically focus on the value that we're earning now, which will only be reflected in RCV and revenues in AMP8. As a consequence of our performance against our AMP7 final determination and the 765 million additional Totex investments Steve discussed earlier, we expect to receive an RCV uplift and additional revenues of around 750 million in AMP8. This slide shows the breakdown of the largest elements relating to the additional Totex, both the investments subject to customer sharing and the fully recoverable investments subject to existing regulatory mechanisms established at PR19 and green recovery. We're targeting net customer ODI rewards in AMP7 of around 200 million, with rewards expected to be earned in the final two years of this AMP of around 125 million carried forward into the next AMP. In addition, there's a blind year adjustment to reflect the true up of the PR19 final determination position for performance in the last year of AMP6. Lastly, there are a multitude of other adjustments, including things like a tax true-up as a consequence of changing tax rates. Together, these represent around £50 million of net adjustment into AMP8. The £750 million of value that we expect to carry forward in total will increase our AMP8 RCV and support AMP8 revenues. So I now want to look specifically at how the profile of our AMP7 RCV is impacted by our additional investment and the higher inflation environment. As you can see from the chart, on a nominal basis, our final determination, as shown by the green line, sets an expected RCV growth over a period of 5.8%. The blue line takes the FDRCV profile and adds in the 750 million carried forward value I've just discussed. And finally, the black line shows RCV growth of 21.4% and includes this carried forward value and the latest consensus view of inflation. We therefore now expect to have RCV growth 15% higher than expected at the beginning of the AMP. This slide bridges the net debt position from March 21 to March 22. Net debt of 7.6 billion has increased 264 million since March 21, with the usual underlying movement shown in the bridge. Our net debt position results in RCV gearing of 61% within our target range of 55% to 65%, which supports a stable A3 credit rating with Moody's. The credit rating agencies also make an adjustment for any IFRS pension deficit position, which, as I've mentioned before, is not relevant for United Utilities given our IFRS pension surplus position. So now briefly looking at pensions, as at March 22, we had an IFRS pension surplus of around a billion pounds and remain fully funded on a low dependency basis. As I've discussed at previous results presentations, this funding position reflects the fact that the IFRS measurement basis is not as robust as the low dependency basis, which the pensions regulator expects schemes to target. We remain fully funded on the low dependency basis with no ongoing pension scheme deficit contributions due. The schemes are subject to funding valuations on a tri-annual basis, with the latest valuation as at March 21 now finalised. The valuation confirms our strong pensions position, and we are now exploring further de-risking options, such as a buy-in to transfer some or all of the risk to an insurance company. We've talked a lot about inflation today, so it's also worth just considering it in the context of pensions. With DB pension liabilities of around 3 billion being a similar order of magnitude to our index-linked debt, it's reassuring in the current high inflation environment that our pension schemes are fully hedged for inflation risk. Now this slide sets out our outlook for the year to March 23. We expect revenue to be around 1% higher year on year, principally reflecting the 4.6% CPIH increase and the 1.5% increase as a result of the ODI reward we earned in FY21. Partly offset by the negative K factor of minus 1.3% and the rebasing of revenues to reflect the over recovery in FY22 due to higher business consumption. Underlying operating costs are expected to increase by around 100 million. Roughly half of this increase reflects the FY23 OPEX impact of the 765 million additional investment already discussed, and half reflects inflationary cost pressures on labour, power, chemicals and other contract costs. High inflation will also impact our index link debt, and we expect our underlying finance expense to be around 150 million higher, based on our current inflation forecast. Our index linked debt portfolio as of March 22 was 4.3 billion, so every 1% increase in inflation equates to around 43 million higher interest charge. As mentioned earlier, our cash interest in FY22 was 118 million, and we expect this to be broadly the same in FY23, with the overall increase in underlying net finance expense largely relating to the non-cash indexation of our index linked debt. Our cash metrics therefore remain strong, and as discussed earlier, the higher inflation will also apply to our RCV, of which 70% is exposed to the benefits of higher inflation, giving shareholders around a 1.75 times leverage position to inflation. Underlying tax is expected to be a small tax charge for the year, as we continue to optimise the use of capital allowance super deductions. CAPEX for the year is expected to be in the range of 640 to 690 million and includes the FY23 element of the incremental CAPEX in relation to the additional 765 million investment beyond the scope of the FD allowance. We're targeting a customer ODI reward of around 30 million, consistent with our updated investment plans and our AMP guidance on ODIs. And finally, our dividend policy remains unchanged and we expect dividends in FY23 to be in line with our AMP7 dividend policy of growth year on year by CPIH. So to conclude, we've delivered another strong financial performance through what has been a challenging year for businesses. We've doubled our base returns on Rory with strong financing, tax and customer ODI performance. Our affordability schemes and the approach to managing cash collection has meant that household cash collection has remained strong, with our bad debt position returning to 1.8%. While inflation has increased our costs this year, it has led to higher levels of Totex allowance and increased financing outperformance, and together with the additional investment we've announced over and above our final determination, will contribute to higher RCV growth over this AMP. And finally, we benefit from having one of the strongest balance sheets in the sector with a low level of customer debtor risk and the leading pensions position. So thank you, and I'll now hand back to Steve.

Thanks, Phil. Before I summarise today's presentation, I want to briefly touch on the developing picture for Ampate and beyond. You'll know that we take public health and the environment very seriously. And this is reflected in the transformation we've achieved in recent years in our water quality and environmental performance. My sense is that we're an inflection point here in the UK and that the environmental agenda is taking centre ground. The government's recent Environment Act reflects that. We very much share this ambition and our original plans for AMP7 deliver significant environmental improvement by 2025. And the additional investment announced today brings forward even more ahead of AMP8 by using outperformance responsibly and wisely. Specific targets for AMP are in discussion with government and our regulators, but what's already clear is that our shared ambition is to deliver a fundamental change in the way our wastewater systems were originally configured, delivering fewer discharges to the environment, less phosphate and water release from our treatment works, and improved nutrient balance in our rivers and coastline. The capital expenditure associated with these changes will be significant for the water sector, but it's a particular issue for the Northwest. For many decades, a much higher proportion of our sewers have been combined sewers, which carry both foul and surface water at 54% compared to an average of 33% across England. Liverpool's system, for example, is around 80% combined foul and surface water and would need complete re-engineering to meet the targets under discussion. We're working with government and regulators to determine how this ambition can be met and by when, recognising that the pace of change must consider customers' ability to pay. It's an exciting but bold ambition that we're keen to play our part in delivering. So to summarize, we've had yet another good year of good performance. We recognize the cost of living pressure on customers and have committed to a significant package of support for struggling households worth around 280 million over this AMP. We've maintained high levels of customer satisfaction underpinned by improving operational performance. At 25 million, ODI rewards have improved year on year, with our five-year forecast having increased by a third to 200 million. Improving performance and higher inflation has contributed to a reported Rory for the year of 7.9%, double the base return. We're managing inflationary cost pressures well, with another year of strong financial performance underpinned by a robust balance sheet and healthy pension position. And we're investing our performance responsibly, sharing our success for the benefit of all of our stakeholders. Looking ahead, we expect MP business plans to reflect the ambitions of involving environmental legislation. So thank you for listening and we'll now take questions. So I have here an opportunity to take questions either on people are submitting in writing or actually through Teams stroke phone. So we'll mix and match as we go. OK. First question I've got coming through is from Mark Fresh in the Credit Suisse. So, Mark.

Hello. Can you hear me OK? Yes, we can.

Thanks, Mark.

Perfect. I have. two questions. Firstly, I was intrigued when you mentioned, Phil, the pension buy-in that you're looking at. Can you give some more colour surrounding that, how much of the total pension funds would go, whether you would have to potentially put cash into that, or even whether you might be paid to give the pensions to somebody else or the liability. Secondly, regarding the tax, I mean, the tax outperformance is pretty substantial, 2.7%. Clearly, tax is always a massive gray area, I guess, particularly with regulators. My question is, how likely is it that Ofwat will allow you to keep that? And presumably, things like super deduction and optimization are super sensitive with Ofwat. Thank you.

Okay, Phil, sounds like both of those are for you. So do you want to pick them up?

Morning, Mark, and thank you for those. I think first on pensions. So as many of you will know, our pension scheme is now fully funded on a low dependency basis. And what that means is that effectively it is at that sort of buyout level in terms of the sort of position. We are hedged for inflation and we're hedged for inflation interest rates were not hedged for mortality, which tends to be a slower evolving risk effectively. So what we're intending to do going forward is to effectively test the insurance market to understand what insurance buyout pricing might look like. We feel probably now is a good time to do that. but we'll need to evaluate that as we see the results coming back in. In terms of the size of the scheme, typically you would look at a buy-in, buy-out arrangement for your deferreds and pensioners, and that's probably around about half of the overall position. And I certainly wouldn't be expecting to have to put cash into the pension scheme to support that because, as I say, it's fully funded on that low dependency basis. So that's the pension position. In terms of the tax, there's two components really to the tax this year, the 2.7% of Rory. 1.7% of that is in relation to the prior year position. And that's where we've been really effective in optimising tax allowances in respect of innovation. And so some people have been up to our capital markets day in March where we went up to the West Cumbria system. which is the first sort of wide scale implementation of systems thinking across the whole drinking water catchment. And that is quite innovative and qualifies for sort of extra tax deductions, as does other schemes like our Narada plant at Blackburn, which is Europe's largest implementation of Narada. So really great to be able to optimise the tax benefits coming out of those capital programmes. In the context of how that will work out from a shareholder stroke customer perspective, those are innovations that we put in place on our decisions and on that basis, effectively that benefit will flow back to shareholders and be retained by the company. You're quite right about the capital allowance super deductions as I touched on in the script. The further 1% of the 2.7% tax is in relation to capital allowance super deductions and also the tax shield effect on our index linked debt. So we've got a higher index linked debt charge so we're benefiting from the tax shield effect on that as well. In relation to the capital around super deductions, as I sort of said, the way the off-what model works in terms of the tax true-up mechanism, basically they rerun their model at the end of the price control period based on effectively the revised tax rates that are in place. And so what that means is the base FD CapEx profile plus any green recovery spend that they've allowed, the tax benefits will pass back to customers. Whereas in relation to the acceleration of capital that Steve and I have put in place over the last couple of years, so we spent about 600 million of capex this year compared to 400 in the base FD profile, accelerating and bringing forward the base spend, that benefit is retained by the company. So, you know, that's how the mechanism works. And in the sort of script, I sort of highlighted that the sort of estimate of the amount that goes back to customers is the 20 basis points that I called out in the narrative. OK, thanks, Mark.

Any other questions? OK, so we've got James Brand from Deutsche. James, good morning. Good morning. James, I think you're on mute.

Can you hear me now?

I can, yeah. Thank you.

Can you hear me now?

Yes, we can. Thank you. Can you hear us?

Okay, great. Sorry about that. I can, yeah. Sorry. So two questions, thanks for the presentation. Firstly, on the power hedging, you gave a cost per megawatt hour for the hedging that you've done for the year we've just come into at £60 a megawatt hour. For the volumes that you've hedged for full year 24 and full year 25, should we have a similar price in mind, or is there any kind of guidance you could give us for how either what the price is or maybe when you put those hedges in place so we can look at the price and try and work it out ourselves? And then secondly, a bit of a broader question on incentives. It seems like in this regulatory period, obviously it's slightly exceptional because of the inflation rate, backdrop and lots of companies are going to be having a lot of financing outperformance in this regulatory period. But when you explicitly look at the incentives, the ODIs and the Totex, a lot of companies seem to be underperforming. And you're doing comparably well compared to the rest of the sector, but the vast majority of companies are underperforming. And I was just wondering whether you thought that was sustainable going into the next regulatory period, because it seems... very tough for so many, you know, to have a quite tough settlement on the cost of capital and for the vast majority of companies to be underperforming on incentives. Do you think there's a case for maybe the regulator being, you know, appreciating that it's been a bit tough and being a bit more generous on the incentives in the next regulatory period? Are you getting any kind of feeling of that or maybe not? Thank you.

Do you want to pick up the hedging and I'll do the other? Yeah. Morning, James. And so picking up the power hedging. So we've given you very clear guidance in relation to FY23 in terms of the two thirds hedged for FY24 and 25. It is broadly the similar sort of level, but I'm not going to put a number out on the table today. But it's a similar sort of pricing level.

I think on incentive, James, you're absolutely right. There's actually just a handful, two or three companies that are in positive ODI territory so far. We obviously see what the results are for the full year. And so a lot of companies are shortfalling on achievement of targets. I think when you look at it, it's probably right that you've got some people earning and others not, because that says... something about the targets. It says something about performance in the round. And really the ODIs are there to try and actually drive everybody to achieve incremental improvement in performance against a sector benchmark. So it probably is, if everybody was earning or everybody was losing, probably you'd start questioning whether we've got the targets right. I think the key issue for me in going forward is I do genuinely believe that having incentives works for the sector. I think if we see what's happened in customer service, for example, we've seen marked improvements in customer service as a consequence of the SIM measure that we had for many years and now CMEX. And I think we're seeing the same in other areas of performance. So I actually think they're a good thing if you're a customer or you're the environment in terms of driving industry that way. I think the key issue for me is setting targets for which you're not funded. And I think if I'm looking at AMP8 and understanding the extent to which companies have a further stretch on the performance they achieve, you can't achieve that stretch without the money to do it. And that's the key consideration is having a conversation around how that performance improvement is going to be financed and that the financing is adequate. I think too soon yet to see where we're going in AMP8 in terms of the methodology. We're expecting to get that in the summer. But I do think we'll probably retain ODIs and we'll see incremental improvement being sought for. But I think you need to see if you want an improvement, you've got to fund it. So, you know, how is that going to work? And I think that's an important consideration as we go into the AMP8 business plans and discussions. Okay, next one. We've got Martin Young from Investec. So good morning, Martin. Over to you. Yeah, morning to everybody.

A couple of quick ones. The first is just a point of clarification around the incremental investment that you've been talking about. If I look at the green box on slide 10, where you have the 250 million that you were investing out of performance, Am I correct that the Totex sharing mechanism effectively gives you half of that back, so the other half is being funded by your shareholders? And then the second question, and maybe there isn't necessarily an answer to this at this moment in time, but just an update on where we are with the environmental agency and Ofwat. investigations in respect of fall to flow and combined sewer overflows. Thanks.

Yeah, thanks very much. I'll pick both those up. I think firstly, when you look at the regulatory mechanisms and we make mention of that, we would expect regulatory mechanisms to apply and therefore the menu mechanism that essentially applies for us, which is roughly 50-50. customer sharing and shareholder sharing. So, yes, Martin, you're right. You'd expect that that mechanism to apply to the to the green box. I think when you look at the investigation, we clearly had a first output associated with the investigation where of what was identified, there are further questions, further detail to be had from five of the companies within the sector, so five of the ten wastewater companies in the sector. That doesn't necessarily mean, as they've said, that they don't have further questions for others, but at the moment that's not the case. The Environment Agency, I think, has indicated that with the data that they've requested and the volume of data and the scale of the work that's needed, they're probably not likely to come back until 2023 with any initial conclusions. And so I think this may well be a relatively long run issue for companies to address. And I think when you look at the amount of data they've got, I'm sure we'll get supplementary questions as we go through. But I think it's probably going to be next year before we start to see any conclusions being drawn, at least initial conclusions from EA on that work. Obviously, what we're doing is working with both Ofwat and EA in regard to data that they want or need for the purposes of that investigation. So hard to see where that's go. Meanwhile, of course, we've got our better rivers plan. I think we'd been focusing very much on the initial element of the investigation, which was what's called flow to full treatment. That's something we've been working on for many, many years. very conscious of and progressively fixing issues as we saw risk in those areas. And you can see in our Better Rivers plan that this year we reduced the number of CSO spills by 28%. It's a bit of a moving target. because we're installing more monitors. We expect to have full monitor installation by next year. But I think a good start in reducing the number of spills that we've got. So yeah, it's an ongoing story, but I don't think it's one that's going to lay an egg quickly. I think there's a lot of work to be done to understand where everybody is. OK. Right. Next question we have from Ahmed Farman at Jefferies. So good morning.

Good morning. And thank you for taking my questions. I actually started wanted to start with the with the operating cost base. And thank you for all the sort of the granularity you have provided today. My question is, as you sort of think about the sort of the next 12 months, How much of your operating cost base will get rebased to reflect the current inflationary environment? And how much still needs to sort of be adjusted over time if we continuously see the current sort of commodity price environment? That's my first question. The second question is on the additional investments that you have outlined to get yourself, I guess, prepared ahead of what you think might be some of the priorities for PR25. Should we see that number as sort of a comprehensive number that now you're quite happy with, or is that an ongoing process where we can see that number increase if there are opportunities and there's capacity to fund that? And then my final question is a bit about sort of the DPS and the EPS profile of what you're outlining today. There is going to, it seems to me that there's a sort of quite, sort of a bit of a disconnect between how EPS will move versus your DPS. And I appreciate some of that is non-cash and, you know, RCV indexation doesn't get reflected. But my question is, is that an important KPI in? for the management. Thank you.

Okay. I think we'll pick it up. If there's something, Phil, you want to add, then do that. I think on cost base, we've been looking at cost base as we go forward in the context of what we see as being sort of consensus inflation development. I think, obviously, there's some uncertainty as to where the economy will go. Are we going to move into recession, you know, where do we think inflation might go? So I think that but at the moment, you know, we're doing all of our projections in the context of what we see as a consensus projection. And clearly, we look very much in the context of the five year And we look at that against what we see for our determination allowance. And I think at this point in time, notwithstanding the pressures, we do feel that we can live within the allowance that we've got within the FD for delivery of our FD scope. And then, of course, beyond that, we talked about the enhanced investment that we've made in specific areas. But at the moment, we do feel that we can manage within the numbers. Our principal cost drivers are labour. And you've seen what we've done this year in largely managing within labour. Inflation, chemicals Phil talked about, power Phil talked about, and the other areas are capital program. And there's no doubt that the infrastructure sector is very active. One might use the word overheated at this moment in terms of the demand for infrastructure development. And as a consequence, we feel very fortunate in that situation that we've already got roughly 80% of our total capital program for the period on contract. That in itself is a great place to be because there are so many companies in the utility sector struggling to get capacity. The other is, as Phil mentioned, is that we tend to set our contracts on the basis of a target cost arrangement with a share line. So our partners are incentivized to effectively contain the cost within those share lines as a way. So we work together very hard to do that. So I think at this point in time, I don't know if that answers your question, Ahmed, but certainly from a cost based perspective, we're clear. Phil, do you want to add anything?

Yeah, morning, Arma. Just to pick up on one point, and I guess we covered it on slide 17, but just to draw your attention to it. On slide 17, we've sort of said each 1% increase in inflation over the whole of the five-year AMP period increases our Totex allowance by 150 million. So effectively, we've got the challenge of managing the inflation impact on our cost base, but we're getting that inflating Totex allowance. So that allows you some context to scale the impact of that.

OK, thanks. I think in terms of additional investment, we very much looked through this AMP and to the beginning of AMP8. And so I think Phil and I have basically said to our organization more broadly, don't darken our door again as we make the run to the end of this particular five-year regulatory period. I think I'd always say that if somebody came up to me with a with a really good idea, with a great payback on it, then you're going to look at it. But at this point in time, I think, you know, we see that the investment we've got is sufficient to do what we want to do. for the rest of this hand and and in getting ready for and paid. So yeah, I don't it's this is not something where I think we'd want to come back every year and, and topping it up, unless there's a wizard scheme that somebody comes forward with. And then, you know, we always consider those. But, you know, I think we've, we've pretty much dredged the organization for the for the great ideas at this point in time. Do you want to deal with the DPS CPS?

Yeah, sure. I think really interesting question. And I guess you sort of, you know, the analyst community very much know the answer to this really, I think, which is, you know, the valuation of our businesses is not an EPS driven valuation process. It's valued on an RCV basis. And it's a focus on effectively the level of Rory financing and other outperformance ODIs and Totex positions. So that's what really drives and what's really important. The overall sort of outlook guidance that I gave for the year here, we've sort of said interest costs are going to go up by about 150 million. So our interest charge next year will be around about 450 million. And that's 120 million of cash and the balance 330 million of indexation. And I've given quite detailed guidance for you because I'm conscious that the current environment is quite volatile and uncertain. So you can see the inflation levels there that are being used for the indexation on the index link debt. And the key point really is the 8% sort of inflation on CPI sort of January 2023. And that's what's driving that higher indexation allowance. So to put it into context, I suppose with a £12 billion RCV, 8% CPI on the RCV is just shy of £1 billion indexation on the RCV, which is being partly offset by that £330 million indexation that's going through the P&L interest line. And then the balance is effectively contributing to performance for the business.

Okay, thanks, Ahmed. We've got Dominic Nash from Barclays. Morning, Dominic.

Good morning. Can you hear me okay?

Yeah, I can.

Thank you. Brilliant. Thank you. A couple of questions from me, please. Firstly, On underlying Rory for Totex, because obviously you've quoted a minus 0.8% and I'm conscious of the fact that you're spending more than your baseline here on, as everything you've mentioned in your presentation. But would you give us a flavor as to what, if we stripped everything out, what would be your underlying performance on an RORE basis on the Totex? And where are we in sort of the core tile performance benchmarking performance as we're heading towards AMP8 on an underlying basis. And then the second question I've got is coming back to inflation. And I might have missed this one, but could you just remind me again, what actual inflation number did you use to calculate your financing outperformance, please? And if it's kind of that 8%, I think Phil mentioned earlier on the CPI-H, is there a risk that there's going to be some sort of windfall or another sharing mechanism or discussions with you into whether this is an unearned number, particularly in a sort of cost of living crisis that might need to be returned. And then just a very quick one here. Can you just remind me again, on your bad debt, 1.8%, is that the provision you're booking against the revenue on last year's numbers? And if we do have a cost of living stroke recession coming next year, what should we be factoring in for bad debt on a guidance outlook basis? Thank you.

OK, most of those are fulfilled, but if I just pick up the sort of off what you might call the sort of mood music around the inflation area. I mean, you'll have picked it up, Dominic, just as much as we do, that essentially, you know, are very conscious of the current inflation environment and really a couple of things. What that does in the context of a customer's ability to pay, and really encouraging companies to do as much as they can in helping customers who are struggling. I mean, as you've seen this morning, I think we as a company have by far the greatest commitment in terms of company contribution. You know, if you look at what we're doing in terms of the 71 million we put in, plus the matching arrangement that we put, There's over 140 million of company money going into supporting customers as part of that overall 280. So we're doing a lot in that area and we've committed to do that through the five year period. I think the other aspect is what is it doing to outperformance potential for companies? And, of course, it won't be uniform across the sector, but that's where our decision comes from in terms of wanting to share outperformance and effectively get ahead of AMP8 by doing things that customers would otherwise have to pay for in AMP8. And that's something that we've taken our own view on, we've taken our own decision on, It's for individual companies to decide what they do. But essentially, that's been our that's our approach to what we consider to be responsible behavior. And we've done it before. So I think in that sense, no specific guidance, no specific requests, no direction in that area. It's something we've decided to do because it's what we do. It's the way we behave towards customers as we as we achieve success. Phil, do you want to pick up the others?

Yeah, so if I pick up first the underlying Rory position and Totex, Dominic, sort of just to give some context and scaling, I guess you can see the 0.5 customer ODI performance, which is the 25 million of ODIs in the current year. So the 0.8 negative for Totex is circa around about 40 million. And that's relating to DNM investment that we're making, which is additional investment that's going through the Totex sharing mechanism and supporting the delivery of of future odis so that's what's happening with the tot exposition i think inflation is a really interesting point you pick up on the eight percent isn't what's driving financing performance in the current year because uh sort of that's really a look forward in the outlook to next year but just sort of unpacking the financing out performance of 1.6 that we've earned this year There is a technical mismatch that's occurring there that's dragging down the financing out performance a little bit because the way the calculation works is an average CPI is used for the allowance over the year. And as we know, we've come through a year that we've had rapidly escalating inflation. So that average CPI for the year is only 3.7%. And then when you look at our index linked debt, our index linked debt is predominantly anchored around a January CPI number, and that was 5.4%. So effectively, you've got a technical mismatch in that rising inflation environment, which is suppressing the financing outperformance in the current year. As you go up and things flatten out and then start to come back down again, on that downward trajectory of inflation, you get the sort of pick-up, because effectively you've got the average lagging, the index linked debt cost. So hopefully that helps explain inflation. But that lag is probably worth of the order about 1.5% on the financing outperformance that will come through in subsequent periods. And then lastly, your question on bad debt and the 1.8%. I guess if you were a prudent organisation, you might try to argue to... provision against future bad debts, but you can't do that. You've got to sort of provision for what's on the balance sheet of the day and your expectation of the collection of that debt. As we look forward, our best view at the moment is cash collection is holding up very well, remarkably well. And I think that's testament to all the hard work that goes into the cash collection activity and also all the support schemes that we have in place. So we have a vast array of targeted support schemes for our customers. So 280 million of a package over the course of the AMP. And that is really helping to sort of help those people who have genuine affordability issues. And then, as I said in the presentation, you know, the whole approach to sort of providing data and analytics in terms of cash collection is really paying dividends. So looking forward, it's hard to call how the environment is going to be over the next 12 months, but we certainly don't expect a significant problem at this stage.

I think just adding to that, I think the The issue that we benefit from hugely in the way that we've looked at the whole relationship with customers is to be able to identify and move quickly to provide help to customers so that they don't fall into debt and they're aware of what's available to them. So, you know, I talked about the schemes that essentially we have available. I talked about the hub that we've created, which essentially gives a point of reference for all of the different debt advisors that there are out in the community. advising and helping people. I think the credit referencing that we've got lets us understand a customer's situation because inevitably when they're struggling, it's not just us they're not paying. And I think the latest innovation is brilliant because by essentially using open banking, rather than having to fill forms out, which often is quite difficult in itself, can take time. People are actually pursuing applications which previously might have taken weeks at a point at which they're very stressed, very concerned about building debt. We're able literally within minutes to talk to them, to share with their agreement their banking picture, and then to actually give them the best advice on what kind of scheme could help, which ultimately might be, we would recommend that you go and speak to the trust fund that's been established, which effectively, independent of us, disperses funds to people who are really needing it. So I think it's about a very deep engagement with the community through multiple channels, being able to understand the customer's financial picture, and then being able to very rapidly get them onto a scheme which helps. And that's really something that we've built over years and has contributed to the bad debt level that we've got. you know, to have only 4 million of bad debt aged over a year is just remarkable, really. And I think so, you know, as well positioned as anybody to deal with what we might see as we go forward over the next year or so.

Okay.

Oh, sorry.

Sorry. I think your initiatives are really, really good, but can I just follow up, which will be, if we added in that lag, I think you said 1.6%, and then next year inflation is at 8% or whatever averaged, you could be printing a financing at performance maybe 6%, 7% in 12 months' time. Is it a fair assumption to say that as a responsible corporation, as investors in your company, some of that will probably be voluntarily used to help more vulnerable customers in your area, or do you think that number is sustainable to put through as frame to shareholders.

Perhaps if I just pick up that briefly, Dominic. I think Steve talked about the sort of reinvestment that we're making in this announcement today, the 250 million. We're really there focusing on driving that environmental agenda and improvements with the sort of use of some of that financing outperformance. So we are making use of it. to drive the right activities in the environmental space. In the context of customers, we're very conscious that customers will be finding it very challenging, but we do have the sector leading package of support measures, as Steve talked about, so 280 million over the AMP, that's very targeted and focused on those people who have the biggest challenges in terms of affordability. So I think with that package in place, it's right for us to pay attention to the environment and support the environmental investment we've announced today.

Thank you. Okay. Thanks, Dominic. So we next have Chris Labor of Morgan Stanley. So good morning, Chris.

Good morning, everyone. Thank you very much for taking my questions. I just really had one question, which is just coming back to your comments earlier about the the 1% inflation across five years would improve your Totex budget by $150 million comment. Is the messaging here that the inflation that you've seen rolling in to date neutralises the impact of the higher costs coming through? Is that simplistically the message? And then perhaps a more strategically orientated question, When I think of UU, I think of digitisation, machine learning, innovation, untapped efficiency potentials, or potential rather. Once again, we're seeing reinvestment, which we can see the benefits of that, particularly politically and also in terms of asset performance. But at what point do we start to see the sort of the potential in the organisation really shine through.

Yeah, I think do you want to pick up the inflation point?

If I take the first question, Chris, first and good morning. Simple answer is yes. And I think, you know, Steve sort of said our base Totex programme we're targeting to deliver within our allowance. And so the allowance is subject to inflation. We've got inflationary cost pressures coming through and we still expect to deliver within that base allowance. So yes.

I think when you actually look at all the drives that we have through systems thinking and others, probably what we don't actually talk about essentially is the efficiencies that we have built into our plan. right from the start of our determination. I think one of the key elements that we had as part of securing fast track for our final determination at PR19 was we had very significant efficiencies built into our underlying Totex, principally the Opex line, associated with savings coming through from efficiencies being delivered through different ways of working. And so those efficiency targets effectively sit there and need to be delivered in order to hit our overall FD numbers. So while we don't talk about it effectively as an explicit set of figures, I can assure you, Chris, there's actually, in order to hit the efficiency curves, which secured us fast track and secured what was an FD that, you know, compared to what happened across the sector at PR19, was a largely undisturbed plan, we were baking in efficiencies which were being delivered through our different innovations, both in use of technology, AI, et cetera. So we'll see that benefit coming through. The other areas you're seeing is in things like ODIs. For those of you that think back to where were we at the beginning of PR19, we were talking about an ODI level which wasn't particularly different from what we'd earned in AMP6, so around 50 million. We're now four times that in terms of our projection for the period. So we are actually seeing that benefit come through as value in a number of different areas in the way it underpins our plan. Okay, Verity. Verity Mitchell from HSBC. Good morning. I think you might be on mute, Verity.

Morning.

Morning.

Morning, Verity.

Thank you very much for the presentation. I'm very interested in slide 11. And you've pointed out that you've already achieved a 28% reduction in spills. between 2020 and 2021, and your target's 33, so you're almost there. So are you being ambitious enough on that? And to your earlier comments, how much of those spills now are actually being monitored? And then I've just got a question on slide 23. Can you just let us know what your revised RCV growth is on a real basis? Because I notice you've got inflationary assumptions in there that would be really helpful. And then just a quick third one, which is following on from Mark's earlier comments about tax. Do you expect the super deductions to mean that your ODI outperformance on tax is going to be lower in subsequent years? Thank you.

OK, thanks. I'll deal with the first two, which is ambition. I mentioned earlier that we're actually trying to hit a moving target in the sense that we've got about just over 80 percent, sort of mid 80 percent of our CSOs have what's called an event duration monitor. So they've got a sensor fitted. And we'll complete that, as we said under our pledges for better rivers, we'll complete that by 2023. So the 28% is against that lower number. So yes, you're absolutely right. It's a great achievement in the first year. But we'll have an even bigger number to consider next year in terms of spills. So I think we're fairly comfortable with the one third. I mean, if we can bust it, we will. But at this point in time, it's a moving target that we're measuring ourselves against. Do you want to pick up on tax, etc.?

Yeah, so picking up on the RCV profile first, I think the extra impact of the carry-forward value is around about 6% real on the overall RCV profile. And as you know, we did have a negative position real on the RCV over the five years in the final determination. So I think it's bringing us out at around about 2% real overall growth in the five-year period. And, Verity, on the tax, just perhaps remind me again, I didn't quite follow the linkage from the tax allowance to the ODIs that you sort of mentioned.

I mean, you've just got a benefit from super deductions. So that is not going to be putting aside the fact you're going to have to hand this back to customers. When the tax regime changes, that number is going to be lower in subsequent years, isn't it?

Yes, so on the tax component, so you're right, the 20 basis points is what I've called out is what will go back, flow back to customers. The balance is what shareholders and the company retain. Clearly that super deduction number is worth about 40 million in the current year. It's a similar sort of order of magnitude next year in terms of the value of super deductions. and then the tax adjustment mechanism will kick in and reverse for the following two years because we'll have the 25% corporation tax rate that's applying and therefore there'll be a flow of money value back into the company from customers because effectively there's a sort of shortfall of the tax allowance to make up to the 25%. So that's how the mechanism works. And, you know, the sort of 1% current tax value in Rory for today, this year, I would expect to be of a similar order of magnitude next year.

Okay. Thank you. I think, yeah, we've got Bartek Kubicki from SocGen, who's on now. Morning, Bartek.

Good morning. Thank you for taking my questions. Three issues I would like to discuss, if you don't mind. Firstly, and again on those additional investments you announced today, I understand you had a choice between two scenarios. First, you invest now. You have Totex underperformance, but you get more on ODIs. And the second scenario, you invest in AMP8. You are fully funded. There is no Totex underperformance, but less ODIs. If we compare those two scenarios, you obviously decided to take the first one, In terms of IRR creation or NAV creation or ROE creation, how do you compare? Are you able to quantify those two scenarios and why did you choose the first one versus the other one, meaning investing in AMP 8? Secondly, on the 280 million of customer support scheme, will it have any impact on earnings, ROE? underperformance, outperformance, et cetera, is it somehow funded also in your allowances or not really? And thirdly, on your capital program procurement, you mentioned 80% is already procured for the AMP 7. And I wonder if you are getting any signals from... from your suppliers that they want to renegotiate the contracts or they want to step out of the contracts because the inflationary pressure is simply too high to keep the contract conditions.

Thank you. If you want, yeah. I suppose just taking the first question on the Totex investment, why now rather than later? I guess driving it now is driving sustainable long-term performance and that investment in DNM and the taste, smell, appearance, the water quality investment is actually driving performance in ODIs in this AMP. which effectively pays back along with the Totex mechanism, but also then puts us in a position to be in a stronger ODI earning potential going forward into the following AMP. So it's really about getting it done early to sort of drive that sort of progressive performance into AMP 8.

I think the other point, Bartek, is whether you're confident you would get the money in Ampeg. So I think you're in a situation, I probably, if I just give you one example, which is DNM, an investment we're making in sewers, I think over... over PR14 and PR19, we'd made what we felt was a compelling case for investment in our sewer system. As I said earlier, we've got 54% combined sewers, we have much higher rainfall, than other parts of the country. And so we felt there was a good case for investing in that sewer system. We didn't win the argument. And I'm not sure even now we'd win the argument again when we go into PR24. And so I think the DNM is an opportunity to transform our performance in this area. but in a way where when you look at things like menu sharing mechanisms, when you look at ODIs, you can actually see that there is a return on investment as far as Shell is concerned. Otherwise, what you'd simply do is probably just continue to carry on the way you are, be penalized very significantly through ODIs in this AMP and subsequent ones. So I think when you actually look at it, there is an issue of if you thought you were going to get an AMP8, yes, there's an issue around timing. There's an issue around the ODI benefit one might get. I also think there's a moral argument here, which is that we are benefiting. quite significantly from outperformance. And in today's environment, when you look at the pressure that customers are under, why not do it? We're doing it. Customers are not having to pay in Amp 7 for these things, and therefore we're delivering the benefits that customers will see, but it's not impacting the pricing that they'll see in Amp 7. So a number of factors that sort of come into play there. I think when you look at the procurement question that you had then undoubtedly when you look at the construction supply chain they are seeing a whole series of cost pressures now the way that's tending to come through is in what you'd see as being both the direct costs of any material cost increases and those you know any of us actually doing building at home will know how much things like wood steel concrete costs have moved, but also the indirect costs associated with a very, very buoyant market where companies are not prepared perhaps to take the competitive risk that they would have done in a less active market. Fortunately, we had our supply chain partners on framework agreements that would essentially set the pricing basis on which we'd work. As I said, most of them are on a target cost arrangement. Yes, I do think there will be pressure on pricing. And yes, in a number of instances, we've had conversations with companies about their ability to honor the arrangement they've done. But I think, as I said before, firstly, the fact we've got them on contract is a huge bonus because we have access to resources and we see as we go forward, taking into account those conversations, we believe that we can deliver our commitments within our FD number. So that's taking a huge amount of work between us and our our contractor partners. in things like looking at scope, looking at further efficiencies, you know, how do you actually deliver against the budget that we've got? And at the moment, we look solid for AMP7.

Is there another question? The £280 million of customer support and the impact on earnings. Shall I take that? Yeah. So, I mean, the £280 million of customer support, Bartok, is not new news. It's something we've put in place for the whole of this AMP. So effectively, our numbers today include this year's components of that cost. So the short answer is running forward. There's no impact of that on our EPS because it's already in our earnings position today, and we'll just carry on running forward into the next three years of ESAMP.

Okay. Right. Thank you. So I think we've no further questions coming through on Teams or written coming in. Oh, we've got one question, have we? One more. Is that coming? Oh, Chris. So Chris... Good morning.

Sorry, I dropped out earlier. I just had a very quick follow-up, please. Just in terms of the extra 400 million of investment, is that figure a real or a nominal figure? Just a clarification point. And also, one of the discussion points I think today, given the reaction in the shares, is reasonably material, is... The inflation assumptions that you're now including in your fiscal 23 guidance, if we were to include those and roll them forward into your revenue, what would be the revenue uplift in 24-25 purely because of the inflationary impact?

Okay. The additional investment is the amount we would expect to spend. So I suppose in that sense, nominal. Yeah. Phil, do you want to pick up the issue about outlook?

Yeah. So in terms of the revenue for the following year, sort of getting one year ahead of ourselves already here, Chris, but I mean, CPI is expected to be relatively flat through the course of this next 12 months. I think sort of, you know, the January number I've got on the outlook side for the index link debt is effectively 8%. As you know, it's the CPI position at November that drives revenue for FY24 and And so I'd probably expect that to be of the order of 8% uplift effectively.

Okay.

Thank you very much. Thank you.

All right. So I did see a quick flash of Mark Fresheny there. Does that mean he's got a question? No. All right, Mark, you're saved. Okay. Thanks very much, everyone. Thanks for joining us. And thank you very much for your questions.

Okay. Thank you, everyone.

Cheers. Bye.