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.