United Utilities Group PLC

Good morning, ladies and gentlemen, and welcome to United Utilities' half-year results presentation for 2022-23. The UK has seen very significant political and economic turbulence this year. However, we've not allowed this to deflect us from delivering value for customers, the environment and shareholders through operational excellence and sound financial management. And in so many ways, we reflect calm confidence in the storm. Over the last decade, we've had a clear strategy to ensure United Utilities is continuously improving and delivering better outcomes for all our stakeholders year after year. We've made significant targeted investment over that period to improve our operational performance, to provide a better service for customers, to become a sector leader on the environment, and to build a business with a strong, resilient balance sheet. and this strategy has delivered real benefits and created value for all our stakeholders. Plans for AMP8 are also coming together and the need is becoming clear for very significant increases in capital investment for the sector over the next and subsequent AMPs to meet new and demanding environmental regulation. And whilst there's still a lot to be done before we know what this will look like, we're supportive of the drive to go further for the benefit of all of our stakeholders. And I'll talk more on this later. So here are the performance highlights of the half year. This is a tough time for customers, and we're helping more than ever before with payment assistance schemes. Our focus on operational excellence, leveraging our systems thinking investment, has again delivered year on year improvement in performance. This spring and summer has been particularly dry across the UK, but with effective management, supported by the investment we've made in our water network, we're able to avoid the need to apply the restrictions seen elsewhere across the country. Our improving environmental performance has again been recognised with a top four-star rating by the Environment Agency. And river health and spills into the environment are huge areas of focus for us. And we're making good progress on our Better Rivers, Better Northwest plan. As a result of our efficient performance and targeted investment, we're one of the top performing companies on ODI rewards and continue to target a net AMP7 ODI reward of 200 million, some five times higher than our AMP6 reward. The government's new Environment Act sets out an ambitious agenda for environmental improvement, with the water sector required to make a major contribution. Achievement of the government's targets will require a very significant uplift in capital investment for the sector in AMP8 and beyond. And through what has been a difficult macroeconomic environment, a financial position has been resilient. The North West is home to the most socio-economically deprived communities in the UK, and the current economic climate will make life more challenging for customers. We work extremely hard to understand our customer situation and find ways to help. And we're supporting more customers than ever before, over 200,000 households, and have committed a significant package of affordability support worth around 280 million pounds for this AMP, the largest in the sector. measures against a broad spectrum of companies in the UK we have a class leading set of tools and techniques to help customers with our most recent innovation being open banking with the customers consent we can use open banking technology to access a customer's bank account and verify their income and this allows us to complete all the necessary checks we need to get support in place for customers in minutes instead of days Proof, if ever we needed it, that great service costs less. We've long had a strong focus on supporting customers with affordability challenges. However, we recognise there's always more that can be done. And this is why we're strong supporters of the National Social Tariff Proposal put forward by the Consumer Council for Water to level up affordability support across the country. This will provide much needed help to families during these difficult times. I mentioned earlier that our determined application of systems thinking through investment in people, process and technology is paying dividends through continuously improving and sustainable operational performance. Over successive amps, we've seen increasing levels of customer satisfaction, environmental and operational performance, all creating shareholder value. Water sector environmental performance is very much in the headlines. And I've said that the Environment Agency awarded us the top four-star rating for our environmental performance last year, and for five of the last seven years. This is against the backdrop of a continuously evolving and tougher assessment methodology, and we're consistently one of the top performing companies in the sector. Adding some colour, we're the sector's frontier performer on pollution performance. And the investment I've told you about previously in dynamic network management is helping deliver our lowest ever levels of sewer flooding, improving our ODI performance for this metric. Our investment in river health is helping to reduce spills from storm overflows, and I'll talk in more detail about this shortly. We're on track to meet our leakage target for this AMP using latest detection techniques to find and stop leakage. And in addition, we're successfully reducing voids, finding properties using water but not being billed. I've mentioned previously that we've made additional investment in mains pipe cleaning to improve water quality through reducing discoloration at customers' taps. And once again, this is paying off with our lowest levels of discoloration contacts from customers, turning what was an ODI penalty last year into an expected ODI reward for the year. We continue to perform well on customer satisfaction with our combined CMEX score for the first half of the year, positioning us in the upper quartile of water and wastewater companies and the top performing listed company. All of the above and more is serving to support our target of 200 million total net ODIs for AMP7, and we're on track to achieve a 30 million net ODI reward this year. The dry weather this summer brought water supply resilience into sharp focus, particularly in the southern half of the UK. In July and August, some areas of our region received less than half of the rainfall typically expected during these months. But effective management of our real-time water production planning system enabled us to optimise abstraction to keep reservoirs as full as possible. In addition, we're benefiting from the investment we've previously made in our integrated regional system. Some of you saw firsthand the work to enhance resilience of our water system in Cumbria during our Capital Markets Day earlier this year. This supports the movement of large volumes of water around our network to balance customer demand and optimize use of resources. Alongside optimising water availability, we worked hard to deliver significant customer campaigns around water efficiency, leveraging the link to energy for water heating. And as a result, we've seen an 11% reduction in per capita consumption when we compare the first half of this year to the same period last year. And this helps to improve regional water resource resilience and ODI performance, as well as helping customers to keep their bills down. As a result of these actions, we've not had to introduce any customer restrictions this summer. However, we're not complacent. We know that there's more to do in this area to help us become stronger and even more resilient. I spoke to you in May about our Better Rivers programme to improve river health in our region. River health and spills into the environment is a key issue for all our stakeholders, and it's a huge area of focus for us too. Our original AMP7 plan provided 230 million of investment in environmental improvements, and I've previously told you that we'd enhance this with a further 250 million to get a head start on requirements emerging for AMP8. This allows us to responsibly accelerate improvements, which is absolutely the right thing to do. Combined storm overflows or CSOs are very much in the headlines with the government setting ambitious targets to reduce spill frequency across the country. And we're fully engaged with this ambition and have already made great progress delivering a 29% reduction in the number of reported spills last year compared with our 2020 baseline. We had targeted a 33% reduction between 2020 and 2025 but our great progress so far suggests that we'll beat this ambition. This targeted action and investment is enhancing our environmental performance and delivering sustainable performance of our wastewater networks against a backdrop of increasing regulatory standards. In addition, last week we hosted the region's first Future Rivers Forum, bringing together several organisations to collaborate to improve the quality of our rivers. These activities are helping us deliver on our four-step plan to improve river health. The Government's Environment Act 2021 sets out an ambitious programme of environmental improvements. The most high-profile component, which has received much of the public attention, is the ambition to reduce spill frequency from storm overflows. These are sewer system pressure relief valves, and we have over 2,000 of them across our network. Estimates prepared for government point to around 60% of the sector investment necessary to meet their targets needing to be made in the north. And this is a reflection of the nature of the long industrial legacy and higher rainfall in the region. This is only part of the story. Another driver is the desire to further reduce phosphate released into the environment from wastewater treatment works by 80% across the country. by deploying the best technology currently available. In addition, there are several areas across the country where further development is prohibited unless nutrient imbalance can be corrected, in which the water sector can play a part in the solution. There are other less significant drivers that combine to produce a patchwork of statutory requirements we are required to satisfy. Our Better Rivers program was our first step in making an early start on these requirements. But the government has asked us to go faster, and we've responded by identifying additional investment that could be accelerated as transitional investment from AMP8 into AMP7. We're still early in the process of scoping and costing the environmental program for AMP8, but early indications are that we may need to invest significantly more than the average over the last two AMP periods. And this is only AMP8, but it's clear that AMP9 and beyond could present similar opportunities. Affordability and deliverability of a programme of this size are important considerations, and we're therefore in discussion with regulators on the pace of the investment. We're unlikely to know the actual size of the programme until much later in the AMP8 process, but early indications are that we are facing a period of significant growth in capital investment, and with that, much higher RCV growth. I'll now hand you over to Phil to take you through the financials.

Thanks, Steve, and good morning, everyone. This year has seen both a continuation of a challenging macroeconomic environment, but also the realisation of significant inflation alongside higher interest rates. While both of these factors have a material impact on our reported and underlying results, the economic performance of the business, reflecting the regulatory model, remains robust, with the company on track to deliver an improved rate of return on equity, or RORI, this year. In today's presentation, I will focus on how we're managing our cost base, our strong balance sheet, and our resilient pensions position. And to finish, I'll provide some updated guidance for the full year to March 23. Here are the key financial highlights for the half year. Revenue is down 1% at £919 million as a result of consumption being lower than expected. Household bad debt has remained stable at 1.8% of regulated revenue. Underlying operating profit of £259 million has been impacted primarily by inflationary increases on core costs. As a result of higher inflation, and in particular its impact on finance expense, we have a small underlying net loss for the first half of the year and an EPS of minus 1.8 pence per share. In contrast, our reported EPS is 51.8 pence per share, reflecting the significant fair value gains arising from higher interest rates. The interim dividend per share is 15.17 pence, in line with our policy. Inflation on core costs is being actively managed, and we're well positioned with a current pay deal agreed at 4.75%, virtually all our base capital programme on contract, and 96% of power costs fixed for the year. We continue to have one of the strongest balance sheets in the sector with RCV gearing of 60% and a pension scheme that is fully funded on a low dependency basis and which has been resilient to the recent market challenges. And finally, we have a strong liquidity position, having raised debt early in the AMP at attractive rates. I'll now consider these points in further detail. So let's look first at our household cash collection and bad debt performance. We're driving continual growth in customers on direct debit. This provides us with a strong starting position for our collections activity, which has continued to be robust in the first half of the year. At 81%, we have one of the highest proportions of customers on direct debit or repayment plans within the sector, providing a high level of collection certainty for a significant proportion of our revenue. We're very conscious of the difficult times that customers may face over this winter and are utilising data and technology efficiently, allowing us to act early and swiftly to support customers. Good examples of this are our nudge activity if customer behaviour changes and open banking, which helps customers to efficiently access support tariffs and reduces our cost to serve for these customers. This all supports our lowest ever level of household bad debt at 1.8% of regulated revenue. Underlying operating profit of £259 million is down £74 million. This principally reflects the decrease in revenue, inflationary increases in our core costs, investments in driving ODI performance and costs associated with incidents resulting from dry weather over the summer. Revenue is £13 million lower than the first half of last year. Over-recovery in the prior half year broadly offsets the allowed inflationary increases in the current half year. The remaining reduction in revenue is driven by lower consumption as we focus on reducing per capita consumption, which supports our water resilience position and benefits our PCC ODI. The £19 million impact of lower consumption in the first half of the year will be recovered in revenue in the financial year ending March 25. We're not immune to the global inflationary pressures, and as a result we've experienced inflationary pressures on input costs with the largest impact to power and chemical costs, resulting in a 36 million increase in the first half of the year. We've invested an additional 9 million in infrastructure renewals expenditure associated with dynamic network management and water quality, and which is targeted at improving ODI performance. And during the exceptionally dry summer, we experienced three atypically large bursts in our water network, resulting in around £8 million of cost associated with network repairs, customer support and compensation. As these were core operational incidents, they have not been excluded as adjusted items in our underlying measure of performance. As we noted at the full year, the accounting change towards the end of last year in respect of software as a service now results in costs of £3 million being treated as OPEX rather than CAPEX. So we're very focused on the action we can take to mitigate the impact of higher inflation. And while we're not immune to the macroeconomic challenges we all face, we are well positioned. Let's first look at how we're managing the near-term impact of inflation. We agreed our pay deal for the current year at 4.75%. Our decision to accelerate AMP7 investment means our base capital program is already 98% let under target pricing arrangements, providing confidence of supply chain resource in a challenging environment and incentivizing efficient and effective cost management. We've already delivered around 65% of the program, only halfway through the AMP, giving an increased level of certainty on costs. On power, we're in a strong position having increased our hedge to 96% for the current year. And as we look forward, we continue to focus on tightly controlling our cost base, although it's also important to understand how the regulatory mechanisms mitigate this impact. We expect a higher non-cash indexation charge in our inflation-linked debt this year. Inflation-linked debt equates to around 30% of our RCV. with a full RCV benefit therefore being around three times the non-cash indexation charge, although as you know, the RCV benefit is not reflected in the income statement. The regulatory contract also allows for inflation indexation of the Totex allowance, providing mitigation to inflation on core costs. Each 1% increase in CPIH over the AMP will result in around £600 million increase to the RCV and around £150 million increase in the Totex allowance. At our full year results in May, I gave a lot of detail on our power position and hedging policy. We came into the year in a strong position and now have 96% of our consumption locked in on contracted rates for the current year. This has helped us control power costs at an average rate of £85 per MWh, which compares favourably to the energy price cap of £211 per MWh through the second half of the year. Our hedging policy has created significant value, as without the benefit of the hedge, our power costs would have been around £75 million higher for the full year. As a result of our hedging strategy, we're also focused on driving energy efficiency across the organisation, minimising usage and maximising benefits from time of usage. We continue to benefit from 25% of our power needs being sourced from self-generation and long-term power purchase agreements. The sale of our energy business, which completed in September, has unlocked capital that we will recycle back into projects to support our journey towards net zero. At the same time, we've locked in the price of the energy from those assets sold through long-term power purchase agreements, or PPAs. Lastly, our long-term power hedging policy is demonstrating its effectiveness. We're in a strong position for the rest of the AMP and have locked in a large proportion of our energy needs at favourable prices. So let's now focus on finance expense. Our underlying net finance expense for the first half of the year is £267 million. This is a £132 million increase on the prior half year, largely reflecting the significantly higher inflation applied to the non-cash indexation of our index-linked debt. Our reported net finance income includes a significant fair value gain of £403 million. This reflects the benefit we will receive in our underlying cash interest expense in future periods from having fixed rates on our nominal debt. Turning to our forecasts for FY23, we now expect underlying net finance expense to be around £165 million higher than the previous year. This increase relates to the non-cash indexation on our index-linked debt due to the higher inflation. But importantly, our cash interest for FY23 is expected to be broadly the same as FY22. We have provided our current forecast along with the main components of our finance expense for FY22 and the first half of FY23 in the appendix to this presentation. Let's now look at how well we're positioned on financing. First, we're ahead of where we need to be, having raised a significant financing in the first half of the AMP. We have a strong liquidity position with over one billion of liquidity, enough to take us through to almost the end of the AMP7 period. This means we have flexibility to choose when and how we issue to maximise best value. Second, we have a strong track record of outperforming the debt index for new debt, typically by between 50 and 100 basis points, as illustrated on the chart in the appendix. This, together with the acceleration of our financing, means we benefit from the debt indexation mechanism in a rising interest rate environment. Third, we're also benefiting from having issued debt early in the AMP, which locked in historically low long-term yields, all of which puts us in a robust position from which to navigate the second half of the AMP. Now turning to our strong balance sheet. To the left of this slide, we have a bridge of our net debt position from March 22 to September 22. Net debt of 7.8 billion has increased by 259 million since March 22, with the usual underlying movements shown in the bridge. High levels of inflation have impacted both net debt and our RCV, and therefore our RCV gearing has reduced slightly to 60%. At the full year, I provided a view of how the investments we're making in AMP7, together with the expectations of inflation, were expected to drive higher RCV growth through this five-year period. To the right of this slide, I've provided an update reflecting our current expectations of inflation. Our nominal RCV growth over the five-year period is now anticipated to be 27.5%. This means we expect to exit AMP7 with an RCV of £15.1 billion and gearing trending towards the lower end of our 55% to 65% target range, which comfortably supports a stable A3 credit rating with Moody's. Now to touch on pensions, as it's been a challenging time for many pension schemes over the last few months. As at September 22, we had an IFRS pension surplus of £824 million and remained fully funded on a low dependency basis with no ongoing pension scheme deficit contributions payable. Our clear and effective risk management policies enabled our schemes to successfully navigate the recent challenging market conditions. And as I mentioned at the full year, we're now exploring with our trustees further de-risking options and this process remains ongoing. This slide sets out our update for the outlook for the year to March 23. We expect revenue to be around 1% lower year on year with the consumption trend we've seen in the first half of the year expected to continue into the second half. The 34 million expected impact from lower consumption will be recovered through increased revenue in FY25. Underlying operating costs are expected to increase by around 130 million. Around 80 million reflects inflationary pressures on operating costs, principally power, chemicals, labour and other contract costs. Around 30 million reflects the increased scope and includes the FY23 element of incremental infrastructure renewals expenditure in relation to the investment we previously announced. The remaining 20 million reflects atypical costs, including the dry weather costs incurred in the first half. As I've already mentioned, higher inflation materially impacts our index-link debt, and as a consequence we expect our underlying finance expense to be around £165 million higher. Further details of the assumptions are set out in the appendix to this presentation. We expect an underlying tax charge of between £5 and £10 million for the full year, as we continue to optimise capital allowance super-deductions and efficiently manage the group's tax position. CapEx for the year is expected to be in the range of £660 to £715 million, a small increase on the guidance given in May as a result of revised phasing. And this includes the FY23 elements of incremental capex in relation to the additional £765 million investment we previously announced. We're targeting a customer ODI reward of around £30 million, consistent with our investment plans and our AMP7 guidance on ODIs. And with higher expected financing performance alongside our improved ODI performance this year, Rory is expected to be higher than the 7.9% reported last year. Finally, our dividend policy remains unchanged and we expect dividends in FY23 to be in line with our M7 dividend policy of growth year on year by CPIH. And so to conclude, we're in a robust financial position. We're actively managing the near-term impacts of inflation driven by wider macroeconomic challenges, and we benefit from higher Totex allowances and RCV growth. Despite the cost of living challenges, our focus on supporting customers and our approach to debt management means that household cash collection has remained robust, with our bad debt position stable at 1.8%. And finally, we have a strong balance sheet with a sustainable level of gearing and a leading pension position, enabling us to capture the opportunities for future investment. So thank you and I'll now hand back to Steve.

Thanks very much, Phil. So to summarise, we see the huge challenges that many of our customers are facing as a result of cost of living increases and are supporting more customers than ever through our sector leading package of support. Our investment in systems thinking is delivering sustainable improvements in operational performance and is helping us to deliver one of the best ODI positions in the sector and continue to target an ODI reward for AMP7 of around 200 million. Effective management supported by previous investment has helped us deliver a reliable and resilient water supply throughout the dry spring and summer. We're improving river health and reducing spills into the environment through a better rivers and better Northwest plan. And our focus on tight cost control is helping us to navigate the current macroeconomic challenges. And with a robust regulatory model, we're in a strong economic position. And looking to the future, the government's Environment Act creates significant drivers for increased investment in AMPATE and beyond. We're supportive of the drive to go further to deliver better environmental outcomes for the benefit of all of our stakeholders. So thanks very much for listening, and we'll now take questions. So the first question we've got is from Mark Fresheny at Credit Suisse. Mark, can you hear? Mark, you're on mute. No, nothing on the slide. OK, we're struggling to hook up with Mark. Shall we try James, who's also there, see if we can get James, and we'll come back to Mark if we can connect. James? Can't hear you.