Slide 1: United Utilities Group PLC Half year results
United Utilities Group PLC Half year results Six months ended 30 September 2011 8, United Utilities
Slide 2: Welcome to half year results presentation
Good morning and welcome ladies and gentlemen to our half year results presentation. When I presented our results last May, I said that our focus is now on turning UU into one of the UK’s leading water and wastewater service providers with the customer at the core of our activity. We have been busy
Slide 3: Agenda
This is the agenda for this morning’s presentation. I’ll provide an update on the business and touch on recent political and regulatory developments, before handing over to Russ who will take you through the numbers and outline some further changes we have made to reduce risks to our financial resul
Slide 4: Headlines
The headlines are: We have delivered a good underlying financial performance whilst continuing to invest in our assets, despite a tough economic climate. Our customer service and operational performance is improving. We have improved our relative efficiency position and remain on track to deliver ou
Slide 5: Early achievements
I’d like to highlight some of our early achievements. We met our leakage target last year, despite extreme winter weather and we have continued with our rigorous year round attention to leakage. This, combined with healthy reservoir stocks, gives us a good start as we enter the winter period. Notwit
Slide 6: Organisational changes and revised incentives
Whilst I recognise that talking about organisational structure can be tedious, we have made some important changes over recent months to align people with the key processes in our business. We have undertaken a rigorous process to select our best operational leaders whose job is to improve the perfo
Slide 7: Customer performance
We aim to deliver long-term shareholder value by providing the best service to customers, at the lowest sustainable cost and in a responsible manner. So, starting with customer performance. 6
Slide 8: Customer experience programme and complaints
We have a customer experience programme that underpins our drive for improved customer service. At our full year results presentation in May, I reported a substantial reduction in customer complaints over the previous year. I am pleased to report further progress. These charts show an important and
Slide 9: Quantitative SIM score
SIM is split into a quantitative assessment, based upon complaints and other customer contact measures, and a qualitative assessment, which seeks to measure our customers’ perceptions of how we handle their enquiries. This chart tabulates our continued improvement in quantitative SIM score. We impro
Slide 10: Qualitative SIM score
This chart demonstrates our progress in improving our qualitative measure. Our quarter two score for this year has improved to 3.99 points, from 3.79 points for the 2010/11 financial year. We are beginning to see first signs of improving customer perception. This early result moves us from last plac
Slide 11: Ofwat overall performance assessment
Ofwat recently issued an assessment of overall performance of the water companies in 2010/11, as shown in this chart. The assessment took account of the formal return made in June this year by UU and its peers and identified where Ofwat has concerns with company performance across a basket of ten me
Slide 12: Private sewers update
I’d now like to provide a brief update on private sewers. As you’ll be aware, ownership of and responsibility for private sewers was transferred to the wastewater companies in England and Wales from 1 October 2011. This will provide additional benefits for customers and the opportunity for additiona
Slide 13: Operational performance
Operational performance ® Best service to customers ® Lowest sustainable cost ® Responsible manner 12 Moving on to efficiency. 12
Slide 14: Relative efficiency performance
I’d like to provide an update on our relative efficiency performance. We are pleased to have made improvements on both the water service and the wastewater service in 2010/11, as shown on these charts. We have improved our relative efficiency banding to band A for water and are now in the first quar
Slide 15: Leakage
Turning to leakage. The performance of the business in meeting its regulatory leakage target for 2010/11 was particularly good, given the extreme winter weather. We were one of only four water and sewerage companies to meet our regulatory leakage target last year. This reflected strong year round op
Slide 16: Capital delivery and TCQi
Now, on to capital delivery. We have enhanced our capital investment governance process to provide a sharper focus on delivering our capital programmes on time, within budget and in line with the performance objectives of the project – simplified to ‘quality’. We monitor a new performance index, whi
Slide 17: Sustainability is fundamental to the way we do business
Sustainability is fundamental to the way we do business. 16
Slide 18: Environmental performance
Environmental performance is a high priority for us. We have more than halved the number of major pollution incidents over the last few years and wastewater treatment works compliance remains high at over 98 per cent, a slight improvement on last year. We are working more closely with the Environmen
Slide 19: External recognition for corporate responsibility
UU has for many years included corporate responsibility factors as a strategic consideration in its decision making and we get external recognition for the way we do business. We are pleased to lead our sector in retaining the highest platinum plus ranking, since its inception in 2008, in the UK’s B
Slide 20: Regulatory and political developments
I’d now like to touch on regulatory and political developments. We have been closely engaged in recent developments and have sought to focus the debate onto three broad areas where the sector can help address climate change and sustainability, affordability, and, water efficiency. In addressing the
Slide 21: Single segment reporting
Thank you, Steve. Good morning. Before I start, I’d just like to remind you that, since our regulated water business accounts for virtually all of the group’s revenue and operating profit, we have now adopted a single segment for financial reporting purposes. 20
Slide 22: Financial section overview
I’ll begin with the half year financial results and then talk about a few changes we have made to reduce risk in the areas of power costs, financing costs and pensions. I’ll then provide a brief update on our regulatory outperformance, before handing back to Steve. 21
Slide 23: Financial highlights
This slide shows the financial highlights for the half year, a good set of results in a tough economic climate. Underlying operating profit was £324 million, down by just one per cent. Underlying profit before tax was £185 million, five per cent lower than the same period last year. It is worth high
Slide 24: Underlying income statement
This is a summary of the underlying income statement, which strips out one-off items, fair value gains and losses, and the deferred tax credits. Revenue of £793 million was up £30 million, principally as a result of the impact of the regulated price increase for 2011/12 of 4.5 per cent nominal (0.2%
Slide 25: Cost analysis
Looking at our costs in a bit more detail. Reflecting good progress on the capital investment programme, infrastructure renewals expenditure was up £18 million, in line with the planned phasing of the programme. Depreciation was higher, as expected, as a result of an increase in the commissioned ass
Slide 26: Bad debt performance
So, now turning to our bad debt performance. We are adopting a more proactive approach to debt collection and our detailed action plan, which I outlined to you this time last year, is progressing well. Last year, we reduced our underlying bad debt expense by more than £6 million, to 2.1 per cent of
Slide 27: Statement of financial position
Now, looking at the statement of financial position. The group has a robust capital structure, which is aligned with the regulatory model. Net debt is higher than last year end, as expected, reflecting additional borrowing to fund the capital investment programme and the accelerated payment of appro
Slide 28: Gearing and credit rating
The green line on this chart shows the movement in gearing over the last 18 months. The reduction between March 2010 and March 2011 mainly reflects a reduction in group net debt as a result of the non-regulated disposals. RCV gearing has increased from March 2011 to September 2011 by one per cent to
Slide 29: Cash flow
Moving on to cash flow. Net cash generated from operating activities was £218 million, down by £112 million on the first half of last year, largely as a result of the £100 million accelerated pensions deficit repair payment. Cash used in investing activities remained at a high level, as we continued
Slide 30: Financing position and EIB loans
We continue to benefit from a robust financing position and we now have headroom to cover our projected financing needs into 2014. This robust financing position enabled us to accelerate £100 million of pension deficit repair payments, providing a higher return than could have been achieved through
Slide 31: Reducing financial risks
We’ve mentioned previously that we are focusing on improving performance across a broad front. As part of this improvement process, we have been assessing opportunities to reduce further our financial risks in three key areas. 30
Slide 32: Power costs hedging
First, power costs. We have increased our energy hedging and have now substantially locked in our power requirements through to 2014/15, as shown by the hedged percentages on this chart. This delivers significant outperformance versus the regulatory contract, although the greatest benefit comes in t
Slide 33: Interest rate management
The second area of risk reduction relates to interest rate management. Very long-term sterling inflation index-linked debt is our preferred form of funding, as this provides a natural hedge to assets and earnings. However, index-linked debt is not always available and therefore we raise a significan
Slide 34: Pensions risk reduction
A third area where we have implemented risk reduction measures is pensions. In March 2010, we amended the terms of our defined benefit pension schemes. We also reduced our future pension obligations as a result of the sale of non- regulated activities. We have now introduced an innovative inflation
Slide 35: Regulatory outperformance update
I’d like now to provide a brief update on regulatory outperformance, before handing back to Steve. 34
Slide 36: Outperformance targets
Our performance in the first six months of this year has reinforced our confidence in delivering the outperformance targets that we set out in May. In respect of opex outperformance, we are targeting a total of at least £50 million, or approximately two per cent of the regulatory allowance, over the
Slide 37: Thank you, Russ
Thank you, Russ. United Utilities 36
Slide 38: Summary
So, in summary, we have delivered a good financial performance. We have demonstrated that we are delivering improved customer service, efficiency and operational improvements, although we are determined to deliver more. Our water supply and demand balance remains robust and our reservoirs are at hea
Slide 39: Questions
That concludes our results presentation. Thank you for listening. We’ll now be pleased to take questions. 38
Slide 40: Appendix contents
Reported income statement Underlying profit before tax Finance expense Movement in net debt Financing and liquidity Term debt maturity profile Debt structure United Utilities 39
Slide 41: Income statement - reported
Income statement - reported Deferred tax credit enhances earnings £m Six months ended 30 September Continuing operations REVENUE 792.7 762.4 Operating expenses (323.5) (309.2) EBITDA 469.2 453.2 Depreciation and amortisation (146.6) (141.7) OPERATING PROFIT 322.6 311.5 Investment income and finance
Slide 42: Profit before tax
Profit before tax Reflects inflationary impact on finance expense £m 2011 2010 Operating profit 3226 311.5 investment income and finance expense (198.2) (189.3) Profit before tax 124.4 122.2 Adjustments: One-off items’ 1.6 162 Net fair value losses on debt and derivative instruments 55.9 53.2 Intere
Slide 43: Finance expense
Finance expense Underlying interest rate broadly flat £m 2011 2010 Investment income 1.7 1.2 Finance expense (199.9) (190.5) (198.2) (189.3) Less net fair value losses on debt and derivative instruments 55.9 53.2 Adjustment for interest on swaps and debt under fair value option 3.8 2.0 Adjustment fo
Slide 44: Finance expense: index-linked debt
Finance expense: index-linked debt Cash benefit for the group £m 2011 2010 Cash interest on index-linked debt (21.5) (19.5) RPI adjustment to index-linked debt principal - 3 month lag’ (35.6) (32.2) RPI adjustment to index-linked debt principal - 8 month lag” (21.2) (17.7) Finance expense on index-l
Slide 45: Movement in net debt
Movement in net debt? Increase in line with expectations = ~ || Net debt at Net capex Dividends Interest & tax Nor-cash Operatingcash —Net debt at ya/it movements & flow 30/9/11 other 1 Net debt includes derivatives which incorporate regulatory swaps
Slide 46: Financing & liquidity as at September 2011
Financing & liquidity as at 30 September 2011 Gross debt = £5,833.1m 1 ther borrowings, £348,4m, EIB loans, £200.0m £477.2m EB indeclinked loans, £868.9m GEP bonds, £1,640.5m + Includes amounts relating to joint ventures of £28.8m Euro bonds (EUR), Headroom / prefunding = £508.8m Cash and short-term
Slide 47: Term debt maturity profile
Term debt maturity profile* Average term to maturity over 25 years 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50 2050-55 2055-60 Years 46 + Future repayments of index-linked debt include inflation based on an average annual RPI rate of 2.75% 46
Slide 48: Debt structure at September 2011
Debt structure at 30 September 2011 ¢ ¥3bn in 13's © £425m in 15's ¥5bn in 17's © £150m in 18's © €500m in 20's © £375m in 22's £300m in 27's + Index-linked finance United Utilities Group PLC United U ies PLC Baal stable; BBB- stable Other debt: * Short-term loans £71m Euro MTN: °£6.5m in 13's Yanke
Slide 49: Cautionary statement
Cautionary statement This presentation contains certain forward-looking statements with respect to the operations, performance and _ financial condition of the group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to dif