United Utilities Group Plc · LSE:UU.
United Utilities — H1 2015/16 Earnings Presentation
42 slides from United Utilities's earnings presentation, November 2015
Slide 1: United Utilities Group PLC Half year results
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Slide 2: Welcome to half year results presentation
Good morning ladies and gentlemen and welcome to our half year results presentation covering the first six months of the 2015 to 2020 period, AMP6. We have made a good start to AMP6, building on the momentum established in AMP5 which saw us climb from a low base five years ago to becoming one of the
Slide 3: Agenda
This is the agenda. I will provide you with an overview of our operational performance in the first half of the year, and Russ will then update you on the financials. I’ll finish with a summary and outlook for the group. 3
Slide 4: AMP5 achievements and good start to AMP6
Our achievements in AMP5 give us a good platform for the next five year period. • We reduced customer complaints by around 75% over the AMP; and • We achieved joint top place in Ofwat’s assessment of water and wastewater company performance and we were delighted to again be assessed as a first quart
Slide 5: Joint top ranking on Ofwat performance indicators
So, this chart shows our joint top ranking on Ofwat’s key customer, operational and environmental performance indicators. We are ranked alongside Wessex, in which we both scored only one amber with all other scores green. This is a very satisfying conclusion to AMP5 and a great place to start AMP6.
Slide 6: Lancashire water quality incident
I’d just like to take a few moments to touch upon the incident we experienced last August. Our regular sampling programme discovered that our water network supplying parts of Lancashire had been contaminated by low levels of the parasite cryptosporidium. As a consequence we issued a precautionary bo
Slide 7: Customer satisfaction and SIM score
So, moving onto customer satisfaction. We were the most improved company on SIM during AMP5, with customer complaints down by approximately 75 per cent across the five years. And we are making early investment in new systems to improve customer satisfaction further. You will recall that SIM combines
Slide 8: Capital investment and totex progress
As I’ve mentioned, we intend to set outperformance targets next May, but good early progress is reinforcing our confidence that the totex targets we have accepted are tough but within reach. I will cover the capex component of totex and Russ will later discuss opex. We spent £39 million of transitio
Slide 9: Outcome delivery incentives
Moving onto outcome delivery incentives, or ODIs, which are a new feature of the 2015-20 regulatory period. As outlined at our results last May, we have 18 wholesale ODIs with financial rewards or penalties. Most of the ODIs include a ‘deadband’ associated with target performance, for which there wi
Slide 10: Systems thinking approach
I talked to you in detail last May about how our ‘systems thinking’ approach to running the business will help drive customer service and operational efficiency improvements. Today, I will just provide a brief overview of the good progress we are continuing to make. The chart outlines some of the th
Slide 11: Business retail market opening
Now, business retail. Our early preparation and progress means we are well positioned for full market opening. We have established a strong presence in the Scottish market for business customers, having secured over 250 customers covering over 3,000 sites and representing annualised revenue of aroun
Slide 12: Energy self-generation
Moving onto energy self-generation. Power is a significant cost for us, at around £60 million per annum, and so it makes sense to look at economically viable options to use our sites to increase our self-generation capability, reducing our exposure to future energy prices. We already generate a sign
Slide 13: Responsible business and ESG
Operating in a responsible manner is fundamental to the way in which we run our business and there is growing evidence of a link between ESG and shareholder value. I believe that we struck the right balance between customers and shareholders in sharing AMP5 outperformance through £280 million of rei
Slide 14: Thank you, Steve. Good morning.
Thank you, Steve. Good morning. 14
Slide 15: Financial performance for the first half
So, moving onto financial performance for the first half, which is the first period under the new regulatory price controls. 15
Slide 16: Results summary
This is a good set of results, in light of the new tough regulated price controls. Underlying operating profit at £309 million was £35 million lower than the first half of last year impacted by these new controls, along with an increase in operating expenses that I will discuss shortly. Underlying p
Slide 17: Adjustments to reported profit
As usual, we have made some adjustments to reported profit to get to underlying profit, which we believe gives a more representative view of underlying performance. We had a £37 million fair value gain in the first half of this year, largely due to gains on the regulatory swap portfolio, mainly resu
Slide 18: Underlying income statement
This is a summary of the underlying income statement after making the adjustments shown on the previous slide. Revenue was down by just £2 million at £857 million, despite the new regulated price controls, mainly because the first half of last year was impacted by the special discount we applied to
Slide 19: Underlying operating expenses
We have continued to maintain tight cost control, although, as is often the case, there were some special factors affecting the comparison of underlying operating expenses between the two periods. Overall, our underlying operating expenses were up £32 million. The main increases were in employment c
Slide 20: Bad debt
So, looking at bad debt in a bit more detail. Deprivation remains the principal driver of our higher than average bad debt. You may recall that bad debt costs increased last year to just over 3 per cent of regulated revenue. This was partly due to a review of bad debt provisions for business custome
Slide 21: Statement of financial position
Turning now to the statement of financial position. Property, plant and equipment was up £129 million in the year to £9.8 billion, reflecting expenditure on our large capital programme. As at March 2015, the group had an IAS 19 retirement benefit surplus of £79 million and this surplus has increased
Slide 22: RCV and gearing
This chart shows our RCV and gearing level. The blue bars show the growth in our RCV, which has slowed over the last year mainly due to lower RPI inflation. The green line shows the movement in RCV gearing over the last few years. Our gearing has remained stable at around 59 per cent, with the growt
Slide 23: Cash flow
Moving on to cash flow. Net cash generated from operating activities at £370 million was similar to the first half of last year. The impact of lower profit was offset by an improvement in working capital cashflows and a slight reduction in corporation tax paid. Cash used in investing activities was
Slide 24: Financing activity
Over the next five-year regulatory period, we have financing requirements totalling around £2.5 billion. This is to meet a combination of refinancing and incremental debt, to help fund our investment programme. We are in a strong position, having already raised over £1 billion of our requirements an
Slide 25: Hedging update
And finally, a brief update on our hedging. As a reminder, we leave the equity portion of the RCV exposed to RPI inflation by hedging the debt portion of the RCV for inflation through index-linked debt and the effect of our pension scheme liabilities. We are currently hedged in line with our policy
Slide 26: Financial summary
So, in summary: • this is a good set of results in light of the tough new price controls; • we have benefitted from a reduction in underlying finance expense; • we continue to maintain a strong balance sheet and solid credit ratings, with S&P having recently uplifted us to a positive outlook; • we h
Slide 27: Thanks, Russ.
CHIEF EXECUTIVE Steve Mogford Thanks, Russ. @ United Utilities 27
Slide 28: Summary and outlook
I’ll finish by providing a brief summary and outlook, before moving onto Q&A. 28
Slide 29: Summary and outlook
We have made a good start against a tough set of AMP6 targets. Our AMP5 operational achievements and customer service improvements gave us good momentum for AMP6 and our ‘systems thinking’ approach is a key enabler to our further improvement. Transitional investment ahead of AMP6 gave us a smooth tr
Slide 30: Questions
That concludes our results presentation. Thank you for listening. We’ll now be pleased to take questions. 30
Slide 31: Supporting information
Supporting information Outcome delivery incentives Reported income statement Underlying profit before tax Finance expense Derivative analysis Movement in net debt Financing and liquidity Term debt maturity profile Debt structure Y United Utilities 31
Slide 32: Outcome delivery incentives (ODIs)
Outcome delivery incentives (ODIs) Challenging operational targets P10 penalties P90 rewards Water quality events DWI cat 3 or above = Water quality service index = Average minutes supply lost a Reliable water service index = Security of Supply index Total leakage at or below target —S—SS= Resilienc
Slide 33: Income statement — reported
Income statement — reported Fair value gains enhance earnings Six s ended 30 September Revenue Operating expenses EBITDA Depreciation and amortisation Operating profit Investment income and finance expense Share of profits of joint ventures Profit before tax Taxation Profit after tax Basic earnings
Slide 34: Underlying profit before tax
Underlying profit before tax Impacted by new regulated price controls £m ix months ended 30 September Operating profit 2783 340.5 Investment income and finance expense (64.9) (138.3) Share of profits ofjoint ventures 22 25 Profit before tax 215.6 204.7 Adjustments: Water quality incident 24.8 - Busi
Slide 35: Finance expense
Finance expense Underlying interest charge lower Investment income Finance expense Less net fair value (gains)/losses on debt and derivative instruments Adjustment for interest on swaps and debt under fair value option Adjustment for net pension interest (income)/expense Adjustment for capitalised b
Slide 36: Finance expense: index-linked debt
Finance expense: index-linked debt Cash benefit for the group £m Six months ended 30 September 2015 2014 Cash interest on index-linked debt (25.5) (25.0) RPI adjustment to index-linked debt principal - 3 month lag' (26.2) (26.2) RPI adjustment to index-linked debt principal - 8 month lag” 2.4 (11.4)
Slide 37: Derivative analysis
Derivative analysis Derivatives intrinsically linked to debt £m At 30Sep15 31Mar Derivatives hedging debt 654.9 677.6 Derivatives hedging interest rates to 2015 0.0 (6.7) Derivatives hedging interest rates beyond 2015 (172.4) (189.2) Derivatives hedging commodity prices (8.8) (4.3) Total derivatives
Slide 38: Movement in net debt
Movement in net debt* Small increase in line with expectations Net debt at Net capex Dividends Interest & tax Non-cash Operating cash —Net debt at 31/03/15 movements & flow 30/09/15 other * Net debt includes derivatives which incorporate regulatory swaps 38 38
Slide 39: Financing and liquidity at September 2015
Financing and liquidity at 30 September 2015 Gross debt = £6,843.0m Other Yankee Other EIB borrowings, bonds Total headroom / prefunding Headroom / prefunding = loans, £271.1m (usp), Cash and short-term £500.0m 750.3m Euro bonds Median s ‘ Medium-term committed bank fac EIB index- Be linked and . Bt
Slide 40: Term debt maturity profile
Term debt maturity profile’ Average term to maturity of over 20 years 3,000 1,000 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50 2050-55 2055-60 Years Future repayments of index-linked debtinclude inflation based on an average annual RPI rate of 3% 40 40
Slide 41: Debt structure at September 2015
Debt structure at 30 September 2015 United Utilities Group PLC United Utilities PLC Baa’ stable: BBB- po Yankees: Other debt United Utilities Water Limited table: BBB+ p: ve ced andr Other debt: Ss_+£100m in 4281 * EB index-linked loans £1,000m' *£100m in 35s" * £50m in 438° * Other index-linked loa
Slide 42: 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 diffe
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