United Utilities Grp - Half-year Report

Customers continue to be at the heart of everything we do

·     Delivering customer service improvements through innovation and strong operational performance

·     Top water and wastewater company on UKCSI and now expect an AMP6 SIM reward of £11m or more

·     Providing the widest range of support for customers, doubling the number receiving help with affordability over AMP6

Sustained improvements in operational performance

·     Systems Thinking unlocking innovation opportunities, underpinning long-term operational improvement

·     Achieved industry leading environmental and water quality performance scores

·     Sustained gains in efficiency delivering totex outperformance of £100m against our AMP6 scope

·     Remain on track to deliver a cumulative AMP6 ODI reward

 

Strong plans for AMP7 and beyond

·     Ambitious PR19 business plan delivering £1bn efficiencies, further reducing bills whilst improving service

·     10.5% real bill reduction and targeted support helping over 300,000 households out of water poverty

·     Builds on our performance in AMP6 giving us confidence heading into AMP7 and beyond

·     Delivers for customers and creates long-term value for all stakeholders

 

Strong financial performance

·     Underlying operating profit of £367.8m (reported operating profit of £339.1m)

·     Interim dividend in line with AMP6 growth policy

·     Robust capital structure and strong pensions position providing resilience and future financial flexibility

 

Key financials

 

 

 

Six months ended

30 September 2018

30 September 2017

Revenue

£916.4m

£876.0m

Reported operating profit

£339.1m

£341.8m

Underlying operating profit1

£367.8m

£344.0m

Reported profit after tax

£212.5m

£197.4m

Underlying profit after tax1

£196.9m

£160.1m

Interim dividend per ordinary share (pence)

13.76p

13.24p

Net regulatory capital spend

£392.7m

£394.4m

RCV gearing2

60%

61%

 

Steve Mogford, Chief Executive Officer, said:

 

"Customers are at the heart of everything we do. Our approach to affordability and vulnerability together with our sustained improvements in customer service position us as a leader in the sector. In the most recent UK Customer Satisfaction Index we were the most improved utility company and the highest ranked water and wastewater company. The Institute of Customer Service, which assesses excellence in customer service across all sectors, recently awarded us its top Service Mark with Distinction.

 

"Our approach to innovation and the use of advanced technology from around the world alongside our capital investment is delivering better service, greater resilience and improved efficiency. Fundamental to this is our pioneering Systems Thinking approach which continues to unlock innovation opportunities and is making a significant and positive difference to our sustainable, long-term performance.

 

"The significant progress we have made positions us well for the remainder of the current regulatory period and beyond. We have responded well to the challenges brought about by the impact of more variable weather and have created a platform for continuing strong operational performance. We will continue to provide a great service to our customers and create long-term value for all of our stakeholders."

OPERATIONAL OVERVIEW

 

The benefits of our innovative Systems Thinking approach and use of technology are wide ranging and permeate all areas of the business. This is delivering sustainable and long-term improvements in operational performance and provides a strong platform for performance into AMP7.

 

·     Sustained improvement in customer satisfaction - our performance against Ofwat's Service Incentive Mechanism (SIM) has improved significantly since the start of AMP6 and we now trend above the industry average for both quantitative and qualitative performance. This performance is mirrored in the UK Customer Satisfaction Index against which we are the leading water and wastewater company and the most improved utility company overall. We were delighted to achieve the Service Mark with Distinction from the Institute of Customer Service and were one of only a small group of companies across the country to achieve this.

 

·     Innovation through Systems Thinking - our innovative Systems Thinking approach and use of data and technology is pervasive throughout the entire organisation. Through our Integrated Control Centre we are able to identify issues before they become problems and therefore minimise customer impact. This is delivering enhanced levels of service and resilience along with sustainable improvements in efficiency and contributes around £450 million of savings identified in our PR19 business plan.

 

·     Leading performance with integrity - in July, we achieved Industry Leading Company status for the third consecutive year as measured through the Environment Agency's (EA) annual assessment. Our performance against the Drinking Water Inspectorate's (DWI) metrics continues to improve, and we are the leading water and wastewater company against the DWI's overall drinking water quality metric for 2017.

 

·     Delivering shareholder value through regulatory outperformance - the low cost of debt we have already locked in places us in a strong position to deliver on our target of minimising our cost of debt compared to Ofwat's industry assumed cost for the 2015-20 period. Through Systems Thinking and the effective delivery of our investment plan, we are confident of delivering our AMP6 scope for £100 million less than the Final Determination totex assumption and a cumulative net reward against our Outcome Delivery Incentives (ODIs) for AMP6. Our strong performance on customer satisfaction now means we expect to be eligible for a SIM reward in AMP6 of £11 million or more.

 

·     Sharing outperformance - sharing net outperformance through additional investment of £250 million. This is delivering industry leading, long-term resilience for the benefit of customers and helping to mitigate future bill increases.

 

·     Prolonged period of dry weather - earlier this year, the UK experienced a prolonged period of extreme hot and dry weather resulting in exceptional demand from customers. To safeguard continuity of supplies to customers and protect our water resources, we expect to spend an additional £80 million during the current financial year. These measures together with the cooler and wetter weather in August avoided the need for any water restrictions. In the first half of the year, we have incurred £34 million of costs of which £9 million is capex, £7 million is infrastructure renewals expenditure (IRE) and £18 million is operating costs. The IRE and operating cost elements are excluded from the underlying results as shown in the underlying profit measure tables below. We expect the costs in the second half of the year to be predominantly capex.

 

·     Strong environmental, social & governance (ESG) credentials - we have achieved our World Class rating in the Dow Jones Sustainability Index for the eleventh consecutive year, a very good achievement in light of the ever evolving standards. We have retained our self-assurance status with Ofwat for reporting and our best practice in the areas of affordability and vulnerability has received external recognition through several awards, many of which look beyond the water sector.

 

·     Strong plans for AMP7 and beyond - in September, we submitted our business plan for AMP7 that delivers for customers and is aligned with the key PR19 themes. Our plan has benefited from extensive engagement with customers and other stakeholders in our region and we are confident that it is a high quality and ambitious plan, rich in content, with a compelling proposition of bill reductions and service improvements.

 

FINANCIAL OVERVIEW

 

The group has delivered a good set of financial results for the six months ended 30 September 2018.

 

·     Revenue - revenue was up £40 million, at £916 million, largely reflecting our allowed regulatory revenue changes.

 

·     Operating profit - underlying operating profit was up £24 million, at £368 million. This reflects the £40 million increase in revenue partly offset by an £11 million increase in IRE and a £6 million increase in depreciation. Reported operating profit was down £3 million, at £339 million, impacted by the same movements as underlying operating profit as well as one off costs of £25 million associated with the extreme hot and dry weather earlier this year.

 

·     Capex - total net regulatory capital investment in the first half of the year was £393 million including IRE and the additional capex associated with the extreme hot and dry weather earlier this year. We are on track to deliver a total of around £830 million of regulatory capex for the full year. This includes around £70 million of the additional £250 million of investment to improve resilience for customers and the capex and IRE associated with the extreme hot and dry weather, neither of which were anticipated at the time of the PR14 settlement. Our five-year regulatory capex programme is around £3.8 billion including this additional investment.

 

·     Profit before tax - underlying profit before tax was up £46 million, at £240 million, largely reflecting the increase in underlying operating profit and a £24 million decrease in the underlying net finance expense. The decrease in the underlying net finance expense was mainly due to the impact of lower RPI inflation on our index-linked debt. Reported profit before tax was £260 million, reflecting fair value movements and other adjusting items as outlined in the underlying profit measures tables below.

 

·     Profit after tax - underlying profit after tax was up by £37 million, at £197 million. Reported profit after tax was higher at £212 million, mainly reflecting fair value movements.

 

·     Capital structure - the group has a robust capital structure with gearing of 60 per cent as at 30 September 2018 (measured as group net debt to 'shadow' regulatory capital value, or RCV). Our shadow RCV adjusts for actual spend and was £11.5 billion as at 30 September 2018. This gearing level is comfortably within our target range of 55 per cent to 65 per cent, supporting a solid investment grade credit rating. United Utilities Water Limited (UUW) has long-term credit ratings of A3 from Moody's and A- from Standard & Poor's, both on stable outlook.

 

·     Financing headroom - the group benefits from headroom to cover its projected needs into 2020, enhanced by the recent raising of new finance. At 30 September 2018, the group had headroom of £426 million consisting of cash and committed funding. This headroom provides flexibility in terms of when and how further debt finance is raised to help refinance maturing debt and support the delivery of our regulatory capital investment programme.

 

·     Dividend - the Board has proposed an interim dividend of 13.76 pence per ordinary share, an increase of 3.9 per cent, in line with our policy of targeting an annual growth rate of at least RPI inflation through to 2020.

KEY PERFORMANCE INDICATORS

 

United Utilities aims to deliver long-term shareholder value by providing:

 

·     the best service to customers;

·     at the lowest sustainable cost;

·     in a responsible manner.