Earnings Transcript for UU.L - Q2 Fiscal Year 2021

Steven Mogford: Good morning, ladies and gentlemen, and welcome to United Utilities Half Year Results Presentation for the Financial Year 2020/2021. COVID-19 restrictions mean that once again we can't meet face-to-face, but I do hope that this presentation and the Q&A that follows will give you an idea of the great start we've made against our AMP7 plans. It's been a unique start to a new regulatory period in having to adapt to the operating conditions necessary to protect customers, employees and supply chain partners. And the EU team has done a fantastic job, and I'm extremely proud and grateful for the flexibility and dedication shown by everyone right across the business. Notwithstanding these challenges, we remained very focused on delivering our AMP7 objectives. So here are the headlines this morning.

Philip Aspin: Thanks, Steve. Good morning, everyone. Having met many of you when I was Group Controller and prior to that Group Treasurer. I'm delighted to be presenting my first set of results to you today as CFO.

Steven Mogford: So thanks, Phil. Before concluding, there are just a couple of areas I wanted to update you on. First, the sector has been supporting the government to play its part in the post-COVID green economic recovery, namely investment in infrastructure that will benefit the environment and create more jobs than would otherwise currently be the case for AMP7. And there are 4 components to this request. The first is that companies should be on track in delivering their current AMP7 commitments, and we are. The second is the companies are encouraged to accelerate existing AMP7 investment plans, and we are, to the tune of around £500 million, as mentioned previously. And the third is company should convert potential AMP7 enhancement projects to commitments through engagement with quality regulators, and we have, with around £150 million of additional investment now planned in AMP7. And finally, companies may propose the acceleration of schemes that might otherwise feature in AMP8 within company's PR24 business plans. We're in dialogue with Defra, the environment agency in Ofwat, regarding proposals in the fourth category, and as much to resolve in terms of scope, cost and funding, but this presents an opportunity to supplement what we're already doing to contribute to the green recovery, creating jobs in the region hard pressed as a consequence of the pandemic. More about that when we meet again. And finally, a reminder of our strong performance across a range of ESG indices. Our approach to ESG has been clear and enduring. And our responsible behavior in supporting customers, colleagues and communities through the challenges of COVID is more important now than ever before. Earlier this month, we were pleased to once again achieve world-class status on the Dow Jones Sustainability Index, a status we've now held for 14 consecutive years, demonstrating our long-term commitment to ESG. And this level of performance is replicated across the broad range of industries shown on the slide, many of you -- many of which are used by investors. Some of you will have seen the investor guide to our approach to ESG that we published in September, and we hope you found it helpful. And as Phil has already mentioned, we're leveraging our strong potentials in this area through our sustainable finance framework to raise debt and replace the green EIB funding that's no longer available. So in summary, I'm hugely proud of the job the UU team is doing in maintaining services and providing support to struggling customers, employees and communities in a region hit hard by COVID. Higher domestic consumption is helping to offset reduced business revenues, and we're well positioned from a bad debt perspective. We started AMP7 extremely well, having benefited from around £130 million investment ahead of the start to the end, and the certainty that fast track status in PR19 provided. We're driving value for all stakeholders. We're leading the way on customer satisfaction, on track for an industry-leading 4-star environment status and expect to deliver outperformance in year 1 of the AMP. And finally, we're reaffirming our AMP7 dividend policy of growth year-on-year by CPIH out to 2025. So thanks for listening, and we now be happy to take any questions.

Operator: Our first question today comes from Dominic Nash of Barclays.

Dominic Nash: Congrats on a good set of results. A couple of questions from me, please. Firstly, on ODIs and the relationship between ODIs and totex. I think you're basically saying that ODIs in this AMP will be higher than the last AMP. Last AMP was £43.9 million. Can you just confirm that number? And does that mean, that we're looking at this sort of run rate throughout the 5-year period? And it does look quite reliant on the flooding ODI. Is that reliance going to shift during the 5-year review? And on the totex versus the ODI, you said there's a trade-off that you might sacrifice some totex for ODIs. How do you look at the returns and the payback of that? And also the sustainability on the ODIs going forward would you put on the cost of the totex, please?

Steven Mogford: Okay. Dominic, I'd just pick that up. I think, yes, on ODIs, you're correct. We do -- we are targeting better improvement -- sorry, better performance on ODIs in AMP7 than we achieved in AMP6. And I think the number that you've got there in terms of top performance for AMP6 is correct. So yes, we are aiming to improve on that. And obviously, first year positive result is a great place to be in terms of great start. As you've said, there are a whole number of contributors to ODIs, both positive and negative, as we are seeing. Part of the issue that we've got going forward is, and it's where we essentially looked at some of our early investments, both in the last year of AMP6, but also what we're spending money on now, is those areas where, particularly, we are seeing up in ourselves in penalty performance, so those are areas like supply interruptions, like internal sewer flooding. And so what we're doing is currently investing and we've got pilot teams operating in the first year, which essentially are aimed at mitigating the downside that the targets we have there is in those areas. We are -- if we just carried on as we are, we'd be in penalty territory. So part of our investment strategy is to improve performance in those areas where we effectively have a penalty regime, a significant penalty regime. And one of those, for example, is internal sewer flooding. And I think what we plan to do, we don't have time this morning, but we can take you through more of that when we do Capital Markets Day to talk about the specifics in that area. In terms of trade off, I mean you're absolutely right. You've caught the tone of the comment we've made there. I think if you actually look at underlying position as far as totex is concerned in AMP7, then at the outset here we look at delivering an outcome which was not dissimilar from AMP6 in terms of delivering our FD commitments with a totex efficiency. I think when you look at the trade-off, and other way, if you look at this, I mean, clearly, if you're looking at totex expenditure, you'd be looking at an ODI return, which was a better return on that investment in terms of the ODI return that you would get would be greater than the totex cost to shareholders. And so what we're doing is essentially encouraging our teams in all respect to look at opportunities to improve outcomes on ODIs, which clearly has a benefit for either customers or the environment in that we're delivering a better service to customer or a better environmental performance as a consequence. But we are encouraging our teams to look for opportunities. So essentially, if there is an opportunity for greater investment that would earn a better return, then please come forward with those. So rather than essentially accepting the -- our FD predictive performance, is exactly what we want to do, we actually want to see improvement. And I think the other area for that, of course, is that when you look at areas where we're already frontier of our own performance like on pollution, for example, where we're a frontier performer, clearly it's an area where we want to maintain frontier, but we've also got an eye to AMP8 and to -- an expectation as we go into AMP8, we want to be as close to upper quartile as possible because you can only expect that as you go into AMP8, you're going to get further challenge. So I think you've picked up. Where we do see opportunity to earn, we will because essentially it's value-creating when you look at the return on investment that you make.

Philip Aspin: And Dominic, just to add. I guess, that Steve's outlined there, it's all about sustained performance into the medium term, really.

Dominic Nash: Yes. So does that mean that you think that AMP8 ODIs and performances are going to be similar to AMP7? I mean you're going to have to review on the sustainability of the measures themselves.

Steven Mogford: I don't -- I mean nobody knows. I mean that it's a crystal ball, isn't it? I mean what's been interesting, if you look at the CMA review of the sector, they haven't fundamentally looked at -- revisited either the econometric models or the incentive regime significantly. So that's not an area that has been revisited in that particular challenge area, notwithstanding the appellant positions on that. And I think if you expected that the train has left the station on upper quartile performance and a drive for the sector to go for upper quartile, you've always got to have an eye as to what that is. And what we've always done really as a business is look to deliver sustainable performance in investment we've made rather than essentially to go short for short-term targets. We'd look to deliver something which is resilient to -- for the future.

Operator: Our next question comes from Martin Young of Investec.

Martin Young: So I hope everybody is well. And 3 questions, if I can, please. The first relates to your observations around the potential COVID impact for the full year on volumes. I appreciate, to a degree, it's trying to nail a jelly to a wall, that minus £14 million in the first half of the year. And then those observations around stability on the non-household side of things or stability in line with the first half of the year, should I say, but perhaps less of a pickup in the household side of things. Just wondered when you're sort of elaborating that narrative, how you come up with minus £10 million at the bottom end of your range? Surely, we should be looking at something a little bit tighter. The second question relates to the £150 million additional totex that you talked about. Is that on top of your final determination? And if so, where can we see this being set out? I guess, by a revised final determination to show its flow through to revenue over the AMP. And then the final question, bigger picture one, the CMA and their provisional determination in respect of the forward talents. Obviously, something that doesn't really impact you that significantly in the year and now, but potential longer term implications. Just wondered if you could share your thoughts on what that might mean for yourselves and the sector in longer term if the CMA does not move significantly from where it landed with those provisional determinations?

Steven Mogford: Yes. Martin, I'll do with 2 and 3 and then hand over to Phil on the revenue impact, if we can. So the £150 million additional totex is principally 2 projects. One is associated with treatment work we have at Bolton and the other one is associated with 1 of our principal Aqueducts, where we're doing some relining. Those are both additional to our final determination. And essentially, one of the mechanisms that exist in AMP7 is that if you get an environmental scheme, which Bolton is, which essentially has converted to a green status, in other words, approved, then essentially you will be reimbursed. So both of those projects, we will be -- we'll have full cost recovery. The mechanism is that we're likely to see that -- the revenue impact of that falling AMP8. So we will be delivering those projects, not in total, but in large part during AMP7, but we won't see a revenue uplift on our AMP7 income, but we will see an adjustment, a full adjustment when we get into AMP8. So we will see full cost recovery. The other one on CMA. I think you're right. The impact of CMA on those companies who aren't appellant is 0 in terms of expectation. I think when you look at it long term, as I said earlier in response to Dominic, if you actually look at what the CMA have done, obviously, they've looked at cost of capital as far as the appellants are concerned and made a higher allowance. That allowance still sits within what was considered to be a sort of a reasonable range. I mean Ofwat's -- well, reasonable perhaps isn't the right word, but within a predictable range, and Ofwat was at the lower end of that, obviously, CMA higher. Whether that has an impact in terms of investment and the considerations taken going forward. When we get to AMP8, it's anybody's guess, but obviously there is a sense that we need to attract investors. I think generally, though, when you look at it across the board, things like econometric modeling, some of the methodologies and approaches that are used have not been challenged. So it's really difficult to say what the impact will be. I think the one feature that I think has come through in the CMA's review is the need to ensure resilience going forward. And I think that's a fundamental issue for the sector as a whole. And in the way that perhaps for the energy sector, the ability to adapt to use of renewables to electric vehicles with the government having given very firm time scales for those now is we like a call to action for the energy industry. And I think if you actually talked to anybody in the water sector and climate change adaptation and population growth, are a call for action as far as the water sector is concerned in terms of having resilience to the very, very evident impact of climate change. And I think that to me was something that came through in the CMA consideration and in some of the points made by the company. So I think it's anybody's guess what will happen in AMP8. But I think those are the 2 probably key issues, both attractive returns for investors and be resilience, I think, are 2 key features that will be subjects. I'm sure we'll talk about, again, as we get into PR24. Do you want to -- Phil, do you want to pick up on the revenue point that Martin made?

Philip Aspin: Martin. Yes, on the revenue point, I guess, here splitting it down between non-volume and volume. First, you can see at half 1 was on the non-volume side is a £40 million price cap impact. So that's going to be around about £80 million for the full year. But for mechanism and overarching about £12 million. So if we expected of circa £30 million for the full year, that's effectively a net £50 million reduction compared to prior year. And that's the difference between the guidance -- the revenue guidance and the volume impact. On the volume impact itself, at half 1, as you say, there's a £40 million adverse impact from non-household and that's offset by the £26 million favorable household position, so £14 million adverse. And we believe that will be slightly worse for half 2. And that's giving us the volume range of sort of £10 million to £60 million. I think it's important to recognize that there's a relatively high level estimation uncertainty at half 1. One of the challenges for the whole sector has been the ability to get meter reads. As you can imagine, certainly through the lockdown period, meter reading was something that wasn't particularly possible. And so you'll notice that in our financial account, at the back of the announcement, we've adopted the FRC best practice in terms of providing guidance around revenue sensitivities. And so we're flagging there. For example, that on the household side of things, we've got 25% of meter reads and that's been used to help estimate the sort of household revenue and only 17.5% of meter reads in terms of the non-household position. So it's all step facts, back to the facts in the accounts. But I think it is highlighting that there is quite a high degree of uncertainty there in terms of the overall position. And then, I guess, looking forward, as you said, in asking the question, it is a little bit like crystal ball gazing in terms of half 2 in terms of understanding how the economy will perform. So that's our best estimate today, and I think a reasonable range to guide you to. And the last point to flag, as you all know, is that the revenue cap has recovered, the sort of volume impact effectively 2 years later.

Operator: Our next question comes from James Brand of Deutsche Bank.

James Brand: I had 3 questions, please. The first is a follow-on from Dom's question, just asking about the kind of trade-offs and how you think about totex versus ODI outperformance? And you'd mentioned that you obviously think about how much you could get out of the ODIs versus how much you're spending on totex. I was just wondering on that, are you thinking, when you make that judgment on what you can deliver on the ODIs in the current period? So you're thinking if we spend £50 million in totex, we might be looking to generate an extra £25 million in ODI outperformance, that kind of calculation? Or are you thinking multiple periods? Like if we invest in this today, we might be able to eke out a little bit extra on ODIs over the next -- over this period, the next period, a period after that. And it becomes a kind of NPV of multiple periods of potential ODI outperformance, in which case, a much longer payoff? That's the first question. Second question is on ODIs directly. I was just wondering whether it gets harder or easier to deliver under ODIs as we go through the period. Obviously, the targets get tougher over time, but sometimes there's a step change in year 1, and then it might become a bit easier or it might become a bit harder as we go through the period? Question number 2. And then thirdly, a question for Phil. Given that it is sector results presenting as new finance director. In the past, the -- with Russ, the company had a target of between 55% and 65% net debt to RAB, with a kind of broad aim to be around the midpoint, although that's always been reasonably conservative versus other companies in the sector, given that a lot of water companies have higher gearing. So I was just wondering whether there's any change in how you think about gearing? Is that still the target, the 55% to 65%? And if that is, why you want to live with lower gearing than some of your peers might do?

Steven Mogford: Yes. Thanks, James, and good morning. I think I'll pick up the first couple and leave the question for Phil, as you went back to him directly. I think as far as trade-offs on ODIs, we do tend to think about it, principally as an Enam's issue. So we are looking at AMP7 ODI targets and investment in totex to hit AMP7, so that we see a, if you like, this AMP return on any totex that we might spend. I think the point I made to Dominic about AMP8 and beyond is that, clearly, we do have an eye to what upper quartile performance might look like in the sector. And therefore, the potential for further targets or even tougher targets as we go into AMP8, from where we might end AMP8. So improvement in AMP7 will give us a better launch platform is the way we tend to think about it. If you are looking longer term, then we will be looking for a very robust position. But there is -- undoubtedly, there is benefit for a pound of totex, a pound of ODI, it's worth more in a way that you actually see performance. And of course, it means you're delivering better service to customers and the environment as a consequence. So yes, in-period is definitely the way we tend to consider. I think as far as ODIs are concerned, it's very much a mixed bag called position. I mean, some of the ODIs with some of the investment we've made. So on leakage, for example, I've talked previously about all the things that we're doing with leakage, both in terms of use of technology, docks, satellite, sensors. We're probably going to have one of the biggest networks of sensors loggers. In our water network, we're doing some piloting. We're actually doing well against our leakage target this year. And that obviously helps as we go forward. In other areas, you can see that on internal sewer flooding, that has been a challenge for us. We actually put forward a 10-year program of improvement to our fourth base do it in 5. So that does get tough as you go through, which is why we're accelerating funding again in the area of how we manage our sewer network to be able to deliver faster improvement in our performance because we're simply spending more on cleaning and reacting to flooding is not going to get us there. So I think it's a mixed bag, quite honestly. But generally, as you know, ODI targets do get tougher over the period as you are moving towards an upper quartile status. Do you want to pick up on...

Philip Aspin: Yes. On the debt-to-RCV position, James, I guess the sort of position -- the group's policy hasn't changed. It means our position and our target credit ratings, we made our target credit recognition to the -- back to the color to that. I think it's probably important to recognize that, that very much contributes to the financing outperformance we are able to deliver and the good access to the markets we have. And I think as we look at this and we've talked about how we're accelerating sort of totex expenditure to deliver the performance. So what you will see and observe is that, that ratio climbing and falling towards the back end of the AMP to really effectively. When we're looking at it, we're looking at it through the cycle and making sure we're comfortable that it's in a sustainable pace.

Operator: Our next question comes from Mark Freshney of Crédit Suisse.

Mark Freshney: Can I please ask about Water Plus. As I understand it, there were 2 issues. The first one, surrounding basic business processes, which took time to refine following the creation. My question is, how are those performing? And secondly, clearly, there's COVID-19 collection issues. I think you alluded to the 17.5% meter readings and void, et cetera, counting for writing that down. So I understand that you've written off the equity. Why would you not start to write-off some of the intercompany loans that you've made to that joint venture?

Steven Mogford: Okay. I'll do the first half. Phil will do the second half. The -- on basic business, yes, we've very clearly at the beginning of this year set about a very radical overhaul of Water Plus in the way that it looked at the market, in the way that it looked at returns from different market segmentation and at its underlying processes. And so we've had a program running right through the year of fundamental improvement. So a understanding where the business will best earn a return, looking at basic processes, looking at systems. And I think we are confident now that as we come out the other side of COVID, we'll have a business that will return to profitability. So I think much, much happier with the business -- it's business performance and its potential I think the issue, obviously, now is to get ourselves through the COVID period. I think when we took a provision at the beginning of the additional provision, we could see ourselves being what we felt was adequately provided for bad debt. But I'll let Phil actually look at -- talk to you about where we are on those.

Philip Aspin: Okay. So I guess picking up the sort of COVID-19 piece on our business. I guess, Mark, you'd have seen from the full year position, obviously, we wrote down the equity value of net investment in water cost, and we also took a £5 million expected credit loss charge in relation to the loans to water cost. So that was in the numbers that back at March '20. And that credit charge was based on sort of the businesses forecast at that time in terms of performance. And as we move forward sort of 6 months, actually, the business is performing and is performing marginally better than those forecasts at that point in time, which is why there's no further impact today in relation to the expected credit loss. Clearly, the second half remains challenging. But as Steve sort of said, the processes and the turnaround is starting to come through, and we would expect sort of effectively the second half to be a consolidation period heading into sort of FY '22, where we would expect to see the business returning to profitability.

Operator: Our next question comes from Ajay Patel of Goldman Sachs.

Ajay Patel: Just really simple sort of granular question more than anything else. Just looking at the IRE, and you had a quite messed up in the first half, is there sort of -- any sort of indications you can give us on how the profile of IRE will be over the 5 years? Is it only be more front-end weighted than maybe back end? Or -- and even looking to this year, would that -- would it be fair just to double the number for the half or the full year? Or would that be overriding it? I just wondered any sort of guidance you can give or direction would be really helpful.

Philip Aspin: Ajay, at a higher level, you're exactly right, I think, I would see the profile being broadly flat through this year effectively into double for the full year estimate. I guess, handing out to the rest of the AMP profile will probably carry on much the same guidance. Is that okay?

Ajay Patel: Sorry? Did you say that broadly the same sort of level for the rest of the AMP. Is that correct?

Philip Aspin: Correct. Correct. Yes.

Operator: We have a question from Chris Laybutt of Morgan Stanley.

Chris Laybutt: I had 2 questions. Just firstly, on the incremental CapEx projects that you've announced today. Will this be -- or will the spend that you announced that you incur in AMP7 be included in your shadow RCV that you report, just so we can keep an eye on it? And secondly, just on governance. You highlighted your issues with pensions risk back in 2010. Just wondering whether you could maybe comment on where you see the greatest risk today from a governance point of view and any commentary that you may have just on that thematic would be very useful?

Steven Mogford: Okay. Yes. Incremental CapEx and shadow RCV. Is it shadow RCV, Phil?

Philip Aspin: I think it probably is. I think the one thing just to be very conscious of is the shadow RCV understates what will be the sort of true value of that in the next AMP because effectively that some of the value just comes back to the revenue compensation in the following AMP as well. So we'll probably look to provide more information about going forward, really.

Steven Mogford: Yes. I think in terms of -- interesting question, Chris, in terms of risk and what do we see as a sort of key governance risk? I mean, clearly, we've got nothing of scale and pensions in the organization in terms of the things we do. I think what you probably find. And obviously, prior to the election, we're also talking about the potential for renationalization. And I think, again, that is largely, I think, gone certainly for this period. And it appears, even with the current labor policy, unlikely to come back in the same guys. So I think in that sense, as far as a principal government risk. In most of the issues that we talk about around the Board now from a risk perspective, are all around ability to meet your statutory obligations. So if you think about it up fundamentally, our obligation is to provide both for water 24/7, 365 days and take away into wastewater. So it's largely around that capacity. And I think, as I mentioned before, that whole challenge of resilience to climate change and population growth. So if you look at us, for example, a lot of activity associated with having sufficient raw water available to us, I mean because we are an organization that relies heavily on surface water supplies, there's very little ground water because of the geology of our area. So having sufficiency in those areas on top of our treatment works on performance. I mentioned the Haweswater Aqueduct in terms of needing to replace it. So what you tend to find from a governance perspective is very little at the scale of pensions in that sense, much more about individual and more granular risk that you're looking at around our operations and the key assets and capabilities that we depend upon. So those are the -- that tends to be. And you'll see that. If you go to the RNS and you go into the back section of the RNS and start looking at the risk section, you will see those sorts of things featuring rather than there being any more macro issue. And I think for COVID, obviously -- I mean COVID has been, if you like, a huge issue for all of us. But it's one where -- because of key work status and the nature of the service that we provide, that actually, we -- I think we've stepped up to that place in a way I'm hugely proud of the organization and what people have done. So I think, yes, you'll see when you go through our risk reports now that it's largely operational stuff that we tend to worry about. Okay. Adam, any others?

Operator: We have 1 more audio question from Ahmed Farman of Jefferies.

Ahmed Farman: Just 1 sort of quick question from my side. I think in Slide 21, you mentioned, when you talk about the dividend about sort of your inflation forecast you being more comfortable with inflation forecast. I just wanted to see if you could elaborate on when you sort of last provided an update, what sort of inflation scenarios you were considering? And what do you see now, which has sort of added you sort of the visibility? And has helps you sort of reaffirm the AMP7 dividend policy?

Steven Mogford: Yes. Ahmed, I'll let Phil look specifically at that. I think when we consider this as a Board in May, I suppose we -- at the time we were discussing this issue, we were smacking in the sort of eye of a storm as far as the COVID in the first lockdown and understanding implications for business and our customers more generally across the region. And so I think there are a number of factors around what would the impact of COVID would be on operations? What would it cost? What would you mean as far as customers were concerned? I think certainly, when you look at the way that, not just we, but sector and utilities, service providers more generally across the country, I would argue that the utilities have done a cracking job in actually maintaining service throughout this period. And then you see what others have done in health service, et cetera. So I think there is -- the fact that we now live with COVID every day, but continue to operate, I think it provides the Board with so much more confidence about our ability to deal with the pandemic in the future. Obviously, we've had the news around the vaccine, which is absolutely brilliant in the sense that there now appears to be a light at the end of the tunnel as far as that's concerned. The other factor, of course, which is probably the biggest economic impact on us was inflation. And at the time, we had a number of scenarios that we were running, which were being dealt with actually at a sector level in some work that we were doing, which gave a very, very broad spread of potential outcomes. And Phil, do you want to just talk about how that's evolved?

Philip Aspin: Yes. Sure, Steve. Ahmed, I guess, just probably refer to Slide 48 as well in the PAT where sort included the HMT survey and inflation forecast, you sort of put out every quarter, you get the latest economic guidance with analysts and such like. I think back in May, Steve, as I said, the Board was appropriate sort of fact of go the challenges of sustainable inflation for business model as well as the more obvious and immediate operational challenges. And back in May, as you can see from the chart, the risk inflation was very much the downside. We forecast the medium-term rates trending down. And really, without any clarity as to what was coming next and where would all this lead to ultimately. I guess in contrast today, the world is a very different place. Operationally, we're performing well. But from a sort of -- I guess, the sort of U.K. authorities perspective, responded with sustained and persistent monetary and fiscal policy support. And it's interesting, the IMF at the end of October did their annual surveillance decision and commended the U.K. on their massive approach, recognizing that policy interventions were probably one of the best across the world. And the U.K. authorities remains committed to doing what was necessary to support the economy and jobs. And thirdly, they have the policy response to do so. So I guess, all of that sort of links into the Bank of England's activity and the sort of chance of activity in terms of supporting the economy. And I think, today, you look at the HMT surveys, November, and you can see the sort of bounce back, we're looking at medium-term inflation book pre-pandemic levels. And I would probably characterize the risk very much to the upside today.

Operator: We have a follow-up question from Mark Freshney of Crédit Suisse.

Mark Freshney: Just on the £150 million, which you believe will go into the asset base due to it being a green scheme. What is the approximate spend between this AMP and next AMP? And I guess further to that, there will be a true-up in an NPV neutral basis for the fact that you're carrying it in this price control, but will -- not getting cash return for it. Is that a fair assumption?

Philip Aspin: I think I'm not entirely sure. I think we might have to take that away as to whether we get a complete true-up, which often is the case. But I'll get Rob to follow that point up, Mark, and come back on it. I mean as far as the £150 million is concerned, then what we'll find is that I can't give you the number completely off the top of my head. I would probably guess that something like 75% of that is expenditure this AMP because part of the project does actually extend into AMP8. If you look at the Vyrnwy program, that actually runs over into AMP8. But I'll get Rob to check the exact numbers, but 75%, 80% is my guess just on the basis of knowing the program durations as to what that expenditure to be. But Rob will come back with the detail, Mark.

Operator: We also have a fellow-up from Dominic Nash of Barclays.

Dominic Nash: One here, this should be quite a quick one. I think you've got totex of about -- was about £6 billion in this review. In the presentation, you said that you'll be looking at sort of boosting as Steve has made in his review, creating jobs in the Northwest, et cetera, et cetera. Have you already sort of right worked out what sort of scale that you could bring through into AMP7 from AMP8 projects? I mean could we get an extra £1 billion, for example? Or is that...

Steven Mogford: Yes. We'll -- yes, and we'll be coming to you for the depth on that, probably. No, I think, I mean it's a really interesting market. There's so much that we can do in terms of bringing stuff forward. So we've -- one of the things that we're looking at is things like our meter reading strategy, where we can see definite benefit on consumption -- on helping manage consumption demand, helping customers manage bills by moving into a metering strategy, which effectively is not compulsory metering, but essentially, it says there is a meter if customers want to use it because we've been moving -- we've been trialing what essentially is the lowest bill guarantee. So if you're a big family, you can go on a fixed charge. If you're a small family, a couple or an individual living in a property, you might want to go on a meter charge. So that's an area that we've been looking at. A topical issue at the moment is combined sewer outfall, So this is where when your sewer system is effectively inundated largely for us with surface water, all the rainfall that we now get to climate change, there's a drive by government to try and reduce the number of spills into the environment in those circumstances. And that's an area where there's quite a lot of opportunity to do work. We're doing some really innovative stuff on catchment management. There's a whole range of things, and it could run from tens to literally hundreds of millions of opportunity, which is why effectively we're talking to government about it and trying to understand how it works. So firstly, if you do the work, will you get remunerated? Will you get remunerated this time or will you get remunerated next time? If you don't get paid this time, will you get essentially a full correction for value for the work, if it's funded in AMP8, for example. I think the other issue essentially is what impact does it have on customer bills? I mean if it's a capital expenditure, then it will tend to have a relatively small impact on customer bills. But is this going to be a bad way to going into AMP8, how are we going to deal with it? I think the other aspect is, what does it do from a shareholder perspective as well in the sense of, if you're doing this work and not getting reimbursed in AMP8, then essentially what you're doing is -- it's reducing, it's diluting the return that shareholders are getting during AMP7 -- and then at the end of the day, you've got to look at it in terms of, well, if you're not being paid, then where is the cash coming from in AMP7? And what does that do in terms of debt to RCV? What does it do to your credit metrics? And what impact does that have? If we went down 1 notch, what would that mean for us in terms of cost of debt going forward? And how does that relate to customer bills? So there's a huge amount of dialogue running at the moment. But the truth is that if you can solve all of those issues in the conversations that we're having, then there is a huge amount we can do, that could end up in the hundreds of millions. And as I indicated, all of the things that we're doing. We're on track with AMP7. So as a company, we qualify. We've already pulled forward £500 million of our AMP7 investment. We've got roughly £1 billion of environmental programs that we're doing in AMP7, which we're accelerating. So we're playing a huge role anyway in green recovery. Yes, we'd like to pull stuff forward, but we want to be able to answer all of those questions. And I think all of that is currently in the melting pot. So we've got a very long list of schemes. And you could literally draw the line anywhere, Dominic, based on what it might mean. But I think, as you know, we jealously guard our credit metrics. And we're also very clear about wanting to ensure that we're delivering value for shareholders. We've worked long and hard to get ourselves to where we are, and we're now confident that we can deliver value. And what we really want to be doing is diluting that for shareholders until we understand what the benefit is going to be. Any other questions?

Operator: We do indeed. Our next question comes from Fraser McLaren of Bank of America.

Fraser McLaren: Hope you are all well. Just a couple of questions, please. First of all, can I ask about the possibility of creating value by applying your systems, thinking of folks to other companies that are doing less well. So do you think that where business set of work? And then the what circumstances would it be attractive for you? And then secondly, can I also ask about the strategic importance of the stake in Tallinn, please?

Steven Mogford: Yes, Fraser. Thank you. We are well, and I hope you and yours are as well. Yes, if you look at system thinking, we've always -- as both of us started with systems thinking, it was when I first joined the sector coming in and looking at how the sector operated, and we've sort of experienced from other sectors and use of technology and the way it provided management information. It has been a significant enabler, and it's an accelerating enabler with us. We'll give you so much more when we do the Capital Markets Day, but use of robotics, use of machine intelligence. I mean, the guys have come up with a brilliant little tricks, for example. And if you remember, a while ago, we used to find people wandering around our field with -- looking for a Pokémon that apparently was stood in the middle of our field, and they have to collect it. And what we've done is we've used that sort of gaming technology, and we've now gotten that, which the guys, the lads are using out in the field, which essentially means that it correlates your GPS position with our database as to whether there's a void property in that location. And it means that we can essentially see on your handheld that essentially there is a -- on this app, that there is a so-called void property. And does it look occupied? Is it a business that looks as though it's doing something? And it's helping us identify and capture those properties that are not really void. So it's that sort of gaming concept. And I mean you can imagine how sad we all are that we'll be driving around a weekends with this app trying to find void properties as we go shopping or go and see mom or whatever it is. It's all sorts of opportunities. But I mean that's sort of, for me, a bit of a funny example really the sort of things that we're doing, but a huge application of technology, machine intelligence to give ourselves better understanding of what we're doing. We've always done it on the basis that we know it's scalable. So you could apply this to anybody's business, and there would be an investment in some of the sensing. But in other areas, not. You could apply. So yes, we do believe that it's applicable. What we found actually is a number of companies have come to us to say, what are you doing? And could you share? And it's a strength sector in that we do share, but also we're competing, so to an extent there is an intellectual property component, a competitive component to systems thinking which we generously protect. But those are really struggling, and you'll know who they are in the sector we do actively share with to try and bring them up. And in fact, some of the people that have helped us are now helping them. There is a question actually about M&A that's come through from Verity in terms of where do we see the ability of M&A. And we certainly think that bringing systems linking to another company will deliver a very significant improvement in performance and the cost of delivery in that performance. And so yes, we do think that, that would help with synergy benefit out over and above the more obvious ones of 2 headquarters to customer teams, et cetera, et cetera. I think more generally, just dealing with Verity's question about M&A. We -- it's something we constantly have in mind. I think we've always felt that you'd look at the scenario post the CMA. Some of the prices paid for businesses have been very racy more recently. And -- but we may see a number of distressed owners. There were owners that were trying to get out of the sector prior to PR19 and looking at the results of PR19. I'm sure they'll still be trying to get out, and there might be more. So we'll keep it in mind. But I think, yes, systems thinking certainly has a broader application. Oh, yes, Tallinn. Sorry, Phil was just reminded me that I was. I got so carried away with systems thinking, I forget. Tallinn, strategic? No. Obviously, as an investment, it's been a good investment over the years, notwithstanding some of the challenges we've had with Tallinn and with Estonia. It's been a good investment, good return. I think for us, it's one of those things where you look at reserve as a value opportunity. I think the right deal came along, we might be interested. But effectively, it's -- but certainly, no, it's not strategic and we haven't got any other forays into overseas plans at this point in time. Okay, Fraser? All right. Any others, Adam? Otherwise, we'll go to the webcast.

Operator: No other audio questions, so I'll let you proceed.

Steven Mogford: Right. Thanks very much, Adam. Thanks, everyone. Just quickly webcast. Mark Freshney asked about savings or ODI benefits that you might see later on in the price control from accelerating totex. I think I've touched on some of those. But sort of more specific examples, I think, one of the things that we're doing through accelerating is driving in this complete network of sensors into our water network. I think if you look at areas that where we see ODI penalty as being something that we're looking to mitigate is in things like supply interruptions, obviously leakage. And so that's an area where accelerating investment we can see will improve our performance on that -- on a number of ODIs associated with it. Wastewater in sewers, essentially the way the sector often operates, it's largely blind as to what's happening in its wastewater network. And so one of the things that we're currently looking at as a way of mitigating penalties and getting to upper quartile faster is the way that we can be more proactive in the way that we manage it, so completely turning on its head the way we manage that's an area where. Again, we'll -- we're accelerating investment in our wastewater area. And then another benefit of accelerating CapEx is associated with our capital program and derisking a number of our capital schemes, which, again, we repeat be penalized for if we didn't deliver on time. So a whole range of different benefits that we get from that acceleration. Mark asked another question. In the context of, given that many businesses will be deferring CapEx, so local authorities, large infrastructure where it's been delayed with COVID, are we seeing any softness in pricing in the supply chain? Certainly, we're not seeing resource constraints, obviously, as a consequence of that. And we are achieving our target efficiencies on our capital program through the tendering that we're doing. We tend not to work in alliancing. We have a number of capital partners, but we tend to use more competitive tendering than partnering in the way that we operate and certainly not alliancing, which I feel can be quite inefficient. And so we are starting to see some benefit coming through pricing there, which is allowing set targets. One of the things that we are sensing in a couple of areas is overhead growth as we see businesses struggling with lower volumes, but it's not significant in the context of the programs that we're driving. Mark also asked an -- a comment on the underlying business performance within Water Plus, which Mark asked over the phone. So we've dealt with that one. Can we talk through AMP8 acceleration? Where are we? Which is Verity?. And I think we've covered that on the call with Dominic. The way that this whole issue around green recovery is just to give you some background, is a point that was made a couple of months ago now by a combined Defra family of regulators and Defra themselves in terms of inviting companies to address how they might contribute to the government's green recovery. Proposals are due to go in. A number of -- I mean a number of discussions have been held and will be held with government around this, the size and shape it and understand how it would work. We understand that proposals from companies have to go in by the end of January. So what we would expect to see is that by the end of January, this might at least harden up in the context of scope. Whether there's more discussion thereafter on terms, we're not sure. Systems thinking. I think I've touched on that one. And more detail on the £150 million increased scope. How much will be borne by shareholders versus customers? I mean essentially, we are looking at full recovery. So we are expecting to see that fully recovered through builds to customers. It doesn't go through the totex sharing mechanism, the menu arrangement, which is roughly 50-50 for us. This will be a full recovery through bills, and we'll see that in AMP8. Okay. I think those are all the questions. Can I just summarize by thanking everybody for giving us their time in listening to the presentation and all the questions that we got. Look forward to seeing everybody at full year where I'm very much hope that we can report on a continued good progress on AMP7. And let's hope that 1 or 2 of us will have had a vaccine by then as well. So thanks very much for everybody, and goodbye.

Philip Aspin: Thank you, everyone. Bye-bye.