Earnings Transcript for UU.L - Q4 Fiscal Year 2017

Executives: Darren Jameson - IR John McAdam - Chairman Russ Houlden - CFO Steve Mogford - CEO and Director Steve Fraser - MD

Analysts: Dominic Nash - Macquarie Lakis Athanasiou - Agency Partners James Brand - Deutsche Bank Iain Turner - Exane Verity Mitchell - HSBC

Darren Jameson: [Call Starts Abruptly] …before handing you over to the Chairman, I just like to volunteer a few points of housekeeping, if I may. And so firstly, there's no planned fire drills this morning, so if the alarm does sound, if you could please exit from the fire exit at the back of the room. Secondly, please can you all ensure that any mobile devices are either switched off or turned to silent. And finally, as ever, if I can ask that you view any forward-looking statements in today's presentation in the context of the cautionary statements in the back of your packs. Thank you, and I'll now hand it over to the Chairman.

John McAdam: Good morning. And welcome to the United Utilities Full Year Results Presentation. Before handing over to Steve, I just like to say a few words on behalf of the board. When I spoke to you last year, I said it has been a year of unprecedented operational events. But the board was pleased with the way our people had responded to those events. It's now clear, having overcome the challenges faced last year, we have emerged a better and stronger company. The business has made further progress in the last 12 months, and we're encouraged to see sustained improvements in operational performance and customer satisfaction. We've delivered another good set of results, coupled with substantial earlier investment in our region that will benefit our customers and the environment as well as our shareholders. There is always more to do, and we will improve further. The board is, however, pleased United Utilities is now firmly established as a leading company in the sector. We've been clear on our targets to outperform the regulatory contract for the 2015 to '20 period, and we're on track to achieve this. Work is already underway in relation to the [indiscernible] for the next regulatory period. We recognized the importance of this and continue to engage constructively with Ofwat with a view to achieving an optimal outcome for all our stakeholders. So overall, it's been another good year for United Utilities and the board is pleased to propose an increase of 1.1% in the final dividend in line with our policy. This takes the total dividend for the year to 38.87p per share. Thank you very much. Over to you, Steve.

Steve Mogford: Thanks very much, John. Good morning, ladies and gentlemen, and welcome to our 2016/'17 full year results presentation. Before we get into the detail, I'd like to make a few comments about the year and our position in the sector. We all know that customer satisfaction is important for any business and none more so than a monopoly utility. And our new customer-facing team has done a fantastic job in delivering sector beating year-over-year improvement, ending the year in an upper quartile position amongst our peers. We decided at the beginning of this regulatory period to accelerate planned investment to achieve 2 things. First, to deliver and secure the benefit of operational efficiencies as early in the regulatory period as we could to deliver over £400 million of efficiencies underpinning our business plans. And second, to mitigate the risks reflected in our outcome delivery Incentives or ODIs, that were heavily skewed towards the downside, and we've been successful on both counts. Operational efficiencies are now secured, and a number of our ODIs have been derisked earlier than otherwise would have been the case. As a consequence, I'm pleased to report that, we have achieved another positive net outcome against our ODIs. And overall, our performance against our final determination means that today, we are announcing additional investment of around £100 million of our anticipated net outperformance over the course of 2015 to '20 regulatory period in projects that will further improve services for customers. I'm pleased with the culture we've developed with regard to innovation means that we're very active in identifying and more importantly, exploiting new technologies or processes that can deliver improved performance and/or efficiencies. Our novel Systems Thinking approach is unparalleled in the sector and is delivering a radically different way of managing our business. We targeted £100 million of savings in our business plan over this regulatory period from Systems Thinking, and we're confident of delivering at least this amount. You'll see from the data that we are a leading player in the sector, consistently delivering customer, operational and environmental performance equal to, and in many cases, better than our peers. And we are deriving the business to be well placed for the future and with a good starting point for PR19 in mind. All of this underpins sustainable dividend growth which can be seen on the next slide. Our objective is to do deliver great service to customers and sustainable dividend growth. And backed by a strong balance sheet, we've delivered sustainable dividend growth for shareholders for the last 7 years. The final dividend of 25.92p per share takes the total dividend for 2016/'17 to 38.87p per share, representing an increase of 1.1% in line with our policy of targeting an annual growth rate of at least RPI inflation through to 2020. Before getting into the detail, I'll expand upon my comment about investing an additional £100 million across the remainder of AMP6, funded through our anticipated net outperformance against our regulatory contract. We're targeting the investment on projects not covered by the PR14 settlement, with the objective of improving future resilience for the benefit of customers against the backdrop of climate change and a growth in our customer base. The first £20 million will be made available in 2017/'18, with the remaining investment to be phased over the final 2 years of this regulatory period. We believe this is an appropriate approach for us, and as a responsible company, investing some of our outperformance back into the business for the benefit of customers. You may recall, that we took a similar approach to sharing outperformance between customers and shareholders in AMP5. Now on to our agenda for this morning. Under operational performance, I'll cover customer satisfaction and our investment program. Steve Fraser, Managing Director of our Wholesale business gave an overview of our ODI performance at our last full year results presentation and this appeared to be well received. So Steve will update you on this year's results. Russ will then cover our financial performance before I finish with a look at PR19 key dates and a summary and outlook for the group, before we invite questions. So starting with customer satisfaction. Over the last 6 years, we've achieved a dramatic cultural shift, placing customers at the core of everything we do. This saw us become the most improved company under Ofwat's Service Incentive Mechanism, or SIM, over AMP5, and in 2016/'17, our new customer-facing management team delivered a further step change with the best year-on-year SIM improvement across the sector. The chart shows our qualitative SIM score for wave 4 of 2016/'17, where we were pleased to achieve our best-ever score, positioning us as a leading company in the sector over the year as a whole. The qualitative SIM scores carry a 75% weighting in the full SIM calculation, and so this is a great place to be. We're achieving investing this by investing in our capabilities, responding quicker and listening harder to customers in order to further improve our services. One of the most successful innovations is our Priority Services offering, which provides dedicated support for those customers experiencing short or long-term difficulties. And since its launch in May 2016, more than 11,000 customers have registered for this service. On recognizing that our region suffers from high levels of income deprivation, bad debt and cash collection remain a priority for us. We've seen a significant uptake in the number of customers taking advantage of our financial assistance schemes with a constant benefit on bad debt. The current trajectory indicates we'll exit this regulatory period with more than double the number of customers on assistance schemes than was originally assumed in our final determination. Underpinning this is our digital transformation, offering customers a channel of choice for their interactions with us. We recently launched our new customer website and the industry's first fully interactive and real-time customer app. We're seeing a step change increase in the proportion of customers using self-service channels, currently running at around 35%. Our progress is also evident in our constant SIM scores. This chart shows the quantitative SIM results available so far, noting that 5 companies have opted not to voluntarily share data for quantitative performance. And so the final picture for the year will change once the data is available. Ahead of the full data share, we are top among the water and sewage companies and 4th in the sector. And we've achieved this with a 27% year-on-year reduction in complaints and a 55% reduction in the circumstance where is an issue is not resolved at first contract. Overall, 2016/'17 has been a tremendous year for improvement in customers' satisfaction with our services. And we're delighted to end the year as one of the leading companies in our peer group that see opportunity to further improvement. Now let's look at operational metrics. This is an update to the chart we saw last year, showing how we have accelerated CapEx investment in the first 2 years of the 2015 to '20 regulatory period compared to the assumptions contained in our final determination, which is represented by the orange line. Our investment in 2016/'17, of just over £800 million, again, exceeded the in-year investment assumed in our FD, delivering the benefits to which I referred earlier. Our total CapEx for AMP6 is circa £3.6 billion which includes additional £100 million investment of anticipated outperformance we're announcing today. We've now invested around £1.6 billion of this total CapEx with a further £700 million committed to date. And the acceleration of our investment has been achieved with continued highly effective and efficient capital delivery across our large and diverse capital program. This is reflected in our internal Time, Cost and Quality index measure, or TCQi, which has improved to 93%. Moving on to ODIs, and you'll no doubt be familiar with this chart which shows how our view has developed for our cumulative AMP6 ODI outcome. Whilst the number of our ODI measures are still susceptible to one-off events and on the whole, our ODI targets get tougher each year, we're pleased that we're able to reduce the downside risk in our target range for the 5-year period, whilst maintaining the potential upside at the same level. Our target range is now between a £30 million net loss and £50 million net penalty. And the net reward achieved in '16/'17 of £6.7 million results in the cumulative net reward to date £9.2 million for the AMP. This, together with the anticipated benefits arising from our accelerated investment, supports delivery of an outcome within our revised target range. Steve will shortly provide some more detail on some of the ODIs that have had a significant impact on overall performance of '16/'17, but before he does that, I'd like to touch on other aspects of our operational performance. Our continuous improvement in recent years has taken us to an industry-leading position on many operational metrics. In the Environment Agency's latest annual assessment of water and wastewater company performance, we were awarded industry-leading company status and expect to retain the status when the performance for 2016 is published this summer. The 2 charts show how our performance on pollution and serious pollution incidents where we've set industry-leading standards this EA measure. We've delivered our best-ever performance against the Drinking Water Inspectorate metrics. And this is particularly pleasing given the historical issues we've faced due to the legacy nature of our asset base. You've already heard me refer to Systems Thinking and integral to this, we're progressively moving greater capability into our Integrated Control Center, or ICC, facilitating a more proactive and predictive approach to monitoring our assets and networks. This central control reduces the level of reactive work thereby improving performance and efficiency and helps to minimize customer impact of any incidents. And we believe that this operational capability is at a leading edge across our industry. Now over to Steve to take you through our ODI measures.

Steve Fraser: Thank you, Steve, and good morning, everyone. I will provide you with an overview of our ODI performance for 2016/'17 and then talk through some of the individual ODIs that have had the most significant impact on our performance in the year. This slide summarizes our ODI position for '16/'17. As a reminder, our ODIs are significantly skewed to the downside as this is what the customers were prepared to support at the last price review. Our job has been to mitigate this downside risk, and we are pleased with the results to date. So we've achieved the net reward of £6.7 million for this year, which means that, together with the net reward of £0.5 million in '15 and '16, our cumulative position for '15 to '20 regulatory period is well ahead of our initial expectations. Overall, performance was very good in the wastewater business, achieving a net reward of £9.5 million, reflecting another good performance on private sewers and pollution. Performance in the water business was a significant improvement on the prior year, but remains a challenge and behind that of our wastewater performance. Our main penalty was on the reliable water service, and I will shortly discuss some of the things we are doing to address this. Our best ever performance on leakage helped to offset this. So we will continue to be mindful of the various trade-offs when prioritizing operational investment to maximize the opportunity and balance performance for all of the stakeholders. I will now take you through some of the measures in more detail, starting with the wastewater performance. So as the chart show, we had another year of strong performance against the private sewers and wastewater pollution. The planned acceleration of our investment program is benefiting our performance against the private sewers ODI and this helped us achieve a reward in '16/'17 of £7.4 million, only marginally below the maximum available. This has put us in a strong position against this measure and although, the investment profile will result in less CapEx in the later years, it gives us a sound foundation for continued performance. The bottom chart shows performance against our wastewater pollution ODI. 2016/'17 was another year where we are comfortably within positive territory, bearing a maximum £3.3 million reward. This ODI is weather dependent and although, weather conditions have been favorable, we have consistently been a good performer in this area relative to all of the peers. So '16/'17 showed another very good performance against these wastewater ODI measures. At our last full year results presentation, I highlighted some areas where the measures get tougher in future years. This top chart shows our performance against our sewer flooding ODI where, despite an improved performance in 2016/'17, we took a £1.5 million penalty, reflecting a much tougher target. However, our improved performance against this metric mitigated a higher penalty of £14.4 million that we would have incurred had we performed at the same level as in the prior year. Here, the measures reflect stretching upper quartile targets for the period to 2020 and require us to achieve a step change in performance over the 3 remaining years to avoid any further penalty. So we're undertaking an extensive sewer cleaning program along with a comprehensive drainage area program to help us improve our performance. And this measure can be significantly impacted by weather variability, so we have also employed widespread use of network modeling to allow us to ramp up or down our pumping to give our network capacity a chance to deal with sudden downpours. The upper quartile target will continue to be a challenge, especially given the level of rainfall in the North West, and we will review operational decisions on a regular basis to help reach the optimal position overall against this measure. The second chart shows an improvement in performance against our maintaining wastewater treatment works ODI. This measure is penalty only and it can be very volatile based on single events at large individual works. Here again, we are benefiting from the acceleration of our investment program, particularly at our major treatment works, which gives us a high level of confidence that we will be able to meet much more stringent permit standards in future years. So Steve will shortly provide more details of a project at one of those large treatment works where our targeted investment will help mitigate the risk of incurring a penalty against this ODI in the years to come. But now looking of our water business. So these 2 charts show our water quality service and reliable water service ODIs and were 2 of the main contributors to our water ODI performance. Whilst overall water quality continues to be good, our performance has very slightly deteriorated from our good performance in the prior year, although it still remains above our historical long run average. This, coupled with a tougher target, has resulted in £3.6 million penalty mainly due to discoloration events. Our target against this ODI becomes progressively tougher, and we have plans in place to deliver improved performance, including a significant mains cleaning program in those areas worst affected. And as you continue from the bottom chart, the penalty and reward band for the reliable water service index is very narrow, and we are susceptible to one-off water no-supply incidents, particularly, those where supply is off for over 12 hours. In 2016/'17, one such event resulted in us taking a maximum penalty of £8 million. However, our performance in respect of minutes lost per customer is good, so whilst we are susceptible to significant one-off events, we are dealing well with more other commonplace events. Our Systems Thinking approach is a key enabler in helping us to avoid these issues and to respond when they do occur, helping us to minimize the impact on customers and mitigate the risk of ODI penalty. For instance, we have invested significantly in a start-up to waste project, which provides local storage capacity at treatment works in the event of a failure, therefore, increasing flexibility and our ability to recover much more quickly. We plan to invest £75 million in start-up to waste across this regulatory period, providing us with the largest coverage in the sector. We are working hard to get back on track against both of these measures and have plans in place to deliver the required changes. Our leakage performance has been relatively stable in recent years and broadly consistent with the performance commitment. For 2016/'17, we're please to report our best-ever leakage performance, earing a reward of £9.1 million. And this is a direct result of significant operational focus on improving our ability to detect leaks and reducing repair times, once those leaks have been found. And our Systems Thinking approach has seen us install new, self-learning pressure management valves, which helped reduce the daily volatility of pressure in our network and result in lower leakage levels. We have implemented a level of central control through our Integrated Control Center, which allows us to remotely monitor and manage the pressure in our network and detect and resolve any issues, increasingly before any customer impact has occurred. So we will roll-out further applications of our Systems Thinking, as we look to progressively improve our operational control across the whole of the business. So overall, our ODI performance in 2016/'17 has exceeded our initial expectations and the acceleration of our investment program is helping to significantly mitigate the downside risk. We will continue to invest effectively to achieve an optimal ODI performance, and as you can see, we are implementing a range of initiatives to help achieve further performance improvements over the remainder of this regulatory period and beyond. Thank you, and now back to Steve.

Steve Mogford: I'd now like to provide a bit more detail on where our investment has been focused to date, contributing to the ODI outcomes Steve just mentioned to. A culture innovation -- of exploiting innovations runs right throughout the business and is contributing to deliver of over £400 million of efficiencies to meet our totex allowance for the 2015 to '20 period. Here you see our Davyhulme wastewater treatment works in Manchester, which is one of our largest and where we're currently investing around £200 million to replace some of the older parts with modern, automated and efficient technology. This will enhance performance and allow us to adhere to tighter environmental permits, therefore, significantly reducing the downside risk in our ODI outcome. The Davyhulme investment makes extensive use of design for manufacturing assembly, or DfMA, involving the digital design and prefabrication of a significant proportion of the construction work off-site. We're targeting over 75% of our projects in AMP6 to employ this approach, which delivers improvement in safety, quality, maintainability and reducing build time on sites, thereby lessening disruptions in the local community but also on site operations. This innovative construction technique at Davyhulme alone is expected to deliver a 15% saving in construction costs compared with traditional construction methods. A new process technology innovation, Nereda, offers significant efficiency and cost-saving benefits in wastewater treatment. During the year, we contracted for our first 2 Nereda plants, the first in the U.K. of significant size, and are targeting up to a 20% through life cost reduction by using this technology and they're other site applications will follow. We have full regional production planning up and running for both water production and sludge processing and this is primarily designed to optimize production costs and service performance. The production control system also plays a critical role in our response to incidents. And this is supplemented by network modeling in our water network modeling in our water network, which allows us to predict events in the network before they occur and in our wastewater network, we can flex the level of pumping, Steve mentioned, to deal with sudden weather events. As Steve has already highlighted, this capability will be important for our ODI performance over the remainder of the AMP. And underpinning all of this is our telemetry backbone which provides enhanced and more reliable communications between our sites and the Integrated Control Center, enabling us to conduct enhanced monitoring and intervention. In our water business, we have been investing with a significant focus on resilience. We took our largest aqueduct, Haweswater, out of supply for a month last October to enable us to carry out the detailed inspection and repairs. This aqueduct normally supplies water to around 2 million people in Central Lancashire and Manchester, up to 35% of our daily regional supply. And the outage was only the second time the aqueduct flow has been completely shut down since it was first commissioned in the 1950s. And the ability to do this was made possible following the completion of West East Link Main project in 2013, allowing us greater flexibility to transfer flow around our region. During the October outage, detailed engineering investigations were carried out along the aqueduct's length to determine its structural condition. Highly specialized and bespoke repairs included the successful installation of stainless steel supports in a section of tunnel 7.8 kilometers in, and 300 meters below ground level. And this investigation work used innovative technologies, such as ground penetrating radar and laser scanning mounted on specially designed vehicles. And this allowed us to determine the condition of the aqueduct lining right through to host bedrock and provide a more reliable indication of the condition of these tunnel sections than the data previously obtained during the visual inspections of 2013. Our real-time production planning capability played a key role in enabling to take the aqueduct out of supply for such a significant period. It meant, we're able to plan to meet the demand normally supplied by the aqueduct through alternative sources. And we'll continue to analyze the data we gathered, but already, we've committed to a further outage in this regulatory period to allow us to address those areas most in need of attention. As well as taking these actions in the short term, we're developing our analysis of the condition of the current structure, so we can evaluate the potential impact on resilience for customers in Manchester, and what the requirements will be in the longer-term for AMP7 and beyond. Now turning our attention to non-household retail market, which fully opened to competition on the 1st of April 2017. Both our United Utilities wholesale business and our Water Plus joint venture with Severn Trent were well prepared for market opening, and we're encouraged that no material issues were encountered either in shadow operations in the period leading up to market opening or since the 1st of April. Water Plus continues to provide customers with a very attractive choice of retail supplier and has been so successful in securing switching, in particular in the large corporate space, including winning large multisite customers such as David Lloyd Leisure and Kwik Fit. The open market is very much in its infancy, but this net gain indicates that the combined business is well placed to compete in what will continue to be an active market as the dynamics between incumbent retailers and new entrants evolve. Now over to Russ for the numbers.

Russ Houlden: Thank you, Steve. So let's now move on to the financial performance. We've delivered a good set of results in the 2016 financial year. In line with ESMA guidelines, I'll start with our IFRS reported numbers. Reported operating profit of £606 million was up £38 million, mainly as a result of reduced profit in 2015/'16 due to the costs associated with the water quality incident. Reported profit before tax of £442 million was up £89 million, reflecting an increase in operating profit, fair value movements and the profit on disposal relating to Water Plus JV. Reported profit after tax of £434 million was up £36 million, as the increase in profit before tax was partially offset by a higher deferred tax credit in 2015/'16 relating to the government's future planned tax rate changes. And reported EPS was up 9% for the same reasons that moved profit after tax. Now let's turn to the underlying income statement, which we believe is more representative -- representation of the underlying business performance. The detailed adjusting items are shown in the profit after-tax reconciliation slide appendix to this presentation. Revenue of around £1.7 billion was down £26 million, as expected, reflecting the accounting impact of our Water Plus JV, which completed on the 1st of June 2016, partly offset by our allowed regulatory revenue increases. Underlying operating profit of £623 million was £19 million higher than in 2015/'16. This reflects our allowed regulatory revenue changes, a reduction in infrastructure renewals expenditure and lower total costs, which I'll discuss in more detail on the next slide, partly offset by the accounting treatment of Water Plus. Underlying profit before tax of £389 million was £19 million lower than last year, as the underlying operating profit with an increase that was more than offset by a £36 million increase in underlying net finance expense. This was due to higher RPI inflation which, as we've said previously, has a greater impact on financing costs than on revenue in the first year of any inflation increase. Underlying profit after tax of £313 million was £12 million lower than last year, reflecting the £19 million decrease in underlying profit before tax, partly offset by lower underlying tax on the lower profits. Underlying EPS was down by 1.7p or 4% for the same reasons that moved underlying profit after tax. Now let's take a look at the cost base. Underlying operating expenses reduced by £45 million compared with last year. Of this, £20 million was simply the effect of the IRE phasing across the AMP, and £12 million was a reduction in third-party wholesale charges which is an accounting effect of the transfer of our out-of-area non-household business to Water Plus. That leaves a net reduction of £13 million, of which, £9 million was an improvement in our bad debt charge. The excellent work undertaken by our customer facing team has contributed to a reduction in our household bad debt to its lowest ever level of 2.5% of regulatory revenue from 3% last year. Our bad debt performance has benefited from the improvement in our cash collection performance in 2015/'16, which led to a cleaner debt book brought forward into 2016/'17. This improved cash performance has been sustained, leading to additional reductions in the bad debt charge. In addition to this, further reductions have arisen from the positive impact of the introduction of billing and collection initiatives including the successful rollout of our Town Action plan, which engages with customers in our most deprived areas and has significantly increased the number of customers benefiting from our financial assistance schemes. This initiative recently resulted in us being awarded a "Credit Award for Excellence in Treating Customer Vulnerability." Our improved performance this year has been encouraging, but bad debt will remain a challenge in our region of high deprivation and so will be an area of continued focus as we drive for further improvement. Turning now to the statement of financial position. As expected, property, plants and equipment was up £374 million and net debt was up £318 million, reflecting expenditure on our large capital program. Other noncurrent assets have increased and other current assets have decreased, largely because the former non-household debtors of United Utilities and Severn Trent are now in the Water Plus JV, which is financed 50-50 by the 2 parents. We again have an IAS 19 retirement benefit surplus, which I'll talk about on the next slide. Derivative assets of £808 million were up £42 million, reflecting both a weakening sterling and a decrease in market interest rates during the period. Derivative liabilities of £250 million was down £12 million, reflecting an increase in the market price for electricity in the period. Gross borrowings of £7.4 billion were up £407 million, due to debt raised exceeding maturities, the inflation uplift on index-linked debt, a weakening sterling and a fall in market interest rates. Retained earnings of around £2 billion were up £112 million, largely reflecting retained profits of £434 million, offset by dividends of £263 million and post tax remeasurement gains on DB pension schemes of £59 million. So now looking at our pensions position in a bit more detail, and as a reminder, we believe that the sum of the part valuations should use normalized IFRS as the best available method for cross-company comparisons. We have a clear hedging policy in respect to our pension schemes, adopting an asset/liability matching approach to avoid unnecessary volatility in the funding and accounting surplus or deficit. This policy is working well, as you can see from the relative stability of the accounting surpluses we've reported in our last few years of results. Our accounting surplus has increased by £33 million compared to the position at September 2016, mainly reflecting a decrease in credit spreads. Our pension position remains strong with an IFRS surplus of £248 million as at 31st of March 2017, putting us in a much better place relative to many other FTSE companies. It's encouraging to see that the majority of our analysts are now factoring pensions into their valuations, and we expect more to follow. However, few analysts have yet attempted to normalize IFRS numbers by adjusting for the differences in published assumptions. It is not difficult to do and it does give much better comparability, and we'd happy to help any analyst who wants to go into this further. This chart shows our RCV and gearing level. The blue bars show the growth in our RCV and for this regulatory period, we've adjusted the RCV to reflect the acceleration of our investment program as suggested by a number of analysts. The black line shows the movement in RCV gearing over the last few years. As you can see, for period to March 2015, our gearing had remained relatively stable around 60%, with the growth in net debt largely offset by the commensurate growth in RCV. In the early part of the current regulatory period, our gearing has nudged up slightly, reflecting the impact of the acceleration in our investment program and lower inflationary growth in RCV. The acceleration of our investment program has a short-term impact on gearing and we therefore, expect our gearing to return closer to historical levels in the later years of the AMP as the investment program reduces. Any future increase in RPI will positively impact the inflationary growth in the RCV and also contribute to a reduction in gearing. As of 31st of March 2017, our gearing was 61%. This remains comfortably within our target range of 55% to 65% and supports a solid A3 credit rating. Now moving on to cash flow. In the year, there has been a switch between cash generated from operating activities and cash used in investing activities due to the accounting treatment of our Water Plus JV. As a result, net cash generated from operating activities was £135 million higher than last year at of £821 million and there was a corresponding increase of £128 million from cash used in investing activities, up to £805 million. Cash generated from financing activities was £22 million, reflecting net proceeds received from borrowings compared with cash used in financing activities of £46 million last year, reflecting net repayments of borrowings. Now onto financing. Over the 2015 to '20 regulatory period, we have financing requirements totaling around £2.5 billion, of which, we've now raised over £1.7 billion. In December 2016, we were pleased to issue the first ever CPI-linked notes by U.K. utility, and to date, we are still the only U.K. water company to have tested this market. The 2 private placements totaling £40 million were issued whilst simultaneously issuing RPI-linked notes of the same maturities, and therefore, allowing us to observe an RPI/CPI spread of 80 basis points, which is better than the estimated long-run average of between 100 and 130 basis points. We were able to follow this up with a further issuance of £60 million CPI notes in February 2017 with an estimated spread of 80 to 90 basis points. Whilst we believe that our CPI-linked issuance to date puts us in a sector leading position in response to Ofwat's decision to transition away from RPI, we've achieved this through tapping into some small but attractively priced demand, and we do not therefore believe that this constitutes a deep CPI-linked debt market. Since September 2016, we've agreed or renewed £200 million of committed banking facilities, bringing the total under our rolling bilateral revolving credit facilities program to £750 million. As a result, we have financing headroom cover our projected financing needs into 2019. And finally, a reminder of our approach to hedging. Our hedging policy for business exposures is to leave the equity portion of the RCV exposed to RPI inflation by largely hedging the debt portion of the RCV for inflation through index-linked debt and the effect by pension scheme liabilities. During 2016 and '17, the group's defined pension schemes implemented a market hedge for around 50% of an inflation exposure on the liabilities and this will be reflected in a corresponding reduction in the pensions inflation funding mechanism. The average cost of our £3.6 billion long-term index-linked debt portfolio is now 1.3% real, with the most recent issuance at much more attractive rates. We expect that our nominal debt, this is virtually fixed for the 2015 to '20 period at an average interest rate of around 3.6%. The low cost of debt that we've locked-in places us in a strong position to deliver financing outperformance up to 2020. As already mentioned, and although we have already issued CPI-linked debt, we will need to know the final form of Ofwat's proposed transition away from RPI before we judge the best overall hedging response. We will also at that time be revising our interest rate hedging policy once Ofwat confirms its approach to setting cost of debt for PR19. So in summary, this is a good set of results and we've continued to maintain tight cost control. We've seen higher RPI inflation deliver further growth in our RCV, although this has also increased our index-linked financing charge for the year. Our asset/liability matching approach to pension risk is working well and places us in a strong position compared with many companies in the FTSE. We continue to maintain strong balance sheet and solid credit ratings. We've already raised over 2/3 of our £2.5 billion financial requirements for the 5-year regulatory period. As part of this, we were the first U.K. utility company to issue CPI-linked debt in response to Ofwat's proposed transition away from RPI. We've locked-in a low cost of debt from the 2015 to '20 period with an appropriate mix of index-linked and nominal debt which is delivering performance. And our hedging policy remains to be to well placed to manage future financing costs. Thank you. Now back to Steve.

Steve Mogford: Thanks. I thought it would be useful highlighting some key dates that are coming up in the ongoing price review process, or PR19, for the 2020 to 2025 regulatory period. And you can see, there's a lot coming up, and you can see that in this calendar of anticipated events. We're engaged with customers, Ofwat and other stakeholders ahead of the next regulatory review period, which will set our price and service package for the 5-year period to April 2025. We look forward to the publication of Ofwat's draft methodology for PR19 in July and final methodology in December this year, which will represent the further evolution of the framework adopted at PR14. We've been actively engaged in the development of this approach, contributing across the full range of working groups and providing detailed proposals in key areas such as development of access pricing arrangements for water resources, which will result in better outcomes for customers and the approach to allocating RCV across disaggregated price controls. We support Ofwat in developing a progressive framework of regulation in sector, whilst also recognizing the importance of key pillars of the historic approach, such as maintaining protection of historic regulatory capital values. We believe that our strong track record of operational performance and service delivery, leading environmental performance, innovative approaches to customer service and recognized strengths in transparency and reporting should provide a strong underpin for our business plan. We are also the first and, so far, only U.K. water company to issue CPI-linked debt instruments in anticipation of the transition to price controls away from the RPI measure of inflation. And before finalizing our business plan, it's anticipated we'll make a number of additional submissions, reflecting company-specific factors. These will include our approach to RCV allocations for bioresources and water resources in September and January 2018 respectively, where Ofwat will consider company-led proposals for the appropriate split. We also expect to provide early evidence on company-specific factors affecting our wholesale and household retail operations in North West ahead of business plan submission, subject to confirmation of this approach in Ofwat's methodology. Submission of the main business plan is expected to be in September 2018. So in summary, it's been a year of strong performance us well to deliver further value. We've seen a step change in customer service, delivering our best-ever customer satisfaction scores and ending the year as one of the leading companies in our peer group. The acceleration of our capital investment program is delivering the benefits of operational efficiencies early and this is being reflected in our ODI performance, where we've achieved another positive net outcome for the year. Our overall performance against our regulatory contract gives us confidence to invest an additional £100 million over the remainder of the AMP, supporting resilience projects for the benefits of customers and shareholders. Our Systems Thinking approach is unparalleled in the sector and on track to deliver £100 million of savings across the '15 to '20 regulatory period, underpinning our business plan. And our performance in the early part of this regulatory period puts us in an industry-leading position and demonstrates we're well placed to deliver further value for customers, shareholders and the environment. All of this supports the dividend growth, sustainable dividend growth since 2010 in line with our policy of an annual growth target of at least RPI inflation up to 2020. That concludes our presentation. Thanks very much for listening. and we now like to take questions.

Q - Dominic: So it's Dominic Nash from Macquarie. A few questions, please. First one is on your decision to invest an extra £100 million, you've explained in the presentation, sharing outperformance. But in the results themselves, you're saying you're confident at meeting your regulatory target, I think, on totex -- you haven't missed yet in -- but I guess, you quantified what you expect the totex outperformance to be through 2020 in order to be shared. And the second one, Russ, I'm sorry, I can't see the RORE anywhere. So is it possible to just give us a quick rundown on a metric of your choice, [indiscernible] the RORE this year, please.

Nash: So it's Dominic Nash from Macquarie. A few questions, please. First one is on your decision to invest an extra £100 million, you've explained in the presentation, sharing outperformance. But in the results themselves, you're saying you're confident at meeting your regulatory target, I think, on totex -- you haven't missed yet in -- but I guess, you quantified what you expect the totex outperformance to be through 2020 in order to be shared. And the second one, Russ, I'm sorry, I can't see the RORE anywhere. So is it possible to just give us a quick rundown on a metric of your choice, [indiscernible] the RORE this year, please.

Steve Mogford: Okay. I'll take the first one and you can take the second one. I think when you look at the £100 million in investment, what we've done is we've looked for that the -- our outperformance across the whole period, we're now anticipating. For the benefit of the performance we've got, seeing the improvements we've had through accelerated investment and looked at net outperformance which includes all aspects of totex financing. And I think as we've looked at that, we've said that we believe that when you look at that net picture, we will be sharing that between customers and shareholders. We think that's an appropriate and responsible approach. I think the other thing that it does is allows us -- if we invest, as we say, rather than waiting till the end of the period, it allows us to invest now and get the benefit of that additional performance now, both in terms of sort of reduced risk of operational high resilience in shareholder benefit and the benefit of our [indiscernible] customers. So if you look at this in the context of total outperformance, the outperformance, all aspects of performance under the program, including financing. And I think when you look at it, we're investing roughly half of our anticipated outperformance as we see it today.

Russ Houlden: Okay. I couldn't really imagine that I'll get a question on RORE. If you remember last year, I was very skeptical about the value of ROREs published for a cross company comparison. And I said that we will continue to engage with Ofwat to try and make it a more meaningful comparison and that's what we've done. As a consequence of that, we are expecting consistently [indiscernible] ROREs come out of Ofwat and the 3 listed during June, and we're expecting that to be followed up by Ofwat with the unlisted companies through the ECA process in July. So I think the consistent set that you are looking for and we're looking for, we will get in July. And I'm happy to give you a few sort of insights now, but I think the July number's the way the move on that we should be looking at. So the first insight, as I said last year, that I thought would be published was with the 3 listings [indiscernible] consistent. If you remember at that stage, we were at 6.9%, Severn Trent's at 8.3%, and Pennon with 13.8%. And based on what I've seen so far this week and from the other 2 listed, the Pennon, 13.8%, and on the 2015-'16 year is now down to 10.1%. And the Severn Trent, 8.3%, is now down to 6.4%. So I think it was clearly right that the things were not aligned. We will also, I think, be publishing a small reduction number, because what else should they've done, which should, I think, surprise us all, is to choose a year average RPI rather than a year-end RPI. So we think once that sort through, we'll probably be publishing 6.9% comes down to 6.3%. So I think once we've done all of that all done, if that is all done in June, and then in July, in the [indiscernible] of the unlisted. So I think we will then add something that is approaching a consistent basis. So I'm very pleased with that result. I think it's really important for everybody, the result are consistent. And as for this year, our -- where we will probably be about 7.3% and so that will bring perhaps some of the consistent basis and that will bring our cumulative for the 2 years together to about 6.8%. As I said, those numbers are subject to finalization and will be published in the ATR out in July and then we'll get an announcement from Ofwat in June as well.

Lakis Athanasiou: Lakis Athanasiou, Agency Partners. Three questions, please. First one, on the rate increases, could you give us an indication of how much they have gone up? Second question on dividends. We saw this week that Severn Trent upped its dividend [indiscernible] for growth. Now you guys are in a far better position to have increased your dividend than Severn Trent [indiscernible] your efforts [indiscernible] far better, it will be far better in the next review. We're going to have an astringecy. And they seem to be willing to get into higher dividends credit metrics [indiscernible] to kind of follow suit? And the third question is on RORE again. The RORE being published are fazed ROREs and the next performance are not meant to be for valuation purposes. And people could just mistakenly use those. Can you guys, like, for example, you massively invested up front. I mean, your debt's higher. You're starting from a different position. Your unfazed RORE is going forward will be much higher than your fazed RORE, which will be published. Consequently, using those fazed ROREs will underestimate your valuations. So are you not worried a little bit about people will take [indiscernible] into account?

Steve Mogford: Okay. Risk is another feature from RORE [indiscernible] from Russ. I'll pass that one over to you in a minute. I think he spent his last work, actually, for the most [indiscernible] you're asking that one? I'll just pick up on the dividend thing. I mean, obviously, the board considers the dividend position every year. I think the key issue for us is it's very clear that investors have talked to us about dividend sustainability being as very important characteristic in investing in this business. And so our strategy has always been to very much drive sustainable and improving business performance and sustainable dividend. We got a competitive yield because we're working as a company. And so we don't see a great need for catch up in that situation of the dividend. And I think we're adopting a strategy which is very much what we did in [indiscernible] which is as we go through the period, we know that we're coming to a transition, we know we've got to manage through that transition, whatever those conditions might be and none of us know what the 6 or 7 transitions looked like yet. And so what we do is we have -- we look at a sustainable position that we will cover as we go. Because what we want to do is to be in the best position we can as we go forward, recognizing what the investor requirements are. So our key strategy here is all about delivering our sustainable value and adopting a dividend policy which supports that kind of -- and it's a different approach, but, I mean, the people can do what they want. That's the position [indiscernible] Russ?

Russ Houlden: Okay. On RORE, yes, I agree that it will be lazy to just rely on RORE for your valuation. And yes, I agree that there are some sort of second and third order effects that you need to go through quite carefully. However, the main risk, I think, on the saving issue is taken away by the current of Ofwat guidance. It wasn't clear [indiscernible] to do the math clear, the company and then to see through phasing. So in calculating the totex outperformence, you should see through that and give an estimate of what ROREs on a scout-to-scout basis and what is it going to be like on full hand. So I think that component should be correctly calculated, where it gets a little bit complicated. So as you say, you get a bit more in the RCV. So with that secondary effects still there. So the reason, I think, valuation is about much more than what it is [indiscernible] single year measure it, still got 1 or 2 floors. It's getting back [indiscernible] It doesn't tell you anything about the long-term, and of course, investors should be looking long-term. We know that public market investors, their long-term tends to be more like 5-year ultimatum for some investors, it's more like 30 years. I think the longer term you look, the better. And you need to have regard to risk. So if you -- which cut costs in an indiscriminate way, you could clearly improve your returns in a short term if you get totex outperformance. But in long-term, the difference with the [indiscernible] So I think that there's a lot more to valuation than just -- really, I agree with you. And on business rates, 2015, '16 business rates were £86.3 million; 2016, '17, £91.6 million. I do expect business rates to continue to rise for the next couple of years and then level out. And the reason I expect that to is we've had rates with value reviews and [indiscernible] working their way through, and as you may be aware, the system that we have is that when your rates go up, they go up quickly; and when the rates come down, it come down slowly. And in our case, [indiscernible] rates will be going up because the way the values have gone up. The rates will be coming down because that's the way the rate values have gone. So relatively go up quickly, rates will go down slowly, but the net-net you'll see further increases business rates in 2017, '18 and a further small increase in 2018, '19. And the next year, about [indiscernible]

James Brand: James Brand from Deutsche Bank. Just two questions, please. The first follows up from one of the answers to the questions I have asked, kind of long-term returns being a more important driver necessarily and I guess, what's kind of happening today or in a given year. One of the issues you faced in the last review was taking on cost allowance in Ofwat, I think in your mind didn't probably take into account your regional circumstances. And now as we start going to the next review, unbelievably, even though I was just [indiscernible] service fee having to sort of come to period, I was wondering whether you could comment, I guess, on the 2 aspects that will be important for the next review, getting more of those costs recognized. One, being what kind of Ofwat model and whether or not do you think you're in a position where that might have changed and then might take into account more factors? And secondly, [indiscernible] evidence in terms of getting exceptional allowances, whether you could just talk about how you see yourself position going to the next review and whether or not that might be scoped to get a better treatment Ofwat next time around. And the second question, also the Chairman mentioned vastly improved operational performance this year and last year, I think, [indiscernible] is just really an issue. I think there is a [indiscernible] sector at the [indiscernible] at some point on that. I was wondering whether if you could just give an update on [indiscernible]

Steve Mogford: Yes. I think you are correct James in saying that when we went through PR14, I think one of the concerns we've had was whether the econometric modeling that was used by Ofwat adequately reflected the circumstances that drive -- the cost drivers that we'd see across different companies, not just us, with the different companies. And I think -- and we're very encouraged by the fact that the dialogue that we can see through the working groups that we're a part of are actually revisiting the econometric modeling for PR19. And we've done a lot of work. We know Ofwat's done a lot of work on what are the cost drivers. And I think the last time around, that work had not been done. It hasn't been done by us. In truth, it hadn't been done by Ofwat. We just knew that when we looked at the models, it didn't replicate what we were seeing in terms of the way our business works. And the bottom line was we started it up. We delivered the efficiencies and we're delivering the plan. But I think going forward, there's a lot more work being done on saying it's less what individual factors, but what combinations of factors would drive your cost. Water was not an issue for us, it was wastewater. And I think what we've clearly seen is the evidence that when you combine things like densely populated areas, combined surface water and waste sewers, a high rain fall, all of those factors when combined, cause you to have a higher cost of operation than one might have in an area where you don't see those better supply. So I think this conversation will be much more facts based, much more evidence based. And from what I can see today, I see a genuine engagement by Ofwat in gaining an understanding. So whether that actually delivers the answers that we'd be happy with, I don't know. But I also get a sense from the working groups, like the companies, are also seeing the advantage of taking, if you like, almost a [indiscernible] approach to modeling. So we'll see. I think that will be important, it's interesting, we'll see different views coming principally around the issue of gaining by companies, is will Ofwat publish their models before we go into pricing. I think -- we think that, that is -- that will be a positive development. Because I think it's very difficult to understand why you're different if you don't know how you're being measured. But obviously, you got the concern of those that might be below the cost curves, might take advantage of that. I know you're asking decision that Ofwat have got. But we certainly see a strong merit in publishing the models before hand, so that we don't have get in -- we don't have that debate after the event that, in any way, what we don't understand. So I think that's constructive. I think the other area in addition to that was the domestic cost serve, the average cost serve approach. I think you know that we were an outlier when it comes to domestic cost serve and we have a glide path as we work through this process. A part of our strategy of digitalization of actually gaining and increasing the number of customers who are transacting either through apps or through Internet at times of their convenience is all part of that strategy. I have to say that the new leadership team, by the way, is led by -- would you just stand up, please? So [Louise] is a force of nature in itself and she's leading our domestic retail team now, has delivered so much at the benefit along with the network areas. We've done a lot of work to drive out our costs to serve activity down. I think what we'll still see are the need to understand cost to serve in the context of, a, you're getting water and wastewater services rather than one service, and also the impact that deprivation has. And so -- and notwithstanding improvements we're making in debt, you can imagine we're still looking and trying to understand in a way that you can look out for the whole industry, what impacts that deprivation have on cost to serve and how do we engage constructively. And we are engaging very constructively. [indiscernible] So I think we're learning from PR14. It's actually a lot more evidence than it needs to build industry-wide evidence. Then you're just basically saying I've got a [indiscernible] On DWI and the more effective [indiscernible] we refer to it as [indiscernible] We decided to had the penetration of crypstosporidium. It's an unbelievably complex situation and we've had a lot of investigation work, we've got a lot of science involved in this, in terms of national laboratories. And the final evidence was only actually submitted to DWI towards the end of last year. So it was a year on before all the evidence was there. They're considering their position. At some point, they will report publicly. There are a number of options as to which road to take. They could publish a report, they require us to do things. In the extreme, they could go to a prosecution. So we're really waiting until we get formal confirmation from Ofwat of which approach they're going to take and then we'll face into that and deal with it. What did I say? Did I Ofwat? I've got it on my brain. It's six years of regulation. Yes, I think the DWI's still effective. It's not an Ofwat issue at all, it's DWI jurisdiction. So we'll be waiting to see what final decisions [indiscernible] There you go. You've got mic as well.

Iain Turner: Iain Turner from Exane. Kind of to the £100 million of extra CapEx, can you just go through the source of things that you will be spending the money on? And does this represent projects that you would have liked to have done in AMP6 that you didn't get funding for or the ones that you might have done AMP7 but you couldn't do? And also, what sort of impact will that have on your own performance measures, ODIs [indiscernible]

Steve Mogford: Yes, we both have them. With the rules of engagement within, so they're not things that we would have otherwise done in PR14, because effectively, as far as I'm concerned, that's just softening the pressure on delivering the totex with being our final determination. There are also projects that we can deliver within the three year period because we want to get that done. And primarily, they will be in our water area and driven around enhanced resilience. So we've got a lot work to look at the potential impact of climate change. We looked at population growth as well in that context. And obviously, we're seeing through climate change, a lot more flooding. We're seeing a higher risk of drought. And so it causes you to look at your network, it causes you to look at the resilience of your sites in those areas. And so we would expect to see a couple of things. Firstly, greater resilience to these sort of shocks we see from climate change but also greater resilience at a basic day-to-day operational level, which will feed through into the sort of metrics that you see here. So -- and we've got a list of projects. I'm sure as we go through the period, some of those will change in terms of priority, but we've set it out in some detail. And I think the benefit from that is that we'll be derisking business. And so I think that's a prudent approach to take from a shareholder perspective. Clearly, I think in the current political environment, it's also a sensible thing to do in the context of your outperformance. So find the prime driver for us, huge waste reduction and long-term shareholder benefit.

Iain Turner: [Indiscernible]

Steve Mogford: You can look at it, and yes, typical one might be putting cost connections in or giving yourself a level of redundancy that enables you to cope with a large site or a number of sites. I think if you look to the flooding that we had in Cumbria, just to give you some example. The flooding in Cumbria in that December over that night, took out 71 wastewater treatment works and 130 pumping stations and water treatment works, pipe bridges and all sorts. And so when people talk about resilience, they'll often focus it on an individual site level, we keep that site working. When you're dealing with these issues now, you're dealing with widespread problems. I mean, you're dealing with multiple events and those are the sort of things that we're actually now facing into. So we've done a lot of work with third parties to look at if you project that forward, what you see is a risk to your operations and it's how do you keep people on supply regardless of all of that happening and those are the sort of things we're putting money into it.

Verity Mitchell: Verity Mitchell, HSBC. Can I just follow-up on that though? Looking back at your very helpful ODI slide, can you just confirm that the change in the targets are going to be covered on the existing plants? For example, on wastewater treatment, I mean, that's a function of the CapEx you're doing, but something like private sewers, I mean, none of this extra investment is going to improving your ODI. This is a completely different investment [indiscernible] has already agreed.

Steve Mogford: I think what we will find is, for example, on water, where you're looking at the ability to keep customers. If you look at the level of water service index, one of those is driven by discoloration, which is a feature of the northern companies who tend to take water from -- in [indiscernible] reservoirs, more than gives much more discoloration. So it's a function of being in the north that causes you to have more difficulty in maintaining that particular aspect. But when you look at the disruption on some of the other one there, where we've had a failure of water supply to individuals is the sorts of things you're talking about, level of redundancy, that we can bring in place or the resilience of the site. It should actually have a benefit on an index like that. It should reduce the risk of a failure in the area. I mean, as Steve said, that one failure was -- that fine was actually one incident and it was just, in many ways, it was an incident we coped with, we got through it. But the disruptions for the customers at that point was over 12 hours and then you actually get back that fairly significant fine. So we can see opportunities through that original investment. So it actually helps on or beyond a small number of --

Verity Mitchell: [indiscernible] And one is about bad debt, the improvement in bad debt to revenue. Have you got trajectory of further improvement there or an internal target? And maybe just a question for Russ. I didn't quite understand what you were saying about changing in hedging and the risk management. You said there was going to be some change this year in addition to more review [indiscernible]

Russ Houlden: Okay. On bad debt, as you know, we've had a very good performance in the year that ended. That's the result of two years of good collection plus a more effective, useful schemes to help those with [indiscernible] income pay. I think our target is to at least maintain that although that will not be easy because the debt book has worked its way through the system. The write-off is something that shouldn't get higher. So I think we'll have to run hard to stand still at 2.5% in essence. On hedging, we haven't made any changes yet. We will be reviewing that this year and I would imagine this time next year, I'll be setting out for you our proposed approach going forward and it may well be that between then and now, we take some time being this way with investors.

Steve Mogford: Okay. Any more questions? No?

Darren Jameson: All right. Thanks very much, everybody. Thanks for coming and thanks for the attention.