United Utilities Group PLC Credit Investor update Summer 2017
Agenda UU overview and investment proposition Financial and operational performance Financing and credit ratings Water regulation and PR19 Supporting information 2
UU overview and investment proposition
United Utilities Who we are United Utilities Group PLC (UU) is the UK s largest listed water company Through its subsidiary, United Utilities Water Limited, UU manages the regulated water & wastewater network in the North West of England, serving around 7 million people & 200,000 businesses Revenue c 1.7bn in FY2016/17 Regulatory capital value (RCV) c 10.7bn (31/03/17) Net debt c 6.6bn (31/03/17) Market capitalisation c 6.8bn (31/03/17) UU s ordinary shares - listed on London Stock Exchange & trade over-the-counter in the USA in the form of American Depositary Receipts (1 ADR = 2 Ords) Of the 1,700 million litres we supply every day, well over half is from Cumbria and Wales. The two biggest reservoirs are Thirlmere and Haweswater in Cumbria. We own and manage over 56,000 hectares of land, making us the largest corporate landowner in England. We help to protect over 400km of coastline and around 7,000km of rivers flowing across our region. We operate 93 water treatment works and 567 wastewater treatment works 4
Investment proposition Why invest in United Utilities? Clear vision to be the best water company in the UK, providing great service to our customers Management team with extensive commercial, operational and regulatory experience Track record of regulatory outperformance; exceeded our 2010-15 targets Wholesale revenue and asset base linked to RPI inflation through to at least 2020 Clarity on allowed returns through to 2020 Water Plus Non-Household Retail JV with Severn Trent - well positioned for full market opening Significant improvements in operational performance and customer service Low cost of debt locked in and robust capital structure with a stable A3 rating Dividend policy targeting annual growth of at least RPI inflation through to 2020 5
Vision To be a leading UK water company Deliver long-term shareholder value by providing: Best service to customers At the lowest sustainable cost In a responsible manner Shareholder value driven by regulatory outperformance: Totex Operational Financing 6
Capital structure Robust and sustainable capital structure Aim to at least retain existing credit ratings for UUW with Moody s and S&P Moody s has an A3 rating with a Stable outlook Standard & Poor s has a BBB+ rating with a Positive outlook Target gearing range of 55% to 65% supports robust capital structure Financing headroom into 2019 Average term to maturity of debt portfolio of around 20 years 7
Dividends 2015-20 policy targets sustainable growth 2016/17 full year dividend of 38.87 pence per ordinary share Increase of 1.1% compared to prior year, in line with 2015-20 dividend policy Target growth rate of at least RPI each year to 2020, from 2014/15 base RPI based on November from prior year - mirrors RPI in price limits Consistent with growth in regulatory capital value Recognise importance of income to shareholders 8
Pence Dividends Sustainable dividend growth 40 35 30 30.00 32.01 Total dividend per share 34.32 36.04 37.70 38.45 38.87 25 20 20.00 21.34 22.88 24.03 25.14 25.64 25.92 15 10 5 0 10.00 10.67 11.44 12.01 12.56 12.81 12.95 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 AMP 5 AMP 6 Interim DPS Final DPS 9
Financial and operational performance
Financial summary Key takeaways Good set of results maintaining tight cost control Higher RPI delivers further growth in RCV, but increases index-linked finance charge Pensions hedging working effectively Robust capital structure Over two thirds of 2015-20 funding requirements already raised First CPI-linked debt issued by a UK utility Debt portfolio locks in outperformance Hedging policy means we are well placed to manage future financing costs 11
Financial performance Good set of results Underlying operating profit of 623m, up 3% - reported operating profit of 606m (impacted by market reform and restructuring costs) Underlying profit after tax of 313m, reflecting higher RPI inflation on finance charge - reported profit after tax of 434m (impacted by one-off deferred tax credit and disposal of business retail) Underlying EPS of 46.0 pence, down 1.7p or 4% - reported EPS of 63.6p Full year dividend of 38.87 pence per share, up 1.1% in line with policy Robust capital structure, with RCV gearing at 61% 12
Operational highlights Another strong performance Record SIM scores resulting in upper quartile performance Systems Thinking approach delivering industry leading innovation and operational performance Sector leading status with Environment Agency and Dow Jones Sustainability Index 804m investment taking total AMP6 investment to 1.6bn over first two years Accelerated investment delivering further operational and customer benefits and contributing to a net ODI reward of 6.7m Additional 100m of new investment to improve resilience for customers Robust capital structure and effective pensions hedging 13
Additional 100m investment Sharing net outperformance Announcing additional investment of c 100m to be made available across the remainder AMP6 Investing in resilience for the benefit of customers Additional investment funded through anticipated net outperformance 20m to be made available in 2017/18 Similar to the approach we took in AMP5 14
SIM points Customer satisfaction Best ever qualitative SIM scores Good performer 5.0 4.8 Ofwat SIM qualitative performance wave four 2016/17 4.6 4.4 4.2 Water & sewerage companies Water only companies 4.0 3.8 Poor performer 3.6 DVW WSK UU PRT SEW NES BRL SBW ANH SVT WSH YKY AFW SWT SRN SSC TMS SES 15
SIM points Customer satisfaction Marked improvement in quantitative SIM scores Poor performer 160 140 Ofwat SIM quantitative performance 2016/17* 120 100 80 60 Water & sewerage companies Water only companies 40 20 Good performer 0 PRT SBW SEW UU SVT DVW NES SWT YKY WSH TMS SRN AFW * Quantitative SIM for 2016/17 is based on a datashare of 13/18 water companies, using 12 month actuals 16
Net regulatory capital spend profile Accelerating investment a further 804m invested this year Acceleration of investment to deliver early customer and operational benefits m TCQi 90% TCQi 93% NB. The UU AMP6 investment programme shown on this chart does not constitute a forecast and is subject to change 17
m Outcome delivery incentives (ODIs) Improving our targets further ODIs reward/penalty ranges 200 100 0-100 + 140m + 50m - 100m + 30m - 70m + 30m - 50m Further reduction to downside risk -200-300 -400-500 - 470m P10/P90 range PR14 Soft guidance May 2015 Target May 2016 New target May 2017 Total net ODI reward earned to date of 9.2 million 18
Leading operational and environmental performance UU assessed as Industry Leading Company Industry Leading Company status measured through EA assessment Best ever performance against DWI metrics Industry leading capability in our integrated control centre (ICC) Customer innovations setting new benchmarks in the industry 300 250 200 150 100 50 0 20 18 16 14 12 10 8 6 4 2 0 Pollution Incidents 2011 2012 2013 2014 2015 Serious Pollution Incidents 2011 2012 2013 2014 2015 19
Outcome delivery incentives (ODIs) Another good performance in 2016/17 Wastewater ODIs m reward/ (penalty) Private sewers service index 7.4 Wastewater category 3 pollution incidents 3.3 Sewer flooding index (1.5) Maintaining our wastewater treatment works - Other 6 wastewater ODIs 0.3 Wastewater net reward 9.5 Water ODIs m reward/ (penalty) Reliable water service index (8.0) Water quality service index (3.6) Average minutes lost - Leakage 9.1 Other 5 water ODIs (0.3) Water net (penalty) (2.8) Total net reward 6.7 20
Leading company in embracing innovation Contributing to over 400m efficiencies Davyhulme modernisation project c 200m in AMP6 Design for manufacture and assembly (DfMA) standardised design and cost efficiency Nereda process control technology efficiency in wastewater process Real time production planning with network modelling Telemetry backbone connecting our sites and integrated control centre 21
Investing in resilience Manchester resilience project Planned maintenance outage of Haweswater aqueduct Extensive use of innovative technology Underpinned by real-time production planning with central control Committed to further outage in AMP6 for additional work Longer term approach to be considered in the context of a wider Manchester resilience project 22
Non-household retail 1 April 2017 full market opening Well prepared when the market opened Successful with large corporates Won multi-site customers Anticipate active market and Water Plus well placed to compete 23
Financing and credit ratings
RCV and gearing RCV gearing supports robust capital structure 12000 75% 11000 70% 10000 65% RCV m 9000 8000 60% RCV gearing 1 within our target range, supporting a solid A3 credit rating 7000 55% 6000 50% 5000 31/03/2011 31/03/2012 31/03/2013 31/03/2014 31/03/2015 31/03/2016 31/03/2017 45% RCV RCV gearing 1 RCV gearing calculated as group net debt / United Utilities Water s regulatory capital value (based on shadow RCV for AMP6, adjusted for actual spend) and presented in outturn prices. RCV at 31/03/2017 = 10,719m 25
Financing Leading the way on CPI debt > 1.7bn of c 2.5bn 2015-20 financing requirements already raised CPI-linked first CPI-linked debt issued by a UK utility o 40m raised from private placements in December 2016, with 15-year and 20-year maturities o 60m raised from private placement in February 2017, with a 20-year maturity RPI-linked o c 73m raised from private placements in December 2016, with 15-year and 20-year maturities o Total of 813m raised previously Nominal o Total of 736m raised previously 200m committed bank facilities agreed or renewed since September 2016 Financing headroom into 2019 26
Hedging Clearly articulated financial risk management Debt portion of RCV remains largely hedged for inflation Index-linked debt portfolio now c 3.6bn with an average cost of 1.3% real Around half of pension liabilities hedge a substantial proportion of the remaining debt portion of RCV Nominal debt portfolio fixed for 2015-20 at average rate of c3.6% 1 Possible hedging response to Ofwat s proposed CPI transition and approach to setting the cost of debt currently being considered 1 Interest rate is inclusive of credit spreads 27
m Pensions Hedging continues to work well 4500 4000 3500 3000 79m surplus IFRS pensions surplus 126m surplus 275m surplus 215m surplus 248m surplus 2500 2000 1500 1000 500 0 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Assets Liabilities 28
Financing and liquidity at 31 March 2017 Gross debt = 7,384.5m Headroom / prefunding = 698.9m 489.1m, Other EIB loans 557.4m, Other borrowings 875.0m, Yankee bonds (USD) 564.2m, Euro bonds (EUR) m Cash and short-term deposits 247.8 Medium-term committed bank facilities 1 600.0 1,543.4m, EIB and other RPI linked loans 1,296.5m, GBP bonds Undrawn EIB term loan facilities 175.0 Short-term debt (229.4) Term debt maturing within one year (94.5) 99.6m, GBP CPI linked bonds 1,959.3m, GBP RPI linked bonds Total headroom / prefunding 698.9 1 Excludes 150m facilities maturing within one year 29
Debt structure at 31 March 2017 United Utilities Group PLC Yankees: $250m in 18s $350m in 19s $400m in 28s United Utilities PLC Baa1 stable; BBB- positive Other debt: Short-term loans 135m United Utilities Water Limited A3 stable; BBB+ positive Ring-fenced and regulated by Ofwat Euro MTNs: 5bn in 17s 150m in 18s 500m in 20s 375m in 22s 300m in 27s 50m in 32s 1 200m in 35s 100m in 35s 1 35m in 37s 1 70m in 39s 1 100m in 40s 1 50m in 41s 1 100m in 42s 1 50m in 43s 1 50m in 46s 1 50m in 49s 1 510m in 56s 1 150m in 57s 1 Other debt: EIB index-linked loans 1,088m 1 Other index-linked loans 300m 1 Other EIB loans 489m Short-term loans 67m 10bn dual currency loan Other sterling loans 128m United Utilities Water Finance PLC 3 Guaranteed by United Utilities Water Ltd Euro MTNs: 25m in 25s 1 52m in 27s 20m in 28s 1 35m in 30s 1 30m in 30s 30m in 31s HK$600m in 31s 38m in 31s 1 20m in 31s 2 27m in 36s 1 29m in 36s 1 20m in 36s 2 60m in 37s 2 1 RPI linked finance 2 CPI linked finance 3 United Utilities Water Finance PLC (UUWF) is a financing subsidiary of United Utilities Water Limited (UUW) established to issue new listed debt on behalf of UUW. Notes issued by UUWF are unconditionally and irrevocably guaranteed by UUW and are rated in line with UUW s credit ratings. 30
Term debt maturity profile as at 31 March 2017 1 Average term to maturity of around 20 years 1 Future repayments of index-linked debt include inflation based on an average annual RPI rate of 3% and an average annual CPI rate of 2% 31
m European Investment Bank funding maturity profile Medium to long-term maturity profile 1200 EIB funding maturity profile 1000 800 600 400 200 0 To 31 Mar 2020 2020-25 2025-30 2030-35 2035-40 Existing EIB funding Additional EIB funding Notes Future repayments of EIB RPI linked debt include inflation based on an average annual RPI rate of 3%. Dark blue areas represent EIB loans currently drawn and outstanding. Light blue areas include the remaining 175m of 250m AMP6 loan signed April 2016 (assumes drawn in 2017), and assumes a further 250m AMP6 is signed and drawn in 2018 (this being the second tranche of a 500m AMP6 funding package approved by EIB in 2016). It is assumed that these loans are drawn down in index-linked form on an amortising repayment basis with an average loan life of approximately 10-years. 32
Credit rating summary Aim to at least retain current credit ratings for UUW (Moody s = A3, S&P = BBB+) supports efficient access to debt capital markets Moody s Investors Service (Moody s) UUW* rated A3, UU rated Baa1. Stable outlook for both companies threshold for A3 rating: net debt to RCV ratio below 68% and adjusted interest cover above 1.6x Standard & Poor s (S&P) UUW* rated BBB+, UU rated BBB-. Positive outlook for both companies adjusted FFO-to-debt threshold for a BBB+ rating is 9-10% * Any notes issued by UUW s financing subsidiary United Utilities Water Finance PLC (UUWF) are expected to be rated in line with UUW s credit rating 33
Water regulation and PR19
Ofwat s legal duties Primary Ensure companies properly carry out their functions Ensure companies can finance their functions Protect interests of consumers, wherever appropriate by promoting effective competition Secondary Promoting economy and efficiency Contributing to the achievement of sustainable development Ensure Ofwat gives no undue preference 1 Secure the long-term resilience of water and sewerage systems 1 1 added as part of the Water Act 2014 35
Regulatory capital value Market capitalisation (shortly after flotation) + Pre 2015: Capital investment 2015-20: RCV additions (from totex) - Pre 2015: Capital charges 2015-20: RCV run-off +/- Inflation adjustment = Regulatory capital value (RCV) Plus other adjustments at each price control 36
Growth in UUW regulatory capital value (RCV) 1 Attractive long-term growth 12,000 Average growth rate of > 350m p.a. from privatisation through to 2020 1 10,000 m 8,000 6,000 4,000 2,000 0 1990 1995 2000 2005 2010 2015 2020 Further environmental improvements and adaptation to climate change should continue to drive long term growth 1 Outturn prices: 2015-20 growth based on the RCV published in the final determination and assuming an inflation rate of 2.5% p.a. 37
Ofwat s final determination December 2014 Weighted average cost of capital 2015-20 Debt Real pre tax 2.59% 1 Equity Real post tax 5.65% Notional gearing 62.5% WACC Appointee business (vanilla, real) 3.74% 2,3 Includes retail margin allowance of 0.14% Wholesale business (vanilla, real) 3.60% 2 1 Assumes ratio of 75% embedded debt / 25% new debt. Cost of embedded debt = 2.75% & cost of new debt = 2.1%. 2 Quoted ratios for non-enhanced companies. Enhanced companies received a slightly higher appointee WACC of 3.85%/ wholesale WACC of 3.70% 3 2010-15 WACC (vanilla, real) of 5.1%; derived from pre-tax debt of 3.6%, post-tax equity of 7.1% and a notional gearing of 57.5% 38
Water 2020 UU actively participating Market reform Water 2020 Water resources Raw water distribution Water treatment Treated water distribution Sewer collection Sewage treatment Sludge treatment Sludge disposal Water resources Water network plus Wastewater network plus Sludge treatment, transport and disposal Achieve full allowance across all four price controls Compete for enhancement projects > 100m 39
Ofwat Water 2020 Key points so far Indexation Confirmed phased transition from RPI to CPI (or CPI-H); CPI/CPI-H will apply 100% for revenues 50% applied to opening wholesale RCV in 2020 with new additions in 2020-2025 allocated to CPI(H) portion; further transition likely at PR24 and beyond Water resources Separate total revenue control to incentivise competition Bioresources Separate average revenue control for sludge treatment and disposal Direct procurement encouraged for discrete projects with a whole life totex > 100m discrete, enhancement, non-sludge projects only Cost of debt methodology proposed move to indexation of cost of new debt embedded debt assessed with reference to sector embedded debt costs and market benchmarks 40
PR19 key dates Engaging with Ofwat on price review process Date Event 11 July 2017 Ofwat publish methodology consultation 25 August 2017 Companies to respond to Ofwat s methodology consultation 29 September 2017 Companies to submit Bioresources RCV allocation December 2017 January 2018 March 2018 Ofwat publish final methodology and risk based review Companies to submit Water Resources RCV allocation Companies submit special factor claims 3 September 2018 Companies to submit business plans July 2019* December 2019* Draft determination Final determination * Current view with further clarification expected in the July methodology consultation 41
Supporting information Where we operate 2016/17 full year results ODI performance 2016/17 additional detail on selected ODIs Financial risk reduction PR14 regulatory framework and final determination Recent UK regulated water M&A transactions
Where we operate Regulated UK water & wastewater business Customer premises Water 3.2m Wastewater 3.2m Regional population of around 7 million 43
2016/17 full year results
Reported income statement One-off tax credit and profit on disposal enhance earnings m Year ended 31 March 2017 2016 Revenue 1 1,704.0 1,730.0 Operating expenses (733.6) (798.4) EBITDA 970.4 931.6 Depreciation and amortisation (364.9) (363.7) Operating profit 605.5 567.9 Investment income and finance expense (189.0) (219.4) Profit on disposal of non-household retail business 22.1 - Share of profits of joint ventures 3.8 5.0 Profit before tax 442.4 353.5 Tax (8.5) 44.0 Profit after tax 433.9 397.5 Earnings per share (pence) 63.6 58.3 Total dividend per ordinary share (pence) 38.87 38.45 1 UU Water appointed: 1,671m, UU Water non-appointed: 9m, Non UU Water: 24m (2016/17) 45
Underlying income statement Good financial performance m Year ended 31 March 2017 2016 Revenue 1 1,704.0 1,730.0 Operating expenses (567.9) (594.0) Infrastructure renewals expenditure (148.3) (168.2) EBITDA 987.8 967.8 Depreciation and amortisation (364.9) (363.7) Operating profit 622.9 604.1 Net finance expense (237.3) (201.0) Share of profits of joint ventures 3.8 5.0 Profit before tax 389.4 408.1 Tax (76.0) (82.8) Profit after tax 313.4 325.3 Earnings per share (pence) 46.0 47.7 Total dividend per ordinary share (pence) 38.87 38.45 1 UU Water appointed: 1,671m, UU Water non-appointed: 9m, Non UU Water: 24m (2016/17) 46
Profit before tax reconciliation m Year ended 31 march 2017 2016 Operating profit 605.5 567.9 Investment income and finance expense (189.0) (219.4) Profit on disposal on non-household retail business 22.1 - Share of profits of joint ventures 3.8 5.0 Reported profit before tax 442.4 353.5 Adjustments: Water quality incident - 24.8 Flooding incidents in Dec 15 (net of insurance proceeds recognised) 1.4 (0.6) Non-household retail market reform 1 5.8 11.1 Restructuring costs 10.1 0.9 Profit on disposal on non-household retail business (22.1) - Net fair value losses/(gains) on debt and derivative instruments (24.3) 26.3 Interest on swaps and debt under fair value option 15.4 16.5 Net pension interest income (10.2) (3.1) Capitalised borrowing costs (29.1) (21.3) Underlying profit before tax 389.3 408.1 1 Relates to market reform restructuring costs incurred preparing the business for open competition in the non-household retail market 47
Profit after tax reconciliation m Year ended 31 March 2017 2016 Reported profit after tax 433.9 397.5 Adjustments: Water quality incident - 24.8 Flooding incidents in Dec 15 (net of insurance proceeds recognised) 1.4 (0.6) Non-household retail market reform 1 5.8 11.1 Restructuring costs 10.1 0.9 Profit on disposal of non-household retail business (22.1) - Net fair value losses/(gains) on debt and derivative instruments (24.3) 26.3 Interest on swaps and debt under fair value option 15.4 16.5 Net pension interest income (10.2) (3.1) Capitalised borrowing costs (29.2) (21.3) Deferred tax credit - change in tax rate (58.2) (112.5) Agreement of prior years' tax matters (15.5) (3.4) Tax in respect of adjustments to underlying profit before tax 6.2 (10.9) Underlying profit after tax 313.3 325.3 Basic earnings per share (pence) 63.6 58.3 Underlying earnings per share (pence) 45.9 47.7 1 Relates to market reform restructuring costs incurred preparing the business for open competition in the non-household retail market 48
Underlying operating costs Movements m Year ended 31 March 2017 2016 Movement Revenue 1,704.0 1,730.0 Employee costs (140.9) (143.7) 2.8 Hired and contracted services (93.4) (96.8) 3.4 Property rates (91.6) (86.3) (5.3) Materials (62.8) (62.7) (0.1) Power (68.7) (65.0) (3.7) Bad debts (29.9) (39.2) 9.3 Regulatory fees (26.8) (24.9) (1.9) Third party wholesale charges (3.0) (15.1) 12.1 Cost of properties disposed (8.6) (10.5) 1.9 Other expenses (42.2) (49.8) 7.6 (567.9) (594.0) 26.1 Infrastructure renewals expenditure (IRE) (148.3) (168.2) 19.9 Depreciation and amortisation (364.9) (363.7) (1.2) Total underlying operating expenses (1,081.1) (1,125.9) 44.8 Underlying operating profit 622.9 604.1 Adjustments: Water quality incident - (24.8) Flooding incidents (net of insurance proceeds) (1.5) 0.6 Business retail market reform 1 (5.8) (11.1) Restructuring costs (10.1) (0.9) Reported operating profit 605.5 567.9 1 Relates to market reform restructuring costs incurred preparing the business for open competition in the business retail market 49
Bad debt and cash collection Sustainable improvement Household bad debt as a percentage of regulated revenue reduced to 2.5% in 2016/17 from 3.0% in 2015/16 Reflects Better cash collection in both 2015/16 and 2016/17 More help for customers struggling to pay Bad debt will continue to be one of our principal challenges because the North West is the most deprived region in England 50
Finance expense Underlying interest charge lower m Year ended 31 March 2017 2016 Investment income 13.7 5.0 Finance expense (202.7) (224.4) (189.0) (219.4) Less net fair value (gains)/losses on debt and derivative instruments (24.3) 26.3 Adjustment for interest on swaps and debt under fair value option 15.4 16.5 Adjustment for net pension interest income (10.2) (3.1) Adjustment for capitalised borrowing costs (29.2) (21.3) Underlying net finance expense (237.3) (201.0) Average notional net debt 6,232 5,853 Average underlying interest rate 3.8% 3.4% Effective interest rate on index-linked debt 3.7% 2.8% Effective interest rate on other debt 3.9% 4.2% 51
Finance expense: index-linked debt Cash benefit for the group m Year ended 31 March 2017 2016 Cash interest on index-linked debt (48.2) (51.2) RPI adjustment to index-linked debt principal - 3 month lag 1 (65.6) (27.7) RPI adjustment to index-linked debt principal - 8 month lag 2 (15.1) (10.2) Finance expense on index-linked debt (128.9) (89.1) Interest on other debt (including fair value option debt and swaps) (108.4) (111.9) Underlying net finance expense (237.3) (201.0) Cash interest payment of 48m on c 3.6bn of index-linked debt Increase in indexation charge mainly due to higher RPI on 3 month lagged debt RPI impact on RCV exceeds RPI impact on debt principal 1 Affected by movement in RPI between January 2016 and January 2017 2 Affected by movement in RPI between July 2015 and July 2016 52
Financial position Robust capital structure m At 31 March 2017 2016 Property, plant and equipment 10,405.5 10,031.4 Retirement benefit surplus 247.5 275.2 Other non-current assets 384.2 208.7 Cash 247.8 213.6 Other current assets 333.4 412.3 Total derivative assets 807.7 765.6 Total assets 12,426.1 11,906.8 Gross borrowings (7,384.5) (6,978.0) Other non-current liabilities (1,620.8) (1,592.5) Other current liabilities (349.5) (369.1) Total derivative liabilities (249.7) (261.7) Total liabilities (9,604.5) (9,201.3) TOTAL NET ASSETS 2,821.6 2,705.5 Share capital 499.8 499.8 Share premium 2.9 2.9 Retained earnings 1,991.2 1,878.8 Other reserves 327.7 324.0 SHAREHOLDERS' EQUITY 2,821.6 2,705.5 NET DEBT 1 (6,578.7) (6,260.5) 1 Net debt includes cash, borrowings and derivatives 53
Movement in net debt * Moderate increase in line with expectations * Net debt includes derivatives which incorporate regulatory swaps 54
Derivative analysis Derivatives intrinsically linked to debt m At 31 March 2017 2016 Derivatives hedging debt 810.0 764.5 Derivatives hedging interest rates beyond 2015 (243.0) (242.1) Derivatives hedging commodity prices (9.0) (18.5) Total derivatives assets and liabilities 558.0 503.9 Derivatives hedging debt; hedge our non index-linked debt into sterling, floating interest rate debt. Typically these are designated in fair value hedge accounting relationships Derivatives hedging interest rates beyond 2015; fix our sterling interest rate exposure beyond 2015. This is in line with our strategy of fixing interest on a 10 year rolling average basis. This is supplemented by fixing substantially all remaining floating exposure across the future regulatory period around the time of the price control determination Derivatives hedging commodity prices; fix a proportion of our future electricity prices in line with our policy Derivatives are included within net debt to eliminate, to a certain extent, the fair value recognised in borrowings and thereby present a more representative net debt figure Further details of our group hedging strategy can be found in the Group financial statements 55
Cash flow statement Cash from operations covers investing activities m Year ended 31 March 2017 2016 Net cash generated from operating activities 820.8 685.6 Net cash used in investing activities (804.6) (676.8) Net cash generated from/(used in) financing activities 22.0 (46.4) Net movement in cash 38.2 (37.6) 56
ODI performance 2016/17 Additional detail on selected ODIs
Outcome delivery incentives (ODIs) Wastewater ODIs strong performance areas Worse Better Worse Better 58
Outcome delivery incentives (ODIs) Wastewater ODIs challenging targets Worse Better Worse Better 59
Outcome delivery incentives (ODIs) Water ODIs challenges in 2016/17 Better Worse Better Worse 60
Outcome delivery incentives (ODIs) Water ODIs best ever leakage performance Better Worse Best ever leakage performance Significant focus on detection, repair times and pressure management Self learning pressure management valves with new central control Systems Thinking approach in action 61
Financial risk reduction
63
Risk reduction Pensions Innovative mechanism reduces funding risk Innovative inflation funding mechanism (IFM) designed to facilitate: use of UU s natural RPI hedge a lower risk investment strategy Natural RPI hedge pension scheme deficit funding based on fixed inflation assumption UU contributions flexed for difference between assumption and actual RPI inflation risk hedged through RPI indexation of RCV IFM covers approximately half the pension scheme liabilities, with the other half covered by external market hedging Lower risk investment strategy pension assets <25% equities or other high risk assets underlying interest rates largely hedged through external market swaps and gilts approximately 50% of liabilities hedged for inflation through external market swaps and index-linked gilts Significantly less volatility in UU pension scheme funding levels 64
PR14 regulatory framework and final determination
Price control structure for 2015-2020 Wholesale Water Domestic Retail Business Retail Wholesale Waste Water Cost to Serve Default Tariff 66
Ofwat s PR14 final methodology Notional capital structure retained Continuation of RCV approach for wholesale controls; indexed to RPI Companies permitted to submit special factor claims 67
Price Review Building blocks for allowed Wholesale revenues 68
Ofwat s final determination December 2014 Allowed revenues m 2015-16 2016-17 2017-18 2018-19 2019-20 AMP6 total Wholesale water (2012/13 prices) 654 660 666 672 679 3,331 Wholesale wastewater (2012/13 prices) 775 783 792 800 804 3,954 Wholesale revenue (2012/13 prices) 1,429 1,443 1,458 1,472 1,483 7,285 Retail household (nominal prices) 132 128 121 116 119 616 Retail Non-household (nominal prices) 36 37 37 38 38 186 Retail revenue (nominal prices) 168 165 158 154 157 802 Total revenue (variable price base)* 1,597 1,608 1,616 1,626 1,640 8,087 * Not consistent with statutory accounting / IFRS revenues 69
Ofwat s final determination December 2014 Adjustments for 2010-15 performance Revenue adjustments largely accepted: 132m allowed relating to 2010-15 period derives mainly from revenue correction mechanism and opex incentive allowance Good serviceability performance: did not receive a penalty all four asset classes rated at least stable for 2013/14 Significant improvements in SIM moved UU into no penalty zone notable achievement given AMP5 starting position as an outlier 70
Ofwat s final determination December 2014 Wholesale price controls Wholesale totex FD threshold of 5,328m 1 (2012/13 prices) 188m below UU October proposal of 5,516m but 427m higher than DD, reflecting additional totex exclusions accepted Wholesale totex in revenue calculation of 5,296m 2 (2012/13 prices) split: 2,356m water and 2,940m wastewater Wholesale pay as you go ratios: water =66%, wastewater =50% pay as you go ratio flexed in line with allowed totex Allowed wholesale revenue of 7,285m (2012/13 prices) split: 3,331m water and 3,954m wastewater Nominal growth in the RCV of c 1.5bn (c15%) across 2015-20 comprising c 0.2bn real growth and c 1.3bn RPI uplift (assuming 2.5% p.a. RPI) 1 Includes pension deficit repair allowances 2 Combines Ofwat s estimates of efficient costs with the companies forecasts in the ratio 75:25. Excludes pension deficit repair allowances 71
Ofwat s final determination December 2014 Retail price controls Allowed retail household revenue of 616m (nominal prices) 20m p.a. special factor claim relating to income deprivation allowed reflects impact of the extreme levels of deprivation in the North West on our costs includes bad debt and associated costs Allowed retail non-household revenue of 186m (nominal prices) No inflationary increases allowed on retail price controls 72
/household Ofwat s final determination December 2014 Average household bills 500 Average household customer bill - combined ( ) 475 RPI* 450 425 Average bill 400 375 350 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 *Assumes 3% p.a. RPI inflation from 2017/18 to 2019/20 73
Impact of RPI inflation Short-term timing differences 2016/17 Regulated revenue Nov 14 to Nov 15 RPI 1 movement --> 1 Apr 16 price limits (2016/17 financial year) Dividend policy (target of at least RPI p.a.) Nov 14 to Nov 15 RPI --> 2016/17 dividends (mirrors RPI in price limits) Regulatory capital value (RCV) Opening RCV inflated by Mar 16 to Mar 17 RPI Plus RCV additions (from totex) in the year --> 31 Mar 17 RCV (year-end gearing calc.) Index-linked debt 2 Jan 16 to Jan 17 --> adjustment to principal for 2016/17 (debt on 3 month lag) Jul 15 to Jul 16 --> adjustment to principal for 2016/17 (debt on 8 month lag) 1 Retail Prices Index (RPI) 2 Indexation of principal is calculated based on monthly movements in RPI 74
Recent UK regulated water M&A transactions
Premium to RCV Recent UK regulated water transactions Premium to RCV 60% UK regulated water M&A transactions 50% Dee Valley** 40% 30% 20% Cambridge S Staffs Mid Kent Sutton Bristol Southern S East East Surrey Yorkshire Thames Anglian Northumbrian Sutton & East Surrey Veolia UK water only companies Bournemouth* 10% 0% Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 *Bournemouth acquisition c25% RCV premium based on a book value of debt, but >50% RCV premium based on fair value of debt **Dee Valley acquisition c50% RCV premium based on a book value of debt, but c100% RCV premium based on fair value of debt Source: JP Morgan to Dec 10, Deutsche Bank from Jan 11 76
Cautionary statement This presentation contains certain forward-looking statements with respect to the operations, performance and financial condition of the group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this presentation and the company undertakes no obligation to update these forward-looking statements. Nothing in this presentation should be construed as a profit forecast. Certain regulatory performance data contained in this presentation is subject to regulatory audit. 77