United Utilities Group PLC (UU) Earnings Call Transcript & Summary

Hello, and good afternoon, and welcome to United Utilities Capital Markets Day 2021. I'm Steve Mogford, Chief Executive, and I have members of my leadership team with me. So running from my left across. We've got Phil Aspin, CFO; Lou Beardmore, essentially is customer and Customer Service and People. We've got Kevin Fowlie, who's Commercial Capital Delivery and Engineering. And then we've got Simon Chadwick, who's responsible for all of our systems activity and operations across the business. This follows a short series of videos that we released last night. Covering off each of the areas of responsibility for the senior team and talking about how we've performed in this first year of AMP7, a particularly challenging year. Not just because of the pandemic, but also because of many of the weather conditions we've experienced during the period. But I think the bottom line is that we've had the best year ever in terms of operational performance, that's translated through into excellent customer satisfaction. And we're seeing the benefit of all of the investment we made in AMP6, all of the fast track work that we did ahead of AMP7. And our fast track status under PR19 now paying through into improved ODI performance and delivering value, not just to shareholders but also to customers in the environment in all the things that we're doing. I hope you've had opportunity to see some or all of the videos. I would ask that if you haven't had time at some point, you do take time to look through each of the videos. There's quite a lot of material in there. And I hope it's worthwhile for you and getting a better understanding of where we are. But this session is really about an opportunity to ask questions of myself and the team, either on content in the video or other areas of particular interest. And the way that we're going to do this is we've got a number of people who are currently on MS Teams and are, therefore, participating in a virtual way in this Q&A session. And we're also -- you can on the website, you can post questions, which we'll pick up as well. So I suppose, without further ado, what I'd like to do is start questions.

And the first is from Pavan Mahbuban, JPMorgan, who has registered a question. So Pavan, would you like to give us your first question?

I've got 3 questions, please. So firstly, looking at the strong start to ODI performance. And the sort of up to GBP 20 million reward for this year. Given the cumulative nature, do you think it's unreasonable to expect a cumulative reward sort of around or north of GBP 100 million for AMP7? Second question is looking at the uptick in bond yields in recent weeks. Do you expect that to affect your investment plans, either in the near or medium term? And sort of how does that affect your view on financing out performance? And then my last question is just quickly on maybe your thoughts on some of the proposals in yesterday's budget. So maybe your preliminary thoughts, looking at the impact of super tax deductibility as well as the proposed increase in corporation tax and how you expect the impact, if any, on your earnings and credit metrics? And those are my questions.

Okay. Thanks very much. Well, I'll ask Phil to pick up the second question -- 2 questions that you put there. But I think first on ODIs. I mean, clearly, we're very pleased with where we are the beginning of AMP7 with the trajectory we've got for end of year with up to GBP 20 million reward. If you think about back to AMP6 where we were, I think we were around GBP 2.5 million at this point and GBP 44 million across full AMP6. So I think we have stepped up the game and seeing the benefit of all of the work that we've been doing this year. As Lou said in her video, there are a number of customer ODIs this time around, on which she's performing particularly well. And, where she can also see future value. She talked about a GBP 24 million potential across the AMP or one of the ODIs. So it doesn't take much in adding up where we are in year 1 and just Lou's potential to see that the AMP6 total that we had of GBP 44 million cumulative looks like a very achievable target. I think where we'll actually be Pavan, by the end of the period, we'll update as we go. But clearly, we're expecting to do significantly better than we did in AMP6. And the run rate that we're achieving so far, I think, supports that also with the projections that you're seeing. So we're not giving a figure at this point in time, but certainly, we're going to do significantly better than the GBP 44 million. Phil, would you like to pick up? While we are doing that, we do Phil. I'll pick up. We've had a couple of questions come in, which I think are on similar themes to Pavan. First is impact of the change in U.K. corporate tax rate on your group tax charge, both P&L and cash and on your deferred tax liabilities is one of the questions that we've got. And that came from [ Misha ]. And then from Peter Hyde, will U.K. tax corporation tax rate change 2023? And 2021 and 2022 investment super deduction tax be reflected in an Ofwat true-up or will you benefit? And we've got another one in from Andy Wilson, which is super deduction change, the time of your capital program? And if so, by how much? And how would it affect things like green scheme? So a lot in that theme. So if we can try and wrap up all of that in your answers, yes.

Okay. Well, perhaps if I take Pavan's first question on the uptick in bond yields first and then deal with the implications of yesterday's budget. So sort of, I guess, the short answer on the uptick in yield Pavan is financing outperformance is pretty much locked in, in the context of sort of our base financing position. So effectively, the uptick in bond yield is only relevant in terms of future debt issuance and the amount of new debt through the rest of the AMP. We have about GBP 2.4 billion of debt to raise this AMP. We've made a great start already. So we've already raised GBP 900 million. And in that context, many of you will be familiar with the debt indexation mechanism that Ofwat has this AMP for effectively the new debt that's raised during the period. And so the relevant sort of yardstick is really how you compare against that metric. So as rates tick up, that sort of metric will tick up as well. So it's all about outperforming that position. And on the sort of discussion yesterday, I was highlighting that the treasury team do a great job in terms of performing well against debt issuance. And typically -- we are typically outperforming that metric by around about 50 to 100 basis points. So we're in a great space with a locked in position. We've raised GBP 900 million of the GBP 2.4 billion already at the lower rates. If rates tick up, then effectively, it's all about outperforming the benchmark. So I believe we'll continue to be able to do that. So very positive for the financing outperformance. In terms of yesterday's budget, I suppose there's a few angles to this. Clearly, the sort of super deductibility in terms of capital allowances and for both plant and machinery, 130% and long-life assets of 50% applying for the next 2 years. And so that will generate a sort of cash benefit to the business through those 2 years. And then at the back end of the AMP, in FY '24 and FY '25, we have the higher rate of corporation tax at 25%, which will have a drag on the corporation tax position. So as a consequence, effectively, the impact of all of that sort of that will be positive in the first 2 years and sort of negative in the sort of last 2 years. Really important to say that on the sort of the tax situation, there is a true-up mechanism that Ofwat has through the price control. And so changes in corporation tax and capital allowance rates flow through that mechanism. And as a consequence, that will be an adjustment -- a price adjustment that will flow back to customers in part of the next AMP. And lastly, just to sort of say, it is very complicated in the context of the capital allowance position because the devil is always in the detail. I think the detail was published this morning. And as a consequence, there are -- so a number of categories that are excluded, it's all about commitments, new commitments that are being entered into rather than long-term ongoing commitments. So all of that needs to be worked through. But I would expect the net position to be mildly cash positive through the AMP to the tune of perhaps up to sort of GBP 40 million or GBP 50 million on the initial numbers we've run. On the deferred tax side, which is a bit more straightforward, I would say the deferred tax position having a sort of atypical charge when it's all enacted of around about GBP 450 million. As you know, deferred tax isn't something that is sort of an issue in the context of a regulatory contract because effectively, the tax position is reset at each price control. And what really matters is the cash tax position. So it will be an accounting charge, but it won't have any impact on the economics.

Okay. Thanks, Phil. I hope that dealt with questions from Pavan and others. Next question we've got is Martin Young from Investec.

Yes. And I just have one question at the moment. And that's around the bigger picture for regulation. Obviously, we've got 4 appellants against PR19. I guess we're going to find out the CMA's final position on that next week. And then we've got the whole of the energy sector referring parts of the Ofgem final determinations to the CMA. So I just wondered what your sort of thoughts at this stage are around the appropriate levels of cost of equity for the water industry? Obviously, I'm cognizant of the fact that you accepted fast tracking your package. But all the signs at the moment are potentially pointing to a higher number than the one that Ofwat set before. And as we start to think about what PR24 might bring? Maybe you could give me some comments around the cost of equity and why not sort of throw in investment needs? And what that might mean for totex [indiscernible] and beyond?

Okay. I'll let Phil pick up on cost of equity as well. But I think what's clear coming through in PR19 is under CMA appellants is in terms of returns to investors in regulated sector, water and obviously now energy. There is a question about are the levels of return that are being afforded? Are they actually correct? And we've seen certainly the draft opinion from the CMA there. I think put that in the context that there's a huge amount to do in the U.K. in terms of infrastructure for the water sector alone just dealing with the impact of climate change, whether that be resilience of water supplies, flood resilience, population growth, there's a huge amount still to do to give us the levels of resilience that we want. So I think attracting investment into the U.K. for those things is important. I don't think the public purse certainly post-COVID can do it. So we're going to need debt and equity investors to be attracted to the sector and continue to be attracted. And I think that's a theme that has been coming through. So we'll see what happens for water. And obviously, as you say, we've just seen that issue raising its head in energy as well. I think the other element for me that's important looking forward is that whole question of resilience. And it's a very challenging issue to get your head around. And I think actually very difficult for regulators to get their heads around in terms of a real understanding of what's needed. In the water sector, our regulator now has a resilience duty along with all the others. And I know it's an area they're putting a lot of time and energy into, along with the sector in understanding how we can look at things like asset conditions, how we can understand the impact of climate change. And ahead of PR24, there will be a number of critical inputs dealing with, for example, drainage programs, looking at climate change forecasts, understanding what needs to happen to the drainage systems around the U.K. and what that means from an investment perspective as we go into PR24. I think the other element, if you look at what happened in the summer or the spring actually of 2020, when we had that extremely dry weather during lockdown. Perhaps it was something of a portent of the future. In that, we had a lot of people at home, very good weather, very, very high demand and peak demand sometimes, which was double-digit increases in the amount of water that needed to be supplied. And in that case, it wasn't necessarily that we didn't have enough raw water. What we were struggling with as a sector. And you saw this pinch points around the country was the ability to produce and more importantly, distribute the amount of water that was needed. Now that's going to -- as population growth continues to buy, and as we start to see weather patterns change, we could expect to see that more and more. So we've got to deal with that in terms of future investment needs. So I think PR24 is going to be a very significant point in understanding what we've got to do to address that overall resilience obligation, both in terms of supply of water, but then how we deal with wastewater. So I think certainly, as we look to PR24, those are some of the big issues that we're dealing with in things like our drainage management plans and also our water resource management plans, all of which precede the actual business plan. So well ahead of that. We've talked about things that we need to do. And the analysis suggests they're going to be necessary from PR24, PR29 and beyond in terms of things that we do. Phil, any particular comment?

Yes. I suppose just adding on the sort of cost of equity, Martin. I think the CMA's position, I think, is quite clear. I think cost of equity is a bit of an art rather than a science. And I guess what we've sort of really been saying is that in the context of setting the cost of equity, it's all about the incentives and what you're trying to sort of encourage investors to do. And I think, therefore, now they've taken the view that you need to aim up to effectively encourage investment in the sector that's trying to bring capital into it to support investment. So I think, as a principle, very clear what we're saying there. And I think from my perspective, when I look at that and I look forward, it's all about how you see the investment needs and requirements going forward. And the extent to which these industries and businesses are operating in a steady state environment or actually are facing a large ongoing investment needs and requirements. So Steve just talked about, I think that's the key, so the question really as we head into PR24.

And I think just a supplementary to that, Martin, was when we looked at what the cost of equity, the WACC ought to be, we obviously had a range as we went into PR19. I think Ofwat initially positioned pretty much towards the bottom of that range. What CMA has done is sort of nudged it closer to the middle of the band. But I think Ofwat wasn't wildly out of the range. And we took the decision in the round in terms of our settlement as to whether we were happy with the package rather than individual elements, and that was the consideration that we had. I'll just quick flip next to one of the questions we've had come in on Slido. And this one is from Dominic Nash. And the question is, how do you look at the relationship between totex and ODIs? Do you look at the cost of totex post sharing versus AMP7 ODI return? And how will balancing this affect AMP8? I think it's absolutely spot on in terms of looking at how we consider investment and return on investment. Clearly, when we saw our performance in AMP6, where against our base scope for AMP6, we performed to the tune of about GBP 100 million of totex outperformance. And going into AMP7, I think we were targeting something similar. But I think it's what's clear is that when you actually look at the opportunity for ODIs, then certainly, we're considering a situation where we look at the return that we get on ODIs for totex investment. And I think when you're looking at ODIs, you're looking at underlying operational performance. And one can only imagine, I think all the signals are from Ofwat that AMP8 will have ODIs as one of its features that we're likely to see a set of common ODIs again as we've got in AMP7, they're common across the sector. And we can expect that we're going to see incentives and penalties around companies achieving upper quartile performance again. And one can also imagine that the frontier is going to move during AMP7 as companies improve. You've seen the levels of improvement we've achieved in year 1. Other companies are also seeing improvement. So that frontier, that upper quartile frontier is going to move. So I think as you look at ODIs and the performance it represents, there is certainly an advantage for customers environment and shareholders, in particular, in actually thinking about the long game rather than the short game of pure totex outperformance. And that's the way we consider. Clearly if you look at the menu regime that applies, as you know, totex underspend and overspend is subject to a sharing mechanism, roughly 50-50 for us. It changes dependent upon where you were, whether you were fast-tracked or not. And you've got to take that into account in the context of the investment and the return you're getting. So that's the way we're looking at it. And I very much believe that as we go through if we see an opportunity, not only to outperform in AMP7, but to position ourselves for future outperformance in AMP8 through investment of totex, then it's likely that that's the route it will take. Okay. Next question. Mark Freshney, Crédit Suisse. So Mark, can we have your question, please?

Yes. Just to follow-up. I mean, I accept that there's the trade-off between totex efficiencies and ODIs. But I mean, as I see it, the GBP 20 million you're guiding for this year is fairly low. Let's be frank, right? The base return on equities are very low, much lower than they used to be. And what you've got this year is an extra 20 bps pretax return on equity. Post tax, it's like 16 bps. The totex efficiencies can be substantial given the GBP 6 billion you've got. I mean, as you've seen with [ pen ] on the kind of savings that they can get in Southwest Water are massive. So is there anything that you can give us on potential totex efficiencies in this review, separate to the trade-off between ODIs and totex to try and bump up those all-in returns because a 6.2% real base return with financing, et cetera, you're probably not going to get much above 8, unless you can really ramp up the totex efficiencies?

I think the issue, when you look at totex is, again, understanding the environment in which you're operating and essentially what you're doing with totex. Effectively, this is a long-term business. And decisions that you make now, you're going to live with for 10, 20, 30, even longer with some of the investments that you're making. We very much take that position where we're looking at investing for the long term and for long-term resilience and sustainability of performance. So I think in that sense that like others, AMP7 is a challenging period for us in terms of the overall FD allowance that we have. We could -- and clearly, we play the trade-off between whether we get totex efficiency. Whether that totex efficiency is a compromise of the future, effectively you're sacrificing future resilience, future sustainability of the business. And I think we very much take the view that if we can deliver value through ODIs, which essentially is driving long-term performance and long-term outperformance against sector-wide targets. Then that's actually to our advantage and to shareholder advantage rather than necessarily taking short-term savings and finding actually that we leave ourselves with an even bigger challenge as we come into subsequent periods. But I think I can assure you, Mark, in all the work that we're doing, that we're constantly trading off the opportunity for efficiencies and totex savings as against infrastructure needs, resilience, sustainability and ODIs. But I think look to the long term is the principle under which we operate. I have another question here from Ruth Williams, which says. There was a lot of mention of ESG, and will the company be formalizing anything in a social contract or similar? Thank you. Phil, you talked a lot about ESG. Do you want to pick that one up?

I mean, I guess, it plays very much to sort of our purpose and how we sort of set out our position. So I think providing great water in North and the Northwest sort of is very much at the heart of what we do. I think in doing all of that, I don't necessarily feel we need to go that stage further in terms of sort of fully [ forged ] social contract. But I think it's all about the actions we're taking and how that's positioned, really.

Yes. I think when you look at this, Ruth, there are a number of different approaches that people have taken. I mean purpose is a big question at this point in time for companies. And notwithstanding the fact you might think the purpose for a water company is pretty obvious. We've given it a huge amount of thought in terms of not only our relationship to shareholders, the customers, the environment, the communities in which we operate and understanding how our values contribute to that. But what we've not tended to do is to look at perhaps any amendments to things like Articles of Association or we're members and assessed by so many different bodies, assessment communities and the things that we do, as you see, if you get opportunity, look in the video. I think for us, a lot of this is about what you do rather necessarily what you say. And I think we're very much demonstrating our commitment to ESG to responsible capitalism. I sometimes talk about it through the action. So whether it be the assistance that we're giving to customers in a very socioeconomic deprived region in the country, whether it's the engagement with schools, whether it's the relationship we have with partners in the environment and the things that we're doing around overall catchment management. There's a huge amount that goes on in the company, which essentially underpins the ESG credentials for the company. And Phil talked in one of the videos about the recent bonds that we've issued under that ESG banner in terms of that -- those sustainable bond issues, where we've had enormous take-up in recognition of the company's credentials. So I think rather than necessarily seeing us draft in contracts or amending Articles of Association, what you'll see is evidence of our ESG commitment in everything that we do. Okay. Move on. James. James Brand from Deutsche. Question from you, please.

Can you hear me okay?

Yes. We hear fine.

Okay. Thanks for the presentation. So 2 questions. The first is on totex. So you've been asked a few times on the kind of trade-off between totex and ODIs that you've had a big spend already this year with your quick start. And I was wondering whether you could comment on whether you'd outperform on totex this year or whether we should be thinking about you being more in line with the allowance? And then the second question is for Phil. And you commented quite a few times in your presentation that you're very happy with having the very strong balance sheet that you have. Just wondering whether you could talk about how you think of the trade-off there? Because obviously, there was a trade-off between having a strong balance sheet. It's a great position to be in, on one hand, but there are a lot of regulated utilities often try and put in place more leverage to try and enhance their equity return. And we saw a decision from National Grids this week to accept a reduction in their credit rating rather than launch a capital increase or capital dividend. Obviously, you're not quite in a position where you haven't to make decisions to forego anything because you're in such a stable position and maybe some thoughts on that would be very interesting?

Okay. I'll pick up the totex question, and then Phil, if you want to do that. I think as far as totex is concerned, in fact, we're -- we've spent more than our business plan this year, James, because principally, we've accelerated our capital expenditure program. So over the first couple of years of the plan, we've accelerated about GBP 500 million of totex into years 1 and 2. And so if you look at that, in the context Phil of your underlying question of have we spent more or less than we planned? We've spent more, but very deliberately. If you look at that in the context of are we on track for totex efficiencies? Yes, we are. We set ourselves out to deliver totex efficiency broadly in line with AMP6. And I think we remain in a position where that's our objective as we get to the end of the period. But I said in one of the earlier questions -- in the answers to earlier questions, I could well see that changing as we go through the period as we see opportunity to improve our ODI position. So the answer is okay at the moment, on track with what we see as being the total AMP expenditure. But we've pulled a lot of that forward. So when you look at our expenditure in year 1, it's beyond plan, beyond original plan in PR19. Phil?

Yes. Thanks, Steve. I guess picking up the question, James, about capital structure. I guess as you say, we're not quite in the same position as National Grid sort of very comfortable with the capital structure we currently have. I think it's probably important to recognize a substantial amount of financing outperformance that's generated from being in that strong position. And I think [indiscernible] is in good stead over the last couple of AMPs and he's supporting us very positively through this AMP. And I know National Grid were quite sort of [ lens ] to sort of explain the impact on the potential credit metrics and the cost of debt that could come about. So I think we're not in a position where we need to make that sort of call or judgment. So it's not a question we really need to answer today. But as I say, the financing outperformance is a sort of robust underpin to our capital structure going forward.

Okay. We have a question -- thanks, James. We have a question again from Dominic Nash. Simon, this one's for you. You say you have the lowest level of leakage ever, that's UU. What was it as a percentage of total water production? And where is it versus peers and their targets? And is it better if you normalize for weather than our peers or worse?

Thank you very much for the question. Quite a lot in there around leakage. And I suppose it's worth just setting the context in terms of historically, obviously, since the '90s, our leakage performance has significantly improved, a 50% improvement over the long term. And that was under a previous regime around the economic level of acceptable leakage, cost of leakage to repair versus the cost of production of water. And obviously, that world has changed over the last few years in terms of focusing on underlying performance of leakage as an absolute measure. And so we are absolutely at the lowest level we've had historically. Relative to others, there's a number of different ways of normalizing for the length of your pipes, the number of customers you're connected to, but we recognize there is more for us to do in terms of leakage. And we already set our long-term commitment to halve leakage again up to 2050. Now in terms of how weather impacts leakage and what's happened this year, absolutely, there are pressures that all companies face in terms of a water system, around weather extremes and temperature, very warm or very cold, can cause ground movement and impact leakage. But overall, we've had a really good year across the last 12 months, and our leakages as a percentage is the lowest we've had as a company. And we'll continue to reduce that percentage over the next few years.

Okay. Another question from [indiscernible] , actually. Should AMP7 investments be modest? Do you think that the asset's quality may deteriorate by the end of AMP7 which would then support more investment in AMP8? So we're seeing asset deterioration because of a modest capital investment in AMP7? Or are we holding ground? Or are we improving?

Well, yes. So I think it's a really good question around assets and asset health. That's a huge focus for us. And it's quite important health because there's an immediate view that assets health is just around the age. The older the asset, the less healthier it is, and that's absolutely one dimension. But the more important focus for us is that health, probably similar [indiscernible] ourselves is not just the age, but your ability to undergo and manage extremes. So it's my example, I suppose. And I look relatively healthy. But can I run a marathon right now or probably not. And that's some of the focus we are paying really deep attention to because in terms of the asset base, those extremes are things like climate change. So whilst our underlying health is being delivered through our maintenance program this period, we recognize actually in the future AMPs the extremes from particularly climate change, you're going to put those assets under much greater stress and pressure to perform. And that's why, I guess, if you did see some of my video, some of the investments we're making in terms of how we can monitor performance of the assets, understand the underlying health and intervene before that health impact service to customers is a vital part of our plan to ensure we can deliver in the long term against some of those external pressures on the health of the system.

Okay. Thanks, Simon. So next question from Verity Mitchell, HSBC.

Thank you very much for the presentation. They're really interesting. I've got a couple of ODI questions actually. One is about water quality contacts, which is something that you still are not meeting. I just wonder whether you could just combat that what they are, how they work and how you can improve them? And then secondly, on the green recovery, extra investment you've foreseen. You're confident you're going to get all of that GBP 145 million. And I presume that will just be a true-up at the end of the period if it's brought forward and again, will be accelerated investment. So those are my 2 for now. I'll think about more later, if you like.

Okay. Thank you. When you look at water quality contacts, I mean, essentially, there are a number of things. There's taste, odor and discoloration. And one of the issues, the characteristic of the Northern companies is that the sources of our raw water tend to be upland. And as a consequence, we get materials in raw water that are quite different in characteristic from what you'd see in the South of the country where you're tending to use aquifers, harder water, et cetera. And that tends to leave us with a situation where discoloration is more challenging for the Northern companies. And if you looked across the Northern companies, you'd see that as a characteristic and performance. Simon, do you want to talk about what you can do about it and how one might approach the levels of performance that we see elsewhere in the country?

Yes. Thanks, Steve. Thanks for the question, Verity. So as Steve mentioned, yes, there's 3 kind of key elements, the taste, the smell and the appearance. And it's as if customers contact us, that's part of how the ODI mechanism works. Over the last 12 months, we've actually delivered really good step change in performance in terms of taste and the odor aspects of that, which sometimes come about just because of customer acceptability and perhaps tasting the chlorine that we go and put into the water as part of the treatment process to ensure it's disinfected. Now as Steve mentioned, we have got some natural background to how our water resources are formed, and that can create a more likelihood of kind of the appearance issues, which is sometimes where customers will see slight element discoloration for a short period of time. And actually, over the last 12 months, our performance has been good in some areas, but actually, one of our challenges has been during the COVID lockdown. And as Steve mentioned earlier, we have seen a much larger increase in water demand. That does create an increase in the amounts of water we're putting through the network, and that can cause a small amount of that sediment to kind of be resuspended and customers to see that. So we do recognize this year, there was a small increase as part of that type of contact that has created the performance you've seen in terms of the update we did in the videos. Now actually, that's something that actually is easy to fix, providing you've got a plan in place. And we've already been creating the plan for the rest of this AMP in terms of our fast track and the investments we've set out. So there are things in terms of actually renewing some of your older network is a great way of delivering that and you get better commensurate performance in terms of leakage and interruption to supply on the other ODIs. It's what you can do in terms of cleaning the network itself, either by setting the system up itself to self clean, and we are programming that to change the pressure and flows throughout the network but don't impact customers, but help to self clean it. And then we can have cleaning teams out themselves to make sure that the pipes themselves are flushed and refreshed, and therefore, the discoloration never reaches customers. So that's all part of our plan that we've been delivering over the last 12 months and will significantly step-up in the coming months as well for next year and beyond.

But I think, Verity, when you look at that, the issue that we've got is that our regulator will actually set a standard, which is a standard for the whole of industry, regardless of, as we talk about the chemical properties of the water that we get. So it's quite a challenge. And you'll see it if you look across the Northern companies, it's a big issue for us. And as Simon has said, with putting more water through the system during lockdowns, particularly when we saw very, very high demand, we've seen more discoloration. So COVID has brought about more challenges than we would normally see in a traditional year. In terms of green recovery, when we look to green recovery, we -- we were principally looking at what's the objective? And the objective is to try and bring work forward, certainly into the first couple of years after we start to move out of COVID. Clearly, we'd already accelerated about GBP 500 million of capital into years 1 and 2. That was acceleration of investment that was already planned within PR19. We then got about another GBP 300 million of investment that essentially sits within the green recovery camp. About half of that, about GBP 150 million has already been approved. And we've talked about work effectively that we're doing one of our treatment works. We're also looking at work on one of our main aqueducts, again, to deal with things like iron deposition in the water. So about half of that green recovery, GBP 300 million, has already been approved, and therefore, we're authorized to proceed, and that's additional to our final determination. And then what you saw us put in a few weeks ago, as the next part of green recovery was just short of GBP 150 million again of items where we have very good definition of the work to be done. A lot of planning, a lot of evidence behind the solutions that are being offered and represent acceleration of things that we might otherwise do to support the environment or customers in AMP8. And it's that final GBP 150 million out of the package of about GBP 800 million that we're accelerating, which we're now waiting for Ofwat consideration. And I think we should know Ofwat's first view of that, if you think of it in the context of a draft view in May and then finally, in July. So that's where we sit with green recovery. I'll go to Slido again for some others. Question from Chris Laybutt. In fact, 2 questions. With the DNM sensor rollout in wastewater, what's the expected timeline for full delivery of that system? And which ODIs do you think would be most affected by system-wide efficiency improvement? So one for you, again, Simon.

So in the presentation I provided online, I did talk quite detailed about dynamic network management. It's our sensor network to operate the wastewater system and deliver better performance by collecting the data, analyzing it, looking for the performance of the end-to-end wastewater network and intervening before that delivers an impact perhaps to customers through targets such as sewer flooding. So our program of rollout is already underway last year. Over the last 12 months, we delivered a proof of value to demonstrate how best to go through the process of identifying where to install sensors, how to install them and how to start to get the information and insight through the machine intelligences that are -- sat on our cloud platform, sifting through reams and reams, millions of pieces of information in near real time. And so our rollout is already underway. And considering we're going to be rolling out over 20,000 sensors, actually that's happening now and we'll run through the rest of this year and towards the end of 2022 when it's fully rolled out. I guess the important thing to just reference in terms of that is that actually, as soon as those sensors are in, they start to provide data. So this isn't waiting for all of that sensor suite to be installed for it to start working. As soon as those are installed, we can start to gain the insights almost immediately and act on them. But because of the scale of the rollout, it will take us really come the next 12 to 18 months into 2022 to complete it. And in terms of kind of the totex point, absolutely, we've identified through the proof of value that we will see significant benefits in terms of our service performance. Things that really matter to customers that are captured through the ODI mechanisms. And I talked about a number of those, again, in the video in terms of pollution performance, sewer flooding, collapses and blockages all key measures that are generally also common ODIs. And we expect and can see that something similar to those will exist in the future. Now the benefit of DNM also is that you actually understand how that system is performing. And part of our wastewater network relies on gravity. We just let the pipe strain to our treatment work, so we clean up the wastewater. Part of the system uses pumping stations and energy. And part of it relies as responding when we found an issue, which is manpower, resources and costs. And so all of those, by understanding how that system is working gives us a better opportunity to optimize it. First, in terms of some of the visuals I showed yesterday, we can optimize pump performance. And our energy bills are large. We are moving lots of water around that system, and therefore, we can optimize the cost of that. We're getting lots of information about the assets themselves, and therefore, we understand how they're performing and when we might need to maintain them in a proactive and preventative way to stop them failing and failed assets cost more to repair. And overall, how we can best optimize the performance of our system and maintain it in the most healthiest way at the lowest kind of whole life cost. So DNM really is unlocking a very different future for us in terms of performance and service to customers in the environment and the future in terms of how we can understand in very, very fine detail on the cost of that system and our best to optimize it overall across totex.

And I think when you actually look at system investment, which is, as we -- the term we use systems thinking is actually trying to look end-to-end at the things that we do, understanding the relationships of the different components. Lou talked yesterday about what we've been doing in the context of voids. Voids essentially are properties that we consider empty or unoccupied and essentially represent either if there is somebody there, if there's a business in that property, they're consuming water, they're not being billed for it. If they're consuming water and we don't know, it's considered to be leakage. In the leakage calculation, where actually it's true consumption. So bringing all those data sets together is something we've been doing purely in the context of voids. Lou mentioned it yesterday. And just look at as we do that, the benefits that we see across a whole range of different metrics simply by addressing that one issue.

I think one of the benefits that we've seen from the approach for systems thinking and how that sort of comes to fruition. And more importantly, seeing that as a capability. It's not just within our operational area, but how we run the business overall. As Steve said, if we look at the voids data and being able to take those data points and visualize them and do that very, very quickly, actually at lower cost because we've got my in-house capability. Has meant that we've been able to accelerate a whole number of properties onto the billing file. So circa 60,000 this year. And the benefit, as Steve said, isn't just in revenue, it's also in leakage, it's in per capita consumption, it's also in terms of our wider customer service metrics. Because the other impact of those empty properties is actually customers are essentially carrying a higher bill than they should be doing. If actually, those properties are on the billing file and therefore, seeks to sort of reduce the overall billing path for all customers. So actually, when we look at a number of both our measures and outputs, more importantly, ODIs, they all do interconnect. And more importantly, can deliver sort of multiple areas of value. And I think that's the real benefit that our approach in terms of data and analytics, and systems capability and machine learning is now giving to us right across all the areas of the business.

And if you look at that in the -- since the formation of the business retail market, the void proportion of the total customer base has been growing. With the challenges for retail organizations to be able to identify voids and do the work to essentially a., identify; b., find out who the customer is and get them on billing. So one of the things that Lou is now looking at is being able to expand not only the work that we've done in the domestic base in expanding that into the business space, again, which in itself is a very significant revenue opportunity. So a lot of the interconnection between the data that we traditionally used for different purposes as part of our overall system approach. Mark. Mark Freshney, come back to you. Another question?

Yes. Can you hear me okay?

Yes, we can.

On the balance sheet management, this is a question for Phil. I mean you've got a lot of legacy RPI index-linked debt, which is perhaps not as probably seen as attractive when you took it out 10 to 15 years ago, but probably less now. What is the strategy with that? Because presumably, as the calculation harmonizes with CPI in 5 years' time, it becomes relevant again, for your hedging and it presumably comes through at a lower cost. So can you talk us through the rationale around that, please?

Okay. Well, I guess the sort of the change in RPI, you say, is sort of some way down the track. I think it's sort of the end of this decade effectively that, that comes through. So from that perspective, quite a long way into the future before it crystallizes. In the context of embedded debt the RPI portfolio, we have is still a very good match for our asset base. And so it's an integral part of our overall hedging sort of strategy. So there's no immediate sort of need or a challenge to do anything about that. In the context of how Ofwat sets the cost of debt, they do look at the embedded cost of debt across the sector. That's part of the overall debt calculation. And we'd expect them to continue to do that going forward. And in that regard, we still compare very favorably compared to peer group companies. So the short answer is no immediate plans, Mark. I expect that the regulatory approach to continue and that to be sort of dealt with through the embedded cost of debt. And as we approach the sort of conversion of RPI to CPI at the end of the decade, there'll be sort of further discussions at that point.

Okay. I'll try and pick up some of the Slido questions as we go through. Andrew Cavanna has asked the question, what are the implications of recent license change to take DPC projects out of the 5-year price controls? As many of you will be aware, DPC projects were created for AMP7. Essentially, there are programs above GBP 50 million in value. Effectively, if you look at them in the context of the acquisition, GBP 100 billion total. They are a relatively small number in AMP7, spread across a number of companies. Ours is for the Haweswater Aqueduct, which is the principle aqueduct, carries about 1/3 of our water from the Lake district down to the [ panel lines ] and principally Manchester. The license change simply provides the possibility for a DPC project to happen. It doesn't commit to a DPC project. That is something that essentially happens at a following stage. Once we've established that DPC represents the best value solution for customers. And that's work that essentially has been running now for over a year, both pre and during AMP7 to essentially establish the framework and the way that DPC would work in addition to definition work, some of the early concept engineering. And then at some point, perhaps later this year, going out to competition. So the license change that you've seen for a number of companies, which was announced a number of days ago is that is for that purpose only. Simply to ensure that should DPC be approved then it can operate in the context of the company license. And under a DPC, essentially the design, construction and potentially the operation of the project would fall to a third-party contractor, who would be expected to fund that program and recover the cost of that project and its operation through a long-term contract, typically 25 years or more. Over which timeframe, there'd be a recovery of the cost of designing, building and operating that particular facility. We'll get to a point probably during 2022, where we would establish with Ofwat, whether our Haweswater Aqueduct program, we call it HARP, the Haweswater Aqueduct replacement program, where the HARP would be delivered through DPC, whether it represents best value for money. And all the work that we're doing with Ofwat over the last year and over the coming months will be to effectively establish whether HARP is the right solution. Another question from Bartek, which is are you planning to share your potential AMP7 outperformance in similar fashion to that you did in AMP6? The arrangement in AMP7 is different in the sense that up to a particular level of totex performance, then outperformance is retained for the benefit of shareholders. That essentially creates an incentive for outperformance. Beyond that point, then essentially, the outperformance is shared between customers and shareholders. And so it isn't the same as AMP6, where we -- in AMP6, we didn't have a particular formulaic approach, but in AMP7, we do. And that's -- each company has a different mechanism for sharing in terms of the way that it operates. Again, perhaps a number of questions all related again to DNM. The first is on DNM, what is near real time, the phrase you've used, Simon? And could the system help on other parts of the network? And then on internal flooding, on your presentation, you showed that there's a binary GBP 5 million fine/no fine. And it looks like you're being penalized. And are we going to beat that going forward?

Okay. So let's just talk about performance for DNM and data in the real time. And I use the term near real-time because I think sometimes when you hear real-time, you think it as soon as the sensor has got it, you can see that data elsewhere. And obviously, there is a lag in that in terms of that transition through the communications network, whichever one you use. But some of our sensors will be taking very short readings in the sense of seconds or minutes and transmitting them immediately to our cloud platform. So near real-time is just meant to recognize that we are taking as close to practically live information in using that to run the network. And that's really valuable to understand the overall performance because it is a dynamic system and you want to understand how that's delivering. Just the second part of the question, Steve?

Second part of the question was DNM -- sorry, on internal flooding, you show your fine, are we in penalty? And do we expect to improve?

Yes. So that is very much why DNM is something we have delivered through the proof of value last year because we can see it will help us to have a better performance, and we're currently forecasting this year on measures such as sewer flooding. So it's absolutely vital for us that actually, whilst I've kind of shared with you kind of year 1, our focus and plan is to optimize the use of DNM to deliver better performance in the future. And the kind of the other question really around what are the other opportunities? Well, DNM in terms of our solution, which is not just the installing sensors, it's much more complex than that in identifying where and how you should monitor information, how you should actually install it, and how you should aggregate the data and what are the algorithms and machine intelligence is pouring over that data to deliver recommendations. That's really part of a unique part of our intellectual property, I would say, for systems thinking about integration of all those elements only deliver the outcome. And so that's very much one of the underpins of systems thinking is. It isn't just one use in one place. It's a mindset and a template. And we can certainly see the look across to how we've already installed a large number of sensors across our water network. We've done similar upgrades in our water and wastewater treatment works. And actually how well that information you can bring together gives you better performance across the end-to-end system, which really is the underpinning concept behind systems thinking. So we do see this as an opportunity to develop even further beyond what I've shared in terms of DNM, which is why, I guess, I was really excited to talk about it yesterday.

Okay. One of the questions from Dominic Nash, I think, again, on the theme of DNM, is are you creating or capturing any IP for sensors AI technology? And could you sell these [ efficacies ] to other waters or outside of the U.K.? And I think as Simon says in the video, certainly, with the market assessment that we've done of what is available around the world and why are we doing DNM the way we are is we certainly feel that what we've got is a global first. We do see many companies installing sensors at different parts of their wastewater network. We do see them using machine intelligence to be able to assimilate the information that is being provided. What we haven't seen is anybody doing a DNM for a variety of components, perhaps we don't have time for today. Clearly, one of the issues that we've got is what is the model that we use for this in terms of an acquisition model. At the moment, we've been funding the concept work, the Board, based on the success we've had in the first year has recently supported the rollout of the program across the network. But obviously, one of the things we're looking at is what is the model that we use with the supply chain and with our partners. And is there an opportunity to monetize some of the systems thinking work we're doing, where it is leading and where it's attractive to others? And I think what's quite interesting is that we've been using the term systems thinking for many years now. And obviously, it's a concept. It's an approach to running the business to effectively creating a digital utility that we've had as a vision for many years, certainly since I first joined the business. And we can see now that, that term systems thinking is being used elsewhere. In fact, this week at a presentation that Ofwat gave to non-Exec Directors and Chairman of the Water sector their ambition for the sector to adopt systems thinking came through very loud and clear. So it's an area where you're absolutely right, Dominic. We've created IP. We've created a capability, we've created solutions, either ourselves or with partners, that are quite attractive, not just the companies in the U.K. but companies globally. And that's something that we're not blind to in terms of the opportunity. So Verity. Another question from you, please.

So in terms of your M&A aspirations that you mentioned for the first time at the half year results. And clearly, system thinking could be used if you acquire another company. Just wondered if you have any more thoughts on that? And then just secondly, a question on C-MeX and D-MeX. It's a large penalty and reward and always enjoyed listening to Louise presenting. And it's a very ambitious target. Do you think you end up furloughing it is going to affect that at all? Or are you on track and really confident about achieving a big reward on?

Okay. Lou, do you want to talk about C-MeX/D-MeX and where we are, particularly the transition post-COVID?

Yes. Thanks for the question, Verity. Yes, I am confident. And actually, we see fantastic customer service performance on C-MeX and on D-MeX. We're [Audio Gap] of course, our position in both. I think what's really encouraging as well is that we're actually in firm reward territory on both metrics as well, which was a fantastic position to be in. And one of the things that I shared on the video actually was, why am I confident if I look at some of the underlying metrics, whether that be our digital capability, whether that be the foundations we've put in place in relation to new services and innovations, such as the app, right through to how we're using data and analytics to segment our customer base and really make sure that we're managing services to the right channel to the right customer at the right time. I think what's really encouraging and what I'm most pleased about as well is we've taken everything that we've done in terms of improving our customer service performance over the last sort of 4 or 5 years and applied that to D-Mex. And actually, when we started on this journey and Ofwat said that we're going to start to look at services to work to developers in the same way as domestic customers. Actually, that wasn't the position we were in. We were sort of -- sort of teetering around potential penalty. So to have delivered and accelerated that transformation program and to now be set in third position and firmly in reward territories [indiscernible] , I'm really, really pleased about. And we've got more space to go. So really encouraging performance. And I think if we overlay sort of customer service performance with our revenue position and, in particular, sort of cash collection. Because those 2 things do go hand-in-hand. And your question about, have I got any concerns or risk of sort of furlough on [ rapples ] and the economy and what does that seek to look like. If I look over the last 12 months, United Utilities is no different than any other business. And then it's been through a huge amount of change and accelerated innovation in that a lot of my staff are now working at home, taking calls from customers and delivering brilliant service. But actually you can look at how cash is continuing to perform during that period it's performing really, really well. And I think some of the investments that we have placed in the past, so the new debt manager system capability that I delivered last year right through to the analytics and credit sharing capability. We've brought on as well as Equifax where we do full credit share. We've now brought on TransUnion as well. So we've got fantastic coverage. And we've -- one of the only water companies that were able to manage to secure an additional social tariff. So we're now helping 145,000 customers who were struggling with affordability. But more importantly, we secured an additional GBP 15 million to help an additional 45,000 customers. So I'm really confident, both with the customer service delivery and more importantly, the cash delivery that I've got headroom as we go forward. None of us know what the economy is going to do. We can all predict how it may look. But then we've got headroom, and more importantly, we've got the right capability, technology and actually capability and the teams to deliver great service and great cash performance. So we're really, really optimistic and hopeful. And I think what's great this time around is we've got some crack in ODIs as well. So an opportunity to really deliver the performance, not just on C-MeX and D-MeX, but on why the customer service ODIs as well.

And I think just on the M&A front, as you might imagine, in a pandemic year, it's not exactly been at the forefront of our minds in terms of things we're doing, and particularly, as we said last year, wanting to understand where CMA goes. We've also had a similar question from Richard Alderman, which is a supplement to what you asked, Verity, which is post-CMA review being published. We might see a takeover or merger between top 10 water and wastewater companies? And do you have a view on Ofwat's likely reaction? And I think, again, Richard talking about different leadership, [ Catherine ] and Rachel, as the different CEOs of Ofwat in terms of their attitude towards merger proposals. And whether there's a minimum number of comparators that are needed? I think the comparator argument is often used. But of course, if you look at the numbers that exist in the sector, do we really have statistical relevance in the comparators that we've got? And are you really comparing apples with apples? I think most of us would say no, there are unique characteristics to each company. I mean, certainly, PR19 looks as though it's going to stress many companies in terms of its delivery. It looks as though shareholders of a number of businesses are perhaps going to have lower returns than they might hope for. I think for people to want to exit, they're going to have to be very stressed. Let's see what the CMA brings as we see going through the process. So it's something that we keep an eye on. It's not something we'd leap at. It's got to -- it would have to be a very good deal for shareholders. And I think looking at it in the context of some of the poison pills that exist out there in financing frameworks and structures, the true debt picture on some of these companies. You can see that there are very few attractive opportunities. But we keep an eye on it. But I think to be fair, Verity, our principal focus has been on delivering AMP7, particularly year 1 and getting a real flying start and very particularly during a pandemic year in which the focus has been all about maintaining supplies and delivering for all of our stakeholders. Okay. I think we have no more MS Teams questions. Can I thank everybody for joining us for the questions that we've had both live on Teams but also on Slido. I do hope if you haven't taken the opportunity to go through the videos that you do get chance. There's a lot about what we've been doing for the last year and plans for the future. And again, final thank you for joining us, and look forward to seeing you at Results Day.