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

Good morning, and welcome to the United Utilities Full Year Results Presentation. Since joining the company, I've enjoyed the opportunity to speak to many of you and look forward to continuing to do so, hopefully, this year in person. One of the topics that investors have discussed with me is Board succession, and I'm pleased to say we've ran an orderly process, as you'd expect us to. With respect to non-exec directors, in July of this year, you'll see that both Mark Clare, our SID; and Stephen Carter, who chairs our Corporate Responsibility Committee, will retire from the Board. They both contributed hugely to the success of the company over the years, and I want to thank them for their support. We have a clear plan for their succession having appointed Liam Butterworth to the Board in January and with the appointment of one further non-exec plan for this year. In respect to our exec directors, Phil Aspin, succeeded as CFO nearly 2 years ago, and the Board is delighted with the contributions Phil continues to make. You'll no doubt have seen Steve plans to retire early next year and that Louise Beardmore has been appointed as his successor. Louise has been with United Utilities for over 25 years, and she has extensive utility experience. She's been at the heart of the company's transition to become a leading performer in customer service, operational delivery, employee engagement and was the outstanding candidate in a rigorous selection process, including both internal and external candidates. The Board is delighted to make this appointment and once again demonstrates a strong management team that Steve has built. In his 11 years in it United Utilities, Steve has led the transformation of the business to become one of the U.K.'s top performing water and wastewater companies. As you'll hear in this morning's presentation, performance over this last year has continued to improve under the leadership of Steve and his management team. Recognizing this, the Board proposes an increase of 0.6% in the final dividend, which is in line with our policy. This takes total dividend to the year to 43.5p per share. Thank you. And now I'll hand over to Steve.

Thanks, David. Good morning, ladies and gentlemen, and welcome to the United Utilities Full Year Results Presentation for 2021-'22. We've built on our strong foundations again this year, delivering value through high levels of customer satisfaction and further improved operational performance. Inflation and cost of living are important current issues. And through our extensive affordability support schemes, we've continued to play our part and helping those that are struggling most. Controlling our cost base in this environment has been a key area of focus for us as has responsibly using our performance. Our anticipated AMP7 outperformance is expected to be significantly higher than previously predicted. And we believe that a responsible approach is to share our success for the benefit of all of our stakeholders. We'll therefore be investing an additional GBP 400 million to deliver even greater improvements in services for customers and the environment, bringing the total investment beyond the scope of our final determination to GBP 765 million. Systems Thinking is embedded across the business, supporting our transformation to a digital utility. And we're seeing the benefit of accelerated investment on performance both in this regulatory period and in expectations for future periods. Recent developments in environmental legislation are very substantial. And the government targets currently subject of consultation could represent significant growth in the investment contained within our business plans for PR24 and beyond. So here are the highlights for the year. Our sector-leading package of support worth around GBP 280 million over AMP7 is providing much needed financial assistance to struggling households in the Northwest. We've sustained high levels of operational performance which together with higher inflation has contributed to a return on regulated equity -- annual net ODI reward of GBP 25 million. And underlying operational performance enhanced by targeted incremental investment underpins our confidence in increasing our total AMP7 ODI target to GBP 200 million, an increase of 1/3 on previous guidance. With our AMP7 outperformance now expected to be significantly higher than previously predicted, we're responsibly sharing our success through additional investment of GBP 400 million including previously announced investment, this takes our total AMP7 investment beyond the scope of the FD to GBP 765 million, driving both sustainable performance and contributing to nominal RCV growth of 21% across the AMP. Central to this is the investment in our Better Rivers plan that will see us make an early start on provisions with the Environment Act and supports a reduction in recorded spills by at least 1/3. In total, we've made 4 pledges to deliver over the next 3 years. And in doing so, we'll kick start a river revival ahead of AMP8. We have an important role to play in supporting customers who're struggling to pay their bills. Looking at bill increases across the sector for FY '23, we're one of the minority companies who expect to see no increase in the average build for households in our region. We're committed to a significant package of support for struggling households worth around GBP 280 million over this AMP. Through our extensive range of affordability schemes, we're currently supporting over 200,000 households. And we're leading the utility sector in implementing Open Banking, and this has helped us deliver even better customer service. It takes a process that previously could have taken weeks down to just a few minutes, allowing us to find the most suitable support scheme for customers quickly. Back in 2019, we worked with the advice sector to develop the North West Hardship Hub, a central repository that provides access to all the very latest affordability schemes that are available. It's proven to be an invaluable resource particularly during the pandemic and will continue to be as households are impacted by the current challenging environment. There's always more we'd like to be able to do. And we're a leading supporter of the customer council for -- Consumer Council for Water's drive to introduce a national social tariff. This would help to deliver a more equitable sharing of support across the country so that support will be provided to those who need it regardless of where they live. Now turning to operational performance. I've said previously that our focus is on investing in sustainable operational performance and that's what we're achieving. We're delivering better service to customers and once again have performed well against Ofwat's C-MeX measure earning a reward for the year. On wastewater, we continue to be sector frontier with low levels of pollution, having reduced by overall -- having reduced overall pollution by 1/3 since the start of the AMP, and our treatment works compliance remained strong, and we expect to remain green on this measure in the Environment Agency's annual performance assessment for 2021. On water, we continue to improve the quality and resilience of our water supply. This is evidenced in Ofwat's latest Service Delivery Report as shown in the chart at the bottom of the slide, where we highlighted as an industry top performer on reducing water supply interruptions as well as on reducing pollution incidents. In both of these areas, we're now seeing the benefits of targeted investment that we made in AMP6. Ofwat's assessment shows us at or better than target on the majority of measures, although there are 3 specific areas where we landed below target. One of these is household water use, where industry target set at PR19 have been significantly impacted by the move to working from home during the COVID pandemic. The other 2 areas are the focus of targeted investment. And I'll now talk about what we're doing in these particular areas. The 2 measures where we fell short of target for the year are internal sewer flooding and water quality, principally appearance. These are both areas of focus and incremental investment. I've previously spoken about our Dynamic Network Management program. This is our groundbreaking GBP 100 million Systems Thinking network, the first of its type in the world. We fitted more than 10,000 sensors on our sewer network and linked them to an innovative artificial intelligence platform. And the data produced by this system means we're finding and fixing issues within the sewer system before they cause an incident. As a consequence, customers have seen a year-on-year reduction in internal flooding of 1/3 over the last year with our performance significantly ahead of the original target we set ourselves. We're also investing GBP 100 million in our water networks to reduce incidence of discoloration experienced by customers. Progress to date has again been good with more than a 26% reduction in taste, smell and appearance reports by customers in the first 4 months of this year compared to last. This builds on the broader assessment of drinking water quality, where last year, we delivered a 44% improvement in the metric that assesses the impact of water quality events during the year. The investments in both these areas is contributing to the improved ODI guidance for AMP7 and will improve our overall AMP8 outlook. I want to talk about how our high level of performance together with investment translates into ODIs. Our strategy for AMP7 has been to prioritize operating performance and ODI rewards through effective totex investment. And this year, we've met or exceeded our targets on 80% of our ODIs. We anticipate ODI targets to tighten again in AMP8, and so maximizing performance this AMP provides an optimum start to the next. We expect our net ODI reward for this year to be around GBP 25 million, our largest single year reward and ahead of our original target for the year. And performance to date, along with targeted investment in areas for improvement, give us the confidence to increase our total AMP7 ODI guidance by 1/3 to GBP 200 million. And I want to look more closely at how we're responsibly sharing with all of our stakeholders, the benefits of our continuously improving operational performance and higher inflation. In the current environment of high inflation, the extensive affordability support we provide is critically important. And the fact that households in our region won't see an increase in the average bill for '22-'23 will be welcomed by many customers feeling significant inflationary pressure on other household bills. Our improving operational performance, together with high inflation is increasing our AMP7 outperformance expectations. And so we're responsibly sharing these benefits through GBP 400 million of additional investment in 2 specific areas that would otherwise be included in our business plan for AMP8. First, GBP 250 million will help us improve environmental outcomes, making an early start on implementation of the government's new environment act, including delivery of the pledges we set out in our Better Rivers plan. Second, we're investing GBP 150 million in additional base and business case-driven projects. This will accelerate improvements in service for customers, drive ODI performance and includes around GBP 100 million that we're investing in improving drinking water quality that I spoke about earlier. The investment we're making now will not only improve service and ODI performance in this AMP, but will also provide a platform for significantly better ODI performance in AMP8 and beyond providing further benefit to be retained by the company. I'd now like to take the opportunity to frame this GBP 400 million of new investment in the context of the total investment we're making beyond the scope of our final determination. That now stands at GBP 765 million. So this slide shows how the total incremental investment of GBP 765 million comprises 3 broad categories. The first category comprises GBP 265 million of approved incremental base investment that's allowed for through regulatory mechanisms established at PR19 plus our Green Recovery investment. The second category comprises GBP 250 million in relation to business case supported investment delivering improved customer performance and ODIs. This contributes to our increased ODI guidance for AMP7 and materially improves our ODI outlook in future AMPs. And the final GBP 250 million relates to the investment to accelerate improvements in environmental outcomes, as mentioned on the previous slide. Our anticipated outperformance, together with our financial strength and balance sheet headroom allows us to fund this investment within our target capital structure and AMP7 dividend policy. In doing so, we're responsibly accelerating improvements to the environment and improving service to customers while also generating value for shareholders with a full GBP 765 million subject to the regulatory mechanisms that are in place. As a sector leader on environmental performance, we care deeply about our impact on the environment. We constantly strive to raise the bar in our performance, and we continue to be actively engaged with EA and Ofwat in their joint investigation into the sector's compliance with wastewater discharge permits. We're determined to maintain our sector-leading position on environmental performance, building on our past legacy by addressing aspects of new and emerging environmental requirements early in AMP7. Demonstrating our ongoing commitment to protecting and enhancing environment, we've launched our Better Rivers, Better North West program to kickstart a river revival in our region over the next 3 years. It's a 4-point plan with the high-level aims set out on the left-hand side of the slide with some of the detailed targets on the right-hand side. Our AMP7 final determination included GBP 230 million of investment in environmental improvement. And as I mentioned earlier, we're investing an additional GBP 250 million to make an early start against the requirements of the Environment Act. We've made a great start against our targets, delivering a 28% reduction in spills between 2020 and 2021. I'll now hand you over to Phil to take you through the numbers.

Thanks, Steve, and good morning, everyone. In today's presentation, I will highlight our strong financial performance. Firstly, I will summarize our RoRE position, before focusing on our resilience in the current inflationary environment and providing further detail on our approach to power hedging. I will then look at our additional investment alongside higher inflation is set to deliver higher RCV growth. And to wrap up, I'll provide some high-level guidance for the full year to March '23. These are the key financial highlights for the year. Our performance, together with higher inflation has helped to deliver a reported RoRE of 7.9%, double our base return. Revenue of GBP 1.86 billion is up 3.1%, largely reflecting higher consumption from businesses as activities returned to prepandemic levels. Household bad debt has returned to 1.8% of regulated revenue, consistent with the rate we were achieving pre-COVID. And underlying operating profit of GBP 610 million reflects the increase in revenue, partly offset by inflationary increases in our core costs including increased power costs. Like many companies, we've experienced inflationary cost pressures on a range of input costs. And as power is a significant cost for our business, we have a progressive policy of hedging to minimize short-term volatility. This has helped to mitigate some of the inflationary impact and puts us in a relatively strong position next year, having hedged over 90% of the commodity price risk. Underlying EPS is 53.8p per share, and the total dividend per share is 43.5p, in line with our policy. And finally, our balance sheet remains one of the strongest in the sector with a low customer debtor risk, RCV gearing of 61% and a pension scheme that is not only fully funded on a low dependency basis, but is also fully hedged for inflation, an important feature in the current environment, all of which supports a stable A3 credit rating from Moody's. So I'll now consider these points in further detail. So first, let's look at RoRE, with the chart here showing our reported RoRE for the year of 7.9% on a real basis. This reflects strong performance on tax, where we've optimized government tax incentives and on financing where we benefit from a higher inflation and rates that we've locked in on our debt portfolio. Our ODI performance reflects GBP 25 million net reward for the year, and totex performance as a consequence of the investment we are making beyond the scope of the FD, primarily on dynamic network management. The benefit of improved ODIs for this investment flows through into RoRE in later years. Underlying RoRE of 7.7% adjusts for our assessment of the tax impact but will be subject to the tax sharing mechanism. The benefit from capital allowing super deductions on the FD CapEx profile, along with Green Recovery spend, will be retained by customers, whereas decisions by the company to accelerate capital investment along with investment beyond the FD scope will be retained by shareholders. So underlying operating profit of GBP 610 million is up GBP 8 million, principally reflecting a GBP 55 million increase in revenue, largely offset by inflationary increases in our core costs. Revenue is GBP 55 million higher than last year, largely reflecting an increase in non-household revenue as business activity has been stronger than expected during the year partly offset by a fall in household revenue in line with expectations with fewer people working from home. The prior year saw a GBP 8 million of additional one-off costs incurred in adapting our operations such that we were able to operate through with pandemic. As we continue to drive for better outcomes for customers and the environment, we have incurred an additional GBP 17 million of costs targeted at improving performance against specific customer ODIs, such as spend associated with Dynamic Network Management. Like many other companies we've experienced inflationary pressures on input costs such as power, chemicals, contract services and labor, resulting in a GBP 33 million increase in core costs. And finally, recent IFRS Interpretations Committee decision in respect of configuration costs associated with Software-as-a-Service means costs of GBP 6 million this year are treated as operating costs, whereas previously, they would have been accounted for as fixed asset additions. Now Steve has already covered the extensive customer support we provide for those customers who have an affordability challenge. So I will talk through our approach now to household cash collection against the broader customer base and our bad debt performance. We have one of the highest proportions of customers on direct debit or alternative payment plans to over 80%. This gives us a strong starting point for our collections activity and provides a high level of certainty for a significant proportion of our revenue where customers can afford to pay but choose not to do so, we have a comprehensive data-led approach to collections that helps us to accurately pursue payment in an efficient and timely manner. There are a number of techniques that we utilize, including nudging customers who are unable to make -- who are late to make payment by e-mail or text, using multiple credit reference agencies to establish a financial footprint and ultimately using credit reporting, one of only a small number of water and sewage companies to do so. Our leading approach to collections continues to receive external recognition, having recently won 5 external credit awards assessed against credit, banking and utility company peers. The innovation we use in data and technology helps the channel financial support to those who need it most and coupled with the announcement of open banking continues to be recognized as best-in-class. Finally, as I've mentioned previously, it's important to consider the bad debt charge in the context of a risk carried on the balance sheet. Last year, I highlighted our strong customer debtor position, one of the best managed positions in the industry and with our robust approach to collections our balance sheet risk remains low today with only GBP 4 million of our net household debtors aged more than 1 year old. This is a very strong position to be in recognizing the precious customers face in a very challenging environment of rising inflation. This all supports our lowest level of household bad debt at 1.8% of regulated revenue. So let's now focus on the impact of inflation on our business. The regulatory model allows for inflation through indexation of the totex allowance and the RCV with each 1% increase in inflation across the AMP, resulting in increases of around GBP 150 million in our totex allowance and around GBP 600 million to RCV. Let's look first at our totex position and how we're managing the impact of inflation. On OpEx, we've agreed our pay deal for FY '23, broadly in line with inflation last November. Power is over 90% hedged for FY '23, and I'll discuss this in more detail shortly. Chemicals represent a relatively modest proportion of our cost base, but we may see costs rise materially above CPIH in FY '23, as a result of pressures from higher energy costs and the disruption caused by the war in Ukraine. On the capital program, we have over 90% of the AMP7 base program already under contract on target price arrangements. This provides greater certainty of supply in a buoyant construction market and ensures both parties are incentivized to manage cost pressures. And so to summarize, we continue to actively manage the impact of inflation on our cost base with the indexation of our totex allowance, providing further mitigation. Looking next at our capital structure and interest costs. Around 60% of the RCV represents debt and the remaining 40% being equity. As you know, our hedging policy targets 50% of our debt is inflation-linked, meaning that 30% of the RCV is hedged for inflation, while equity benefits from inflation exposure on the 70% of the RCV that comprises equity and nominal debt. As such, equity is leveraged 1.75x to inflation. As a consequence of the indexation charge for our inflation-linked debt is matched by inflation -- the inflation return of 30% on the RCV, although this inflation return on the RCV is not reflected in the P&L. Our policy of hedging is one for the long term and has served the company well, contributing a significant proportion of our past financing outperformance. It continues to be a fundamental pillar of AMP7 outperformance, while providing increased certainty in an uncertain world. So now let's look at power in more detail. The chart here shows our current estimate of power consumption over the AMP, detailing the proportion of total consumption with a fixed price and the balance that we need to buy. Through our progressive hedging policy, we had locked in the cost on most of our FY '22 consumption before the recent price increases, securing an average rate over the year of GBP 65 per megawatt hour. This compares favorable with a current market rate of GBP 238 per megawatt hour for FY '23 and has been fundamental to our ability to minimize the impact on our cost base. Our hedging policy supports the position over the remaining years of the AMP. In FY '23, we expect total consumption to be broadly stable year-on-year at around 800 gigawatt hours. Through self-generation and the application of our hedging policy, we have around 8% or just under 70 gigawatt hours of our expected consumption left to buy, giving us certainty on pricing on over 90% of our expected consumption for FY '23. This puts us in a strong position with a vast majority of our FY '23 consumption locked in at a rate that is 1/4 of the current market price. And as such, we expect only a small increase in power costs year-on-year. While we still have a proportion of our energy consumption over the remainder of the AMP exposed to the current unprecedented volatility in energy prices, our progressive hedging policy means we're in a strong position with 2/3 locked in at prices that compare favorably to the current market rates. Now focusing on the remaining lines of the income statement. Our underlying net finance expense is GBP 306 million, comprising GBP 118 million of cash interest with the balance largely reflecting indexation. The GBP 173 million increase in the overall expense compared with last year largely reflects the significantly higher inflation applied to a noncash indexation of our index-linked debt. Having optimized the available research and development tax allowances around innovation and capital investment in respect of all open prior year tax positions alongside the use of capital allowance super deductions in the current tax year, we have an underlying tax credit for the year of GBP 65 million. This excludes the impact of all deferred tax, including one-off deferred tax charge of GBP 403 million in relation to the increase in the headline rate of corporation tax to 25% from April '23, all of which results in an underlying profit after tax of GBP 367 million and an underlying EPS of 53.8p per share. Now looking more closely at financing performance of AMP7. We have around GBP 2.7 billion of financing to raise, of which we have already raised GBP 1.4 billion, taking advantage of attractive rates and extending our liquidity position out to February 2025. Our effective interest rate for the year is 5.1% nominal. The chart on the right-hand side shows our average locked in rates over the AMP7 period compared with Ofwat's allowance for embedded debt. As you can see, our rates compare favorably and helped to demonstrate the level of financing outperformance we expect to achieve this AMP. And I want to talk more broadly at shareholder value and specifically focus on the value that we're earning now, which will only be reflected in RCV and revenues in AMP8. As a consequence of our performance against our AMP7 final determination and the GBP 765 million additional totex investment Steve discussed earlier, we expect to receive an RCV uplift and additional revenues of around GBP 750 million in AMP8. This slide shows the breakdown of the largest elements relating to the additional totex, both the investments subject to customer sharing and the fully recoverable investment subject to existing regulatory mechanisms established at PR19 and Green Recovery. We're targeting net customer ODI rewards in AMP7 of around GBP 200 million, with rewards expected to be earned in the final 2 years of this AMP of around GBP 125 million carried forward into the next AMP. In addition, there's a blind year adjustment to reflect the true-up of the PR19 final determination position the performance in the last year of AMP6. Lastly, there were a multitude of other adjustments, including things like a tax true-up as a consequence of changing tax rates together these represent around GBP 50 million of net adjustment into AMP8. The GBP 750 million of value that we expect to carry forward in total will increase our AMP8 RCV and support AMP8 revenues. So I now want to look specifically at how the profile of our AMP7 RCV is impacted by our additional investment in the higher inflation environment. As you can see from the chart, on a nominal basis, our final determination, as shown by the green line shows an expected RCV growth over the period of 5.8%. The blue line takes the FD RCV profile and adds in the GBP 750 million carryforward value, I've just discussed. And finally, the black line shows RCV growth of 21.4% and includes this carryforward value and the latest consensus view of inflation. We, therefore, now expect to have RCV growth 15% higher than expected at the beginning of the AMP. This slide bridges the net debt position from March '21 to March '22. Net debt of GBP 7.6 billion has increased GBP 264 million since March '21 with the usual underlying movements shown in the bridge. Our net debt position results in RCV gearing of 61%, within our target range of 55% to 65%, which supports a stable A3 credit rating with Moody's. The credit rating agency is also making adjustment for any IFRS pension deficit position, which as I've mentioned before, is not relevant for United Utilities given our IFRS pension surplus position. So now briefly looking at pensions. As of March '22, we had an IFRS pension surplus of around GBP 1 billion and remain fully funded on a low-dependency basis. As I discussed at previous results presentations, this funding position reflects the fact that the IFRS measurement basis is not as robust as below dependency basis, which the pensions regulator expects schemes to target. We remain fully funded on a low dependency basis, with no ongoing pension scheme deficit contributions due. The schemes are subject to funding valuations on a triennial basis, with the latest valuation as at March '21 now finalized. The valuation confirms our strong pensions position, and we are now exploring further derisking options such as a buy-in to transfer some or all of the risk to an insurance company. We've talked a lot about inflation today, so it's also worth just considering it in the context of pensions. With DB pension liabilities of around GBP 3 billion being a similar order of magnitude to our index-linked debt, it's reassuring in the current high inflation environment, but our pension schemes are fully hedged for inflation risk. Now this slide sets out our outlook for the year to March '23. We expect revenue to be around 1% higher year-on-year, principally reflecting the 4.6% CPIH increase and a 1.5% increase as a result of the ODI reward we earned in FY '21, partly offset by the negative K factor of minus 1.3% and the rebasing of revenues to reflect the overrecovery in FY '22 due to higher business consumption. Underlying operating costs are expected to increase by around GBP 100 million. Roughly half of this increase reflects the FY '23 OpEx impact of the GBP 765 million additional investment already discussed and half reflects inflationary cost pressures on labor, power, chemicals and other contract costs. High inflation will also impact our index-linked debt, and we expect our underlying finance expense to be around GBP 150 million higher based on our current inflation forecast. Our index-linked debt portfolio as at March '22 was GBP 4.3 billion. So every 1% increase in inflation equates to around GBP 43 million higher interest charge. As mentioned earlier, our cash interest in FY '22 was GBP 118 million, and we expect this to be broadly the same in FY '23, with the overall increase in underlying net finance expense largely relating to the noncash indexation of our index-linked debt. Our cash metrics, therefore, remained strong. And as discussed earlier, the higher inflation will also apply to our RCV, of which 70% is exposed to the benefits of higher inflation, giving shareholders around 1.75x leverage position to inflation. Underlying tax is expected to be a small tax charge for the year, as we continue to optimize the use of capital allowance super deductions. CapEx for the year is expected to be in the range of GBP 640 million to GBP 690 million and includes the FY '23 element of the incremental CapEx in relation to the additional GBP 765 million investment beyond the scope of the FD allowance. We're targeting a customer ODI reward of around GBP 30 million, consistent with our updated investment plans and our guidance on ODIs. And finally, our dividend policy remains unchanged, and we expect dividends in FY '23 to be in line with our AMP7 dividend policy of growth year-on-year by CPIH. So to conclude, we've delivered another strong financial performance through what has been a challenging year for businesses. We've doubled our base returns on RoRE with strong financing tax and customer ODI performance. Our affordability schemes and the approach to managing cash collection has meant that household cash collection has remained strong with our bad debt position returning to 1.8%. While inflation has increased our cost this year, it has led to higher levels of totex allowance and increased financing outperformance and together with the additional investment we've announced over and above our final determination will contribute to higher RCV growth over this AMP. And finally, we benefit from having one of the strongest balance sheets in the sector with a low level of customer debtor risk and the leading pensions position. So thank you, and I'll now hand back to Steve.

Thanks, Phil. Before I summarize today's presentation, I want to briefly touch on the developing picture for AMP8 and beyond. You know that we take public health and the environment very seriously. And this is reflected in the transformation we've achieved in recent years in our water quality and environmental performance. My sense is that we're an inflection point here in the U.K. and that the environmental agenda is taking center ground. The government's recent Environment Act reflects that. We very much share this ambition and our original plans for AMP7 delivers significant environmental improvement by 2025. And the additional investment announced today brings forward even more ahead of AMP8 by using outperformance responsibly and wisely. Specific targets for AMP8 are in discussion with government and our regulators. But what's already clear is that our shared ambition is to deliver a fundamental change in the way our wastewater systems were originally configured, delivering fewer discharges to the environment, less phosphate and water released from our treatment works and improved nutrient balance in our rivers and coastline. The capital expenditure associated with these changes will be significant for the water sector, but it's a particular issue for the Northwest. For many decades, a much higher proportion of our sewers have been combined sewers, which carry both foul and surface water at 54% compared to an average of 33% across England. Liverpool system, for example, is around 80% combined foul and surface water and would need complete reengineering to meet the targets under discussion. We're working with government and regulators to determine how this ambition can be met and by when, recognizing that the pace of change must consider customers' ability to pay. It's an exciting but bold ambition that we're keen to play our part in delivering. So to summarize, we've had yet another good -- year of good performance. We recognize the cost of living pressure on customers and have committed to a significant package of support for struggling households worth around GBP 280 million over this AMP. We've maintained high levels of customer satisfaction, underpinned by improving operational performance. At GBP 25 million, ODI rewards have improved year-on-year with our 5-year forecast having increased by 1/3 to GBP 200 million. Improving performance and higher inflation has contributed to a reported RORE for the year of 7.9%, double the base return. We're managing inflationary cost pressures well with another year of strong financial performance underpinned by a robust balance sheet and healthy pension position. And we're investing outperformance responsibly, sharing our success for the benefit of all of our stakeholders. Looking ahead, we expect AMP8 business plans to reflect the ambitions of evolving environmental legislation. So thank you for listening, and we'll now take questions.

So I have here an opportunity to take questions either on people are submitting in writing or actually through Teams through phone. So we'll mix and match as we go. Okay. first question I've got coming through is from Mark Freshney at Crédit Suisse. So Mark?

Hello, can you hear me okay?

Yes, we can. Thanks, Mark.

Perfect. I have 2 questions. Firstly, I was intrigued when you mentioned, Phil, the pension buy-in that you're looking at. Can you give some more color surrounding that how much of the total of your pension funds would go, whether you would have to potentially put cash into that? And -- or even whether you might be paid to give the pensions to somebody else or the liability. Secondly, regarding the tax, I mean the tax outperformance is pretty substantial, 2.7%. Clearly, tax is always a massive gray area, I guess, particularly with regulators. My question is how likely is it that Ofwat will allow you to keep that? And presumably, things like super deduction and optimization are super sensitive with Ofwat?

Okay. Phil, it sounds like both of those are for you. So do you want to pick them up?

Mark, thank you for those. I think first on pensions. So as many of you will know, our pension scheme is now fully funded on a low dependency basis, and what that means is that effectively, it is at that sort of buyout level in terms of the sort of position. We are hedged for inflation, and we're hedged for sort of interest rates. We're not hedged for mortality, which tends to be a sort of -- a slower sort of evolving risk effectively. So what we're intending to do going forward is to effectively test the insurance market to understand sort of what insurance buyout pricing might look like. We feel probably now is a good time to do that, but we'll need to evaluate that as we see the results coming back in. In terms of the size of the scheme, typically, you would look at a buy-in, buyout arrangement for your deferreds and pensioners and sort of that's probably around about sort of half of the overall position. And I certainly wouldn't be expecting to have to put cash into the pension scheme to support that because as I say, it's fully funded on a low dependency basis. So that's a pension position. In terms of the tax, there's 2 components really to the tax this year, the 2.7% of RORE. 1.7% of that is in relation to the prior year position. And that's where we've been really effective in optimizing tax allowances in respect of innovation. And so some people will have been up to our Capital Markets Day in March where we went to the West Cumbria System, which is the first sort of wide-scale implementation of the Systems Thinking across the whole drinking water catchment. And that is quite innovative and qualifies for sort of extra tax deductions as does other schemes like [ Nereda ] plant at Blackburn, which is Europe's largest implementation of [ Nereda ]. So really great to be able to optimize the tax benefits coming out of those capital programs. And in the context of sort of how that will work out from a shareholder -- from a customer perspective. Those are innovations that we put in place of our -- sort of -- on our sort of decisions. And on that basis so effectively that benefit will flow back to shareholders and be retained by the company. You're quite right about the capital allowance super deductions. As I touched on in the script, of over 1% of the 2.7% tax is in relation to capital allowance super deductions and also the tax shield effect on our index-linked debt, so we've got a higher index-linked debt charge. So we're benefiting from the tax shield effect on that as well. In relation to the capital allowance super deductions, as I sort of said, the way the Ofwat model works in terms of the tax true-up mechanism basically, they rerun their model at the end of the price control period based on effectively the revised tax rates that are in place. And so what that means is the base FD CapEx profile plus any Green Recovery spends that they've allowed the tax benefits will pass back to customers, whereas in relation to the acceleration of capital sort of Steve and I have put in place over the last couple of years, so we spent about GBP 600 million of CapEx this year compared to GBP 400 million in the base FD profile, accelerating and bringing forward the base spend that benefit is retained by the company. So that's how the mechanism works. And in this script, I sort of highlighted the sort of estimates of the amount that goes back to customers is the 20 basis points that I called out in the narrative.

Okay. Thanks, Mark. Any other questions? Okay. So we've got James Brand from Deutsche. James, good morning. James, I think you're on mute.

Can you hear me now?

I can, yes. Thank you.

Can you hear me now?

Yes, we can. Thank you. Can you hear us?

Okay. Great. Sorry about that. I can, yes, sorry. So 2 questions, please. Firstly on the power hedging you gave a cost per megawatt hour for the hedging that you've done for the year we've just come into at GBP 60 per megawatt hour. For the volumes that you've hedged for full year '24 and full year '25, should we have a similar price in mind or is there any kind of guidance you could give us for how either what the price is or maybe when you put those hedges in place so we can look at price and term workout ourselves? And then secondly, a bit of a broader question on incentives. It seems like in this regulatory period, obviously, a slightly exceptional because of the inflation backdrop and lots of companies are going to be having a lot of financing outperformance in this regulatory period. But when you especially look at the incentives, the ODIs and totex, a lot of companies seem to be underperforming. And you're doing comparably well compared to the rest of the sector. But vast majority of companies are underperforming. And I was just wondering whether you thought that was sustainable going into the next regulatory period because it seems very tough for so many -- we have a quite a tough settlement on the cost of capital and for the vast majority of companies to be underperforming on incentives. And do you think there's a case for maybe the regulator being appreciating that -- it's been about tough and being a bit more generous on the incentives in the next regulatory period? Are you getting any kind of feeling of that or maybe not?

Do you want to pick up the hedging, and I'll do the other?

Yes. James, and sort of picking up the power hedging. So we've given you very clear guidance in relation to FY '23 in terms of the 2/3 hedged for sort of FY '24 and '25. It is broadly at the similar sort of level, but I'm not going to put a number out on the table today. But yes, it's a similar sort of pricing level.

I think on incentive, James, you're absolutely right. There's actually just a handful, 2 or 3 companies that are in positive ODI territory so far. We obviously see what the results are for the full year. And so a lot of companies are shortfalling on achievement of targets. I think when you look at it, it's probably right that you've got some people earning and others not because that says something about the targets. It's says something about performance in the round. And really, the ODIs are there to try and actually drive everybody to achieve incremental improvement in performance against sector benchmark. So it probably is -- if everybody was earning or everybody was losing, probably, you'd start questioning whether we've got the targets right. I think the key issue for me in going forward is I do genuinely believe that having incentives works for the sector. I think if we see what's happened in customer service, for example, we've seen marked improvements in customer service as a consequence of the [ SIM ] measure that we had for many years and now C-MeX. And I think we're seeing the same in other areas of performance. So I actually think they're a good thing, if you're a customer, or you're the environment the in terms of driving industry that way. I think the key issue for me is setting targets for which you're not funded. And I think if I'm looking at AMP8, and understanding the extent to which companies have a further stretch on the performance they achieve, you can't achieve that stretch without the money to do it. I mean that's the key consideration is having a conversation around how that performance improvement is going to be financed and that the financing is adequate. I think too soon yet to see where we're going in AMP8 in terms of the methodology. We're expecting to get that in the summer. But I do think we'll probably retain ODIs, and we'll see incremental improvement being sought for. But I think you need to see -- if you want an improvement, you've got to fund it. So how is that going to work? And I think that's an important consideration as we go into the AMP8 business plans and discussions. Okay. Next one. We've got Martin Young from Investec. So good morning, Martin, over to you.

Yes. A couple of quick ones. The first is just a point of clarification around the incremental investment that you've been talking about. If I look at the green box, on Slide 10, where you have the GBP 250 million that you were investing in outperformance. Am I correct that the totex sharing mechanism effectively gives you half of that back, so the other half is being funded by your shareholders? And then the second question and maybe there is necessarily an answer to this at this moment in time, but just an update on where we are with the Environment Agency and Ofwat investigations in respect of full to flow and combined sewer overflows?

Yes. Thanks very much. I'll pick both of those up. I think firstly, when you look at the regulatory mechanisms, and we make mention of that, we would expect regulatory mechanisms to apply, and therefore, the menu mechanism that essentially applies for us, which is roughly 50-50, customer sharing and shareholder sharing. So yes, Martin, you're right, you'd expect that mechanism to apply to the green box. I think when you look at the investigation, we clearly had first output associated with the investigation where Ofwat has identified, there are further questions, further detail to be had from 5 of the companies within the sector. So 5 of the 10 wastewater companies in the sector. That doesn't necessarily mean, as they've said that they don't have further questions for others, but at the moment, that's not the case. The Environment Agency, I think, has indicated that with the data that they've requested and the volume of data and the scale of the work that's needed, they're probably not likely to come back until 2023 with any initial conclusions. And so I think this may well be a relatively long run issue for companies to address. And I think when you look at the amount of data they've got, I'm sure we'll get supplementary questions as we go through. But I think it's probably going to be next year before we start to see any conclusions being drawn, at least initial conclusions from EA on that work. Obviously, what we're doing is working with both Ofwat and EA in regard to data that they want or need for the purposes of that investigation. So hard to say where that's going. Meanwhile, of course, we've got our Better Rivers plan. I think we've been focusing very much on the initial element of the investigation, which was what's called flow to full treatment, that's something we'd be working on for many, many years, very conscious of and progressively fixing issues as we saw risk in those areas. And you can see in our Better Rivers plan that this year, we reduced the number of CSO spills by 28%. It's a bit of a moving target because we're installing more monitors. We expect to have full monitor installation by next year. So -- but I think a good start in reducing the number of spills that we've got. So yes, it's an ongoing story, but I don't think it's one that's going to lay an egg quickly. I think there's a lot of work to be done to understand where everybody is. Okay. Right. Next question we have from Ahmed Farman at Jefferies.

I actually start -- wanted to start with the operating cost base. My question is, as you sort of think about the sort of the next 12 months, how much of your operating cost base will get rebased to reflect the current inflationary environment? And how much still needs to sort of be adjusted over time if we continuously see the current sort of commodity price environment? That's my first question. The second question is on the additional investments that you have outlined to get yourself, I guess, prepare ahead of what you think some of -- might be some of the priorities for PR25. Should we see that number as sort of a comprehensive number that now you are quite happy with or is that an ongoing process where we can see that number increase as if there are opportunities and there's capacity to fund that? And then my final question is a bit about sort of DPS and the EPS profile of what you're outlining today, there is going to -- it seems to me that there's sort of -- quite sort of a bit of a disconnect between how EPS will move versus your DPS, and I appreciate some of that is noncash and RCV indexation doesn't get collected. But my question is, is that an important KPI for the management?

Okay. I think we'll pick it up if there's something Phil you want to add then do that. I think on cost base, we've been looking at a cost base as we go forward in the context of what we see as being sort of consensus inflation development. I think, obviously, there's some uncertainty as to where the economy go. Are we going to move into recession, where do we think inflation might go. So I think -- but at the moment, we're doing all of our projections in the context of what we see as a consensus projection. And clearly, we look very much in the context of the 5-year picture. And we look at that against what we see for our determination allowance. And I think at this point in time, notwithstanding the pressures, we do feel that we can live within the allowance that we've got within the FD for delivery of our FD scope. And then, of course, beyond that, we talked about the enhanced investment that we've made in, in specific areas. But at the moment, we do feel that we can manage within the numbers. Our principal cost drivers are labor. And you've seen what we've done this year in largely managing within inflation. Chemicals, Phil talked about; power, Phil talked about. And the other area is our capital program. And there's no doubt that the infrastructure sector is very active. One might use the word overheated at this moment in terms of the demand for infrastructure development. And as a consequence, we feel very fortunate in that situation that we've already got roughly 80% of our total capital program for the period on contract. That in itself is a great place to be because there are so many companies in the utility sector struggling to get capacity. The other is, as Phil mentioned, is that we tend to set our contracts on the basis of a target cost arrangement with a share line. So our partners are incentivized to effectively contain the cost within those share lines, as are we. So we work together very hard to do that. So I think at this point in time, I don't know if that answers your question, Ahmed, but certainly from a cost base perspective, we're clear. Phil, do you want to add anything?

Yes. Just to pick up on one point, and I guess we covered it on Slide 17, but just to sort of draw your attention to it. On Slide 17, we've sort of said each 1% increase in inflation over the whole of the 5-year AMP period increases our totex allowance by GBP 150 million. So effectively, we've got the challenge of managing the inflation impact on our cost base, but we're getting that inflating totex allowance. So that allows you some context to scale the sort of the impact of that.

Okay. Thanks. I think in terms of additional investment, we very much looked through this AMP and to the beginning of AMP8. And so I think Phil and I've basically said to our organization more broadly, "don't darken our door again" as we make the run to the end of this particular 5-year regulatory period. I think I'd always say, Ahmed, that if somebody came up to me with a really good idea with a great payback on it, then you're going to look at it. But at this point in time, I think we see that the industrial investment we've got is sufficient to do what we want to do for the rest of this AMP and in getting ready for AMP8. So yes, I don't -- this is not something where I think we want to come back every year and topping it up, unless there's a wizard scheme that somebody comes forward with and then we always consider those. But I think we've pretty much dredged the organization for the great ideas at this point in time. Do you want to deal with the DPS/EPS?

Yes, sure. I think a really interesting question. And I guess you sort of the analyst community very much know the answer to this really, I think, which is -- the valuation of our businesses is not an EPS-driven valuation process. It's valued on an RCV basis, and it's a focus on effectively the level of RoRE financing over outperformance, ODIs and totex positions. So that's what really drives and what's really important. The overall sort of outlook guidance that I gave for the year here, we've sort of said interest costs are going to go up by about GBP 150 million. So our interest charge next year. will be around about GBP 450 million, and that's GBP 120 million of cash and the balance of GBP 330 million of indexation. And I've given quite detailed guidance for you because I'm conscious that the current environment is quite volatile and uncertain. So you can see the inflation levels there that are being used for the indexation of the index-linked debt. And the key point really is the 8% sort of inflation on CPI sort of January 2023 and that's what's driving that higher indexation allowance. So to put it into context, I suppose, with a GBP 12 billion RCV, 8% CPI on the RCV is just shy of GBP 1 billion indexation on the RCV, which is being partly offset by that GBP 330 million indexation that's going through the P&L interest line and then the balance is effectively contributing to performance of the business.

Okay. Thanks, Ahmed. We've got Dominic Nash from Barclays.

Can you hear me okay?

Yes. I can. Thank you.

Brilliant. A couple of questions from me, please. Firstly, on underlying RoRE for totex because obviously, you've quoted a minus 0.8% and I'm confident in the fact that you're spending more than your baseline here on as you've mentioned in your presentation. But would you could give us a flavor as to what -- if we strip everything out, what would be your underlying performance on an RoRE basis on the totex? And where are we in sort of the quartile benchmarking performance as we're heading towards AMP8 on an underlying basis? And then the second question I've got is going back to inflation, and I might have missed this one, but could you just remind me again what actual inflation number did you use to calculate your financing outperformance, please? And if it's kind of that 8%, I think, Phil, mentioned earlier on the CPIH, is there a risk that you -- that there's going to be some sort of windfall or another sharing mechanism or is Ofwat in discussions with you into how whether this is sort of an unearned number particularly in that sort of cost of living crisis that might need to be returned? And then just a very quick one here. Can you just remind again, on your bad debt at 1.8%, is that the provision you're booking against the revenue on last year's numbers? And if we do have a cost of living strike recession coming next year, what should we be factoring in for bad debt on a guidance outlook basis?

Okay. Most of those are for Phil. But if I just pick up the sort of Ofwat what you might call sort of mood music around the inflation area. I mean you have picked up, Dominic, just as much as we do that essentially, Ofwat are very conscious of the current inflation environment and really a couple of things, what that does in the context of a customer's ability to pay? And really encouraging companies to do as much as they can in helping customers who are struggling? I mean as you've seen this morning, I think we, as a company, have by far the greatest commitment in terms of company contribution. If you look at what we're doing in terms of the GBP 71 million we put in plus the matching arrangement that we put, there's over GBP 140 million of company money going into supporting customers as part of that overall GBP 280 million. So we're doing a lot in that area, and we've committed to do that through the 5-year period. I think the other aspect is what is it doing to outperformance potential for companies? And of course, it won't be uniform across the sector. But that's where our decision comes from in terms of wanting to share outperformance, and effectively, get ahead of AMP8 by doing things that customers would otherwise have to pay for an AMP8. And that's something that we've taken our own view on, we're taking our own decision on for individual companies to decide what they do. But essentially, that's been our -- that's our approach to what we consider to be a responsible behavior, and we've done it before. So I think in that sense, no specific guidance, no specific requests, no direction in that area, it's something we've decided to do because it's what we do. It's the way we behave towards customers as we achieve success. Phil, do you want to pick up the others?

Yes. So if I pick up first the underlying RoRE position and totex, Dominic. Sort of just to give some context and scaling, I guess you can see the 0.5 customer ODI performance, which is the GBP 25 million of ODIs in the current year. So the 0.8 negative to totex is sort of circa around about GBP 40 million, and that's relating to DNM investment that we're making, which is additional investment that's going through the totex sharing mechanism and supporting the delivery of future ODIs. So that's what's happening with the totex position. I think inflation is a really interesting point you pick up on, the 8% isn't what's driving financing performance in the current year because sort of that's really a look forward in the outlook to next year. But just sort of unpacking the financing outperformance of 1.6% that we've earned this year, there is a technical mismatch that's occurring there. It's dragging down the financing outperformance a little bit because the way the calculation works is an average CPI is used for the allowance over the year. And as we know, we've come through a year that we've had rapidly escalating inflation. So that average CPI for the year is only 3.7%. And then when you look at our index-linked debt, our index-linked debt is predominantly anchored around the January CPI number, and that was 5.4%. So effectively, you've got a technical mismatch in that rising inflation environment, which is suppressing the financing outperformance in the current year. Sort of as you go up and things flatten out and then start to come back down again on that downward trajectory of inflation, you get the sort of pickup because effectively, you've got the average wagging the sort of the index-linked debt cost. So hopefully, that helps explain, but that lag is probably worth of the order of about 1.5% on the financing outperformance, but will come through in subsequent periods. And then lastly, your question on bad debt and the 1.8%, I guess if you're a prudent organization, you might try to argue to provision against future bad debts, but you can't do that. You've got to sort of provision for what's on the balance sheet at the day and your expectation of the collection of bad debt. As we look forward, our best view at the moment is cash collection is holding up very well, remarkably well. And I think that's a testament to all the hard work that goes into the cash collection activity and also all the support schemes that we have in place. So we have a vast array of targeted support schemes for our customers sort of GBP 280 million of a package over the course of the AMP. And that is really helping to sort of help those people who have genuine affordability issues. And then as I said in the presentation, the whole approach to sort of data and analytics in terms of cash collection is really paying dividends. So looking forward, it's hard to tell how the environment is going to be over the next 12 months, but we certainly don't expect a significant problem at this stage.

I think the -- just adding to that, I think the -- the issue that we benefit from hugely in the way that we've looked at the whole relationship with customers is to be able to identify and move quickly to provide help to customers so that they don't fall into debt and they're aware of what's available to them. So I talked about the schemes that essentially we have available. I talked about the hub that we've created, which essentially gives a point of reference for all of the different debt advisers that there are out in the community, advising and helping people. I think the credit referencing that we've got, lets just understand a customer situation because inevitably, when they're struggling, it's not just us, they're not paying. And I think the latest innovation is brilliant because by essentially using Open Banking rather than having to fill forms out, which often is quite difficult in itself, can take time. People are actually pursuing applications, which previously might have taken weeks at a point at which they're very stressed, very concerned about building debt. We're able, literally within minutes to talk to them, to share with their agreement, their banking picture and then to actually give them the best advice on what kind of scheme could help, which ultimately might be, we would recommend that you go and speak to the trust fund that's been established, which effectively independent of us disburses funds to people who are really needing it. So I think it's about a very deep engagement with the community through multiple channels, being able to understand the customers' financial picture and then being able to very rapidly get them onto a scheme which helps. And that's really something that we've built over years and has contributed to the bad debt level that we've got. To have only GBP 4 million of bad debt aged over a year is just remarkable really. And I think -- so we're as well positioned as anybody to deal with what we might see as we go forward over the next year or so.

I think the initiatives are really, really good, but can I just follow-up which would be if we added in that lag, though, I think you said 1.6% and then next year inflation is at 8% or whatever averaged, you could be printing a financing outperformance maybe 6%, 7% in 12 months' time. Is it a fair assumption to say that as a responsible corporation as investors in your company, some of that will probably be voluntarily used to help more vulnerable customers in your area or do you think that number is sustainable to put through as playing to shareholders?

Perhaps if I just pick up that briefly, Dominic. I think as Steve talked about the sort of reinvestment that we're making in this announcement today of GBP 250 million. We're really there focusing on driving that environmental agenda and improvements with the sort of the use of some of that financing outperformance. So we are making use of it to drive sort of the right activities in the environmental space. In the context of customers, we're very conscious that customers will be finding it very challenging, but we do have the sector-leading sort of package of support measures, as Steve talked about. So GBP 280 million over the AMP is very targeted and focused on those people who have the sort of biggest challenges in terms of affordability. So I think with that package in place, it's right for us to sort of pay attention to the environment and support the environmental investment that we announced today.

Okay. Thanks, Dominic. So we next have Chris Laybutt of Morgan Stanley.

I just really had one question, which is just coming back to your comments earlier about the 1% inflation across 5 years would improve your totex budget by GBP 150 million comment. Is the messaging here that the inflation that you've seen rolling in to date neutralizes the impact of the higher cost coming through? Is that simplistically the message? And then perhaps more a strategically oriented question. When I think of you, I think of digitization, machine learning, innovation, untapped efficiency potentials or potential rather? Once again, we're seeing reinvestment, which we can see the benefits of that, particularly politically and also in terms of asset performance. But at what point do we start to see the sort of the potential in the organization really shine through?

Yes. I think , do you want to pick up the inflation point?

Yes. If I take the first question, Chris, first. The simple answer is yes. And I think as Steve sort of said, our base totex program, we're targeting to deliver within our allowance. And so the allowance is subject to inflation. We've got inflation with cost pressures coming through, and we still expect to deliver within that base allowance. So yes.

Right. I think when you actually look at all the drives that we have through systems thinking and others, probably what we don't actually talk about essentially is the efficiencies that we have built into our plan right from the start of our determination. I think one of the key elements that we had as part of securing fast-track for our final determination at PR19, which we had very significant efficiencies built into our underlying totex, principally the OpEx line associated with savings coming through from efficiencies being delivered through different ways of working. And -- so those efficiency targets effectively sit there and are -- need to be delivered in order to hit our overall FD numbers. So while we don't talk about it as effectively as an explicit set of figures, I can assure you, Chris, there's actually in order to hit the efficiency curves, which secured us fast-track and secured what was an FD that compared to what happened across the sector at PR19 was a largely undisturbed plan. We were baking inefficiencies, which were being delivered through our different innovations, both in use of technology, AI, et cetera. So we'll see that benefit coming through. The other areas you're seeing is in things like ODIs. For those of you that think back to where were we at the beginning of PR19? We were talking about an ODI level, which wasn't particularly different from what we earned in AMP6, so around GBP 50 million. We're now 4x that in terms of our projection for the period. So we are actually seeing that benefit come through as value in a number of different areas in the way that it underpins our plan. Okay. Verity Mitchell from HSBC. I think you might be on mute, Verity.

I'm very interested in Slide 11. And you pointed out that you've already achieved a 28% reduction in spills between 2020 and 2021 and your target is 33%. So you're almost there. So are you being ambitious enough on that? And to your earlier comments, how much of those spills now are actually being monitored? And then I've got -- just got a question on Slide 23. Can you just let us know what your revised RCV growth is on a real basis because I noticed you've got inflationary assumptions in there, that would be really helpful? And then just a quick third one, which is following on from Mark's earlier comments about tax. Do you expect the super deductions to mean that your ODI outperformance on tax is going to be lower in subsequent years?

Okay. Thanks. I'll deal with the first 2, which is ambition. I mentioned earlier that we're actually trying to hit a moving target in the sense that we've got about just over 80%, sort of mid-80% of our CSOs have what's called an event duration monitors. So they've got a sensor fitted. And we'll complete that, as we said under our pledges for Better Rivers. We'll complete that by 2023. So the 28% is against that lower number. So yes, you're absolutely right, it's a great achievement in the first year, but we'll have an even bigger number to consider next year in terms of spills. So I think -- so we're fairly comfortable with the 1/3. I mean if we can bust it, we will. But at this point in time, it's a moving target that we measuring ourselves against. Do you want to pick up on tax, et cetera?

Yes. So picking up on the sort of RCV profile first. I think the extra sort of impact of the carryforward value is around about 6% real on the overall RCV profile. And as you know, we did have a negative position real on the RCV over the 5 years in the final determination. So I think it's bringing us out at around about 2% real overall growth in the 5-year period. And Verity, on the tax, just perhaps remind me again, I didn't quite follow the linkage from the tax allowance to the ODIs that you sort of mentioned.

I mean you've just got a benefit from super deduction. So that is not going to be -- putting aside the fact you're going to have to hand this back to customers, when the tax regime changes, that number is going to be lower in subsequent years, isn't it?

Yes. So on the tax component, so you're right, the 20 basis points is what I've called out is what will go back -- flow back to customers, the balance is what shareholders and the company retain. Clearly, that super deduction number is worth about GBP 40 million in the current year. It's a similar sort of order of magnitude next year in terms of value of super deductions. And then the tax adjustment mechanism will kick in and reverse the following 2 years because we'll have the 25% corporation tax rate that's applying. And therefore, there will be a flow of money value back into the company from customers because effectively, there's a sort of shortfall of the tax allowance to make up to the 25%. So that's how the mechanism works and the sort of 1% current tax value in RoRE for today this year, I would expect to be of a similar order of magnitude next year.

Okay. Thank you. I think, yes, we've got Bartek Kubicki from SocGen, who's on now , good morning. Bartek?

Three issues I would like to discuss, if you don't mind. Firstly, and again on those additional investments you announced today, I understand you had a choice between 2 scenarios. First, you invest now, you have totex underperformance, but you get more on ODIs. And the second scenario you invest in AMP8, you are fully funded. There is no totex underperformance, but less ODIs. If we compare those 2 scenarios, you obviously decided to take the first one. In terms of IRR creation or NAV creation or ROE creation, how do you compare -- are you able to quantify those 2 scenarios? And why did you choose the first one versus the other one, meaning investing in AMP8? Secondly, on the GBP 280 million of customer support scheme, will it have any impact on earnings, ROE, underperformance, outperformance, et cetera? Is it somehow funded also in your allowances or not really? And thirdly, on your capital program, procurement, you mentioned 80% is already procured for the AMP7. And I wonder if you are getting any signals from your suppliers that they want to renegotiate the contracts or where we want to step out the contracts because the inflationary pressure is simply too high to keep the contract conditions?

Can I take the first one?

If you want, yes.

Yes. Okay. So I suppose just taking the first question on the sort of totex investment, why now rather than later? I guess driving it now is driving sort of sustainable long-term performance. And so that investment in DNM and the sort of taste, smell and appearance or sort of water quality investment is actually driving performance in ODIs in this AMP, which effectively pays back along with the totex mechanism, but also then puts us in a position to be in a stronger ODI earning potential going forward into the following AMP. So it's really about getting it done early to sort of drive that sort of progressive performance into AMP8.

I think the other point, Bartek, is whether you're confident you would get the money in AMP8. So I think you're in a situation, I probably -- if I just give you 1 example, which is DNM and the investment we're making in sewers, I think over PR14 and PR19, we'd made what we felt was a compelling case for investment in our sewer system. As I said earlier, we've got sort of 54% combined sewers, we have much higher rainfall than other parts of the country. And so we felt there was a good case for investing in that sewer system. We didn't win the argument. And I'm not sure even now, we'd win the argument again when we go into PR24. And so I think the DNM is an opportunity to transform our performance in this area, but in a way where when you look at things like menu sharing mechanisms, when you look at ODIs, you can actually see that there is a return on investment as far as shareholders are concerned. Otherwise, what you'd simply do is probably just continue to carry on the way you are, be penalized very significantly through ODIs in this and subsequent ones. So I think when you actually look at it, there is an issue of if you thought you were going to get an AMP8, yes, there's an issue around timing, there's an issue around the ODI benefit one might get. I also think there's a moral argument here which is that we are benefiting quite significantly from outperformance. And in today's environment, when you look at the pressure that customers are under, why not do it? We're doing it. Customers are not having to pay in AMP7 for these things. And therefore, we are delivering the benefits that customers will see, but it's not impacting the pricing that you'll see in AMP7. So a number of factors that sort of come into play there. I think when you look at the procurement question that you had, then undoubtedly, when you look at the construction supply chain, they are all seeing a whole series of cost pressures. The way that's tending to come through is in what you'd see as being both the direct costs of any material cost increases. And those -- any of us actually doing building a home will know how much things like wood, steel, concrete, costs have moved, but also the indirect costs associated with a very, very buoyant market, where companies are not prepared perhaps to take the competitive risk that they would have done in a less active market. We've -- fortunately, we had our supply chain partners on framework agreements that would essentially set the pricing basis on which we work. As I said, most of them are on a target cost arrangement. Yes, I do think there will be pressure on pricing. And yes, in a number of instances, we've had conversations with companies about their ability to honor the arrangement they've done. But I think, as I said before, firstly, the fact we've got them on contract is a huge bonus because we have access to resources. And we see, as we go forward, taking into account those conversations, we believe that we can deliver our commitments within our FD number. So that's taking a huge amount of work between us and our contractor partners in things like looking at scope, looking at further efficiencies? How do you actually deliver against the budget that we've got. And at the moment, we look solid for AMP7. Is there another question on...

Yes, the GBP 280 million of customer support and the impact on earnings, can I take that?

Yes.

Yes. So I mean, the GBP 280 million of customer support, Bartek, is not new news. It's something we've put in place of a whole of this AMP. So effectively, our numbers today include this year's component of that cost. So the short answer is running forward there's no impact of that on our EPS because it's already in our earnings position today and will just carry on running forward into the next 3 years of this AMP.

Okay. Right. Thank you. So I think we have no further questions coming through on Teams or written coming in. We've got one question. Have we? One more. Is that coming -- Chris. So Chris.

Sorry, I dropped out earlier. I just had a very quick follow-up, please. Just in terms of the extra GBP 400 million of investment, is that figure a real or a nominal figure, just a clarification point? And also one of the discussion points I think today, given the reaction in the shares is reasonably material is the inflation assumptions that you're now including in your fiscal '23 guidance. If we were to include those and roll them forward into your revenue, what would be the revenue uplift in '24-'25, purely because of the inflationary impact?

Okay. The additional investment is the amount we would expect to spend. So I suppose, in that sense, nominal. Yes. Phil, do you want to pick up the issue about outlook?

Yes. So in terms of the revenue for the following year, sort of getting 1 year ahead of ourselves already here, Chris. But -- I mean, CPI is expected to be relatively flat through the course of these next 12 months. I think sort of the January number I've got on the outlook side for the index-linked debt is effectively 8%. As you know, it's the CPI position at November that drives revenue for FY '24 and so I'd probably expect that to be of the order of 8% uplift effectively.

Okay. All right. So I did see a quick flash of Mark Freshney there. Does that mean you've got a question -- no. Right, Mark, you saved. Okay. Thanks very much, everyone. Thanks for joining us, and thank you very much for your questions.

Okay. Thank you, everyone.

Cheers. Bye.