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

Okay. Good morning, everyone. My name is Chris Laybutt, IR and Clean Energy Strategy Director here at United Utilities. And I would like to welcome you all to our interim results presentation this morning. As always, please note the cautionary statement at the start of the presentation. And as per previous events, today's -- the format of today's event will be a brief presentation by our CEO, Lou Beardmore; and CFO, Phil Aspin. And then we'll follow that main presentation with some Q&A. The Q&A will be conducted live. [Operator Instructions]. So terrific. With that, over to Lou in the studio.

Thanks, Chris, and good morning, everybody, and thank you for joining us this morning and the opportunity to talk to you about our business plan. Our aim is to talk you through the detail in relation to the half year set of results and also the opportunity to have a chat through the actual plan that we submitted at the start of the year. I'm very conscious that it's in October since we last spoke to you, and therefore, we're going to do our very, very best to keep this brief and -- but more than anything, recognizing we want to leave some time, we can do a Q&A and an opportunity to ask any questions that you may have of us. So firstly, and I suppose recognizing that I've got a captive audience this morning, I wanted to take a moment to go through some of the highlights from the business plan because you know it's been a huge effort, and that plan went in on the 2nd of October. If we look at the detail, we really believe that this is a plan that delivers on the things that matter most: a county-based approach that we've taken to its design, its planning and its engagement has ensured that we have a plan that delivers customers for communities and for regulators. It's a GBP 13.7 billion totex plan, and that's going to see us deliver 37% real RCV growth, delivering strong year-on-year growth for investors in a way that AMP6 and AMP7 never did. We've got a strong balance sheet with 59% gearing and a credit rating of A3/A-. And if we look forward, we've got the flexibility in financing with a 65% average gearing over the AMP period on Ofwat's early view WACC and the current scope, and that's without any recourse to equity. The plan is deliverable. But what's more, we've already started delivering against it. The GBP 1.2 billion worth of early investment has enabled us to start delivering against our store-made flow reduction plan. We've invested in and are up and running with our in-house CSO rainwater management and modeling team. And we've already increased our delivery partners, moving from 5 to 50 to underpin our delivery in each of those 5 counties. Despite having one of the biggest plans in the sector, our bill increase at 25% is in the midpoint of the range, outlined by regulators. And at the same time, we have an affordability package of GBP 525 million, which you're going to see us being able to support 1 in 6 customers here in the North West. But most importantly, this is a plan that delivers a step change in performance, particularly on combined 0 overflows with a 60% reduction in spills against the baseline. In terms of what comes next, you'll recognize this time line. We shared it with you in October. But what you can see is the details and some of the high-level milestones we've set out for you here. As you know, Ofwat is considering publishing an early assessment in March, and then it will be May, June for draft determinations which may, hopefully, if we're lucky, could coincide with our full year results. But whatever happens, I think we know that it's going to be a very busy May and June both for yourselves and for us here as we all absorb the detail. So now I'd like to take you through the operational performance for the first half of the year. It's been a solid first half, and I hope you'll see, as I take you through the next couple of slides, is that we've not just been working hard on delivering great performance for customers and communities. We've also been focused on building new capabilities. And those capabilities are going to see us really well placed to deliver AMP8 and the step change that we've put forward in our plan. So once again, we've delivered strong operational performance despite the challenges that the weather has thrown at us. I smiled when I listened at the music we were playing before you joined in terms of Mr. Blue Sky by ELO. While it might be a particular favorite, it doesn't feel like we've had much Blue Sky. And with Storm Debi this week, we've actually had 3 named storms in this many weeks. As a result of that, I'm pleased to say water resources are strong and in a healthy position and we go into the winter and into the spring looking extremely positive on water resources. We remain ahead of our target in glide path on reducing water quality contacts with our investment and focus on water quality, showing tangible improvements for customers. And our leakage were once again on track to deliver strong performance, achieving our leakage targets and expecting to earn a customer ODI reward for the year. But I'll now turn to our wastewater performance. On the EA's EPA assessment, our teams are working hard to deliver strong performance. And we're pleased that we're currently on track to achieve 4-star status this year. We have unfortunately seen an impact of performance driven by the wetter weather over the summer and the storms we've experienced, particularly on sewer flooding. However, if we look at storm overflow performance, despite the higher levels of rainfall and the increased monitoring which, by the way, is on track to hit our target 100% monitoring by the end of the year, we expect to deliver further reductions in average bills this year. The accelerated investment has allowed us to get to work, and we're already starting to see the benefits of the new team and the solutions that we're starting to deploy across the North West. That's going to see us going from 59 spills per overflow in 2020 down to around 30 spills per overflow in 2023, making great progress towards the 2030 target of 20 spills per overflow that we set out in our business plan. Turning now to customer service. We continue to perform strongly on our customer service metrics. We've just been ranked by the Institute of Customer Service as the #1 WaSC, and more importantly, I think, the fourth out of 30 utilities for customer service across the country. We know things are tough for many families right now. We have over 370,000 households on our priority services register and we've helped over 350,000 customers so far in AMP7 with affordability support. The schemes we provide, combined with the industry-leading credit collection practices and clever utilization of technology such as open banking, have seen us deliver our best-ever current year cash collection performance and a stable debt charge of 1.8% of household revenue. Really strong performance considering the headwinds of the current cost of living crisis. Now turning to our ESG performance. On environment, pleased to be currently on track to achieve 4-star EPA. We're also supporting development of an exciting new carbon capture facility at our head office here in Warrington, representing a great opportunity for us to decarbonize our head office footprint. And on social, I'm pleased to share with you that we have been named as Water Industry Skills Employer of the Year. And with an investment program in AMP8 that's going to require great skills and talent, it's a great springboard for future success. All of that, not just delivering for our customers and our communities, but from our perspective of water poverty, I'm also pleased to say that we've lifted 100,000 customers out of water poverty so far this AMP. Real testimony to all the hard work that's going on helping with customer affordability. And we maintain our focus on strong governance with Ofwat's monitoring financial resilience report once again categorizing us as having the highest financial resilience status. So if I move on to ODIs. Last year, we had our best every year, delivering on 83% of our performance commitments, the highest in the sector. This year, we're on track to deliver over GBP 50 million net customer ODI reward, more than double the reward we earned last year. And the AMP guidance remains unchanged at GBP 200 million. So to sum up, it's been a strong first half for operational performance. We've seen really strong water quality performance. We're currently on track to achieve the 4-star EPA rating. The accelerated infrastructure delivery project is really helping us to deliver further reductions in average spills per overflow despite the levels of rain and the increased monitoring. We've supported over 350,000 customers so far in AMP7 with affordability support, and we're continuing our track record on ESG. We expect to achieve record ODI levels, and as I've said, we're really pleased that we're able to double the ODI rewards from last year. Finally, as I said at the beginning, we've submitted what we feel is a really strong and ambitious AMP8 plan. It delivers on the things that matter to customers, it's transferrable and it's deliverable. I'm now going to hand you over to Phil and we'll take you through some of the financial highlights to you.

Thanks, Lou, and good morning, everyone. So here are the key financial highlights for the first half of the year. Revenue of GBP 982 million is up 7%, largely as a result of the allowed inflation increase, partly offset by a small K factor adjustment, as set out in our PR19 final determination. Underlying operating profit of GBP 271 million increased by 5%, primarily reflecting higher revenue, offset slightly by the impact of inflation on our core costs. Now during June, we experienced a fractured outlook pipe at our Fleetwood wastewater treatment works. We installed a 2-kilometer, 5-lane temporary bypass to restore full operations to the site. And during that time, we supplemented site treatment by an extensive tankering operation to minimize any potential environmental impact. And this resulted in a GBP 30 million of additional OpEx and IRE in the first half which, given it's a typical nature, we've adjusted for in our underlying measures. As a consequence, our reported operating profit is lower at GBP 241 million. Underlying EPS of 13.2p per share reflects the improved underlying operating profit, and we reduced net finance expense due to the lower inflation charge on our index-linked debt. Finally, in line with policy, the interim dividend per share is 16.59p, and our gearing increased slightly to 59%, reflecting ongoing investment. And before getting into the detail of the first half performance, I want to remind you of our AMP7 financial framework that we set out at the full year results. Our framework today remains unchanged from May. Having updated for performance expectations and inflation, our RoRE guidance for the AMP remains in the range of 6% to 8% real, delivering strong returns. And we continue to expect the compound annual growth rate of the RCV across the regulatory period to average between 4% and 5% per annum. Our dividend policy is for growth in line with CPIH inflation, and we continue to benefit from our strong balance sheet with gearing targeted in the range of 55% to 65%, resulting in an A3/A- rating at the world company level. As we progress further through the PR24 process, we'll be able to provide an update as to what this means for our framework into AMP8. So now let's have a look at underlying operating profit. Underlying operating profit of GBP 271 million is up 5% on the prior half year. This is driven by inflation with regulatory adjustments to revenue of around GBP 50 million higher than the prior half year, more than offsetting the inflation impact of higher OpEx. Looking ahead to the full year, our revenue and OpEx guidance remains unchanged. While the OpEx run rate is slightly ahead in the first half compared to historical norms, this is due to some timing effects and the more even split of power and chemical costs between Half 1 and Half 2. Lastly, with our asset base growing, depreciation has increased by GBP 7 million, which completes the picture. Turning next to underlying tax and interest. Underlying net finance expense for the half year was GBP 180 million, GBP 87 million lower than the first half of last year, largely reflecting lower inflation applied to our index-linked debt. Now it will come as no surprise, but cash interest rose GBP 6 million as higher interest rates take hold, but we continue to deliver financing outperformance. As you know, we front-loaded our CapEx program in AMP7, which means we funded proportionately more of our AMP7 capital requirements in the low interest rate environment, contributing to further outperformance against regulatory assumptions. Looking ahead to the full year, we still expect net finance expense to be down at least GBP 150 million. On underlying tax, we recognized no current tax charge for the first half, in line with our guidance as we benefit from full expensing. We continue to expect this to be the case in the second half, resulting in no current tax charge at the full year. This all results in an underlying profit of GBP 90 million and an EPS of 13.2p per share. Now turning to our strong balance sheet. At 59%, we have one of the lowest gearing levels in the sector. This is based on an RCV of GBP 14.4 billion, up from GBP 14 billion at the end of March, and net debt of GBP 8.5 billion. During the half year, we completed a GBP 1.8 billion pension scheme buy-in transaction with Legal & General, covering around 2/3 of our liabilities. This represents a very significant milestone in our derisking journey. We've raised around GBP 750 million of funding during the first 6 months of the year, and having fully funded our AMP7 financing requirements, we're now funding our AMP8 investment program. As such, our liquidity position remains robust and cash coverage into 2026. So to summarize, once again, it's a robust half year for us here at UU. As you know, we benefit from higher inflation for RCV near-term impacts to manage and we're pleased to deliver a solid set of financial results with our full year guidance unchanged. Our balance sheet remains one of the strongest in the sector. And so we're well positioned to fund the growth investments in the last month in our regulatory submission. And our progressive dividend continues to grow in line with inflation. So thank you, and I'll now pass back to Lou.

Thanks, Phil. And before we open to questions, I'd like to sort the highlights for the first half of the year. We've submitted an ambitious and high-quality plan to the regulator, one that's affordable, financeable and deliverable, a plan that's backed by a strong track record and delivering for our stakeholders. As we've shown you today, we continue to benefit from our strong balance sheet, providing us with future flexibility. We're delivering in AMP7. And more importantly, we're setting ourselves up for success in AMP8. And with this, we're continuing to support our customers in the North West with sector-leading affordability support. Finally, and I think most importantly, we are waiting in AMP8 to deliver on what matters to our stakeholders. We're tackling storm overflows already, and that's helped by the accelerated investment allowed by Ofwat earlier this year. Thank you for your time today. And Phil and would be happy now to take any questions that you may have.

Terrific. Thank you very much, Lou. Thank you, Phil. So to start us off on the Q&A today, James Brand. Mr. Brand, if you'd like to unmute and go ahead. Thank you.

I just had one question actually. When you published your business plan just over a month ago, you had some quite strong call support from the local mayors. There's now obviously been a lot more time for people to digest the plan and for you to engage with stakeholders. I was just wondering how the process has gone in terms of the feedback you've had subsequent to the plan from politicians and if you're able to comment from Ofwat.

Thanks, James, for the question. Yes, we had really strong support. I think, as you know, when we put the plan in we've taken a very different approach to the way that we've constructed our plan. So essentially, used a country-based model so that we have a plan that is specific for each of the 5 counties here in the North West, and that's because we've got very different stakeholders with very different needs and drivers. And as you know, as I said, when we put the plan in, we've had great support from both Steve Rotheram in Merseyside and Andy Burnham in Manchester, and that support has actually continued to strengthen since the plan's gone in. And I think what's really important is the context of how many people that we've managed to talk to the plan since its submission on the 2nd of October. So just to put some sort of quantification against that. We've engaged with over 550,000 customers since the plan has gone in, over the 400 stakeholder meetings. So fantastic regional support and engagement. What's more important, we're already now up and working with Andy and the regional team in terms of Greater Manchester and the combined authority starting to deliver against those commitments. So the political and local support that we've had continues to gather real pace and momentum. In relation to feedback from Ofwat, as you know, we're obviously now in a formal process. You can tend to judge these things by how many questions and queries you're getting back. I'm really pleased to say, based on the data and insight that we're seeing, we're absolutely at the lower end of those queries that are coming back in, which is where I want us to be. And the things we're being asked are really constructive and the things we'd really want to engage on. We continue to have really positive conversations on adaptive planning and the overall plan. So since the plan has gone in, the engagement has continued to intensify and it's been really positive.

Okay. Thanks, James. Next on is Sarah Lester. Go ahead, please.

Sorry, no video. IT is being a little bit of a challenge this week. I've got 2 questions, please. So firstly, on the business plan and, in particular, your base regulatory dividend assumption. Could you just please remind us how that base rate dividend assumption of the return on equity minus the 1% fits within Ofwat's suggestion in "4% assumption for non-growth companies and close to 2% for high growth". Then my second question is quite a high level, and I do appreciate you may be limited in what you can say. I'm just curious, here in the U.K., we have 2 regulators whose sectors are facing a really meaningful step-up in investment, one regulator showing encouraging signs being proactive, nimble, adaptable to that. Presumably this presents an opportunity for some cross-sector learning. So I guess the question is twofold. What would you ideally like to see from the water regulator? And I'm not drawing you into a public debate on return allowance. This is just more general. And then the second part of the question, do you think the door is open to at least evolution, if not revolution at Ofwat?

Thanks, Sarah. Let's split the questions into 2. I'll ask Phil to pick up on the dividend, and then I'll come back on the regulatory question.

Yes. Thanks, Sarah. I think on the dividend position, we're very, very comfortable with our dividend policy we put forward in plan. It's a very ambitious and high-quality plan. I think to your specific point, the 1% lower than rest of equity is balanced with where we start. We haven't positioned in terms of the strong capital position of UU Water and the fact that it doesn't suffer from -- of the drags on its sort of cash flows. For example, we've talked today about the pension scheme derisking transaction. So the long tail risk of cash flows there is eating away at sort of debt position. So very, very strong sort of capital position and a dividend policy that retains equity. It's the right proportion. And you've got to look at this in the broader context of where you see things happening in the context of the adaptive planning and the changes that will come through from WACC. So now that the WACC is going to get updated, we know that's going to be rising by probably a minimum of sort of 40 to 50 basis points. And I think if you look at what we framed at the sort of October business plan submission event, when we talked about the Ofwat position and the sort of Frontier Economics position. If we were running those numbers today, we're probably looking at something of the order of an extra GBP 500 million to GBP 1 billion of cash flow that will be flowing through the plan. So there's a lot of moving parts to still work through. And in the context of all of that, we're very confident our dividend policy is both a high-quality and ambitious approach to the plan.

And Sarah, picking up on your second question, you're absolutely right. I don't necessarily want to get drawn into a sort of a debate on that. But I suppose what I would say is I am seeing that evolution come through from Ofwat. So I think the way that they're engaging with the plan is really positive and broader regulators, too, in terms of the environment agency, Defra and Natural England. They're really great and constructive conversations, and I think that's really important. But what I'd also say is we are seeing some movement. And I think we've already seen evidence as well with the accelerated investment that we saw last year and the ability for us to be able to maximize that. That was an opportunity that was put forward which, as you know, United Utilities sort of ceased. And we took the opportunity in terms of how we could advance that investment from AMP8, AMP7 so we could get started. So I think we're seeing more and more of those types of -- that type of thinking and that sense of actually how can we get going early on some of these programs. So I think it's really encouraging signs that we're seeing, and we're at the heart of trying to have those conversations and present those solutions.

Okay. Thank you, Sarah. Keeping us on our toes, I see. Next up, we have Martin Young. Go ahead, Martin.

A couple of questions from me on business plans. As you have said, you have a very big, very ambitious plan. If I ask you for the greatest single risk to that plan, whether it be internal or external to the group, what is it? And then secondly, you undoubtedly have a team of people that have poured over the business plans of the rest of the sector. From that analysis, where do you feel that you are coming out as being well positioned relative to the peer group? And conversely, where do you feel that you are below best-in-class at the moment?

Thank you, Martin, for both of those questions. I'm really clear in terms of where I see the biggest risk. It's actually, if you think about the level of infrastructure that we're delivering, it's how do we get through the sort of planning departments that exist in relation to the positions that we need. And we've already started in terms of how do we mitigate that risk. That's the real benefit of building a plan that's based on 5 counties, because we've already been able to engage with local authorities, MPs, stakeholders, Post Councils and everybody else and construct and build that plan so we can enable delivery. So actually, that smooth run through, if you like, of getting those permissions is key. So all the work that we've been doing on what we've called early mobilization, both in terms of ground conditions and planning is designed specifically to deal with that particular risk. In addition to that, you asked me a question about where did I think we were well positioned. When we put the plan in and we talked to you about it in October, we said we were backing ourselves as a team to deliver. And we very much are, particularly in the space of around ODI. So the mood, if you like, from bespoke to common ODIs, certainly in United Utilities as well. I think we've demonstrated this morning that we've performed well, the best in the sector in terms of the ODIs that we've delivered. And as you can see from the latest data that Ofwat submitted, we're only 3 -- there's only 3 water and sewage companies that are actually earning rewards. And that's largely delivered by bespoke. But if we look at how we perform on those common ODIs, we've performed well, and we're not as resilient -- reliant, if you like, on those bespoke ODIs. I think one of the key things in that therefore is our ability confidence as we step in AMP8 in terms of delivering those rewards. I think conversely, we've had a look around to everybody else in relation to, is there anything we're worried about. There are some features of the North West that are a challenge, and the amount of rainfall being one of them. And I suppose, particularly on sewer flooding, so if I look at where we're positioned on sewer flooding compared to others, then that is Mid-Pac. But that is a feature, if you like, of the environment of which we're operating in. But that's part of the balance of ODIs more broadly. So again, I come back to what I said earlier. We feel we're really well placed and confident when we see the targets that we've put forward and where we think we're going to sit and perform against them.

Terrific. Next up, Pavan Mahbubani. Please go ahead.

Really quickly, firstly, you expressed confidence in your presentation on getting a 4-star EPA rating. Can you give a bit more color as to your confidence, especially given that you fell to 3-star for 2022? Secondly, on your A- credit rating, can you remind us if this is at the group or the water company level? And tied to that, in terms of your guidance for being able to fund your AMP8 plans with no recourse to equity, does that imply that we would need to take a downgrade? And if it does, is that something you're willing to take? And then my final question is on the ODI strength this year versus last year. Can you just give us some color on which have been the metrics that have done particularly well?

Okay. Pavan, thanks for your question. I'll pick up the 4-star and ODI strength and then I'll hand you over to Phil, and we'll pick up on that point around credit metrics and equity more broadly. We're now in November, EPA measure is a calendar year measure. We've currently got 6 weeks to go. We're absolutely where we'd want to be with 6 weeks to go. We are entering into the sort of more riskier period, if you like, in relation to the weather, the challenges that the weather presents. So we have everything crossed. We're working extremely hard, but we're absolutely where we'd want to be at this moment in time. But the next 6 weeks is ahead of us. And if I look at how the team have responded, the areas that we've been really focusing on that have paid dividends for us in terms of performance throughout this year. We are extremely focused on the next 6 weeks performance. In relation to ODIs and ODI strength and what's sort of contributed this year, if you like, to the improvement that we've seen and the doubling of the ODI rewards. That's particularly in terms of improvements in relation to water quality. So that's a picture, if you like, of water quality improvements and infrastructure that's been brought onboard and improved resilience that have delivered those improvements in relation to the ODI rewards that we've talked about this morning.

Okay. Thank you, Lou. And you're quite right, Pavan. The A- rating is for the water company. All of our debt is issued by the water company. So that's a relevant rating in terms of debt issuance. In terms of the plan that we talked about back in October, clearly, we showed the pathway there to position. In terms of no equity -- no recourse to equity plan that would be an average gearing of 63% through the AMP period. That was based on the adaptive planning scenario of GBP 1 billion that we've been talking about this morning. And again, that's sort of been received very positively by Ofwat and government more broadly. So that was one factor. And the second factor was the sort of WACC position. And we sort of showed the Frontier Economics WACC at 3.9%. Interestingly updating it today, that WACC position today is more like 4.2%. And so that, again, just sort of continues to push down our overall average leverage in the AMP period. And that's consistent with the A- rating we have currently for UU Water.

Terrific. Mr. Nash, you've been very patient there. Please go ahead.

Can I have 3 questions, if I may. The first one is, I think, from 22nd we got the autumn statement coming out and these proposals that the capital allowances for the tax might be extended. Now clearly, capital allowances have been a material benefit for your investment program in AMP7. I'm just basically wanting to know what would be the impact of these capital allowances if they were to be extended on both AMP7, but also on your business plans as we're going to AMP8? Do you think there'll be a sort of a new iteration on this? Second question I've got is on your -- you mentioned the early assessment in March. What do you see the probability of that being fast track, being allowed by Ofwat? And do you think if there was, you'd be one of them? And then finally, I was going to talk about another risk probability. You mentioned just earlier, but you said that your WACC is 4.2% today. Can you just tell me how you build that one up on your cost of equity number and how that ties in with your sensitivity number? I think you end at 5.32%, which I think is a bit low personally.

Dominic. Thanks for those questions. I'll let Phil pick up the ones in relation to the autumn statement and the WACC build. In relation to your to 2 points about early assessment and where do I think Ofwat will be. I think we know what you know at this moment in time in relation to that time line and when we're expecting some early indication. I think the methodology that Ofwat put forward this time around as we went into the AMP was really clear. They want the companies to put in the very best plan from the offset. And we feel that, that's what we've done. We're very much after those additional 30 basis points in terms of we've put forward a plan that's ambitious. It's financeable, it's deliverable, and more importantly, it's affordable for customers, too. So we feel we're very well placed in terms of taking being positioned in that way. And we're obviously as keen as you are to be able to get a view so that we can start work as quickly as possible. So I think we will all continue to try and pursue some clarity on that date, on any early indication as to when we may find out more. But I think there is an overall sense, both politically and from a regulatory perspective, that it's in everybody's best interest actually to try and move with pace to get these settlements determined so actually we -- all water companies can deliver the improvement that customers and stakeholders are after. So I think I am very hopeful that it will move with pace and momentum. Phil, do you want to pick up the 2 questions?

Yes. Nice to see you Dominic. So 2 questions on tax. First, the autumn statement, I think, great question. Full expensing runs through to FY '26 at the moment. And I think we're all hopeful and expect that potentially that will be extended. If it was extended for the full AMP period, that would give us GBP 120 million of cash tax benefit compared to what we submitted in our plan. So that's clearly quite a material number. It will also help in terms of the sort of context of the plan. Clearly, as you know, there's a tax adjustment mechanism. So when that change happens, it will ultimately flow back to customers in any event. It's just whether it's factored into the base calculations or as an exposed adjustment. In terms of the WACC, sort of the WACC position today, sort of clearly, we showed you the Ofwat early view and we showed you the sort of Frontier Economics WACC back in October. If we were updating most today, my best estimate today will be -- the Ofwat position will be around 40 basis points higher and the Frontier Economics position will be around about 30 basis points higher. And most of that is driven really, as you know, by the cost of equity. And I would see the cost of equity from the Ofwat position being more like 4.7% and the Frontier Economics being more like 5.6%. And we can pick up after and have a more detailed discussion, if you wish.

Terrific. Thank you, Dom. Hannah Avory. Hannah, over to you.

Hannah Avory from BNP Exane. My questions on finance charge and net debt. So obviously, good results this morning with finance dispensed, with the inflation indexation component coming down. Obviously, you currently have quite a high proportion of index-linked debt versus listed peers in Ofwat guidance. I was just wondering if you could remind us what the plan is here with your net debt in terms of proportion sort of debts linked versus tax kind of going forward in the short term and also into the next.

Yes, sure, Hannah. Yes, so net debt, sort of roughly around about 50%, just over 50% of our net debt is index linked. Sort of going forward, we're not intending to issue more index-linked in the near term and that position will gradually unwind. Although, as you're probably aware, most of those instruments are very long-dated. So it's quite a long run out effectively.

Okay. Terrific. Last but not least, John, from BMO.

I wanted to come back to the topic of outcome delivery incentives. If I understand properly, you've got full year guidance this year for GBP 50 million. And based on my math, that looks slightly conservative given that you have GBP 200 million cumulative for the entire AMP, which would probably imply something more like GBP 60 million for the full year 2024 and 2025 to reach that guidance based on your current performance. Or perhaps am I missing that there's some sort of end of period AMP7 adjustments that will result in a significantly higher ODI award in full year 2025? So any clarification on that would be helpful.

John, thank you for the question. Yes, it's actually the ODIs that come in. So I talked at the beginning about the water quality and the improvements. This is about some infrastructure delivery, and that rolls in, in terms of next year. So they're not equal in terms of distribution throughout each of them, you're seeing the difference. So we set up its default. And again, we see further ODI benefits coming through next year is more of that infrastructure delivery -- delivered associated with those programs.

Terrific. Some late callers. Excellent. Good to see you, guys. Bartek, please go ahead.

Just 2 very short questions. First, on your carbon capture project. What does it mean in terms of your P&L impact? And what does it mean in terms of your potential totex ODI outperformance, whether it's nice to have or whether it has any financial impact. And secondly, if we look at your costs. Of course, costs are going to increase in FY '24 as you are guiding. For FY '25, do you expect some increased reversal? I'm specifically referring here to cost of electricity.

Okay. I'll perhaps pick up both of those, Lou. So I mean, the carbon capture project is a small-scale projects being undertaken on site. It's really quite exciting and innovative. So I think it's more about sort of seeing that understanding the benefits. It's not going to drive material short-term financial impacts on our statements, though. In the context of sort of costs going into FY '24 and, in particular, in power, we'll give full guidance in May next year when we sort of usually step out and sort of explain what's happening in the year ahead. So that's -- actually power have been sort of pretty much fully hedged. So we've got a full hedging position. So that's average things in. So we're not going to suddenly find we've got a sort of big one-off benefit or prices have fallen. Because it's a more smooth profile.

Thanks, Bartek. Alex, please go ahead.

Just one quick one for me for you, Phil. Just on the net debt. Could you give us an idea of what you expect for the run rate on net debt in the second half and whether you expect that to follow the same sort of pattern that you've seen in H1?

Yes. There's probably a very short answer on that, Alex, which is a lot will depend on inflation and how we see inflation playing through in that second half. Because that has been quite a big driver of the indexation, obviously, onto the net debt number. So that will be probably the volatile piece, if you will, in the second half.

Terrific. One last call, Dominic Nash. Welcome back.

I was going to ask you 3 questions and I changed it to a different one in Phil's answer. So I'll ask the question I had withheld. Can you just remind me again, please, what your CSO target for 2030 is? And in line of what the labor policies kind of managed around their party conference, which I think is a material acceleration of CSO cleanup, could you just tell me what you think that would impact your 2030 target? And is it actually physically more simple to meet that acceleration supply chain constraints and spending constraints, please?

Thanks, Dominic. I'll pick those up. So I think we showed you the graph in the presentation so you could see where CSO spills has actually moved from and to. So I take you back to 2020, we were at 59 average spills. But look at where we're expecting to outturn at the end of this year, that's in the region of 28 to 30, rainfall being a dependency on that. So we will continue to show a year-on-year reduction in combined 0 overflow spills despite the level of rainfall that we're seeing. And as I said, that's testimony to all the work that's going on. In relation to 2030 and the target, that will get us to 20 spills by the end of the plan. And we've had a lot of conversation with Ofwat about that spill target, and you'll see the representation that we've put forward in our business plan. Because in setting our targets, what's important is the context of where we're operating. So as you know, here in the North West, 28% more rainfall, over 54% of our sewers are combined compared to the national average of 30%. And if I take you back to that Stantec did sort of 2 years ago where they said it's going to cost GBP 56 billion across England and Wales to the CSOs targets, GBP 20 billion of that which was in the North West. I think what is really, really good, as part of the debate on CSOs, there's a much greater level of understanding about actually what it's going to physically take to drive that step change in performance. So I think what's really important and the conversations we've been having with the regulators is what they're wanting to do is incentivize reductions. And so I know there's been a lot bundled around about targets. But actually, equally, I don't know regulators who want to sign up to giving companies targets that were already achieving that level of performance. So I think we've put forward a very strong proposition in the plan, that essentially says this will show the biggest step change in CSO spills across the country and we are committed to delivering it. Your point about labor, I think, is really well made. There was conversations initially about 18 months ago in relation to fast-tracking CSO reductions. I think there is a great -- well, I don't think, I know there is now a much greater level of understanding of what is physically needed to drive that level of reduction. And the fact that a 2030 target, whilst that we all want to see the improvement, it's just physically impossible. And not just because of the infrastructure, Dominic, that we're going to have to build, but it's also because, and I think this is a really important point, we've got to continue to deliver the service. So our plan sees us tackle 420 overflows, but at no point kind of turn off those treatment works, kind of stop actually treating sewage. So there is a physical restraining factor, if you like, by the very nature of the fact that we are operating on existing infrastructure and we've got to continue delivering the service. It is like building a road, and I can't essentially shut it while I delivered the improvement. I think engagement with labor is going well. I'm on the session this afternoon with Steve Rotheram at 3:00. And I think they're very keen to engage with this sector. Because I think they also think that -- all parties are realizing is that these plans generate opportunities for jobs, and that's something we've really made on here in the North West and for growth. And so I think there's an opportunity in many people's manifest those once they are published to make that connection and welcome the investment.

Terrific. Thank you. Dom, do you have any follow-up question? Mic is yours.

Yes. So I think you mentioned, probably like every water company in the U.K., you're keen to get an additional 30 basis points of allowed return on equity from Ofwat. This is kind of, I suppose, the quasi-early view, which may come in March, I think, as you said. Do you know only one company in the sector can actually achieve up to that 30 basis points? Because I think the range was between plus 10 and plus 30. And presumably, you think you're the best positioned. But do you know if it's only one company or could several companies, additional?

Certainly not limited to just one company at all. And I think they've set out a very clear criteria. We feel that we've put forward a plan that delivers against that criteria. But absolutely, it's not only 1 company that can get the gold medal, that's for sure.

Excellent, a lot of questions. Okay. One last call for questions. Anyone have a follow-up? No. I think we have come to a conclusion. So thank you very much. That draws our Q&A session to an end. Lou, Phil, back to you.

Thanks, Chris. Look, thank you very much for the opportunity to chat with you this morning. Also, thank you for many of you who we've seen. Since we've submitted the business plan, we're really keen to continue to engage and answer any questions that you may have. But thank you very much for your time this morning and the opportunity to talk to you about our performance for the first half of the year.

Thank you.