Financial highlights
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Revenue from regulated activities increased by three per cent to £1,541 million, principally as a result of an allowed price increase of 6.0 per cent (including inflation of 3.0 per cent), partially offset, as expected and indicated previously, by reduced water demand reflecting the challenging economic climate. The regulated price increase supports significant investment in UUW’s infrastructure which provides vital water and wastewater services to customers.
Underlying operating profit for the year increased by three per cent, primarily reflecting the revenue increase coupled with the impact of tight cost control measures, offset by higher depreciation, bad debts and power costs.
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The increase in depreciation reflects the recent high levels of capital spend, in line with the planned profile of the investment programme. Reported operating profit was significantly higher than the prior year, reflecting a one-off credit of £77 million in respect of the group’s revised pension provision and partly offset by restructuring costs of approximately £16 million.
As outlined previously, the business had entered into forward contracts for the majority of its power requirements for 2009/10. As a result, unit power costs in 2009/10 were approximately 10 per cent higher than in 2008/09 and the power expense has increased by around £6 million. The business has also entered into forward contracts for the majority of its power requirements for 2010/11 and 2011/12 and unit power costs are expected to be in the order of 20 per cent lower than in 2009/10. Bad debt expense is broadly in line with the prior year at approximately 3.5 per cent of regulated revenue. This reflects the impact of the continuing tough economic environment on cash collection rates.
Capital investment in the year, including £114 million of infrastructure renewals expenditure, was £620 million. This level of spend was in line with the planned capital investment profile for the final year of UUW’s 2005–10 regulatory programme.
Operational performance
Operational performance is a key area of focus and UUW is targeting an upper quartile position among UK water companies on key operational measures in the medium-term. The regulated business continues to upgrade its infrastructure, replacing 134 kilometres of water mains during the year. UUW continues to supply high quality drinking water with a mean zonal compliance water quality performance for the year of 99.94 per cent, which compares with 99.92 per cent for the previous year. UUW is making good progress against its key performance indicators:
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Relative efficiency
UUW has narrowed the operational efficiency gaps to the most efficient water and wastewater companies since 2005. This is reflected in Ofwat’s most recent (2008/09) assessment of United Utilities as band B for the water service and band C for the wastewater service and represents a one band improvement for both services over this period. UUW expects at least to sustain these bandings in Ofwat’s 2009/10 assessment.
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Security of water supply
UUW met its economic level of leakage rolling target for the fourth consecutive year in 2009/10, despite extreme winter weather conditions, reflecting strong management focus and the commitment of the workforce.
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Pollution
The business has now met or outperformed its mediumterm target of a 50 per cent reduction in major pollution incidents in each of the last four years. One water and seven wastewater Category 1&2 incidents were recorded in 2009, compared with the base position of two water and 21 wastewater incidents in 2005.
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Sewer flooding
UUW continues to remove properties from the sewer flooding register. In 2009, an independent review of UUW’s sewer flooding recording and reporting process was undertaken, which was submitted to Ofwat for consideration. The independent reviewer concluded that the processes are generally fit for purpose with some scope for streamlining and further improvement. UUW agreed to implement changes required by Ofwat as a result of this review and has reassessed its sewer flooding registers. The number of properties on the register in 2009/10 is expected to be 1,028 (for properties at risk of experiencing at least one sewer flooding incident in ten years), which compares with a reassessed number for 2005/06 of 1,091 properties, a net reduction of 63 properties over the four-year period. The company has plans in place to reduce the number of incidents due to sewer flooding (other causes) and to offer mitigation measures for all properties on the register.
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Overall customer satisfaction
Significant progress has been achieved and overall customer satisfaction in response to enquiries is now at its highest recorded levels, with a satisfaction rating of 82 per cent for the 12 months to 31 March 2010. UUW achieved its target of 85 per cent for March 2010, the highest score attained for an individual month. These satisfaction levels are based on a comprehensive independent survey conducted on behalf of UUW each month. Customer satisfaction has improved from less than 50 per cent in 2005 to consistently over 80 per cent during the second half of 2009/10. The business remains focused on achieving further improvements.
Although UUW has delivered real progress, the business recognises that there is more to do. As indicated previously, sewer flooding incidents, together with environmental underperformance at Fleetwood wastewater treatment works, negatively impacted the 2008/09 overall performance assessment (OPA) score.
UUW has a capital investment programme designed to improve performance at its Fleetwood works, which is scheduled to be completed later this year on time and on budget. The business has introduced an enhanced monitoring system across the company’s wastewater treatment works to help improve performance in respect of meeting consent standards at its works. With regard to sewer flooding, the business has identified those areas of its sewer network which are high risk with the potential to have a major flooding impact and has commenced a programme of work to help mitigate these risks.
Improving the company’s response to customer contacts is another key area of focus, in particular billing enquiries. The business has introduced new working practices to help improve performance and early progress is encouraging. The process of monitoring regulatory targets has been enhanced and managers now have better information and the flexibility to reallocate resources to help meet these targets. The more technical work has also been brought back in-house, giving the business greater control to resolve issues and help meet its targets.
The business expects an improved OPA score for 2009/10, with an increase in points in the areas of wastewater treatment works compliance, company contact score and unplanned interruptions. The actions being taken will have a positive impact on UUW’s performance as measured by Ofwat’s new service incentive mechanism, which is replacing OPA and is due to be introduced in 2010/11.
2009 water price review
On 26 November 2009, Ofwat published its final determination of price limits for the 2010–15 period, which sees customers benefit from lower prices and higher levels of capital investment. After careful consideration, UUW accepted these proposals and the new price limits took effect from 1 April 2010. Ofwat’s final determination of price limits for UUW was based upon:
- a £3.6 billion capital investment programme (2007/08 prices);
- real growth of 12 per cent, or approximately £900 million, in the regulatory capital value over the five-year period;
- an average annual underlying operating efficiency of 1.2 per cent for the water service and 2.4 per cent for the wastewater service;
- a return on capital of 4.5 per cent (post-tax, real); and
- an average annual real price decrease of 0.4 per cent across the five-year period, with a real price decrease of 4.3 per cent in the first year.
United Utilities had indicated previously that there was potential for additional investment in respect of the North East Irish Sea, which was dependent upon a European court case decision involving the UK government. A ruling by the European Court of Justice on 10 December 2009 concluded that United Utilities will not be required to undertake this additional investment.
Efficiency initiatives
UUW is well prepared for the 2010-15 price review period. Over the last year, United Utilities has undertaken a comprehensive review of the business, challenging working practices across the group, and is implementing detailed plans to improve performance and reduce its cost base.
Operating efficiency
During 2009/10, United Utilities reduced the number of people working in the group by the equivalent of around 500 full time employees (includes United Utilities staff and agency staff). Approximately 350 of the 500 worked in or supported the regulated business, equivalent to around seven per cent of that workforce. This provides an immediate contribution to the achievement of efficiency targets set by Ofwat.
Customer service is a key area of focus, as this forms part of Ofwat’s relative efficiency analysis and will also contribute to the regulator’s new service incentive mechanism assessment. UUW aims to reduce its cost to serve significantly, whilst continuing to improve the customer experience. The business has reduced its annual cost to serve from £23 per customer to £19 per customer over the last two years and is implementing plans to deliver further reductions, all while customer satisfaction has improved markedly. The company has amended staff incentive mechanisms to help get things right first time, with the aim of reducing unnecessary customer calls. Performance measurement is now based on first time resolution, rather than average call handling time. United Utilities’ customer online self-serve system is being enhanced to make it more comprehensive and user friendly, with the aim of reducing by a third the need for customers to contact the company’s call centre. UUW is focused on improving its debt collection rates and is planning to utilise more local authority collection agreements. The company is also enhancing systems to improve its customer segmentation analysis and to obtain better data on customers who have moved address, coupled with a more proactive debt follow-up strategy.
United Utilities is reviewing and streamlining its processes as it aims to become a leaner, more efficient company. The group is focused on operating with fewer, simpler and more consistent processes. For example, UUW is halving the number of steps from metering to cash collection. The group is rationalising its IT infrastructure, providing greater automation and visibility of workflow. Managers now have ownership of all steps in a process to help enhance performance. Individuals also have greater visibility and understanding of how their performance influences the efficiency of the entire process.
The group will continue to focus on delivering benefits from its existing efficiency initiatives, such as its workforce management system which is a key element in improving the efficiency of frontline staff, utilising remote operational site management and optimisation of chemical and power usage, improving efficiency of operational pumps, developing combined heat and power assets, which recycle energy generated from wastewater treatment processes, and improving supply chain management to deliver further procurement economies. A number of these schemes are also key elements of United Utilities’ plan to mitigate its carbon emissions. In 2009, UUW was awarded funding from Defra to convert biogas, a by-product of the sludge treatment process, into bio-methane for vehicle fuel. There is potential in the future to export biogas into the national gas distribution network.
Capital delivery
United Utilities has a robust commercial capital delivery framework in place for the 2010-15 period. Contractor partners have been appointed and the company has signed new supplier contracts, which will deliver significant savings and help improve efficiency. Incentive mechanisms are closely linked to the UUW business plan and pain/gain incentives are assessed on a project basis, rather than a cumulative basis, providing more clarity on performance. A partial fee retention mechanism is also in place to help drive on-time project delivery. In addition, UUW has flexibility in respect of the level of competitive tendering it may use in the award of future work during the five-year regulatory period.
United Utilities undertook detailed advanced planning which ensured smooth transition into the 2010-15 period and leveraged recent economic conditions to deliver procurement efficiency benefits. UUW expects capital investment, including infrastructure renewals expenditure, in 2010/11 to be substantial as the company aims for a smoother capital delivery profile across the five-year period compared with 2005-10. UUW has a strong focus on asset serviceability and also expects to bring forward the delivery of certain outputs.
Financial
United Utilities has approximately £2 billion of long dated, index-linked debt at an average cost of 1.8 per cent real. This compares with Ofwat’s cost of debt assumption of 3.6 per cent real and secures financing outperformance for the next five years. In line with its policy, the group has also fixed the interest rates on a significant proportion of the remainder of its existing debt portfolio, for the 2010-15 regulatory period, at an average nominal rate in the range 5.0 per cent to 5.5 per cent (inclusive of credit spread). This provides more clarity on UUW’s ability to outperform the final determination. Taken together with the group’s index-linked debt, this equates to approximately £300 million of financing outperformance over the five years, based on an RPI inflation rate of 2.5 per cent per annum. In addition, the group requires little refinancing during the 2010-15 period.
The changes to the defined benefit pension schemes have significantly reduced the company’s pension deficit, reduced the future service cost and reduced future funding and deficit risk, thereby placing the company’s pension provision on a much more sustainable footing.