Steve Mogford Chief Executive Officer and Dr John McAdam Chairman
The last 12 month period was the fifth and final year of the 2010–15 regulatory period. Our objective over this period was to deliver improved and sustainable underlying performance for the benefit of customers, the environment and shareholders. We are pleased to report that we achieved this.
We were the most improved water company for customer satisfaction over 2010–15
Customer satisfaction remains a priority and we were the most improved water company over the 2010–15 regulatory period. Our improvements have helped reduce further the number of customers who need to contact us about the service they receive by around 75 per cent over the five-year period. We continually review the causes of customer dissatisfaction and revise our training, policies, processes and systems to drive improvement. We were pleased that our improved customer satisfaction performance over the period took us out of Ofwat’s service incentive mechanism (SIM) penalty zone, thereby also benefiting shareholders.
Ofwat will change the process it uses to assess customer satisfaction during the next five-year regulatory period. This new SIM measure has been piloted over the last 12 months and has helped us identify that, while customer satisfaction with our services is continually improving, we could do better in keeping customers informed whilst we are resolving their issue. This will be a key area of focus for us in continuing to deliver improving satisfaction.
Modern customer relationship management (CRM) systems can offer a much improved customer experience as well as efficiencies in customer-facing operations. We were pleased to receive Ofwat’s support for our plan to invest in a new CRM system in the 2015–20 period and we are already in the detailed design phase before implementation.
The reliable and efficient operation of our assets is critical to both customer service and our environmental performance.
Targeted investment in our assets, processes and the people who operate them has supported an improvement in our environmental performance as measured by the Environment Agency (EA), positioning us again as one of the best performers in our sector.
We invested £3.8bn in the renewal and upgrade of our assets across the last five years
Performance against indices used by the Drinking Water Inspectorate (DWI) to measure water quality has also improved and we achieved our best ever performance over the last year.
Asset serviceability was assessed as stable or improving over the last 12 months, representing a significant and sustained improvement since the start of the 2010–15 regulatory period. We were delighted to outperform our leakage target for the year – the ninth successive year in which we have met or beaten our target.
The improvements made early in the 2010–15 regulatory period to our project and risk management processes have supported the successful delivery of our capital programme. We invested a substantial £3.8 billion in the renewal and upgrade of our assets across the last five years, with over £850 million invested over the last 12 months. We measure the effectiveness of our investment using our Time, Cost and Quality index for which we scored 97 per cent this year – ahead of our targets and consistent with the good performance of the previous year.
We have already invested around £40 million to accelerate project delivery relating to schemes due to be delivered early in the 2015–20 period and to secure associated benefits.
A difficult economic environment
Although unemployment in the North West has reduced over the last 12 months, our region has the highest proportion of disadvantaged households in England and therefore customer indebtedness continues to be a significant challenge for us.
Our collections team continues to work hard to contain bad debt levels. During the year we implemented data sharing with the credit reference agency ‘Experian’ and this is helping to identify those customers who could pay their bill but choose not to. For those struggling to pay, we continue to offer a wide range of ways to help them back into regular payment. This includes an independently administered trust fund for which we increased our annual contribution using a cash tax refund from HMRC. We also gained customer support to launch a social tariff for those customers who receive Pension Credit.
Having secured a retail licence in 2012, we have been a leading competitor in the Scottish business retail market securing over 200 customers, covering over 2,800 sites, and representing future annual revenue of £15 million. During this period we have seen the number of active market participants increase to around 18 and as a consequence, pricing is becoming increasingly competitive. We continue to bid selectively for profitable business where our value-added solutions offer benefits to customers.
The Water Act 2014 confirmed plans to open the English business retail market for water and wastewater services in 2017. Our experience of the Scottish business retail market is invaluable ahead of the English market opening and work is in hand to prepare our business retail and wholesale teams to address this development. We are actively engaged in the creation of a market operating company that will govern and facilitate the switching of their retailer by business customers.
Our Strategic Direction Statement, ‘Playing our part to support the North West’ reflects extensive consultation with customers and other stakeholders to create our best view of what the next 25 years holds for our region. This includes economic, social and environmental developments such as the predicted impact of climate change.
Our recently updated Water Resources Management Plan, which describes the projected pattern of water resource activity in our region until 2040, was approved by the Secretary of State in February 2015. This plan projects that the majority of the North West will be in surplus, benefiting from an integrated network that supports movement of water around the region to accommodate its changing supply and demand balance. Our plan includes a new Thirlmere pipeline to extend our integrated network to encompass West Cumbria. This will reduce abstraction from Ennerdale, thus protecting sensitive ecology, and improve security of supply for customers.
As a lone agent, United Utilities could not deliver the scale of required environmental improvement at an acceptable level of cost. Instead we are committed to partnering with others who can support the achievement of our required outcomes – such as our ‘Turning tides’ partnership with the EA, local authorities, the Marine Conservation Society and other interested parties to improve bathing waters in the North West.
Pictured: Our new £1.5 million purpose-built technical training centre in Bolton is part of our training and apprenticeship programme to source the next generation of water engineers. Facilities include mechanical and electrical workshops, a laboratory and a mock sewer system, with around 70 trainees attending each day.
We have sought to share the benefits of our improvements over the last five years between customers, the environment and shareholders.
Around £200 million of capital savings has been reinvested in projects that deliver benefits to customers or the environment. We have also used a portion of our financing outperformance to support our private sewer network.
We received a cash tax refund from HMRC in 2013/14 and we have committed to share this with customers. We provided a special customer discount in 2014/15 of around £20 million and have committed further support to help customers struggling to pay their bills.
Our customers are set to benefit from both continued significant levels of investment and below inflation growth in average household bills for the decade to 2020.
The 2015–20 Price Review represented a significant departure from previous reviews and proved to be a demanding period for both companies and regulators. Building on some of the changes introduced in the Water Act 2014, the Price Review introduced:
- significantly enhanced customer consultation on the content and pricing of companies’ business plans;
- a new pricing structure involving four price caps: business retail, domestic retail, wholesale water and wholesale wastewater;
- new outcome delivery incentives (ODIs) providing penalties or rewards for company performance in aspects of its performance identified by customers as a priority;
- a new SIM measure providing continuing focus on customer satisfaction; and
- preparation for full opening of the retail market for business customers.
In formulating our 2015–20 business plan, we sought the views of over 27,000 customers, as well as the views of our regulators and other stakeholders, to shape a plan that strikes the right balance for all our stakeholders. We worked closely with our regulators over the last year and our final plan resubmission in October 2014 took account of Ofwat’s upper-quartile efficiency targets across many aspects of our operations. Ofwat’s final determination in December represented a further efficiency challenge of £188 million, in the context of a wholesale total expenditure (totex) allowance of £5.3 billion. Whilst challenging to deliver, the final determination has not required us to revisit the key components of our business plan.
In the final analysis, the board considered Ofwat’s proposal tough but, on balance, acceptable and confirmed its acceptance in January 2015.
Attractive to shareholders
We set out to deliver improved performance for customers and shareholders over the last five-year period. We delivered for both sets of stakeholders with improved customer satisfaction, better underlying operational performance and effective capital programme management.
Revenue increased by 1.9 per cent to £1.72 billion and underlying operating profit was up 4.7 per cent to £664 million. Underlying earnings per share increased by 16 per cent to 51.9 pence.
We exceeded our outperformance targets for the five years, supporting our dividend growth target throughout the period and building dividend cover as we approached the changes introduced in the 2015–20 Price Review.
The board is proposing a final dividend of 25.14 pence per ordinary share, making a total of 37.70 pence per ordinary share for the 2014/15 financial year.
This represents an increase of 4.6 per cent compared with last year. The final dividend is expected to be paid to shareholders on 3 August 2015.
In accepting our final determination, the board approved a policy of maintaining the existing level of dividend and targeting a growth rate of at least RPI inflation each year through to 2020.
To support the retention of a robust capital structure, we aim to maintain efficient access to debt capital markets throughout the economic cycle. The board believes that it is appropriate to keep gearing, measured as net debt to regulatory capital value, within our existing target range of 55 to 65 per cent. We also aim to maintain, as a minimum, our existing credit ratings of A3 with Moody’s and BBB+ with Standard & Poor’s for United Utilities Water Limited.
We are focused on continuous improvement and our new operating model for our wholesale business is employing technology and new work processes to deliver enhanced customer satisfaction and operational efficiency.
Measurement of our progress across the next five years will use a mix of existing and new measures, which reflect the revised structure and features of this price control. This forthcoming period will see a greater emphasis on operational excellence as a means of earning financial rewards.
We expect that our environmental and water quality regulators, the EA and the DWI respectively, will continue to use a basket of established measures to assess our performance. New for the next period is a revised SIM measure and a series of ODIs, to which are attached penalties and rewards. We will also focus more on total expenditure, rather than on the individual measures of opex and capex , in line with Ofwat’s move to this way of assessing costs.
We have refined our key performance indicators (KPIs) for the 2015–20 period, which will recognise the tougher operational and financial targets inherent in the final determination settlement. We do not intend to set targets for the 2015–20 period until we have more experience of operating under the new arrangements. However, more detail of these KPIs is provided in Our KPIs 2015-20 and we intend to publish our performance annually.
Our aim is to operate in an environmentally sustainable, economically beneficial and socially responsible manner. In recognition of this focus, we retained our ‘World Class’ rating as measured by the Dow Jones Sustainability Index, achieving industry leading status in the multi-utility/water sector in the most recent assessment.
We are delighted to have led a North West pilot for the Energy and Efficiency Industrial Partnership, backed by UK Skills, in which we leveraged our investment in a new apprentice skills training facility in Bolton to help young people find employment. The programme involves skills training, interview technique and work experience and early trials have shown an over 60 per cent success rate in finding full-time employment for participants. Following the success of the pilot, the programme is now being rolled out across the UK.
None of our progress over the last 12 months would have been achieved without the enthusiasm and commitment of the people who work for United Utilities – both our employees and those working for our sub-contracting partners that represent us in the field. We would like to thank them for their dedication and hard work in supporting customers and the environment every day of the year.
We work hard to sustain high levels of engagement by our employees. The company has seen significant change over the last four years and our plans will engage our teams for further improvements. Employee engagement is 79 per cent, well above the UK transitional norm and just below the norm for high performing UK companies.
Health and safety remains a key focus area. This year we placed greater emphasis on the ‘health’ component with investment in a new gym at our main office, along with measures to assist our employees in assessing their health and in securing faster access to treatment should it be necessary.
We strive to operate in a manner that reflects the highest standards of corporate governance. Our company structure and governance standards are designed to ensure that our board continues to provide sound and prudent governance in compliance with the principles of the UK Corporate Governance Code.
We are pleased to welcome Lord Stephen Carter to the board following his appointment in September 2014 as an independent non-executive director. Stephen is Chief Executive at Informa plc and his operational expertise and previous public services roles will be an asset to the board.
We are encouraged by our operational and customer service performance improvements and believe we can improve further. Substantial investment in our assets will continue, delivering additional benefits for our customers and the environment. We have made significant and sustained performance improvements over the last five years and, combined with our ‘systems thinking’ approach to operating the business, this provides a solid foundation for the future.
Dr John McAdam
Chief Executive Officer
The strategic report was approved at a meeting of the board on 20 May 2015 and signed off on its behalf by Steve Mogford, Chief Executive Officer.