Prudent financial risk management
What do we do
Debt – we maintain around half our debt in index-linked form, offering good relative value and hedging the impact of inflation on a portion of our RCV and revenue. Most is RPI-linked, but now that Ofwat is transitioning to CPIH we are gradually increasing our CPI exposure, subject to cost and availability, as this is the best available proxy for CPIH in the absence of a CPIH debt capital market. On our remaining nominal debt, we fix the underlying interest cost out to ten years on a reducing balance basis.
Pensions – we adopt an asset-liability matching approach for our defined benefit pension schemes by investing in assets that perform in line with the liabilities, such as corporate bonds and gilts and the use of interest rate swaps, to hedge the impact of changes in swap and gilt yields. The schemes have hedged inflation exposure through RPI gilts and swaps, and in April 2019 we prepaid all remaining deficit repair contributions. As a result, our pension position is stable and the schemes are self-sufficient.
How this differentiates us
Our prudent approach offers a lower risk exposure than many other companies, and it may be costly for others to transition from a different approach due to the typically long-term nature of debt in our industry.
How it helps us create value
Effective financial risk management delivers long-term resilience and our clearly articulated policies, covering a variety of market risks, help us reduce our exposure to the economic and regulatory environment, providing more predictable returns. Our approach to debt financing helps us consistently lock in long-term debt at good relative value, manage uncertainty in Ofwat's approach to setting the cost of debt at each price review, and maintain resilience to financial shocks.
Our pensions approach reduces volatility in our defined benefit schemes, and self-sufficiency means our employees, past and present, are in a very secure position and shareholders are well protected.
Systems Thinking
What do we do
Systems Thinking looks at how each individual element interacts with the other parts of the system in which it operates. Instead of isolating small elements, Systems Thinking expands its view to consider larger numbers of interactions over time as a particular system issue is being studied. For a water and wastewater company, this means, rather than operating each asset or treatment works in isolation, we use all the data from the telemetry we have installed across our network to analyse the entire system and all its linkages, enabling us to find the best all-round solutions.
Our field engineers are linked by an Integrated Control Centre (ICC) at our head office, from which we plan, monitor and control our operations. From our ICC we process vast amounts of real-time data from across our network, factoring in other source data such as weather forecasts, and using artificial intelligence and machine-learning to process this data and spot issues so we can resolve them before they impact customers. We allocate resources to production teams with full accountability for asset and system performance, helping embed this way of thinking within our operational teams.
How this differentiates us
Many of our assets were built over 30 years ago when water and wastewater services were managed by local authorities, with little coordination at a regional or national level. It takes considerable time and investment to install the telemetry and interconnections across the network to enable a Systems Thinking approach. No other UK water company does this at the holistic level we do, and we are continuing to extend our lead, with new developments and further rollouts in the pipeline.
How it helps us create value
Using real-time data and operating our network in this way enables us to optimise cost and service performance. Systems Thinking improves our asset reliability and resilience, reduces unplanned service interruptions, and helps us move away from the traditional reactive approach to address problems proactively before they affect customers. This pioneering approach helped us deliver operational improvements and cost savings during AMP6, and we have further developments planned for AMP7 and beyond, as Systems Thinking forms part of our long-term strategy to continue creating value for customers and stakeholders.