This year saw completion of the 2015–20 price review period in which we continued to make good progress on delivering our promises. The COVID-19 pandemic has required us to adapt the way we operate, and we are proud of the way our people have embraced that change and continued to deliver great service to customers at this time.
Sir David Higgins
Chief Executive Officer
We are a purpose-led company, driven by what matters to customers and other stakeholders. This focus has helped us deliver a significant and sustainable transformation in our operational performance and customer service in recent years. We have exceeded our targets for the 2015–20 period (AMP6) and we exit this regulatory period as one of the best performers in the industry.
Since 2015, we have reduced significant water quality incidents by 69 per cent and reduced water supply interruptions by 39 per cent. We have been the joint top performing company over the last five years under the Environment Agency's (EA) annual assessment, and we are an industry leader in reducing pollution.
Our regulatory targets this year were the toughest to date, and we have risen to the challenge, earning a net outperformance payment against our outcome delivery incentives (ODIs) for the year and a cumulative net outperformance payment for the five-year period in total.
Strong performance in 2019/20 was delivered in the face of many challenges. It has been a year of significant rainfall, culminating in severe flooding caused by storms Dennis and Ciara in February 2020. The COVID-19 (coronavirus) pandemic has created further challenges, with enormous practical implications on the way we work and economic impacts for our communities.
We are well prepared for the 2020–25 period (AMP7) and our fast-track business plan achievement allowed us to make a flying start on improving our performance towards our targets for the period. We are proud of the responsible way we have delivered this improvement, operating in an environmentally and socially conscious manner and upholding the highest standards of governance.
Maintaining service for customers while keeping our people safe
We have an incredible group of people working at United Utilities who have shown themselves to be great at embracing change, be that new technologies and innovation or the need to adapt quickly to an unexpected incident.
The flooding caused by Storm Ciara in February caused damage to a key water main that served thousands of properties in the Eden Valley area. The damage occurred where the water main crossed a river, and the conditions in the area were treacherous with continuing heavy rain and strong winds. Thanks to our contingency plans and the dedicated hard work of our people around the clock, we were able to repair the damage in just three days and restore supply fully in five days.
COVID-19 then challenged us to deliver an unprecedented level of change to working practices. Our primary concern at this time is the safety of our people and those they work alongside. We moved over half of our people to remote working and, of those remaining in offices and sites, many moved locations to maintain compliance with government guidelines on social distancing. Non-essential tasks have been postponed but we are continuing with our construction activity where we can do so safely for our people and those with whom they are in contact.
Many of our employees are designated as key workers, continuing to provide essential water and wastewater services at a time when sanitation is even more important. We are proud of the dedicated way in which they, like all the amazing key workers, have continued to leave their families each day in this difficult time to serve their communities.
We worked to ensure all our people have access to the correct equipment to comply with sanitation and personal protective equipment (PPE) requirements, and we rapidly increased our internal communications to ensure our people are kept informed about the latest national guidelines and what we are doing to respond to the pandemic. We set up a dedicated area of our intranet to assist with employees' mental health during the lockdown, recognising that this can be a particularly challenging time from a psychological perspective as well as a practical one.
Thanks to the flexibility and hard work of our employees we have maintained great water services throughout this time, and it is pleasing to see that this is appreciated by customers as well. Our satisfaction scores have never been higher and the latest scores are the highest in the sector.
As well as maintaining our own services, we want to help where we can with the economic impacts COVID-19 is having. None of our employees have been furloughed, and we accelerated payments to suppliers as well as paying particular attention to the more fragile elements of our critical supply chain as part of the industry-wide incident response.
The most pressing economic impact for the sector is on non-household retail where the closure of businesses has interrupted payments to retailers, causing liquidity issues in this market. The potential implications on our non-household retail joint venture, Water Plus, have led to a reduction in the carrying value of our investment, along with other charges. Ofwat has introduced a number of measures to help support the industry and, while the pandemic is ongoing and we do not yet know the full impact it will have on the economy, as a result of these measures and the actions we have taken, Water Plus is now on a firmer footing.
Delivering a strong financial performance
Our financial performance from an underlying statutory perspective has been strong again this year. Underlying earnings per share is 63.0 pence, an increase of 5 per cent and more than covering the dividend for the year. The main drivers of this increase are our allowed regulatory revenue profile and lower infrastructure renewals expenditure, partly offset by an increase in the underlying net finance expense due to higher RPI inflation applied to our index-linked debt, higher depreciation, and a share of small, underlying losses of joint ventures.
Our underlying tax charge at 13 per cent is lower than the headline rate of corporation tax at 19 per cent, reflecting a change in how we derive our underlying profit after tax and EPS figures. We now present our underlying profit measures excluding the impact of deferred tax to better reflect the regulatory revenue allowances. On our previous basis, including the impact of deferred tax, our underlying tax charge for 2019/20 would have been 19 per cent, in line with the headline rate of corporation tax.
Reported earnings per share is much lower at 15.7 pence due to around £300 million of adjusting items during the year. This includes non-cash impacts such as accelerated depreciation on bioresources assets we are no longer using and a significant deferred tax charge, as well as restructuring costs as we prepare for the next regulatory period and the expected impact of COVID-19. These adjusting items are outlined in the reconciliation table and more can be found inOur performance in 2019/20.
The board has proposed a final dividend of 28.40 pence per ordinary share, taking the total dividend for 2018/19 to 42.60 pence. This is an increase of 3.2 per cent, in line with our policy for this regulatory period of targeting an annual growth rate of at least RPI inflation through to 2020.
We continue to maintain a strong balance sheet, healthy liquidity, and a low-dependency pension scheme that is in surplus on an IAS 19 basis. We accelerated around £100 million of deficit repair contributions in April 2019, getting us to this low-dependency funding position, which is a significant value driver for our business. We have a consistent policy of targeting gearing of 55–65 per cent, measured as net debt to regulatory capital value, which has been supportive of United Utilities Water Limited's (UUW) A3 stable credit rating with Moody's. At 62 per cent, our gearing is one of the lowest in the sector, our credit ratings are in line with our targets, and as at 31 March 2020 we have around £1.2 billion liquidity. This is a strong and responsible position to be in, mitigating financial risk for all our stakeholders and giving us a high degree of resilience and financial flexibility as we move into AMP7.
We have shared over £600 million with customers in the last ten years, out of over £1 billion outperformance earned, reinvesting this into our services to deliver further improvements.
Exceeding our targets for the 2015–20 period (AMP6)
We delivered outperformance against all four principal areas of our regulatory contract in AMP6.
In customer service, we continued to improve year on year in Ofwat's Service Incentive Mechanism (SIM). Last year was the final year of measurement for this mechanism, and we were scored as upper quartile in the sector and awarded a SIM outperformance payment of £6 million for our performance across AMP6.
Our outcome delivery incentives (ODIs) for AMP6 were heavily skewed to the downside, and we started the period with a significant challenge that saw the most likely net outcome at around a £90 million penalty. Our performance transformation and acceleration of investment, along with tremendous hard work from our people, has seen us earn a net £43.9 million cumulative outperformance payment over the period, which is a significant achievement against our original expectations and sees us as one of the top performers in the sector.
This year we earned a net ODI outperformance payment of £22.4 million. This included our West Cumbria pipeline project, a hugely complex project that is ahead of schedule, meeting or beating all its AMP6 targets, and earning an outperformance payment of £21.6 million.
We delivered total expenditure (totex) outperformance of around £100 million against the final determination allowance, in addition to the significant cost savings we were already delivering to close the gap between the allowance and our original business plan submission for AMP6.
Our industry-leading treasury management helped us lock in a low cost of debt, which has delivered significant financing outperformance compared with the industry allowed cost for AMP6.
The total outperformance across these areas has been shared with customers. We reinvested £350 million during AMP6, including £250 million that has helped increase our operational resilience and £100 million that we invested this year to target improving our performance against our most challenging ODIs for AMP7. We are in a strong position as we move into the next period.
Well prepared for the 2020–25 period (AMP7)
Our embedded culture of innovation, including our pioneering Systems Thinking approach, alongside the acceleration of investment to deliver improvements earlier in the five-year period, underpins the business plan we submitted for AMP7, helping us to achieve fast-track status.
We made a number of representations to Ofwat during the year on the draft determinations, received in April for fast-track companies, and we accepted the final determination for 2020–25 in January 2020.
We announced that the board has set a group dividend policy for AMP7 of annual growth by CPIH inflation, based on expected returns from UUW for AMP7 performance, including the base dividend return of 4 per cent (nominal) on the equity portion of the shadow RCV, together with accumulated outperformance in prior periods that has been retained by the group after sharing with customers.
Alongside this, we announced our intention to continue with our 55–65 per cent target gearing range and to maintain long-term issuer credit ratings for UUW of A3 with Moody's and BBB+ with Standard & Poor's (S&P), and a senior unsecured debt rating for UUW of at least A- with Fitch.
The way Ofwat measures customer satisfaction is changing in AMP7, with higher outperformance payments available in this area. SIM will be replaced by C-MeX measuring household customer satisfaction and D-MeX measuring developer satisfaction. This year has been used as a pilot for C-MeX, and we were pleased that our contactor scores ranked third of 17 companies for the year, and first in the third and fourth quarter surveys. While we expect to see an upward trend in scores for the industry as a whole, this gives us confidence of being in a strong position in AMP7.
Acceleration of capital spend in AMP6 proved to be a successful strategy in delivering early benefit against ODIs, and we plan to do the same again in AMP7. Fast-track status gave us early visibility of our targets – we have robust plans for the common ODIs in AMP7, with the £100 million reinvestment of outperformance already showing improvement in our expected performance, and our bespoke ODIs offer some unique opportunities. We have awarded the first tranche of our capital programme at a value of £300 million with the next tranche of £250 million to be awarded in the next few months, and we have continued with the majority of our construction programme throughout the COVID-19 lockdown.
The low cost of debt we have already locked in compares favourably with the cost of debt allowance for embedded debt, and we have historically demonstrated our ability to raise debt at efficient levels compared with the industry average, underpinned by our robust credit quality. We expect to continue to perform well against the rest of the industry in financing across AMP7.
ODI outperformance earned over 2015–20
reduction in our carbon footprint since 2005/06
Read more about Our performance
Read more about our plans for 2020–25 in Our business model
Strong environmental, social and governance (ESG) performance
Behaving in a responsible manner is one of our three strategic themes and has always been a core part of how we operate. We have a strong track record of performance across all the components of ESG.
We have reduced our carbon footprint by 73 per cent since 2005/06, ahead of the target we set ourselves for 2020, with 95 per cent of the electricity we use having zero emissions. We lead the sector in our approach to catchment management, including our award-winning sustainable catchment management programme (SCaMP) and more recently taking this further with catchment systems thinking (CaST), which sees us working with the EA and other stakeholders to deliver the best overall approach to catchment management in the most efficient way. In the EA's annual assessment of performance we have demonstrated the best overall performance, achieving industry-leading 4 star status in three of the last four years and 3 star status this year, with particularly strong performance in the way we minimise pollution.
We focus on having a positive impact on society. We lead the industry in affordability and vulnerability assistance with a wide range of schemes for customers, many of which are firsts for the industry. This is more important than ever as we help those customers struggling as a result of the economic impacts of COVID-19. Over 120,000 customers benefit from the most comprehensive range of affordability schemes in the industry. We led the sector in establishing Priority Services, a scheme designed to provide additional support to customers with health or financial difficulties during an incident. We now have over 100,000 customers registered for this service. We contributed over £35 million to communities and our Trust Fund during AMP6 and committed to provide £71 million to help customers in difficulty over AMP7.
Excellent governance is part of who we are. We were delighted to secure the Fair Tax Mark in July 2019, and have attained World Class ranking in the Dow Jones Sustainability Index for 13 consecutive years. Ofwat has awarded us top self-assurance status for three consecutive years – the only company in our sector to achieve this – reflecting the highest level of trust and confidence in our transparency and reporting. We place great value on financial resilience, with the strongest credit rating in the sector and a pension position that compares favourably to most, if not all, companies in the Financial Times Stock Exchange (FTSE) index. This means the obligations to our past and current employees are well funded, properly resourced, and on a sound footing for the future with minimal reliance on the company and protecting employees and shareholders from the risk of a large pension deficit.
We can reflect on our performance improvements across the last five-year price review period with satisfaction. We have shared £350 million of our outperformance through additional investment, providing better service to customers and enhancing the environment, and we have delivered financial performance that supports the payment of the final dividend in August 2020, in line with our AMP6 commitment.
The economic implications of COVID-19 will provide a challenging backdrop to the AMP7 regulatory period. United Utilities will continue to prioritise the implementation of its delivery plans, albeit reviewing and adapting these plans as necessary, and we fully intend to play our part in the recovery of the north west economy. It is, however, too early to predict the full impact of COVID-19 on inflation, the economy more generally and on our business, and we will review our dividend policy for AMP7 as a clearer picture of the post COVID-19 economic environment emerges.
Grateful to our stakeholders for their support
We want to say a huge thank you to our employees for the dedication and hard work they have demonstrated this year, to the trade unions for their incredible support in helping us with the flexibility to arrive at safe working practices during Covid-19, and to customers and other stakeholders for their continued support.
Sir David Higgins
Chief Executive Officer
The Strategic report was approved at a meeting of the board on 21 May 2020 and signed on its behalf by Steve Mogford, Chief Executive Officer.