financial resilience: assessing and demonstrating financial … · 2018-09-01 · business plan...

Financial resilience: Assessing and demonstrating financial resilience Chapter 4: Supplementary document

Document Reference: S4006

This document sets out the board’s assessment of the financial resilience of UUW and supports the high quality viability statement provided as part of our PR19 business plan submission.

United Utilities Water Limited

Copyright © United Utilities Water Limited 2018

Chapter 4: Supplementary Document - S4006 unitedutilities.com

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Contents 1 Executive Summary ........................................................................................................................................ 3

2 Our financial resilience assessment ............................................................................................................... 4

2.1 Assessing the strength of our financial position ................................................................................... 5

2.2 Assessing the threats to financial resilience ......................................................................................... 8

2.3 Understanding the extent of mitigations available in extreme circumstances .................................. 12

2.4 Recognising the other protections that exist ...................................................................................... 13

2.5 Financial resilience assessment .......................................................................................................... 14

3 Appendix 1: Viability statement provided by the board .............................................................................. 15

4 Appendix 2a: Approach taken in respect of financial resilience assessment .............................................. 18

5 Appendix 2b: Approach taken in respect of scenarios prescribed by Ofwat ............................................... 21

6 Appendix 3: Debt finance raised during the 2008 Global financial crisis ..................................................... 23

7 Appendix 4a: Committed facilities and debt instruments maturing through to March 2025 ..................... 24

8 Appendix 4b: Debt maturity profile ............................................................................................................. 25

9 Appendix 5: Summary of insurance portfolio .............................................................................................. 26

10 Appendix 6: Principal risks facing the business at May 2018....................................................................... 27



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1 Executive Summary

• High quality viability statement provided out to 2025 - providing robust assurance and confidence over our business plan.

• Strong liquidity and capital solvency position – c60% average gearing providing c£4.5bn of capital headroom across the AMP, robust A3/ BBB+ credit ratings and 20 months of liquidity at May 2018, providing considerable liquidity headroom.

• Resilience to absorb all modelled scenarios without taking mitigating actions - ability to absorb all ‘severe but reasonable’ company risk specific scenarios and the extreme common scenarios prescribed by Ofwat, whilst maintaining investment grade credit ratings.

• Extensive mitigations available in very extreme scenarios - ability to increase gearing by 5% would raise over £500m in funding and deferring dividends would provide significant liquidity across the viability period and would conserve cash and maintain gearing at an appropriate level.

The Board has provided a high quality viability statement out to March 2025 (c7 years) as part of our PR19 business plan submission (Appendix 1). This statement provides robust assurance over the strength of our financial resilience taking into account the impact of our submitted PR19 business plan.

The company has a strong liquidity and capital solvency position (section 2.1), providing it with the ability to comfortably absorb all the ‘severe but reasonable scenarios’ identified by the Board (section 2.2.1) and the most extreme common scenarios prescribed by Ofwat (section 2.2.2). In addition, even in the event of the most extreme downside scenario we consider that the company could finance expenditure on the Manchester & Pennines Resilience Project during AMP7 if it was not possible to deliver the programme by a third party Competitively Appointed Provider. (This would be subject to receiving clear assurance from Ofwat that these costs would be added to the RCV in AMP8 (section 2.2.3).) Considerable protections also exist from the economic and regulatory environment in which the company operates and the insurance in place to protect against catastrophic risk (section 2.4). In addition, in very extreme scenarios the company has a number of mitigating actions available to it, providing it with significant scope to improve its liquidity and capital position to further absorb any such threats (section 2.3).



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2 Our financial resilience assessment The board has provided a high quality 7-year viability statement out to March 2025 as part of our PR19 business plan submission (Appendix 1). This statement provides additional assurance over the strength of our financial resilience taking into account the impact of our submitted PR19 business plan. As set out in this section, to support the board in making this statement we have undertaken an assessment of our ability to absorb financial impacts against the magnitude of the risks that we face as an organisation. This point-in-time assessment has been carried out based on conditions as at 31 May 2018. The approach taken in making this assessment is summarised below and further details are provided in Appendix 2:

The financial resilience assessment is performed on a standalone basis in relation to United Utilities Water Limited (UUW). UUW is part of the United Utilities group. The regulated activities of UUW represent 98% of the value of the United Utilities group as a whole, and as such the financial resources and interests of the regulated business are robustly ring-fenced and protected, with negligible risk from our non-regulated activities.

Assess the strength of our financial position

Assess threats to financial resiliance (risk assessment and development of scenarios)

Quantification of the impact of scenarios

Consideration of impact on long-term viability, taking account of mitigating actions and other factors



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2.1 Assessing the strength of our financial position 2.1.1 Providing a significant equity buffer to protect customers and debt investors The key financial measures we focus on from an equity perspective are set out in the table below.

Table 1: Key equity financial measures

UUW actual company

2017-18 £m

2018-19 £m

2019-20 £m

2020-21 £m

2021-22 £m

2022-23 £m

2023-24 £m

2024-25 £m

Equity- RCV less net debt

3,722.0 3,987.6 4,289.2 4,514.0 4,652.4 4,798.2 4,956.1 5,080.1

Equity- accounting basis 2,297.4 2,334.3 2,416.3 2,287.5 2,342.4 2,384.0 2,415.9 2,437.7

Net debt/ RCV 65% 64% 63% 62% 62% 61% 60% 60%

Adjusted net debt/ RCV 61% 61% 60% 59% 58% 57% 57% 56%

Dividend cover 1.00 1.09 1.38 1.15 1.25 1.24 1.25 1.26

Underlying dividend cover

0.85 0.94 1.23 1.14 1.24 1.24 1.24 1.25

Profit after tax 339.0 389.3 416.1 298.5 299.1 288.5 286.3 285.6

Underlying dividend cover is calculated using ‘underlying profit after tax’ (as defined on 52 of UUG’s annual report 2018) which provides a more representative view of business performance. Underlying dividend cover is below 1.0x in 2017/18 and 2018/19 due to £127m and £134m of AMP6 outperformance dividends being proposed in relation to those years respectively.

The information in underlying dividend cover is calculated using ‘underlying profit after tax’ (as defined on 52 of UUG’s annual report 2018) which provides a more representative view of business performance. Underlying dividend cover is below 1.0x in 2017/18 and 2018/19 due to £127m and £134m of AMP6 outperformance dividends being proposed in relation to those years respectively. Table 1 demonstrates that we should be able to maintain a substantial equity buffer of c£4.5bn on average across the period to March 2025 based upon our business plan submission. This is supported by our business plan forecasting sufficient levels of profitability (see chapter 9 of our business plan submission for our financeability assessment, ensuring that the return on equity is sufficient) and dividend cover to maintain and increase the equity buffer throughout the period to March 2025. This equity buffer provides protection to customers and debt investors in having the capacity to absorb financial impacts that may arise.

Adjusted net debt/RCV provides a more comparable measure of gearing across the sector, adjusting for the IAS19 pension surplus/deficit and the short-term loan to Water Plus. As deficits can significantly impair financial resilience, as is illustrated by some of the high profile corporate failures in recent times, company gearing assessments should recognise pension scheme deficits as a form of debt. This is consistent with rating agencies’ assessments of gearing and the Employer Debt Regulations 2005, which legally establishes deficits as debt. Normalising the calculation of pension scheme liabilities under IAS19 provides an even more robust assessment. Where gearing estimates do not include pension deficits there is less incentive for companies to pay down pension deficits in favour of reducing other forms of debt. Indeed, the incentive would be for companies to allow pension deficits to increase by diverting funds to reduce the reported gearing position.

2.1.2 Ensuring efficient access to debt markets at all times Our current credit ratings for the actual company are A3 stable with Moody’s and A- stable with Standard and Poor’s. We aim to target a credit rating of at least A3/BBB+, which provides a degree of headroom above the threshold for investment grade, and our business plan submission is premised on this basis. We consider this to be an appropriate level of credit rating as it enables us to meet our objective of being able to maintain efficient access to debt capital markets throughout the economic cycle. For further detail as to why these



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credit ratings are targeted, please see section 3 of our financeability supplementary document.1 The key credit and covenant financial ratios, including thresholds, are set out in the table below.

Table 2: Key credit and covenant financial ratios, including target thresholds

UUW actual company

Threshold 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

Moody’s = A3

Debt/ RCV <65.0% 64.7% 63.9% 62.1% 62.6% 62.0% 61.2% 60.7% 60.3%

Adjusted interest cover

>1.7x 2.9 2.8 2.6 2.0 2.1 2.2 2.2 2.1

S&P = BBB+

Fund from operations/ Net debt

>9.0% 9.5% 10.0% 10.5% 9.0% 9.2% 9.3% 9.4% 9.4%

Funds from operations interest cover

>2.5x 6.5 6.3 6.4 5.6 5.9 6.0 6.0 5.9

Debt/RCV <70% 64.9% 64.0% 62.2% 62.6% 62.0% 61.2% 60.7% 60.3%

EIB covenants

Net debt to RCV <75% 63.3% 62.7% 61.1% 61.4% 60.9% 60.0% 59.6% 59.1%

Net cash interest cover

>1.4x 3.3 3.1 3.1 2.3 2.3 2.3 2.4 2.2

The credit metrics shown in table 2 and used for the purpose of our stress testing, are calculated based upon the methodology used by Moody’s and S&P and as such, are on a slightly different, but materially consistent basis to those quoted in App10 (‘alternative’ and ‘proposed’ metrics basis where relevant). See section 4.1.1 for more information.

The ratios in Table 2 demonstrate that our PR19 business plan will provide sufficient headroom to maintain our current credit ratings and ensure we will be covenant compliant over the period to March 2025. In addition, these credit ratings are comfortably above those required for investment grade credit ratings, providing further headroom.

We have demonstrated our ability to access debt capital markets efficiently regardless of the stage in the economic cycle, most recently during the 2008 Global financial crisis, considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s2. During the period 2008-2009 we were able to efficiently raise over £1.8bn in debt finance, comprising £900m debt market bonds, £400m loans and £500m in committed facilities (See Appendix 3).

In addition, Goldman Sachs support our ongoing ability to efficiently access the debt capital markets in their Board-level assurance letter on the selection of target credit ratings and the financeability of our business plan (see T7003).

Evidencing our current ability to access the debt capital markets in the last twelve months, the company has negotiated c£586m of new bonds with maturities ranging from 2027 to 2057 at competitive rates of interest. In addition, the group has drawn down the remaining £175m under the £250m AMP6 index-linked loan facility signed with the EIB in April 2016.

2.1.3 Having readily available access to cash resources to meet short term shocks

1 Detailed evidence supporting our financeability assessment, supplementary document S7003 1 “Three top economists agree 2009 worst financial crisis since great depression”, source: Reuters

https://web.archive.org/web/20100212214538/https:/www.reuters.com/article/pressRelease/idUS193520%2B27-Feb-2009%2BBW20090227



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At 31 May 2018, UUW had £961m of available liquidity (including cash on deposit) at its disposal, comprising £436m of cash and short-term deposits and £525m of undrawn committed loan facilities.

We currently have a board policy of maintaining between 15 and 24 months of financial headroom, which provides a substantial level of liquidity (excluding cash on deposit) to meet any short-term cash flow impacts that may arise. At 31 May 2018 UUW had in excess of £500m liquidity out to 9 months, and 20 months of liquidity, which is in the middle of the board’s core policy range.

Figure 1: UUW liquidity at 31 May 2018

It is important to note that the liquidity analysis in Figure 1 assumes that existing borrowings and committed facilities mature with no refinancing taking place, and as a result represents an extreme prudent scenario. In practice, new funding is raised to ensure that the company remains within its 15-24 months liquidity policy.

We maintain an appropriate debt maturity profile to avoid undue refinancing risks. At May 2018, there were £655m of committed bank facilities in place, which reduce to £nil by March 2025. In addition, there are debt maturities of £517m in 2019 with a further £569m in 2020, £725m in 2021, £482m in 2022, £343m in 2023, £111m in 2024 and £547m in 2025. Our debt portfolio has an average term to maturity of around 20 years (see Appendix 4b). Management would typically renegotiate committed facilities and refinance debt maturities ahead of the maturity date, which would increase liquidity.

2.1.4 Recognising our robust pension scheme position On a funding scheme basis, we have a [] [] as at 31 March 2016. We have a plan in place with the schemes’ trustees to address the funding deficit by 31 December 2021 and we have incorporated this funding commitment within our PR19 business plan and the sections above. The schedule of contributions to address the funding deficit is not expected to be impacted by a valuation, adopting a low risk funding basis, being undertaken as at 31 March 2018. This funding deficit does not pose any concerns to the viability of our business.



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2.2 Assessing the threats to financial resilience 2.2.1 Stress testing for the principal risks to the company (“company specific scenarios”) The principal risk factors facing the company at May 2018 that could have a significant financial or economic impact are set out in Appendix 6. It is evident from this information that in ‘severe but reasonable scenarios’3 these risks would not pose a significant threat to the viability of the company. In making this assessment, we have assumed our PR19 business plan is accepted by Ofwat and there are no substantive changes to the political landscape in the foreseeable future.

• The largest ‘severe but reasonable scenario' and ‘largest single impact overall’ is a [] Manchester and Pennine Water supply risk.

• The largest combined ‘severe but reasonable scenario' should two of the largest impacting risks occur, which has a highly unlikely probability of occurrence, would be [] .

• The estimated value of all the risks in the table based upon probability of occurrence [] [].

The risk position shown is the ‘value at risk’ through to the end of March 2025, consistent with the latest board reporting, and the financial values quoted represent the potential NPV exposures associated with each risk.

The table below summarises the key ratios for UUW in accordance with Moody’s and Standard and Poor’s calculations for each scenario at the end of the viability period. The final year of the viability period has been presented for illustrative purposes as the assessment of the impact in each of the years of the viability period has demonstrated that in none of the intervening year would the rating assessments fall below those in the final year. This is due largely to the nature of the scenarios modelled giving rise to a cumulative impact over the period meaning that 2025 represents the most prudent case.

Table 3: Key credit ratios for each scenario modelled at the end of the viability period

Scenario Base Largest ‘severe but reasonable’

Largest combined if two largest occurred

Probability weighted value of all the risks

Moody’s

Net debt adjusted / RCV (FY25)

60.29% 64.16% 67.42% 61.46%

Adj int cover (FY25) 2.1x 1.9x 1.7x 1.9x

Rating assessment A3 A3 Baa1 A3

Standard and Poor’s

FFO / Debt (FY25) 9.39% 8.48% 7.82% 8.77%

Net debt / RCV (FY25)

60.29% 64.18% 67.44% 61.46%

Rating assessment BBB+ BBB+ BBB BBB+

The company’s existing credit ratings are A3 with Moody’s and A- with Standard and Poor’s. In all but the most extreme scenario the company would reasonably expect, on a standalone basis, to be able to maintain its targeted credit ratings of A3 and BBB+ (lower than the existing Standard and Poor’s rating), while in the most extreme scenario the credit rating is likely to reduce to Baa1 and BBB. The most extreme scenario results in a c7% increase in debt to RCV gearing to c67%, a c0.4x reduction in adjusted interest cover to c1.7x and a c1.6% reduction in FFO to debt to c8% by the end of the viability period.

3 Reasonable scenarios: management view this to be anything with a greater than 10% (1 in 10) cumulative likelihood of occurrence.



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Given the strong capital base and prudent levels of liquidity none of the scenarios are reasonably expected to impact the company’s ability to service debt. Based on the impact of these severe but reasonable scenarios, the group’s net assets, net debt and RCV gearing would be not be impacted significantly enough to cause UUW to lose its investment grade credit ratings. We expect that under such circumstances the company would be able to maintain sufficient capital solvency to be able to raise any additional finance required to remain viable in the event of these adverse factors materialising.

2.2.2 Stress testing for Ofwat’s common scenarios Ofwat’s common scenarios In addition, the assessment has also considered the impact of a number of scenarios proposed by Ofwat in a recent PR19 consultation4 on the company’s ability to maintain its credit ratings, financial metrics and its ability to service debt. These scenarios do not necessarily fall under the category of ‘severe but reasonable’ scenarios in the same way as those considered in 2.2.1 above, and in many cases represent more extreme scenarios/outcomes. Specifically, the scenarios tested are:

1. Totex underperformance of 10% over 5 years of AMP7

2. Inflation for each year of AMP7

2.1 High case: 4% RPI and 3% CPIH

2.2 Low case: 2% RPI and 1% CPIH

3. An increase in bad debt of 5% for each year of AMP7

4. New debt at 2% above forward interest rate projections for each year of the viability period

5. An ODI penalty at 3% of RORE in relation to one year of the viability period

6. A financial penalty at 3% of turnover in relation to one year of the viability period

7. Combined scenario assuming totex and retail cost underperformance of 10% and an ODI penalty at 1.5% of RORE - in each year of AMP7 - and a financial penalty of 1% of revenue in relation to one year of the viability period.

Further detail of how these scenarios have been applied is included in Appendix 2b.

We have not considered it necessary to present further scenarios to model the risk in relation to our pension schemes or intercompany financing. Our pension scheme risk exposure is not significant as the schemes are well funded and operate an asset-liability investment mandate hedging the liability exposure (see section 4.7.2 of our PR19 business plan submission for more information). In relation to intercompany financing, this is adequately covered by scenario 4, which assesses the risk on all debt (internal and external to the United Utilities group).

Stress testing of common scenarios Table 4 below summarises the key ratios for UUW in accordance with Moody’s and Standard and Poor’s calculations for each scenario at the end of the viability period. We have also provided ‘normalised’ ratios where appropriate, as we believe these provide a more representative basis upon which to assess the impact on credit ratings. The credit rating agencies tend to take a forward-looking view rather than considering a point in time in isolation. The normalised ratios look through, where appropriate, the impact of the specific shocks in a given year resulting from the modelled scenario and present a more forward-looking view (see Appendix 2b for more information).

The final year of the financial resilience assessment period has been presented as in most cases this represents the most severe point in the assessment and in the few cases where this is not the case, the rating assessment in the table is unchanged.

4 Putting the sector in balance – position statement on PR19 business plans (July 2018)



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Table 4: Key credit ratios for each scenario modelled at the end of the viability period

Scenario Base 1 2.1 2.2 3 4 5 6 7

Moody’s

Net debt adjusted / RCV (FY25)

60.29% 63.34% 58.20% 62.42% 61.07% 62.05% 61.21% 60.65% 65.98%

Adj int cover (FY25)

2.1x 1.5x 2.4x 1.9x 1.9x 1.4x 2.1x 2.1x 1.0x

Adj int cover (FY25 normalised)

2.1x 1.7x 2.2x 2.1x 2.0x 1.4x 2.1x 2.1x 1.4x

Rating assessment

A3 A3 A3 A3 A3 Baa2 A3 A3 Baa2


FFO / Debt (FY25) 9.39% 7.59% 9.77% 9.06% 8.92% 8.75% 9.16% 9.30% 6.22%

FFO / Debt (FY25 normalised)

9.39% 8.41% 9.05% 9.75% 9.18% 8.75% 9.16% 9.30% 7.80%

Net debt / RCV (FY25)

60.29% 63.35% 58.19% 62.43% 61.07% 61.05% 61.22% 60.65% 65.99%

Rating assessment

BBB+ BBB BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB

The company’s existing credit ratings are A3 with Moody’s and A- with Standard and Poor’s. In all but the most extreme scenarios the company would reasonably expect, on a standalone basis, to be able to maintain its targeted credit ratings of A3, BBB+. In the most extreme scenario, the analysis supports that we would still maintain an investment grade credit rating of Baa2, BBB without taking mitigating actions. However, we would not consider this to be a sufficiently comfortable level of credit rating for UUW given the lack of headroom this provides, and as such mitigating actions would be considered to restore the ratings to a more comfortable level. The most extreme scenario results in a c6% increase in debt to RCV gearing to c66%, a c0.7x reduction in adjusted interest cover (normalised) to c1.4x, and a c1.6% reduction in FFO to debt (normalised) to c8% by the end of the viability period. Given the strong capital base and prudent levels of liquidity, we are relatively well positioned to manage through such extreme scenarios.

Further details of the thresholds used by Moody’s and Standard and Poor’s when making a rating assessment are included in section 3 of our financeability supplementary document.5 It should be noted that Moody’s and Standard and Poor’s do not always determine a credit rating based on individual measures in isolation, and may take into consideration a range of measures in the round. The rating assessments in figures 5 and 6 therefore represent a worst case interpretation of the likely credit rating based on the modelled numbers.

2.2.3 Stress testing additional funding required for the Manchester & Pennines Resilience Project

The expectation is that our Manchester & Pennines Resilience project will be delivered by a third party Competitively Appointed Provider (CAP) under a direct procurement for customers arrangement. However if, despite the best efforts of UUW, a DPC procurement route was not viable then our working assumption is that

5 Detailed evidence supporting our financeability assessment, supplementary document S7003



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under these circumstances the costs incurred would be added to the opening AMP8 RCV on an NPV neutral basis, and that this is set out in an appropriate licence amendment or otherwise committed to by Ofwat in such an eventuality. (See S5007 and S5007a for more details of this project).

We have included a further scenario to demonstrate that assuming the worst-case scenario from sections 2.2.1 and 2.2.2, if UUW funds the project in AMP7 and we receive firm assurance from Ofwat that the costs will be added to the RCV in AMP8 on an NPV neutral basis, we have sufficient financial resilience available to absorb this event.

In Dividend cash flows are higher in the three years to 2020/21 due to the inclusion of AMP6 outperformance dividends of £130m, £101m and £34m in each year respectively. The dividends from 2021/22 onwards represent only base dividends.

Below, we summarise the impact on our credit ratios across the viability period to March 2025 assuming scenario 7 (see section 2.2.2) plus [] of additional funding on the Manchester & Pennines Resilience project in AMP7.

Table 5: Key credit ratios for scenario 7 plus [] of additional funding on the Manchester & Pennines Resilience Project across the financial resilience assessment period

Scenario 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25

Moody’s

Net debt adjusted / RCV

63.87% 62.09% 63.90% 64.43% 64.74% 66.36% 67.98%

Adj int cover 2.8x 2.6x 1.1x 1.2x 1.0x 1.0x 0.9x

Adj int cover (normalised)

2.8x 2.6x 1.6x 1.6x 1.5x 1.4x 1.3x

Rating assessment

A3 A3 A3 A3 Baa1 Baa1 Baa2


FFO / Debt 10.05% 10.52% 6.85% 6.95% 6.66% 6.23% 5.78%

FFO / Debt (normalised)

10.05% 10.52% 8.56% 8.49% 8.22% 7.75% 7.34%

Net debt / RCV 64.03% 62.25% 63.90% 64.44% 64.75% 66.37% 67.99%

Rating assessment

BBB+ BBB+ BBB BBB BBB BBB BBB

Under this extreme scenario, the analysis supports that we would still maintain an investment grade credit rating of Baa2, BBB without taking mitigating actions. However, we would not consider this to be a sufficiently comfortable level of credit rating for UUW given the lack of headroom this provides, and as such mitigating actions would be considered to restore the credit ratings to a more comfortable level. The most extreme scenario results in a c8% increase in debt to RCV gearing to c68%, a c0.8x reduction in adjusted interest cover (normalised) to c1.3x, and a c2% reduction in FFO to debt (normalised) to c7% by the end of the viability period. Given the strong capital base and prudent levels of liquidity, we are relatively well positioned to manage through such extreme scenarios.



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2.3 Understanding the extent of mitigations available in extreme circumstances

As evidenced in section 2.2, we assessed that we have a robust position to effectively absorb and respond to extreme events if they were to arise. In the event that adverse factors result in an impact on the business beyond what can be naturally absorbed, there are a number of mitigating actions available to management to ensure the ongoing viability of the company.

2.3.1 Deferral of dividend payments (liquidity and capital solvency) Whilst providing sufficient returns to equity investors through dividends is important, dividends represent substantial discretional cash flows and as such, in extreme circumstances, we could defer these to meet liquidity requirements and improve capital solvency.

Table 6: Forecast dividends of UUW within our PR19 business plan 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

UUW dividend- cash flow

352 334 255 227 234 242 250

Dividend cash flows are higher in the three years to 2020/21 due to the inclusion of AMP6 outperformance dividends of £130m, £101m and £34m in each year respectively. The dividends from 2021/22 onwards represent only base dividends.

The amounts shown in the table above represent the annual dividend cash flows that could be potentially deferred/retained in each financial year. To the extent that multiple UUW dividend `payments are deferred, this could provide additional liquidity up to the amounts in the table above across the viability period, equivalent to c16% of the RCV. UUW’s operating cash flow broadly covers its investing cash flow, and so in isolation deferral of dividends would allow the business to balance its cash flow (absent debt maturities).

2.3.2 Access to new equity finance (Liquidity and capital solvency) Another way in which the company could enhance both its liquidity and capital solvency position, either in addition to or instead of dividend deferral, could be through the group raising new equity in the market. The group has past experience of this kind of activity and the likes of a deeply discounted rights issue could be a course of action by which we could achieve increased certainty over the company’s ability to remain viable. As we would not expect the company’s RCV gearing to increase significantly based on the scenarios modelled in section 2.2.1 and 2.2.2 above, it is reasonable to believe that equity investors would continue to support the group through such actions.

2.3.3 Access to new debt finance (Liquidity) With RCV gearing at c60% this provides a significant level of capital headroom, providing a functioning equity buffer within which new debt financing could be raised. RCV gearing could increase to 72% before our Moody’s credit rating would be downgraded to Baa1, and 80% before it fell to Baa2; if we were to raise our gearing by 5%, through the issuance of new debt, this would make c£500m of additional funds available if required.

It is appropriate for the Directors to take account of the company’s ability to raise future finance when assessing viability, recognising, as evidenced in section 2.1:

• Our expectation that UUW will to maintain a solid A3 and BBB+ credit rating based upon its rating metrics;

• Our proven ability to efficiently access the debt capital markets at all times; • Our responsible c60% debt to RCV ratio; and • Based on the modelling in section 2.2.1, 2.2.2 and 2.2.3 above, UUW would be expected to maintain

investment grade credit ratings when faced with a number of challenging scenarios

Goldman Sachs support this view in their Board-level assurance letter on the selection of target credit ratings and the financeability of our business plan (see T7003).



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2.3.4 Close out of our derivative asset positions (Liquidity) We estimate that at least £394m could be realised from the close out of ‘in-the-money’ swap contracts at May 2018. There were £492m of ‘in-the-money’ swap contracts on the balance sheet at May 2018 and we have assumed that 80% of the value would be realised on these, to take account of the counterparties’ cost of borrowing which would be factored into the fair value on closeout. Management could close out these swap contracts relatively simply, realising the value on these as a one-off opportunity.

It is worth noting that swap valuations can move significantly based upon reference market interest rates and exchange rates. These swaps, taken out to hedge long-term debt, have had this level of asset valuation for a number of years now. An increase in market interest rates and/or a strengthening of Sterling against the Euro or US Dollar would reduce the value of the derivative assets.

2.3.5 Deferral of the capital programme (Liquidity) There is little scope for the company to defer capital expenditure in the final two years of AMP 6 (the first two years of the financial resilience assessment period), however other mitigating actions are available to the company in the event of adverse factors materialising. The company is budgeting to invest around £500m per annum of capital expenditure in the 2020-2025 investment programme. In the event that any adverse factors were to materialise that significantly impacts the financial position of the company, temporary deferral of the capital investment programme could ensure on-going viability.

Table 7: Forecast capital investment of UUW within our PR19 business plan 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

UUW capital investment

624 511 483 475 421 605 521

The extent and timing of any deferral could have significant implications on the delivery of our performance commitments, however in extreme scenarios deferral may prove an effective option. We estimate that we could temporarily defer c£100m per annum in years one to three of AMP 7 with modest risk to the business (i.e. limited impacts in terms of ODI failure, missed regulatory dates and fines).

2.4 Recognising the other protections that exist 2.4.1 Regulatory and economic protections In making an assessment of the viability of UUW there are significant factors associated with both the economic and regulatory environment of the business which provide additional protection compared to many other non-regulated businesses.

UUW benefits from a rolling 25-year licence which, coupled with the five year price control, provides a high degree of certainty over cash flows during the period to March 2025, and beyond to a lesser degree. In addition, to the extent that certain actual cash flows deviate from the fixed allowances within our price control, certain regulatory mechanisms exist which provide a degree of protection:

• Totex sharing mechanism- under/over performance is shared with customers, with recovery coming in the following AMP

• Inflation uplift to RCV- we are economically protected against cost inflation through the inflation uplift to the RCV, however inflation can impact cash flow due to timing differences

• Debt indexation mechanism- under/over performance on new debt is shared with customers in the following AMP

• Tax sharing mechanism- under/over performance due to changes in tax rates/legislation are shared with customers in the following AMP

Within the AMP there exists the IDoK and the substantial adverse effect mechanisms, which in extreme circumstances may enable the re-opening of the price control. Between AMP periods, there exists the protections afforded by the regulatory regime in which regulators – including Ofwat – are required to have regard to the principles of best regulatory practice. These include that regulation should be carried out in a way which is transparent, accountable, proportionate, consistent and targeted. Ofwat’s primary duties provide



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that it should protect consumers’ interests, by promoting effective competition wherever appropriate; secure that companies properly carry out their statutory functions; secure that companies can finance the proper carrying out of these functions – in particular through securing reasonable returns on capital; and secure that water and wastewater supply systems have long-term resilience and that companies take steps to meet long-term demands for water supplies and wastewater services.

Taken together, these regulatory factors provide UUW with a considerable degree of protection from threats to its viability within the current price control period and beyond, which by their nature would need to be extreme. The financial resilience assessment assumes that there is no significant change to the regulatory environment during the viability period, and therefore the scenarios modelled should be considered in this context. The scenario modelling has been performed taking into account the normal protections under the regulatory mechanism, but does not assume any reliance on the IDoK and substantial adverse effect mechanisms.

From an economic perspective, given the nature of water and wastewater services, threats to the company’s viability from risks such as reduced market share, substitution of services and reduced demand are low relative to those faced by other industries.

2.4.2 Insurance We have a significant portfolio of insurance cover in place to provide protection against many catastrophic scenarios such as dam failure, terrorism, employer’s liability etc. (see Appendix 5 for more details). There would still be a short-term liquidity impact from such events due to the time it would take between incurring the expenditure and recovering this through the insurance claim, however it is an important consideration in terms of medium term liquidity.

2.5 Financial resilience assessment The company has a strong liquidity and capital solvency position (section 2.1), providing it with the ability to absorb all the ‘severe but reasonable scenarios’ identified by the board (section 2.2.1), the extreme common scenarios prescribed by Ofwat (section 2.2.2) and finance the Manchester & Pennines Resilience Project during AMP7 if it was not viable to deliver by a CAP (section 2.2.3) without the need for mitigating actions. Considerable protections also exist from the economic and regulatory environment in which the company operates (section 2.4.1) and the insurance in place to protect against catastrophic risk (section 2.4.2). In addition, in very extreme scenarios the company has a number of mitigating actions available to it, providing it with significant scope to improve its liquidity and capital positions to further absorb any such threats (section 2.3).

2.5.1 Liquidity medium term Considering that UUW has 20 months of liquidity, a c60% debt to RCV ratio providing it with c£4.5bn (40% of RCV on average over AMP7) of capital headroom within which to increase its medium term liquidity, a proven track record of being able to raise new forms of finance, the scope of the mitigating actions available to it (including c£230-350m dividend per annum), the protections which the regulatory and economic environment provide and the coverage of its insured risks; management believes that UUW has sufficient capacity to maintain its viability over at least the period to March 2025 in the event of the principal risks materialising. Based on the scenarios modelled we would not expect net debt to RCV to exceed 68% over the assessment period.

2.5.2 Capital solvency On a regulatory equity valuation basis, which is the method by which water and wastewater businesses are valued, the equity valuation is £3,722m as at May 2018. This increases to over £5bn by the end of AMP7. On an accounting measurement of equity basis, there is a £2,297m equity valuation as at May 2018. These equity valuations represent the amount by which assets exceed liabilities (i.e. net assets) and therefore on each basis the company would be able to settle its liabilities at 31 May 2018. The equity valuations also indicate that there is a substantial equity buffer against future risks arising based on the severe but reasonable scenarios modelled over the financial resilience assessment period.



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3 Appendix 1: Viability statement provided by the board The directors have assessed the viability of the company, taking account of the company’s current position, the potential impact of the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions. This assessment has been performed in the context of the company’s prospects as considered over the longer term. Based on this financial resilience assessment, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period to March 2025.

This viability statement is based on the fundamental assumption that the current regulatory and statutory framework does not substantively change, for example a change which facilitated the compulsory purchase of the shares or assets of either UUW or its ultimate parent undertaking for the Renationalisation of the water sector, throughout the financial resilience assessment period. In addition, it assumes that the PR19 final determination reflects the business plan submitted to Ofwat in September 2018.

The long-term planning detailed on page 37 of the UUW statutory accounts assesses the company’s prospects and establishes its strategy over a 25-year time horizon consistent with its rolling 25-year licence and its published long-term strategy. This provides a framework for the company’s strategic planning process, and is key to achieving the company’s aim of providing the best service to customers at the lowest sustainable cost and in a responsible manner over the longer term, underpinning our business model set out on pages 20 to 21 of the UUW statutory accounts.

In order to achieve this aim and promote the long-term sustainability and resilience of the business, due consideration is given to the identification and management of risks over the long-term that could impact on the business model, future performance, solvency and liquidity of the company. This includes consideration of, amongst other things: the potential impacts of Brexit; increasing penalties under the Environmental Sentencing guidelines; compliance risks associated with business retail following the opening of the market opening to competition in April 2017; performance penalties against the regulatory contract; and continuing to adapt to climate change both in terms of its significant and permanent impacts on the water cycle and the potential for extreme weather events. An overview of our risk management approach that supports the company’s long-term planning and prospects can be found on pages 51 to 54 of the UUW statutory accounts.

The viability statement for the period to March 2025 has been assessed based upon the company’s medium-term business planning process, which sits within the overarching strategic planning process and considers

• The company’s current liquidity position – which provides headroom to cover projected financing needs through until 2020

• The company’s robust capital solvency position – with a debt to regulatory capital value (RCV) ratio of around 60 per cent, providing considerable headroom supporting access to medium-term liquidity as required; and

• The current regulatory framework within which the company operates – which provides a high degree of certainty over cash flows in the short to medium term and broader regulatory protections in the longer term

The analysis underpinning this assessment has been through a robust review process, which has included scrutiny and challenge by the board and assurance by Deloitte.

The company has a proven track-record of being able to raise new forms of finance in most market conditions, and expects to continue to do so into the future. In addition, the board has considered the protections that exist from the regulatory and economic environment within which it operates.

From an economic perspective, given the market structure of water and wastewater services, threats to the company’s viability from risks such as reduced market share, substitution of services and reduced demand are low in contrast to those faced by many other industries.



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From a regulatory perspective, the company currently benefits from a rolling 25-year licence and a regulatory regime in which regulators – including the economic regulator, Ofwat – is required to have regard to the principles of best regulatory practice. These include that regulation should be carried out in a way which is transparent, accountable, proportionate, consistent and targeted. Ofwat’s primary duties provide that it should protect consumers’ interests, by promoting effective competition wherever appropriate; secure that the company properly carries out its statutory functions; secure that the company can finance the proper carrying out of these functions – in particular through securing reasonable returns on capital; and secure that water and wastewater supply systems have long-term resilience and that the company takes steps to meet long-term demands for water supplies and wastewater services.

The business planning process is closely aligned with these principles, and, coupled with the company’s robust management of risks, gives confidence that current and future regulatory price controls will provide certainty around cash flows that will support the continuing viability and prospects of the company. For these reasons, the board considers it appropriate to provide a viability statement for the period to March 2025.

The directors have assessed the company’s viability in the context of its expected performance and past ability to deliver for customers, considering the principal risks as set out in S4006 - Appendix 6 of the financial resilience assessment supplementary and its ability to absorb a number of severe but reasonable scenarios including those arising from operational and environmental risks, political and regulatory risks, the risk of critical asset failure, and the potential for a restriction to the availability of financing resulting from a global capital markets crisis. The financial resilience assessment has considered the potential impacts of these risks on the company’s business model, future performance, solvency and liquidity based on a number of stress-tested and sensitised scenarios in which the company is assumed to face a series of the top risks in terms of the most severe impact and likelihood of occurrence over the course of the financial resilience assessment period. As well as the protections that exist from the regulatory environment within which the company operates, a number of mitigating actions are available in the kind of severe scenarios considered, including the restriction of dividend payments, access to additional equity, the raising of new finance, the closeout of derivative asset positions, and capital programme deferral. These actions provide the company with significant scope to improve its liquidity and capital position to further absorb such threats.

In addition, the assessment has also considered the impact of the common scenarios prescribed by Ofwat6 on the company’s ability to maintain its credit ratings, financial metrics and its ability to service debt.

• The individual scenarios modelled assumed a totex underperformance of 10%, inflation of 4% RPI/3% CPIH, an increase in bad debt of 5% and a cost of new debt at 2% above forward interest rate projections - for each year of AMP7- and an ODI penalty at 3% of RoRE and a financial penalty at 3% of turnover in relation to one year of the viability period

• The combined scenario modelled assumed totex and retail cost underperformance of 10% and an ODI penalty at 1.5% of RoRE - in each year of AMP7- and a financial penalty of 1% of revenue in relation to one year of the viability period

The principal financial risk not captured within these scenarios relates to the funding deficit of defined benefit pension schemes. As the company’s schemes are well funded and operate an asset liability investment mandate hedging the liability exposure (and in the unlikely event of a substantial deterioration of the funding position, a period of time would be allowed for deficit repair payments), pension risk is not considered to have a material impact on the company’s financial resilience assessment.

The company’s existing credit ratings are A3 with Moody’s and A- with Standard and Poor’s. In all but the most extreme scenarios the company would reasonably expect, on a standalone basis, to be able to maintain credit ratings of A3, BBB+. In the most extreme scenario the credit rating is likely to reduce further to Baa2, BBB, without taking mitigating actions, which we consider inappropriate given the lack of headroom this provides and, as such, mitigating actions would be considered to restore the ratings to a more comfortable level. The




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most extreme scenario results in a c6% increase in debt to RCV gearing7 to c66%, a c1.1x reduction in adjusted interest cover8 to c1.0x and a c3.2% reduction in FFO to debt9 to c6% by the end of the viability period. Following any stress period, FFO would then be reasonably expected to revert to more normalised levels, improving adjusted interest cover to c1.4x and FFO to debt to c8% which supports the Baa2, BBB credit rating associated with the extreme scenario. Given the strong capital base and prudent levels of liquidity, none of the scenarios are reasonably expected to impact the company’s ability to service debt.

Mitigating actions to support the overall financeability of the company could include: a temporary reduction in dividends; a revised dividend policy; or the raising of new equity capital. As a consequence of the significant equity base, dividends across the viability period are equivalent to c16% of the RCV at the end of the viability period, providing substantial headroom to improve

the capital strength of the company and its credit ratings and/or allow the company to absorb more extreme downside scenarios.

Additionally, we have assessed the potential impact of financing the Manchester & Pennines Resilience programme through the traditional in house funding approach in the event that a direct procurement for customers cannot be secured. Adding the expected impact to Ofwat’s most extreme scenario still indicates that the company would be able to sustain a Baa2, BBB credit rating assuming that there was a firm commitment to reflect this expenditure in the RCV from AMP8 on a NPV neutral basis.

7 Debt to RCV gearing is calculated based on the company’s shadow RCV 8 Adjusted interest cover calculated based on the methodology published by Moody’s 9 FFO to debt calculated based on the methodology published by Standard & Poor’s



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4 Appendix 2a: Approach taken in respect of financial resilience assessment

We were an early adopter in 2015 of the requirement to provide a long-term viability statement for statutory purposes and have an established approach to make this assessment. To support the board in making the viability statement in Appendix 1 we have undertaken a rigorous assessment of our ability to absorb adverse financial impacts that could arise in a range of scenarios based on the key risks we face as an organisation. In performing this point-in-time assessment, which has been carried out based on conditions as at 31 May 2018, we have had due regard to the principles of the UK Corporate Governance Code in respect of risk and viability reporting.

4.1.1 Assessment of the strength of our financial position As a starting point we have assessed the expected strength of our financial position across the assessment period based on delivery of our business plan without any adverse scenarios arising. This provides a ‘base case’ to enable us to assess the impact of adverse scenarios that may arise and the extent to which these could be absorbed. In performing this initial assessment we have considered the level of capital headroom available to the company to enable us to understand the size of the equity buffer within which adverse financial impacts could be absorbed, and our capacity to raise new debt financing should this be required. We have also considered the company’s liquidity position in order to ascertain whether the company would have sufficient liquidity to deal with financial shocks that may arise.

In addition to this we also consider the company’s credit ratings, which provide an indication of our ability to maintain efficient access to debt markets throughout the assessment period. We have targeted credit ratings of A3/BBB+ with Moody’s and Standard and Poor’s respectively as these provide a degree of headroom above the threshold for investment grade and represent the ratings at which we would be able to comfortably access new debt finance if required. The Standard and Poor’s targeted rating is below our current rating of A-, and is targeted as a sustainable rating over the period given that headroom on the FFO/Debt ratio used by Standard and Poor’s is relatively tight.

The credit rating metrics quoted in our financial resilience assessment are calculated based upon the methodology used by Moody’s and Standard and Poor’s and as such, are on a different basis to those quoted in APP10. The differences between the credit metrics in this report and APP10 (‘alternative’ and ‘proposed’ metrics basis where relevant) are not considered significant.

We have chosen to base our financial resilience assessment on the credit rating agencies methodology as this provides the most accurate basis upon which to perform our stress testing, avoiding the difficulties of adjusting the various credit rating thresholds for multiple credit ratings, to approximate the APP10 basis. In addition, as this assessment has been undertaken to provide our Board with the basis upon which to base their 7 year viability statement, presenting the analysis on a consistent basis to that used by the credit rating agencies provides them with the most relevant information for this purpose.

4.1.2 Assessment of threats to our financial position Having assessed the strength of our financial position and the level of headroom available we have then considered risk factors that could threaten this position in order to develop scenarios with which to stress test our financial resilience.

4.1.2.1 Risk assessment The scenarios selected for consideration have been informed by the detailed risk assessment process carried out as part of our ordinary activities. The company has a robust risk management framework that supports our long-term resilience. Risks are identified and evaluated within individual business areas and fed into a framework developed and maintained by our corporate risk team for the purpose of ensuring that risk exposure can be actively monitored and appropriate responses can be developed. The corporate risk team maintains a register of live risks that the company faces, which is wide-ranging and encompasses, amongst other things, regulatory and legal risks; risks associated with our core operations and service provision; risks



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associated with our functional and support services; and hazard-based risks. These include financial risks associated with the company’s ability to finance the business appropriately and ensure that it has sufficient resources to absorb adverse factors it may face in the future.

The risk register considers the likelihood of individual risks materialising and the estimated financial impact the company would face should this occur. Probabilities are assigned to individual risks based on the deemed likelihood of occurrence in any one year, and the financial impact is estimated based on the “most likely” NPV of the full life impact.

The principal risks facing the business are regularly reported to the board, with a focus placed on the most significant risks based on likelihood of occurrence and financial impact, together with high impact and low likelihood risks. For the purpose of our financial resilience assessment the principal risks set out in Appendix 6 were considered. Note that as the viability statement is based on the fundamental assumption that the current regulatory and statutory framework does not substantively change throughout the financial resilience assessment period, relevant regulatory and political risks have not been included in this assessment.

4.1.2.2 Development of scenarios For the purpose of the financial resilience assessment we have modelled the largest ‘severe but reasonable’ scenario in terms of potential financial impact, in additional to a number of other more ‘extreme’ scenarios based on the principal risks in order to perform stress-testing that models what the expected financial impact on the company would be should it face these scenarios. The ‘severe but reasonable’ scenarios, take into account those risks with a greater than 10% (1 in 10) cumulative likelihood of occurrence.

We have then modelled whether the company has sufficient capacity to withstand these stresses during the financial resilience assessment period based on its existing resources (within the context of the business plan submission), together with the financial effect of mitigating actions available to the company should these be required.

In addition, the assessment has also considered the impact of common scenarios proposed by Ofwat in a recent PR19 consultation on the company’s ability to maintain its credit ratings, financial metrics and its ability to service debt. These scenarios do not specifically feature on the company’s principal risks, which focus on specific event-based scenarios, instead focusing on outcomes that the company could face that could result from a range of factors. Including these scenarios in our assessment in addition to the company-specific events-based principal risks adds depth to our stress-testing, ensuring that it is balanced and well-rounded.

In considering the scenarios proposed by Ofwat we have modelled these based on the current regulatory regime and taking into account the regulatory mechanisms that currently exist (e.g. totex sharing mechanism, inflation uplift to RCV, debt indexation mechanism, and tax sharing mechanism), though we have not assumed any reliance on the protections afforded by the IDoK and substantial adverse effect mechanisms in extreme circumstances.

4.1.3 Quantification of the impact of scenarios In order to consider the potential impact of the scenarios modelled we have assessed how they would be expected to impact the company’s financial results, forecast in the business plan submission, from an income statement and balance sheet perspective. These revised financial figures have then been fed into modelling of key credit and covenant financial ratios in order to understand the likely impact on the company’s credit ratings as assessed by Moody’s and Standard and Poor’s. The assessment is based on the assumption that as part of its mitigating actions the group would be able to raise sufficient new financing to deal with risks that may materialise provided that it can maintain an investment grade credit rating. Modelling has therefore considered how credit ratings may be affected based on tightening of credit and covenant financial ratios in each year of the financial resilience assessment in order to give an indication of the company’s viability over the assessment period.

Having ascertained the potential impact of the scenarios modelled, we have considered mitigating actions available to management in the event of these scenarios arising together with their potential effectiveness.



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These mitigations focus on ways in which the company’s capital solvency and liquidity positions could be enhanced in order to withstand the financial impact that the scenarios could bring. We have focused firstly on measures that could increase both capital solvency and liquidity, including deferral of dividend payments and accessing new equity, and then considered other measures that could increase liquidity in order to deal with the impact of scenarios as they arise.

This assessment of the company’s viability based on its ability to withstand/mitigate against adverse financial impacts has been performed in the context of other protections that exist, including insurance the company has in place against particular catastrophic risks, and the economic and regulatory environment in which the company operates.

4.1.4 Assurance of financial resilience assessment The risk assessment that feeds into the financial resilience assessment is regularly reviewed by the group audit and risk board, and the appropriateness of the specific risks and scenarios tested, together with the outputs of this testing, have been scrutinised internally in order to ensure their veracity. This has included review by the External Reporting Manager, Head of Finance (Planning & Performance), and Group Controller.

In addition to this, we engaged Deloitte as an external assurance partner to provide specific assurance to the board that this financial resilience assessment provides a considered and appropriate basis upon which to base the viability statement and is consistent with the wider PR19 business plan submission. We obtained this additional level of assurance for the viability statement provided as part of the PR19 business plan to provide additional confidence to our stakeholders.



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5 Appendix 2b: Approach taken in respect of scenarios prescribed by Ofwat

We have applied the scenarios prescribed by Ofwat10, the impact of which is assessed in section 2.2.2, as follows:

Scenario Description Assumptions Normalisation

1 Totex underperformance of 10% over 5 years of AMP7

10% overspend in each year in line with the existing annual profile of spend and the existing weighting between opex and capex. Assumed underperformance post-sharing is added to the RCV in the same year as it occurred.

Totex reverts back to normal levels but the debt and RCV impacts remain.

2.1 Inflation for each year of AMP7: High case 4% RPI and 3% CPIH

Annual compounding until the end of AMP7 applied to revenue, opex, capex and index-linked debt. Assumed underperformance post-sharing is added to the RCV in the same year as it occurred.

n/a – the higher inflation will remain in the base at the end of the period

2.2 Inflation for each year of AMP7: Low case 2% RPI and 1% CPIH

Annual compounding until the end of the period applied to revenue, opex, capex and index-linked debt. Assumed underperformance post-sharing is added to the RCV in the same year as it occurred.

n/a – the lower inflation will remain in the base at the end of the period

3 An increase in bad debt of 5% for each year of AMP7

Increased from the assumed statutory bad debt percentage up to 5%

Reverts back to normal levels of bad debt

4 New debt at 2% above forward interest rate projections for each year of the viability period

Assumed 2% additional interest applied to new debt each year. Assumed the existing robust interest rate hedging strategy continues throughout the period, reducing the total exposure to interest rates (mitigating most of the exposure)

n/a

5 An ODI penalty at 3% of RORE in relation to one year of the viability period

Reduced revenue by 3% of Regulated Equity in 2020/21 only

n/a

6 A financial penalty at 3% of turnover in relation to one year of the viability period

Reduced revenue by 3% in 2020/21 only n/a

7 Totex and retail cost underperformance of 10% and an ODI penalty at 1.5% of RORE - in each year of AMP7 - and a financial penalty of 1% of revenue in relation to one year of the viability period

10% overspend in each year in line with the existing annual profile of spend and the existing weighting between opex and capex. Reduced revenue by 1.5% of Regulated Equity in each year and reduced revenue by 1% in 2020/21 only. Assumed underperformance post-sharing is added to the RCV in the same year as it occurred.

Totex, retail costs and revenues all revert back to normal levels but the debt and RCV impacts remain.




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There is a generic assumption that the RCV has been adjusted to take account of any totex over/underspend in the year where the over/underspend has occurred, meaning that a shadow RCV is effectively used for the purposes of the financial ratios.

In performing our assessment, the normal regulatory mechanisms outlined in section 2.4.1 have been assumed to apply; the IDoK and substantial adverse effect mechanisms available in certain extreme circumstances have not been factored into our scenario analysis.



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6 Appendix 3: Debt finance raised during the 2008 Global financial crisis

During the 2008 global financial crisis we were able to efficiently raise over £1.8bn in debt finance, comprising £900m debt market bonds, £400m loans, and £500m in committed facilities, as follows:

Date finance raised Details

Bonds

Dec 2008 £250m bond due 2015

Jan and Feb 2009 £50m and £75m taps of 2015 bond

Mar 2009 £200m bond due 2022 and £75m tap of same bond

Mar 2009 JPY5bn bond due 2017

June 2009 £100m tap of 2022 bonds

June 2009 £50m tap of 2015 bonds

July 2009 £70m index-linked bond due 2039

Loans

Oct to Dec 2008 c£400m index-linked loan from the European Investment Bank

Committed facilities

Mar 2008 £450m various new and renewed facilities

Oct 2008 £50m relationship facility



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7 Appendix 4a: Committed facilities and debt instruments maturing through to March 2025


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Chapter 4: Supplementary Document – S4006 unitedutilities.com

8 Appendix 4b: Debt maturity profile


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Test 4: Securing Long Term Resilience www.unitedutilities.com

9 Appendix 5: [] []

[]


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Test 4: Securing Long Term Resilience www.unitedutilities.com

10 Appendix 6: Principal risks facing the business at May 2018

[]

[]

For the purpose of the financial resilience assessment we have used the 7 year financial impact to 2025 in our risk analysis. The full life impact has not been used within the financial resilience assessment but has been included merely to enable the table to be linked to ‘Table 4.3: Top operational risks’ in Chapter 4 of our AMP7 business plan. Please refer to chapter 4 for more information on the table above and what the ‘likelihood of event’ and financial impacts represent.

financial resilience: assessing and demonstrating financial … · 2018-09-01 · business plan...

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