How we differentiate ourselves from our competitors within the water industry
Systems Thinking approach to how we operate improves efficiency and resilience
We have adopted an innovative systems-based approach to our regional water system and wastewater drainage areas, which we call Systems Thinking. This enables us to build a better understanding by examining the linkages and interactions between each of the components in our system. Rather than operating each treatment works in isolation, our field engineers are linked via our Integrated Control Centre (ICC), the data hub where we plan, monitor and control our water and wastewater infrastructure. It's one integrated system across the North West, and we can process enormous amounts of data received in real time from the telemetry backbone across our network, as well as factoring in other source data such as weather forecasts.
By operating our network in this way we are able to optimise cost and service performance, as well as moving away from a reactive mindset to address problems proactively, before they actually affect customers. This helps us to improve the reliability of our assets in order to reduce unplanned service interruptions. It also helps us to improve our use of data, at local asset level and centrally, to optimise performance and allocate resources to production teams with full accountability for asset and system performance.
This approach was built into our business plan in order to help us deliver both operational improvements and cost savings across the 2015–20 regulatory period, and is part of our long-term strategy to continue delivering operational benefits in future regulatory periods. As a result of this Systems Thinking approach, we are improving the resilience of our assets and network. This enables us to keep providing a reliable service to customers long into the future.
Prudent financial risk management delivers long-term predictability and resilience to financial shocks
Effective financial risk management delivers long-term predictability and resilience to financial shocks. 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 to investors. They underpin our target to maintain debt to regulatory capital gearing (RCV) within a range of 55 to 65 per cent, supporting a solid A3 rating with Moody's for United Utilities Water Limited and efficient access to the debt capital markets across the economic cycle.
Inflation exposure is managed by having around 50 per cent of our debt in index-linked form, which offers good value relative to nominal debt and acts as a partial hedge of the impact of inflation on our RCV and revenues. Most of our index-linked debt is RPI-linked, reflecting the regulatory model to March 2020, but thereafter the regulatory model will transition towards CPIH. In the absence of a CPIH debt capital market we will, subject to cost and availability, gradually transition towards a greater proportion of CPI-linked debt, being the best available proxy for CPIH.
Interest rate exposure on our remaining nominal debt is managed by fixing the underlying interest cost out to ten years, on a reducing balance basis. We have previously supplemented this by substantively fixing interest rates for each forthcoming regulatory period at the time of the price control determination, but this is no longer necessary as Ofwat is using debt indexation on the assumed portion of new debt from 2020. Our approach to interest rate management enables us to manage uncertainty in the approach to setting the cost of debt at each price review and our approach to debt financing, with a continuous assessment of various funding opportunities, enables us to consistently lock in long-term debt at good relative value.
We adopt an asset-liability matching policy for our defined benefit pension schemes by investing in assets such as corporate bonds and gilts along with the use of interest rate swaps, which perform in line with the liabilities so as to hedge against changes in swap and gilt yields. This therefore reduces the volatility of the required funding level. The schemes have also hedged inflation exposure, partly through RPI swaps and partly through an inflation funding mechanism, whereby company contributions are flexed for movements in RPI inflation, providing a natural hedge against any inflationary uplift on the RCV. It is anticipated that further progressive de-risking measures will continue to be implemented in relation to the pension schemes as part of a long-term 'self-sufficiency' strategy.