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We create value by delivering the services that customers want, at a price they can afford, now and in the future, through innovation and efficient operational performance, effective risk management and efficient financing. Through the work that we do and the investment that we make, we also create value for wider stakeholders, including the environment and communities in the North West.

We use short, medium and long-term planning horizons to focus our activities and investment on the creation of sustainable value, under our strategy of delivering the best service to customers, the lowest sustainable cost, in a responsible manner.

Our 25-year planning horizon seeks to ensure we are investing in our people, collaborating with suppliers, innovating to make our services better and more efficient, maintaining a robust capital structure, and preparing to ensure a resilient service in the face of future challenges.

This long-term planning helps us to focus the business plans that we submit to Ofwat, which set out how we intend to create value for each five-year regulatory period, whilst setting ourselves up in a sustainable way to continue creating value in future years. We monitor progress against these five-year plans as well as each individual financial year.

Delivering our regulatory contract

By submitting a robust, balanced plan to Ofwat prior to the start of each five-year regulatory period, we can help ensure we receive a regulatory contract that allows for the best overall outcomes for our customers, shareholders and the environment.

Once each regulatory contract is set, we create value in line with our business plan by delivering that contract. In order to drive better and more efficient operational performance, there are a number of areas in which companies have the opportunity to outperform in each regulatory period, and in doing so we are able to create further value for customers, shareholders and wider stakeholders.

During the 2015–20 regulatory period, there are five main areas in which Ofwat has given incentives for companies to outperform.

Totex

We can create value by delivering the agreed outcomes for customers within or below the total expenditure (totex) allowance. This requires us to innovate and create operational efficiencies to minimise our expenditure.

ODIs

We can create value by delivering a level of operational service that meets or exceeds the targets set in our wholesale outcome delivery incentives. These targets stretch us to continuously improve our service to customers and our environmental performance.

Customer satisfaction

We can create value by delivering a great level of customer service that is favourable relative to the other water companies. This is measured through Ofwat's quarterly service incentive mechanism (SIM) surveys during the current regulatory period.

Financing

We can create value by raising debt finance at a cost that meets or beats the industry allowed cost of debt.

Household retail

We can create value by minimising the costs to serve our customers relative to the allowed revenue for household retail activities.

We include our performance against each of the above areas in our operational KPIs, including our targets for the 2015–20 regulatory period.

Risk management

The risk-return trade-off means that the level of return to be earned from an investment should increase as the level of risk increases, therefore value is created through the effective management of risk. We adopt a prudent approach to risk management.

Our Systems Thinking approach and telemetry backbone improves our ability to manage operational risks, as we are able to recognise the normal 'signature' of our network and generate real-time alerts of potential issues, which we can then manage before there is any impact on service delivery, by undertaking proactive repairs and/or redirecting supply from elsewhere in our network where we have built in additional capacity.

Our financial risk management policies help us reduce our exposure to the economic and regulatory environment, thereby providing more predictable returns to investors. These cover a variety of market risks including inflation hedging, interest rate exposure, and an asset-liability matching policy for our defined benefit pension schemes.

Systems Thinking and prudent financial risk management are competitive advantages for us, as we set out in Our competitive advantage section.

We also engage in reasonable tax planning, which fully complies with the letter and spirit of the law. We benefit from allowable tax deductions on our substantial capital investment programme, whilst continuing to pay corporate tax at the full headline rate. We maintain an open, transparent and collaborative relationship with HMRC, and maintain a robust governance and tax risk management framework.

Stakeholders

We value the importance of building and maintaining constructive relationships with all of our stakeholder groups in order to ensure we are considering their interests in our strategic decisions and to influence and inform as much as we are able to do so.

We create value for a number of stakeholder groups through the returns we provide to investors, the essential service we provide to customers and support to those in vulnerable situations, the contribution we make to the economy and our communities across the North West, and the natural environment that we maintain and enhance.

One area from which value is derived is market sentiment. This encompasses any developments in the regulatory environment, political and media focus, and any speculation there may be on potential merger and acquisition (M&A) activity in the sector.

This sentiment has many elements that impact the industry as a whole and are largely outside of management control, however we seek to influence elements where possible.