Utility Week

8 | 15TH - 21ST DECEMBER 2017 | UTILITY WEEK Interview in the average interruption to water sup- ply, all before the start of the next AMP (asset management plan) period in 2020. To achieve these goals, Yorkshire has hired 300 new staff, ranging from traditional engineers to more cutting- edge data scientists, accompanying enhanced investment in technological solutions. So how much will all this cost, and who is going to pay for it? Flint won't be drawn on a number – "it's commercially sensitive information" – but confirms that it involves "significant and material expenditure". The cost will be met within the current price framework, and Flint insists it will be achieved via efficiency. Pressed with the question, will investors take lower returns, he responds again: "Efficiency is what allows us to drive this." Going public with such a plan is a bold step, particu- larly in the water sector, which has regulatory targets enough to deal with. Flint acknowledges: "We could have said, let's make a set of goals and pursue them pri- vately, but there is a value I think in saying let's be pub- lic about this and put a time span against it and therefore drive our own performance." The plan represents a narrowing and deepening of the company's focus. Flint reiterates the company's commit- ment to wholesale water operations, mentions a number of disposals parent company Kelda Group has already made of non-core operations, and hints at a number still to come. Of the business retail market, where Yorkshire has been rumoured to have been touting its business Three Sixty for sale, he says: "I've made it quite clear this is not a market we want to be in. I think you need big players in that market operating at scale and bringing expertise proven elsewhere to be able to make that mar- ket work." He adds that while Yorkshire is still currently in the market, it has "an eye open to opportunity". The performance plan is the second major statement to come out of Yorkshire Water in a matter of weeks – the first being made by group director of finance and regulation Liz Barber at a recent Moody's conference for investors in the sector, held in London in October. Barber announced that the company would be closing its Cayman Island operations, later explaining to Utility Week: "Our offshore companies in the Cayman Islands have nothing to do with tax and no matter how we try to explain, people just don't understand them. Because it affects our reputation and legitimacy we have taken the decision to get rid of them. It may take time but that's what we have decided to do." Yorkshire uses the companies to manage high levels of borrowing – another controversial issue for the sector, and again, one where the company has pledged to take action, outlining plans to reduce its gearing from 76 per cent to 70 by 2020. This move will no doubt please Ofwat chairman Jonson Cox, himself a former chief executive of Yorkshire Water, who has publicly questioned the suit- ability of complex, highly-leveraged financial structures for water companies. Reflecting on the move, Flint emphasises the impor- tance of perception: "That's one of the things it's impor- tant for leaders of organisation to grasp: the concern out there among customers, among the man and woman in the street. You could look at [the Cayman Island compa- nies] and say, they're not doing any harm so why should we work on that? There's a lot of other things to do in a busy environment. But it's what they look like that con- cerns people." It's a sign of changing times. York- shire reviewed its offshore arrange- ments a few years ago and decided at that time it would be too costly and complex to remove them. Today, with the Labour party committed to that manifesto pledge to renational- ise water companies, the world looks very different. Flint acknowledges that the prospect of renationalisation "really throws down the gauntlet" to companies to "demonstrate the value we bring and can continue to bring for customers". He muses: "A challenge is a good thing. That's not to say it makes life easy, but challenge tends to be good." Flint must be looking forward, then, to PR19, the next regulatory review, which is itself set to be very challeng- ing for companies. Ofwat has made little secret of its intention to set the investor returns – the weighted aver- age cost of capital (Wacc) – at historically low levels to reflect the macro-economic environment. Some compa- nies have publicly protested at the regulator's decision to take less account of historical financial trends than is usual in such calculations, with Northumbrian, Anglian and Affinity Water commissioning a report from consult- ant KPMG to challenge the model. Yorkshire has not been among the protestors, though Flint admits the company will be "keeping a very close eye" on the Wacc, the provi- sional level of which was set to be announced alongside the methodology for the price review on 13 December, aer Utility Week goes to press. One of the major talking points in the PR19 meth- odology is the increase in financial rewards and penal- ties for performance on key metrics – outcome delivery incentives (ODIs). ODIs have worked well for companies in the current regulatory cycle, and Flint welcomes the increased emphasis on them, commenting: "Companies respond really well to incentivisation." He is also positive about direct procurement, the new model requiring companies to competitively tender the financing, building and potentially operation of capital projects costing more than £100 million. He suggests that Yorkshire will bring forward a project under direct pro- curement in the next price cycle and also hints that the company, as part of the wider Kelda Group, is well posi- tioned to tender for other companies' projects. The financial questions surrounding the upcoming price review are of particular interest to Yorkshire at the moment given the change in its investor profile. Two of the companies' owners, Deutsche Bank and Corsair Capi- tal, are looking to sell their stakes, which together repre- sent 55 per cent of the company, ahead of the review, for up to a reported £4 billion. Infracapital was reported to have sold its 10 per cent stake earlier this year. Speaking about the investment profile of the sector in general, Flint insists: "Without being too glib about it, the nature of investment [in the sector] has always been evolving." He enumerates the different financial models the sector comprises, from not-for-profit to listed to pri- vately held, and adds: "As investors get to understand the market, which they have done over time, I think it creates more scope for direct investment rather than through infrastructure funds, and I think that's really quite a statement of confidence in the sector." Whoever buys into Yorkshire, they will be buying into the company's publicly-stated performance commit- ments as well. They are bold, ambitious and, according to Flint, non-negotiable. With just two years until the start of the next AMP cycle, there's a busy time ahead. "You need big players in that [retail] market operating at scale and bringing expertise proven elsewhere to be able to make the market work."

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