BioresourcesKMT Update29th August 2017

Agenda

• Background• KPMG Summary• Future Bioresources Business

Background

Background

• Virtual separation of bioresources business approved at joint strategy day in September 2016

• KPMG appointed to carry out a review of business and opportunities

• Core principles are that virtual separation should;– Ensure compliance with Water 2020;– Focus on delivering efficiency into the price control (opex >

capex > revenue)– Changes should not adversely affect wholesale business– Any changes will prepare the business for PR19 and AMP7– Business will be market ready– Deliver safety and compliance

KPMG Summary

KPMG – Key Findings

In the short term competition is likely to be limited with small volumes of trading across boundaries. In the longer term the advent of co-digestion (if allowed by regulators) will change the attractiveness of market development and should be monitored.

Ofwat data suggests that Kelda is a lower quartile performer on unit costs of sludge, even taking into account exceptional costs due to flooding, and third lowest in terms of income generated per unit.

There are hundreds of smaller, higher cost, operating sites, which are 25% of volume but around 40% of the cost, there is opportunity to reduce opex through market means. Capex plans need to be clarified and aligned to bio-resources

objectives

Allocation of costs is likely to have an impact on Yorkshire Water as a whole e.g. market testing of group services. The bio-resources business needs to have the

internal capability to take advantage of the developing market(s).

Features BioresourcesBusiness

Stages of Separation

Accounting Separation

Operational Separation

Full Separation

Full Separation

Legal Separation

Dec ‘17

April ‘18

April ‘19

April ‘20

[April ’25]

• Compliance with Ofwat guidelines

• SLAs in place• P&L responsibility to business

• Direct management of capex, opex, markets and strategy

Outsourcing of inefficient areas, direct use of market for procurement, new

funding solution

• Potential disposal; or• Development of growth strategy

Operational Separation

Innovation

- Utilising marketready technologythat can deliverOPEX, CAPEX andrevenue objectives

- Deploying SAP planto manufactureprocesses to focuson bioresourcelowest cost to treatexecution

Great Customer Service

- Making our businesstransparent forcustomers to compareagainst

- Pre-emptingwholesale servicefailure by targetingnuisance hotspots

- Embracing new EPAmetrics early toshowcase wholesaleenvironmental capitalcontributions

Affordable Bills

- Closing the cost perTDS between YWand the frontier

- A focus on improvedprocesses,technology, marketsolutions anddevolved capital toaddress currentinefficiencies

Resilience

- Creating tradingagreements withother providers tohandle emergencies

- Creating internalheadroom frommaintenance andreliabilityimprovements

- Using markets todirect procuretemporary solutions

New Operating ModelStrong Internal Processes

Commercial Outlook

Bioresources– New

Directorate

Group Relationship

• Services markettested [andoutsourced] (e.g.maintenance, IT,HR)

• Sludge deliveredunder qualitybased SLA (i.e.WW incentivisedto deliver highquality sludge)

• Capital deliverymanaged directlyby the directorate

Market Relationship• Operation of inefficient sites

outsourced (e.g. north Yorkshire)• Delivery of new assets under

DBFO model• Trading with other organic waste

producers and water companies

Direct Relationship with Customers

• Assets delivered via direct investment from customers ‘green bond’

• Customers given choice around power purchase (fixed price vs share in risk)

Full Separation