United Utilities Regulatory News (UU.)

26 Mar 2009 07:00

United Utilities Group PLC

26 March 2009

UNITED UTILITIES TRADING UPDATE

United Utilities Group PLC today issues an update on trading for the year ending 31 March 2009. The company will announce its full year results on 28 May 2009.

Commenting on the group's trading position, Philip Green, Chief Executive, said:

"The group is on track to deliver results in line with our expectations for the year ending 31 March 2009. We also continue to benefit from a robust financing position and have headroom to cover our projected financing needs through to mid-2011.

"United Utilities Water submitted its draft business plan for the 2010-15 period to Ofwat in August as part of the 2009 water price review process and we will submit the final business plan next month. The capital investment programme contained within the final plan will aim to safeguard existing standards of service, address new, higher quality standards and make provision for the challenge of climate change, whilst maintaining the affordability of customer bills."

Regulated activities

The regulated business is expected to deliver good underlying operating profit growth, for the year ending 31 March 2009, despite reduced water demand, as indicated previously, and ongoing cost pressures in areas such as power and bad debts. This profit growth is primarily a result of allowed price rises to help fund major investment in the company's assets on behalf of its customers and the environment.

High levels of capital expenditure continued in 2008/09 and spend is expected to total over £700 million for the year, including infrastructure renewals expenditure. The company's business improvement initiatives are progressing well and United Utilities Water remains broadly on track to deliver its regulatory efficiency targets across the 2005-10 period.

The business continues to focus on improving operational performance and is on course to meet its 2008/09 regulatory leakage target of 465 megalitres per day, for the third consecutive year. This is despite unfavourable winter weather which has made the target more challenging. Customer satisfaction, in response to enquiries, continues to improve.

United Utilities Water submitted its draft business plan for the 2010-15 period to Ofwat in August 2008, as part of the 2009 water price review process, and will submit its final business plan in April 2009. The company will propose a level of capital expenditure in its final business plan which it believes represents an appropriate balance between safeguarding existing standards of service, addressing new, higher quality standards and making provision for the challenge of climate change, whilst maintaining the affordability of customer bills.

The draft business plan was based on the requirement for a 4.7% return (fully post-tax, real). This return was consistent with the cost of capital range of 4.4% to 4.9% published by NERA Economic Consulting (NERA) in June 2008. NERA has recently updated this research* and concluded that a higher cost of capital in the range of 4.6% to 5.1% (fully post-tax, real) would be appropriate for the UK water industry. As indicated previously, United Utilities Water intends to reassess its financing costs ahead of its final business plan submission in light of the prevailing financial market conditions and will consider NERA's findings in this reassessment.

Non-regulated activities

Good underlying operating profit growth is expected in the non-regulated business compared with the prior year. This partly reflects the planned increase in activity on the Scottish Water contract and a benefit from foreign exchange rate movements. The business continues to benefit from a strong order book worth over £6 billion in revenue, which provides long-term income streams for the group.

The group continues to pursue asset-light growth opportunities based on its core skills. In December, United Utilities was selected as preferred bidder for a municipal solid waste treatment contract in Derbyshire, via a joint venture with Interserve. The contract is due to commence in April 2010 with an expected duration of 27 years. Last month, United Utilities was also selected as preferred bidder for a 20-year desalination operations and maintenance contract in Adelaide, through its joint venture with Acciona Agua. It is expected that this contract will commence in mid-2011.

Other activities

United Utilities Property Solutions is expected to make a small operating profit for the year, reflecting the slowdown in the UK property market. As indicated previously, given the nature of this business, profits are unlikely to follow a smooth profile. As a result, other activities, which include central costs, are expected to make a small underlying operating loss for the year ending 31 March 2009.

Other financial

The group continues to benefit from a robust financing position and has headroom to cover its projected financing needs through to mid-2011. The average term to maturity of the group's long-term debt portfolio is over 30 years, which helps reduce refinancing risk. During the period, United Utilities Water PLC (A3, stable; A-, stable) drew down a 12-year, £400 million loan facility from the European Investment Bank. In addition, United Utilities Water PLC recently issued a £375 million, 6.125%, 7-year bond and earlier this month agreed the sale of £275 million, 5.75%, 13-year bonds. In total, the company has raised over £1 billion of term funding in the current financial year.

The Board continues to target an investment grade credit rating of A3 for United Utilities Water PLC, which it believes best mirrors regulatory assumptions and is an appropriate investment grade rating to allow the company to raise finance to fund its substantial capital investment programmes.

Borrowings, net of cash and short term deposits and derivatives, at the year end are expected to show a modest increase compared with the position at 30 September 2008, subject to no material further fair value movements. This principally reflects expenditure on the regulatory capital investment programmes, payment of the 2008/09 interim dividend and payments of interest and tax, partly offset by operational cash flows.

As outlined previously, the company recognised a one-off deferred tax charge in 2008/09 relating to the abolition of industrial buildings allowances, with effect from April 2008. This one-off adjustment of £214 million, which has already been recognised and published in the company's half yearly financial report, will therefore result in a significant increase in the effective tax rate for the year ending 31 March 2009, compared with the prior year. However, the cash impact will be spread over a period of approximately 20 years. Excluding the impact of the abolition of industrial buildings allowances, the tax rate for the year is expected to be around 28%. This reflects the full provision for deferred tax.

One-off costs in the order of £10 million are expected in 2008/09, of which £ 6.5 million was recognised in the first half of the financial year. These costs principally relate to the capital restructuring associated with the £1.5 billion return to shareholders and restructuring within the business.

United Utilities' contacts:

Philip Green, Chief Executive +44 (0)1925 237000 Tim Weller, Chief Financial Officer +44 (0)1925 237000 Gaynor Kenyon, Communications Director +44 (0)7753 622282 Darren Jameson, Head of Investor Relations +44 (0)7733 127707 David Trenchard / Tom Murray, Tulchan Communications +44 (0) 20 7353 4200

This announcement is also available at: http://www.unitedutilities.com

Notes

* NERA Economic Consulting: "Cost of Capital for PR09 - A Final Report for Water UK", January 2009.