Trading Statement
United Utilities Group PLC
25 September 2008
UNITED UTILITIES TRADING UPDATE
Introduction
United Utilities Group PLC today issues an update on trading for the six months
ending 30 September 2008. The company will announce its half year results on 26
November 2008.
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
six months ending 30 September 2008.
"In August, United Utilities Water submitted its draft business plan to Ofwat
which covers the 2010-15 period. This plan forms part of the 2009 water price
review process and builds on the company's strategic direction statement
published in December 2007. The proposed £4 billion capital investment
programme contained within the plan aims to meet existing standards of service,
address new, higher quality standards and make provision for the challenge of
climate change.
"As planned, we returned approximately £1.5 billion to shareholders last month
following the sale of United Utilities Electricity. This return has helped
create a more efficient capital structure and the Board is aiming to maintain a
credit rating of A3 for United Utilities Water PLC."
Regulated activities
The regulated business is expected to deliver good underlying operating profit
growth, for the six months ending 30 September 2008, despite experiencing cost
pressures during the first half of the year, in areas such as power and bad
debts.
The business continues to focus on improving operational performance and is on
course to meet its 2008/09 economic level of leakage rolling target of 465
megalitres per day, having met its regulatory leakage target for the last two
years. In addition, no water restrictions are anticipated in the year.
The total capital investment programme contained within the draft business plan
submitted to Ofwat, including infrastructure renewals expenditure, is
approximately £4 billion (2007/08 prices), comprising £1.6 billion for the
water service and £2.4 billion for the wastewater service. Of this, investment
to meet new regulatory quality standards, enhance service to customers and
maintain the supply/demand balance is forecast at around £2 billion, almost
half the total programme. The remainder of the capital investment programme
relates to maintenance of the water and wastewater infrastructure.
United Utilities Water expects to improve its efficiency across the 2010-15
period. The company is aiming for a 1.5% annual improvement in its underlying
operating efficiency, although operating expenditure is likely to increase
overall due to cost pressures in areas such as power and rates. United
Utilities Water is also targeting an average improvement in efficiency of 3% in
respect of its capital investment programme.
United Utilities Water believes that to finance this plan an average real,
fully post-tax return of 4.7% is required. This return is consistent with the
cost of capital range published by NERA Economic Consulting in its June 2008
publication: "Cost of Capital for PR09 - Final Report for Water UK". This
compares with a cost of capital of 5.1% assumed by Ofwat at the last price
review in 2004 and reflects the sustained reduction in the cost of debt finance
available to the water sector. The company will, however, wish to reassess its
financing costs at the time of its final business plan submission to Ofwat in
spring 2009, in light of the prevailing financial market conditions.
To deliver this plan, United Utilities Water proposes an average annual real
price increase of 2.7% across the 2010-15 period, although average household
bills are expected to increase by just over 2% in real terms on average each
year.
The company's draft business plan, entitled "planning for the future", is
available on United Utilities' website at: http://www.unitedutilities.com.
Non-regulated activities
Good underlying operating profit growth is expected in the first half of the
year, compared with the corresponding period last year. This partly reflects
the planned increase in activity in relation to the outsourcing contract with
Scottish Water, which is now in the second year of the 2006-10 programme.
Performance across the contract portfolio is in line with management's
expectations and the business continues to benefit from a strong order book and
secured revenue streams, supported by the recent contract extensions with
Southern Water and British Gas Trading.
Other activities
United Utilities Property Solutions (UUPS) is expected to broadly break even in
the first half of this financial 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 operating loss for
the six months ending 30 September 2008. However, UUPS has a secured pipeline
of work and is expected to deliver a positive contribution over the medium
term.
Other financial
The group is pre-funded for its capital investment programme through to 2010.
United Utilities Water has in place around £1.5 billion of index-linked
funding, with an average real interest rate of approximately 1.8%. Around two
fifths of this funding was issued with 50-year maturities.
United Utilities has a long-standing relationship with the European Investment
Bank (EIB) and recently enhanced its liquidity position further via a new £400
million term loan facility, which was approved by the EIB in July, to support
the remainder of the company's current capital investment programme.
The vast majority of the planned £1.5 billion return to shareholders took place
in August 2008. The residual balance of approximately £17 million is scheduled
to be returned in April 2009 to shareholders who elected to receive the return
in the next financial year. The Board is aiming to maintain a credit rating of
A3 for United Utilities Water PLC and, following this return, is anticipating a
group net debt to regulatory capital value gearing level towards the upper end
of Ofwat's range (55% to 65% for the 2005-10 price control period) by 2010.
Borrowings, net of cash and short term deposits, at the half year are expected
to show a significant increase compared with the position at 31 March 2008,
excluding the impact of IAS 39. This principally reflects the planned return to
shareholders of approximately £1.5 billion, along with expenditure on the
regulatory capital investment programmes, payment of the 2007/08 final dividend
and payments of interest and tax, partly offset by operational cash flows.
Before adjusting for the impact of the abolition of industrial buildings
allowances, with effect from April 2008, the tax rate at the half year is
expected to be around 28%. This reflects the full provision for deferred tax.
As outlined in United Utilities' 2008 annual report, the company is forecasting
a one-off deferred tax charge in 2008/09 relating to the abolition of
industrial buildings allowances. This one-off adjustment is anticipated to be
over £200 million and is likely to result in a significant increase in the
effective tax rate for the year ending 31 March 2009. However, the cash impact
will be spread over a period of approximately 20 years.
One-off costs in the order of £7 million are expected in the first half of 2008
/09. These costs principally relate to the capital restructuring associated
with the £1.5 billion return to shareholders.
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
Dominic Fry and Tom Murray, Tulchan Communications +44 (0) 20 7353 4200