UU. United Utilities Group Plc

 
TIDMUU. 
 
United Utilities Group PLC 
 
21 January 2010 
 
UNITED UTILITIES ACCEPTANCE OF FINAL DETERMINATION OF PRICE LIMITS AND INTERIM 
                             MANAGEMENT STATEMENT 
 
Acceptance of final determination 
 
On 26 November 2009, Ofwat published its final determination of price limits 
for the period 1 April 2010 to 31 March 2015. United Utilities Group PLC (UUG) 
today announces that its subsidiary, United Utilities Water PLC (UUW), has 
decided to accept the final determination. 
 
Philip Green, Chief Executive, said: 
 
"This is a challenging price review which sees our customers benefiting from a 
combination of lower bills and a major investment programme. The review 
requires us to invest GBP3.6 billion in our infrastructure over the next five 
years, an increase of some GBP400 million in real terms compared with the 2005-10 
period. 
 
"With the efficiency plans we are already implementing and the low cost of the 
group's debt portfolio, we believe that, on balance, it is not in the best 
interests of our shareholders and customers to seek a referral to the 
Competition Commission. In light of our efficiency plans, we are well prepared 
to meet the requirements of the review. In addition, we believe we can deliver 
outperformance in a number of areas, particularly financing. 
 
"In order to meet the requirements of the price review, we need to retain a 
robust and sustainable capital structure whilst providing an attractive return 
for shareholders. In view of this, the group board intends to rebase the 
dividend to 30 pence per share for the 2010/11 financial year and thereafter 
continue with our policy of targeting real dividend growth of 2% per annum." 
 
Capital structure and dividend policy 
 
As the company starts the new price review period, the UUG board is confident 
that the group has a robust capital structure and will be able to finance 
itself effectively through the 2010-15 regulatory period, with expected real 
growth of 12% in UUW's regulatory capital value over the five years. The group 
already has headroom to cover its projected financing needs until early 2012. 
 
United Utilities has approximately GBP2 billion of long dated, index-linked debt 
at an average cost of 1.8% real. In line with its policy, the group has now 
also fixed the interest rates on a significant proportion of the remainder of 
its existing debt portfolio, for the 2010-15 regulatory period, at an average 
nominal rate in the range 5.0% to 5.5%. This provides more clarity on UUW's 
ability to outperform the final determination. 
 
The group intends to continue to target an A3 credit rating with Moody's 
Investors Service for UUW, which it believes best mirrors the regulatory 
assumptions underpinning the final determination and remains appropriate to 
maintain efficient access to debt capital markets. 
 
The group expects that Moody's Investors Service is highly likely to maintain 
an A3 credit rating for UUW, whilst it is probable that Standard & Poor's will 
assign a lower credit rating due to differing methodologies (as explained in 
the notes section at the end of this announcement). This was fully considered 
in the UUG board's assessment of capital structure. 
 
In line with United Utilities' existing policy to grow dividends by RPI+2% per 
annum, the UUG board expects to grow the final dividend for 2009/10 by 5%. The 
final dividend for 2009/10 is therefore forecast to be 23.13 pence per ordinary 
share. Together with the interim dividend of 11.17 pence, this provides a 
forecast total dividend per ordinary share for 2009/10 of 34.3 pence. 
 
Following detailed analysis and assessment of the final determination, 
including the impact of the 4.3% real price decrease in the first year of the 
2010-15 period, the UUG board intends to rebase the dividend per share to 30.0 
pence for the 2010/11 financial year. Thereafter, the intention is to continue 
to target a dividend per share growth rate of RPI+2% per annum through to 2015. 
 
The UUG board believes that this represents an appropriate balance, recognising 
the challenges of the final determination, the importance of income to 
shareholders and the need for United Utilities to retain a robust and 
sustainable financial profile. 
 
The decisions in relation to capital structure and dividends are not dependent 
on any potential opportunities to crystallise further value from the group's 
non-regulated business. 
 
Efficiency initiatives 
 
The group is well prepared for the next price review period. Over the last 
year, United Utilities has undertaken a comprehensive review of the business, 
challenging working practices across the group, and is implementing detailed 
plans to improve performance and reduce its cost base. The group is 
streamlining its processes as it aims to become a leaner, more efficient 
company and has signed new supplier contracts for the 2010-15 period, which 
will deliver significant savings and help improve operational and capital 
efficiency. 
 
Trading update 
 
Trading for the period from 1 October 2009 to 20 January 2010 is in line with 
the group's expectations of delivering a sound underlying financial performance 
over the remainder of 2009/10. 
 
The regulated business is allowed a 6.0% regulatory price increase (including 
inflation) for 2009/10, to help fund the high levels of essential investment in 
its assets to meet strict environmental standards and deliver an improved 
service for customers. The economic pressures the group experienced in the 
first half of 2009/10 are continuing. Regulated revenue growth for the year 
ending 31 March 2010 is expected to continue at a similar rate to that outlined 
in the group's 2009/10 half year results, published on 25 November 2009. 
 
United Utilities' balance sheet remains robust and its asset base continues to 
grow in line with management's expectations. Group net debt has reduced 
slightly since the position at 30 September 2009, reflecting the cash inflow 
from the divestment of United Utilities' holding in Northern Gas Networks and 
the sale of its economic interest in Manila Water Company. 
 
On 25 November 2009, the UUG board declared an interim dividend of 11.17 pence 
per ordinary share, in respect of the six months ended 30 September 2009, which 
represents growth of 5%. The interim dividend payment is scheduled for 3 
February 2010 and is expected to amount to approximately GBP76 million. 
 
Regulatory developments 
 
United Utilities had indicated previously that there was potential for 
additional investment in respect of the North East Irish Sea, which was 
dependent on a European court case decision involving the UK government. A 
ruling by the European Court of Justice on 10 December 2009 indicated that 
United Utilities will not be required to undertake this additional investment. 
 
Non-regulated activities 
 
During the period, United Utilities disposed of its investment in Northern Gas 
Networks Holdings Limited for approximately GBP86 million in cash and agreed the 
sale of its economic interest in Manila Water Company for approximately GBP44 
million in cash. The intention is to retain these proceeds within the group. 
 
As part of United Utilities' continuing focus on its core activities, in its 
half year results on 25 November 2009, the group announced that it planned to 
assess further opportunities to crystallise value from its non-regulated 
business. Since then, United Utilities has received several preliminary 
expressions of interest. Although no decision has been taken to sell any 
further non-regulated businesses, the group will continue to evaluate these 
expressions of interest. 
 
Board change 
 
On 10 December 2009, United Utilities announced that Tim Weller, Chief 
Financial Officer, has decided to leave the group in May 2010, after almost 
four years in the role. Tim will be taking up a new position with Cable& 
Wireless Worldwide as its Chief Financial Officer. The search for his successor 
is underway. 
 
Outlook 
 
Looking ahead, management is confident of delivering a sound underlying 
financial performance for the year ending 31 March 2010. The group will 
continue with its strong focus on operational performance and cost efficiency 
and aims to build on the improvements already achieved. 
 
In line with its usual practice, United Utilities intends to issue a pre-close 
trading update on 25 March 2010. 
 
Investor and analyst conference call 
 
A conference call for investors and analysts starts at 8.30am this morning, 
hosted by Chief Executive, Philip Green, and Chief Financial Officer, Tim 
Weller. The call can be accessed by dialling: +44 (0) 20 7906 4157 or 0800 376 
4706, access code 668653#. A recording of the call will be available for 30 
days following 21 January 2010 on +44 (0) 20 7075 6589 or 0800 376 5689, access 
code 255567#. 
 
United Utilities contacts 
 
For further information please contact: 
 
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) 1925 237033 
 
Rob Hughes, Investor Relations Manager               +44 (0) 1925 237019 
 
James Bradley / Tom Murray, Tulchan Communications   +44 (0) 20 7353 4200 
 
Notes 
 
Price review 
 
Ofwat published its final determination of price limits, for the period 1 April 
2010 to 31 March 2015, on 26 November 2009 which for UUW included: 
 
  * a GBP3.6 billion capital investment programme (2007/08 prices); 
 
  * real growth of 12% in the regulatory capital value over the five year 
    period; 
 
  * an average annual underlying operating efficiency of 1.2% for the water 
    service and 2.4% for the wastewater service; 
 
  * a return on capital of 4.5% (post-tax, real); and 
 
  * an average annual real price decrease of 0.4% across the five-year period, 
    with a real price decrease of 4.3% in the first year. 
 
Credit ratings 
 
A key difference in Moody's Investors Service and Standard & Poor's (S&P) 
approach is expected to be the treatment of infrastructure renewals expenditure 
(IRE), which following the introduction of International Financial Reporting 
Standards (IFRS), has been treated as an operating expense rather than 
depreciation by S&P. This results in a material reduction in S&P's assessment 
of the group's funds from operations (FFO), and hence has an impact on key 
credit ratios such as FFO to debt, without any compensating change to S&P's 
target threshold levels. 
 
In contrast, Ofwat has continued to assess financial ratios on a UK GAAP basis 
for the 2009 price review. The difference in approach between that expected to 
be applied by S&P and that modelled by Ofwat is likely to result in a lower 
actual credit rating from S&P than that implied by regulatory assumptions. 
 
 
 
END 
 

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