United Utilities Group Plc · LSE:UU.
United Utilities — EEI Conference 2009
47 slides from United Utilities's conference presentation, March 2009
Slide 1: United Utilities Group PLC EEI Conference
United Utilities Group PLC EEI Conference March 2009 Credit ratings United Utilities PLC BBB+ / Baa1 United Utilities Water PLC A3 / A- 0 www.unitedutilities.com Good afternoon ladies and gentlemen, and welcome to United Utilities’ presentation. I am Philip Green, Chief Executive, and with me today
Slide 2: Agenda
Agenda • Overview • Business update • 2009 water price review • Summary and outlook • Supporting information 1 I’ll begin with a brief overview of the group before giving you an update on the business and the water price review. I will finish off with a summary of the principal growth drivers and ke
Slide 3: Overview
Overview • Good financial performance in challenging economic climate • UUE sale completed at substantial premium to regulatory asset value – portfolio now focused on core skills – £1.5bn returned to shareholders in August 2008 • Capital investment programme on track • Operational performance improv
Slide 4: Key areas of focus
Key areas of focus Challenge Progress Portfolio 3 Capital structure 3 Operational performance 3 On track Current Priorities • Operational performance • Delivery of 2005-10 regulatory contract • 2009 water price review • Growth in the non-regulated business 3 During the first two years of my time wit
Slide 5: United Utilities portfolio: focus on core skills
United Utilities portfolio Focus on core skills Former structure UUCS UUW UUE Vertex YC Group (Utility outsourcing (Water and (Electricity (Business process (Telecoms) contracts) wastewater assets) distribution assets) outsourcing) Support functions Support functions Support functions Support functi
Slide 6: Capital structure and dividend policy
Capital structure and dividend policy • Capital structure and target credit rating to mirror regulatory assumptions – target credit rating of A3 for United Utilities Water PLC – upper end of Ofwat’s 55% to 65% gearing assumption • In light of revised composition and earnings profile of the group – i
Slide 7: Agenda
Agenda • Overview • Business update • 2009 water price review • Summary and outlook • Supporting information 6 I will now provide you with an update on the business. 6
Slide 8: 2008/09 half year results highlights
2008/09 half year results highlights • Underlying profit before taxation1 up 4% to £253m • Underlying operating profit1 up 6% to £369m • Regulated activities – operating profit2 up 7% to £347m • Non-regulated activities – operating profit3 up 21% at £26m • Interim ordinary dividend of 10.64p per sha
Slide 9: Robust funding and strong refinancing position
Robust funding and strong refinancing position • Headroom until 2011 in line with board’s treasury policy • £400m 12-year loan with the European Investment Bank to support capital investment programme • £375m, 6.125% 7-year bond recently issued, enhancing liquidity • All commercial bank facilities a
Slide 10: Debt portfolio: average term to maturity over 30 years
Debt portfolio Average term to maturity over 30 years 3,000 Long-term debt1 maturing per regulatory period 2,000 £m 1,000 0 2008-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50 2050-55 2055-60 Years 9 1 future repayments of index-linked debt include inflation based on an average a
Slide 11: Key operational and service measures
Key operational and service measures Improved and sustained performance Start point Current Target Relative Below average Narrowed operating efficiency gap to most efficient Upper quartile in the efficiency water companies since 20051 and improved opex medium term position to band B for water and ba
Slide 12: Regulatory performance
Regulatory performance Good progress on capex and efficiency initiatives • Continue to make good progress on regulatory capital programme – £353 million in the half year – majority of 2005-10 expenditure already delivered • Spend and outputs broadly in line with regulatory assumptions • Business imp
Slide 13: United Utilities' non-regulated activities
United Utilities’ non-regulated activities Major presence in UK utility sector Scottish Water • Leading utility infrastructure outsourcing company in the UK – order book worth over £6 billion • Good profit growth in 08/09 half year Northern Gas Networks • Bidding for UK municipal solid waste BGT1 tr
Slide 14: Share of UK utility outsourcing target market
Share of UK utility outsourcing target market1 UU No.1 utility outsourcing company in UK Around 10% of our target UK utility market …and we are involved in has been outsourced… around 60% of this outsourced portion Water and wastewater Gas Electricity UU has the only UK electricity and gas distribut
Slide 15: Agenda
Agenda • Overview • Business update • 2009 water price review • Summary and outlook • Supporting information 14 That brings us to the 2009 water price review. 14
Slide 16: UK water price review methodology well established
UK water price review methodology well established • Ofwat’s approach is established, transparent and well documented • Ofwat allowed a return (WACC) of 5.1% (post-tax, real) for 2005-101 – plus financeability uplift to achieve acceptable financial indicators • Two key drivers to determine prices fo
Slide 17: Draft business plan submitted August 2008
Draft business plan submitted August 2008 Final plan due in April 2009 • £4bn capital investment programme (2007/08 prices) • 1.5% p.a. improvement in underlying operating efficiency • 3% efficiency improvement in capital programme • 4.7% cost of capital (post-tax, real) – targeting an A3 credit rat
Slide 18: Unsatisfactory intermittent discharges (UIDs)
Unsatisfactory intermittent discharges (UIDs) Potential for further investment • 3,000 intermittent discharges in the region - c.10% are unsatisfactory1 • Two funding submissions (Change Protocols) made to Ofwat • Funding requirement estimated at approximately £600m – of which £280m included in draf
Slide 19: Regulatory capital value: long-term growth potential
Regulatory capital value Long-term growth potential Significant capital investment still required • Flooding and asset protection • UIDs • Water Framework Directive • Environment Agency & Drinking Water Inspectorate requirements • Environmental improvements driven by EU regulations “…adaptation to c
Slide 20: Agenda
Agenda • Overview • Business update • 2009 water price review • Summary and outlook • Supporting information 19 So, to sum up. 19
Slide 21: Growth drivers for United Utilities
Growth drivers for United Utilities • Water regulatory capital value to grow by c.25% in 2005-10 period – underpinned by around £3bn of capex – capital investment in 2010-15 period expected to continue at high levels • Financing outperformance – around £1.5bn1 of index-linked debt at an average cost
Slide 22: Summary and outlook
Summary and outlook Good results and a robust financing position Confident of further good underlying financial performance Operational performance 2005-10 regulatory contract • Met leakage target for last 2 years • Good progress on capital • Customer satisfaction at highest investment programme lev
Slide 23: Supporting information
Supporting information Geographical location 2008/09 half year results Financing, liquidity and debt structure Market to asset ratio UK water regulation 22 22
Slide 24: Geographical location
Geographical location Regulated water and wastewater business Customer premises Water 3.2m Wastewater 3.2m Regional population of 6.8m Liverpool Manchester 23 23
Slide 25: 2008/09 half year results
2008/09 half year results 24 24
Slide 26: Regulated activities
Regulated activities £m 2008 2007 Revenue 756.9 713.0 +6% Operating profit 347.4 325.3 +7% • Good growth in regulated business • Underpinned by allowed price increase of 7.8% including inflation 25 25
Slide 27: Regulated activities: operating expenses
Regulated activities Operating expenses £m 2008 2007 Depreciation and amortisation 116.1 106.2 Infrastructure renewals expenditure (IRE) 57.7 61.6 Other expenses 235.7 219.9 Operating expenses 409.5 387.7 +6% • Higher depreciation in line with planned expenditure profile • Cost pressures in areas su
Slide 28: Non-regulated activities
Non-regulated activities £m 2008 2007 Revenue 447.3 454.3 -2% 1 Operating profit 26.0 21.5 +21% • Rise in operating profit principally reflects: – planned increase in activity in relation to Scottish Water contract – favourable effect of foreign exchange rate movements of £1.1m 27 1 depreciation and
Slide 29: Finance expense
Finance expense Continuing operations £m 2008 2007 Published finance expense 104.8 168.0 Fair value gains / (losses) on debt and derivative instruments 30.8 (18.5) Add back interest on swaps and debt under fair value option 8.3 27.6 Underlying interest payable 143.9 177.1 Investment income (48.6) (7
Slide 30: Profit before tax
Profit before tax Continuing operations £m 2008 2007 Operating profit 362.1 347.8 +4% Investment income and finance expense (56.2) (95.4) Profit before tax 305.9 252.4 +21% Adjustments: 1,2 One-off costs 6.5 - Fair value (gains) / losses on debt and derivative instruments (30.8) 18.5 Interest on swa
Slide 31: Earnings per share (EPS)
Earnings per share (EPS) Impact of one-off deferred tax items Six months ended 30 September 2008 2007 Basic earnings per share (pence)1 0.7 38.5 2008/09 • £213.6m deferred tax charge - abolition of industrial buildings allowances • H1 08/09 EPS lower by 31.3 pence 2007/08 • £81.9m deferred tax credi
Slide 32: Movement in net debt
Movement in net debt 6,000 277.4 49.3 431.0 5,000 396.2 2.1 4,675.4 1,482.2 4,000 £m 2,903.4 3,000 2,000 1,000 RCV RCV gearing1 gearing1 39% 61% 0 Net debt at Return to Net capex Dividends Interest & tax Operating Other Net debt at 1/4/08 shareholders cash flow 30/9/08 • £1.5 billion cash returned t
Slide 33: Financing, liquidity and debt structure
Financing, liquidity and debt structure 32 32
Slide 34: Financing & liquidity at 30 September 2008
Financing & liquidity at 30 September 2008 Gross debt = £5,913m EIB loans, Joint venture Headroom / prefunding = £807m £203m Yankee debt, £221m Other bonds (USD), £m borrowings, £539m £292m Cash and short-term deposits 1,080 Medium-term committed bank facilities 1,332 Committed GBP bonds, EIB 12-yea
Slide 35: Debt structure at 30 September 2008
Debt structure at 30 September 2008 United Utilities Group PLC United Utilities PLC BBB+ stable; Baa1 stable Yankees: Euro MTN: Short term debt: • $250m in 18’s • USD10m in 08’s3 • Commercial paper £239m • $350m in 19’s • USD10m in 09’s • Drawings on committed facilities £603m • $400m in 28’s • EUR
Slide 36: Structured linker trade
Structured linker trade Monoline credit insurer Money £ IL € libor UUW Bank investor market loan £ IL € libor Collateralised swaps (50y swaps with 24 hour Investment risk) bank £ IL £ libor £ libor Money Pension fund market deposit 35 35
Slide 37: MAR - Market to asset ratio
MAR - Market to asset ratio 36 36
Slide 38: Market to asset ratios for listed UK water and sewerage companies
Market to asset ratios (MARs) for listed UK water and sewerage companies 1.6 PR99 PR04 PR09 1.4 1.2 1.0 Yorkshire 0.8 Northumbrian South West Severn Trent 0.6 United Utilities Anglian Industry Aggregate 0.4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: NERA analysis of Bloomberg and
Slide 39: UK water regulation
0, United Utilities ulation 38
Slide 40: Ofwat's legal duties
Ofwat’s legal duties Primary Secondary • Ensure companies properly carry • Promote efficiency and out their functions economy • Act in a way to enable efficient • General environmental duty companies to finance those functions • Protect interests of customers, where appropriate by promoting competit
Slide 41: Ofwat price setting methodology
Ofwat price setting methodology RCV x Post-tax WACC from CAPM model + Opex plus depreciation for an efficient company plus tax Interest cover Gearing = Cash interest Ofwat allowed revenues covers Dividend cover Ofwat review financial ratios and decide if financeable in markets Not financeable Financ
Slide 42: Regulatory capital value
Regulatory capital value Market capitalisation (shortly after flotation) + New investment = Regulatory capital value (RCV) Adjustments • Inflation • Depreciation • Rolling 5-year clawback of past capital efficiencies 41 41
Slide 43: Water regulatory review 2005-2010
Water regulatory review 2005 - 2010 Ofwat price caps: Retail price inflation + Year to 31 March 2006 2007 2008 2009 2010 k factor 5.0% 6.4% 4.4% 3.5% 3.0% • Cumulative opex savings of £147m over five years • Capital investment programme of £3bn over five years 42 42
Slide 44: United Utilities Water £3 billion investment programme 2005-10
United Utilities Water £3 billion investment programme 2005-10 Improving Maintaining drinking our water quality wastewater 16% system 29% Improving wastewater effluent Maintaining quality our drinking Improving 25% water system services to 23% customers 7% 43 43
Slide 45: Growth in regulatory capital value (RCV)
Growth in regulatory capital value (RCV)1 Water and wastewater 8,000 £m RCV shows Further growth compound annual in RCV based 6,000 growth rate of 14% on 2005-10 since privatisation investment programme 4,000 2,000 0 1990 1995 2000 2005 2010 “…water and wastewater investment drives significant growt
Slide 46: Weighted average cost of capital 2005-10
Weighted average cost of capital 2005-10 Debt Equity Real pre tax 4.3 % Real post tax 7.7 % Water WACC Real vanilla 5.8% + financeability Real post tax 5.1% 45 45
Slide 47: 2009 water price review timetable
2009 water price review timetable Phase 1 - Preparation October 2007 – Consultation on approach to the 2009 price review March 2008 - Publication of decisions on approach and information requirements Phase 2 - Setting the June 2008 – Companies submit June returns Scene August 2008 - Companies submit