United Utilities Group PLC · LSE:UU.
United Utilities — Debt Investor Presentation (October 2008)
54 slides from United Utilities's debt investor presentation, Oct 7, 2008
Slide 1: United Utilities Group PLC Paris credit investor update
United Utilities Group PLC 7 October 2008 Paris credit investor update Tom Fallon Treasurer
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Slide 3: Agenda
1. Agenda 2. Business update 3. Capital structure and dividend policy 4. Setting prices for 2010-2015 current review 5. Financing 6. Appendices • Monopoly assets owned • Regulation • MAR – Market to asset ratio • Index linked trade Credit ratings – stable United Utilities Water PLC A3 / A- United Ut
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Slide 5: Business update
0, United Utilities 2. Business update
Slide 6: Overview
Overview • Strong financial performance in 2007/08 • UUE sale completed at substantial premium to regulatory asset value – portfolio now focused on core skills – proposed £1.5bn return to shareholders complete • Capital programme on track • Operational performance improvements: outperformed tougher
Slide 7: Key areas of focus
Key areas of focus • Operational performance • Delivery of 2005-10 regulatory contract • PR09: price review for next period 2010-15 • Growth in the non-regulated business 7 October 2008 Paris investor update 7
Slide 8: Movement in net debt
Movement in net debt 6,000 300 126 5 877 5,000 655 4,126 482 1,153 279 4,000 3,644 76 2,903 3,000 £m RCV RCV 2,000 gearing1 gearing1 52% 39% 1,000 0 Net debt at Discontinued Re-presented Interest & tax Net capex Dividends Non-cash Share capital Operating Disposal of THUS stake Net debt at 1/4/07 net
Slide 9: Key operational and service measures
Key operational and service measures Improved and sustained performance Start point Current Target Relative efficiency Below average Narrowed operating efficiency gap to most Upper quartile in the efficient water companies1 over last two years from medium term 16% to 12% for water and from 27% to 18
Slide 10: Customer satisfaction
Customer satisfaction Improving performance Overall customer satisfaction (in response to enquiries) 1 80% 70% 60% 73% customer satisfaction1 for 2007/08 50% 40% Mar-06 May-06 Jun-06 Jul-06 Oct-06 Feb-07 Jul-07 Nov-06 Dec-06 Jan-07 Mar-07 May-07 Jun-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Sep-0
Slide 11: Business improvement initiatives
Business improvement initiatives On track to meet regulatory efficiency targets • Integrated performance management - improving treatment works’ efficiency • Asset improvement - cost savings from increasing pump efficiency • Combined heat & power - sustainable strategy with cost benefits • Workforce
Slide 12: Regulatory capital expenditure
Regulatory capital expenditure Spend and outputs broadly in line Water Wastewater 800 1200 800 1200 1000 1000 Cumulative spend (£m) Cumulative spend (£m) 600 600 Year spend (£m) Year spend (£m) 800 800 400 600 400 600 400 400 200 200 200 200 0 0 0 0 2005/06 2006/07 2007/08 2005/06 2006/07 2007/08 FD
Slide 13: Unsatisfactory Intermittent Discharges (UIDs)
Unsatisfactory Intermittent Discharges (UIDs) Potential for further investment • 3,000 intermittent discharges in the region - c.10% are unsatisfactory1 • Funding submission (Change Protocol) made to Ofwat • Further submissions being considered following appeals • Funding requirement estimated at ap
Slide 14: Climate change and sustainability
Climate change and sustainability Driver of future capital investment and growth • Mitigation - good progress on carbon action plan • Adaptation to climate change essential – strong influence on investment in the water sector in future – longer term investment planning – combat flooding to protect a
Slide 15: Non-regulated activities
Non-regulated activities Successful contract renewals • In addition to first time inclusion of electricity outsourcing contract: Southern Water • Currently managing part of 2005-10 regulatory capital investment programme – worth £700m to 4D consortium in which UU has a 40% share • Contract extension
Slide 16: Summary and outlook
Summary and outlook Operational performance 2005-10 regulatory contract • Efficiency initiatives delivering • Ofwat agreement on new sewage benefits sludge strategy • Outperformed leakage target • Spend and outputs broadly in line • Focus on customer satisfaction • On track to meet efficiency target
Slide 17: Capital structure and dividend policy
3. Capital structure and dividend policy
Slide 18: Capital structure and dividend policy
Capital structure and dividend policy • Capital structure and target credit rating now mirrors regulatory assumptions – target A3 gives more efficient capital structure • Returned £450m or 51 pence per share • In light of revised composition and earnings profile of the group – rebased dividend per s
Slide 19: Return components
Return components Total return to shareholders £m Net equity proceeds from sale of UUE 1,050 Additional return of value 450 Total return to shareholders 1,500 Return to shareholders by way of redeemable B share scheme 7 October 2008 Paris investor update 19
Slide 20: New A3 targeted capital structure
New A3 targeted capital structure… • £1.5bn capital return accompanied by a – 23% reduction in the number of shares; and a – 30% reduction in dividend per share • Material improvement to the group’s retained cashflow – Dividend payments reduced by approx 50% – Improvement in retained cashflow by mor
Slide 21: Setting price limits for 2010-2015 current review
4. Setting price limits for 2010- 2015 current review
Slide 22: Ofwat PR09 timetable
Ofwat PR09 timetable Phase 1 - Preparation October 2007 – Consultation on approach to the 2009 price review March 2008 - Publication of “Framework and approach” document Phase 2 - Setting the Scene June 2008 – Companies submit June returns August 2008 - Companies submit draft business plans Current
Slide 23: 2009 water price review
2009 water price review UU’s preparations well advanced • UU is well advanced in its preparations for the 2009 price review – draft business plan submitted August 2008 • We commend Ofwat for increased focus on climate change • Cost of capital – important to consider short and long-term economic data
Slide 24: UU Board targets A3
UU Board targets A3 • “We will be targeting an A3 credit rating for United Utilities Water PLC and believe that Ofwat should ensure that water companies can at least maintain this rating. I am sure that Ofwat will also consider recent developments in the credit markets.” • “… raising debt finance wi
Slide 25: Setting price limits for 2010-2015: Framework & approach
“Setting price limits for 2010 – 2015: Framework & approach” Published by Ofwat: March 2008 • “…most of our methodology continues to rest on tried and tested experience from previous reviews…. We are sure that this methodology will enable each company to develop and deliver a strategy that offers fa
Slide 26: Setting price limits for 2010-2015: Framework & approach
“Setting price limits for 2010 – 2015: Framework & approach” Published by Ofwat: March 2008 “It is important for consumers that investors and markets see water companies as good quality credits. We will continue to check cash flow indicators to make sure that an efficient company… can continue to fi
Slide 27: Financing
0, United Utilities 5, Financing
Slide 28: Robust liquidity position
Robust liquidity position • Pre-funded to 2010 in line with board approved policy – including the £1.5bn returned to shareholders • Arranged or extended maturity date on £500m of facilities since 30 September 2007 • UU has long standing relationship with the European Investment Bank – £400m loan app
Slide 29: Long-term, index-linked debt
Long-term, index-linked debt • Since September 2005, UUW has issued £1,195m of long-term, index-linked debt – maturities ranging from 30 to 50 years; and – real interest rates ranging from 1.3% to 2.0% – Average debt maturity of circa 36 years • The group has also drawndown around £200m, from a ten-
Slide 30: Long-term, index-linked debt: financing outperformance
Long-term, index-linked debt Financing outperformance • In addition to providing a good match for our regulated assets and revenue profile, the relatively low cost of this funding has secured substantial additional value – represents outperformance of the regulatory allowance for the cost of debt of
Slide 31: Financing & liquidity as at 31 March 2008
Financing & liquidity as at 31 March 2008 Continuing operations Gross debt = £4,667.3m Headroom/prefunding = £2,494.4m £m EIB index-linked Cash and short-term deposits3 1,810.5 EIB loans, £205m loan, £209m Yankee bonds (USD), £771m Medium-term committed bank facilities2 1,549.6 Joint venture debt, £
Slide 32: Debt structure under new parent co
Debt structure under new parent co - no change United Utilities Group PLC United Utilities PLC United Utilities PLC BBB+ stable; Baa1 stable BBB+ stable; Baa1 stable Yankees: Euro MTN: Yankees: Euro MTN: • $500m in 08’s • USD10m in 08’s • $500m in 08’s • USD10m in 08’s • $250m in 18’s • USD10m in 09
Slide 33: Appendices
0, United Utilities 6. Appendices
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Slide 35: Monopoly assets owned
0, United Utilities Monopoly assets owned
Slide 36: Monopoly assets owned
Monopoly assets owned Wastewater Water 40,323km of sewers 40,080km of distribution main 1,749 pumping stations 862km of treated water large 3,087 combined sewer overflows diameter trunk mains 584 waste water treatment works 192 impounding reservoirs 36 sludge treatment facilities 1
Slide 37: Regulation
0, United Utilities Regulation
Slide 38: 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 39: Regulatory capital value (RCV)
Regulatory capital value (RCV)* Market capitalisation (shortly after flotation) + Net investment = Regulatory capital value (RCV) Adjustments Inflation & Deflation- natural hedge for index linked debt Depreciation *RCV sometimes also known as regulatory asset value (RAV) and regulatory asset base (R
Slide 40: Growth in regulatory capital value (RCV)
Growth in regulatory capital value (RCV) 8,000 Water RCV shows £m compound annual Projected growth rate of 14% growth based on Ofwat’s 6,000 since privatisation published to 2005 RCVs from 2005-10 > 25% 4,000 in nominal terms Water 2,000 Electricity 0 1990 1995 2000 2005 2010 No plans to sell water
Slide 41: Price setting methodology
Price setting methodology RAV X WACC + Opex plus capital charges for an efficient company = Allowed revenue Review financial ratios = A3? Unacceptable Acceptable Increase allowed revenue Final price determination 7 October 2008 Paris investor update 41
Slide 42: Ofwat cost of capital 2005-10
Ofwat cost of capital 2005-10 Debt Equity Real pre tax 4.3 % Real post tax 7.7 % WACC Real vanilla 5.8% + financeability Real post tax 5.1% 7 October 2008 Paris investor update 42
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 £2.9bn over five years 7 October 2008 Paris investor update
Slide 44: Components of the average household bill 1991-2010
Components of the average household bill 1991-2010 (2007-08 prices) Equity Credit Tax Capital charges Opex Source: Ofwat’s “Framework and approach” document published March 2008 Operating expenditure reduced as a proportion of the total – fairly flat operating costs despite running more infrastructu
Slide 45: MAR - Market to asset ratio
0, United Utilities MAR - Market to asset ratio
Slide 46: 7 October 2008 Paris investor update
7 October 2008 Paris investor update 46
Slide 47: MAR on Google
MAR on Google 7 October 2008 Paris investor update 47
Slide 48: MAR definition
MAR definition CEPA – Cambridge Economic Policy Associates MarketCap + NetDebt − NonUKregulatedAssets MAR = RCV + / − NPVofCapitalEfficiency 7 October 2008 Paris investor update 48
Slide 49: Leverage effect on risk
Leverage effect on risk (obvious!) 130% of RAV & 90% leverage Revert to par and same leverage MAR = 1.3 MAR = 1 Debt: 90 Debt: 90 Equity: 40 Equity: 10 Total EV: 130 Total EV: 100 In this scenario: equity loses 75% of its capital Leverage amplifies equally the effect of both value creation and value
Slide 50: Inflation & financeability
Inflation & financeability • RAV indexed to UK inflation (RPI) • Like fine art – Asset growth – But … no immediate cashflow 7 October 2008 Paris investor update 50
Slide 51: Financeability solution: more equity or IL
Financeability solution: more equity or IL • Financeability is due to the mismatch between real and nominal returns Nominal return Real return Inflation risk premium Inflation Credit spread Credit spread Risk free rate Risk free rate • The regulatory model – Allows a real return on the regulatory as
Slide 52: How do we retain equity in the sector?
How do we retain equity in the sector? Professor Colin Mayer, Saïd Business School, University of Oxford 2003 Beesley lecture on regulation: “… rising levels of leverage increase the risk of firms sweating assets, minimizing investment and leaving future generations of owners and customers to clean
Slide 53: Index linked trade
0, United Utilities Index linked trade
Slide 54: Structured linker trade
Structured linker trade AAA rated monoline credit insurer Money £ IL Bank € libor UUW investor market loan £ IL € libor Collateralised swaps (50y swaps with 24 Investment hour risk) bank £ IL £ libor £ libor Money Pension fund market deposit 7 October 2008 Paris investor update 54
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