United Utilities Group Plc · LSE:UU.
United Utilities — EEI Conference 2008
70 slides from United Utilities's conference presentation, November 2008
Slide 1: United Utilities Group PLC EEI Conference November 2008
United Utilities Group PLC EEI Conference November 2008 Credit ratings United Utilities PLC BBB+ / Baa1 United Utilities Water PLC A3 / A- 0 www.unitedutilities.com
Slide 2: Agenda
Agenda • Overview • Portfolio, capital structure and return of value • Business update • Summary and outlook • Supporting information 1
Slide 3: Growth for equity – built on solid credit
Overview Growth for equity – built on solid credit Regulatory capital value (RCV)1 8,000 Water and wastewater Further growth £m RCV1 shows compound in RCV1 based annual growth rate of 14% on 2005-10 6,000 since privatisation investment programme 4,000 2,000 0 1990 1995 2000 2005 2010 “…water and was
Slide 4: Returns to investors underpinned by Ofwat's legal duties
Overview Returns to investors underpinned by 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 custo
Slide 5: United Utilities fundamentals
Overview United Utilities fundamentals • Regulated water and wastewater monopoly with 3.2m customers • Prices agreed with independent economic regulator (Ofwat) every five years and include UK retail price index inflation (RPI) uplift • UU earns a return (set by Ofwat) on its regulatory capital valu
Slide 6: UK water price review methodology well established
Overview 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
Slide 7: UU draft business plan (2010-15 period)
Overview UU draft business plan (2010-15 period) • Draft business plan for 2010-15 submitted to Ofwat in August 2008 • £4bn capital investment programme proposed • 4.7% (post-tax, real) allowed return included in UU draft business plan – at mid point of NERA’s range in its recent research paper1 • U
Slide 8: Financial and operational performance
Overview Financial and operational performance • Strong financial performance in 2007/08 • Electricity distribution assets (UUE) sold for substantial premium to regulatory asset value – operations retained via outsourcing contract – £1.5bn returned to shareholders in August 2008 – portfolio focused
Slide 9: Key areas of focus
Overview 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 8
Slide 10: Agenda
Agenda • Overview • Portfolio, capital structure and return of value • Business update • Summary and outlook • Supporting information 9
Slide 11: The new UU – focus on core skills
The new UU – focus on core skills Delivering higher performance 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 function
Slide 12: 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 – NERA1 assesses vanilla WACC to be 40 bps higher at Baa1 rating vs A3 – more efficient capital structure – upper end of Ofw
Slide 13: Return components
Return components Total return to shareholders £m p/share1 Net equity proceeds from sale of UUE 1,050 119 Additional return of value – more efficient capital structure 450 51 Total return to shareholders2 1,500 170 • Return to shareholders by way of redeemable B share scheme • 1 B share of £1.70 for
Slide 14: Return mechanism – illustrative example
Return mechanism – illustrative example Redeemable B share scheme New parent company UU (UU Group) B shares B shares convert to cash for shareholders 8.82m 6.81m Holding in Holding in new shares shares UU parent company or 1% or 1% 882m Ordinary 681m shares in issue • Number of ordinary shares issue
Slide 15: Agenda
Agenda • Overview • Portfolio, capital structure and return of value • Business update • Summary and outlook • Supporting information 14
Slide 16: Business update
Business update – Financial highlights – Operational performance – Delivery of 2005-10 regulatory contract – 2009 water price review – Non-regulated activities 15
Slide 17: Results highlights 2007/08
Results highlights 2007/08 • Underlying profit before taxation1 up 17% to £476m – profit before taxation of £478m • Underlying operating profit1 up 7% to £677m • Regulated activities – underlying operating profit2 up 8% to £614m • Non-regulated activities – underlying operating profit3 up 4% at £62m
Slide 18: Robust liquidity
Robust liquidity • Pre-funded to 2010 in line with board’s treasury policy – including £1.5bn returned to shareholders in August 2008 • UU has a long-standing relationship with the European Investment Bank – £400m loan to support capital investment recently signed • UU has £1.5bn of index-linked deb
Slide 19: Strong refinancing position
Strong refinancing position • Average term to maturity of debt portfolio of over 30 years • All commercial bank facilities are bilateral with spread of maturities – no large single refinancing requirement – greater leverage when negotiating with banks individually • Relationship with London branch o
Slide 20: Business update
Business update – Financial highlights – Operational performance – Delivery of 2005-10 regulatory contract – 2009 water price review – Non-regulated activities 19
Slide 21: 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 22: Customer satisfaction
Customer satisfaction Improving performance 1 Overall customer satisfaction (in response to enquiries) 80% 70% 60% 73% customer satisfaction1 for 50% 2007/08 40% Mar-06 Mar-07 Mar-08 May-06 Jun-06 Jul-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 May-07 Jun-07 Jul-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 May-0
Slide 23: Business update
Business update – Financial highlights – Operational performance – Delivery of 2005-10 regulatory contract – 2009 water price review – Non-regulated activities 22
Slide 24: Business improvement initiatives
Business improvement initiatives Focus on efficiency • Integrated performance management - improving treatment works’ efficiency • Asset improvement - cost savings from increasing pump efficiency • Combined heat & power - sustainable strategy with cost benefits • Workforce management – more efficien
Slide 25: 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 26: Business update
Business update – Financial highlights – Operational performance – Delivery of 2005-10 regulatory contract – 2009 water price review – Non-regulated activities 25
Slide 27: Regulatory draft business plan for 2010-15 submitted August 2008
Regulatory draft business plan for 2010-15 submitted August 2008 • £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 rating fo
Slide 28: Unsatisfactory Intermittent Discharges (UIDs)
Unsatisfactory Intermittent Discharges (UIDs) Potential for further investment • 3,000 intermittent wastewater discharges - 10% are unsatisfactory1 • 2 funding submissions (Change Protocols) made to Ofwat and £280m included in regulatory draft business plan for 2010-15 • Further investment likely to
Slide 29: 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 30: Business update
Business update – Financial highlights – Operational performance – Delivery of 2005-10 regulatory contract – 2009 water price review – Non-regulated activities 29
Slide 31: United Utilities' activities
United Utilities’ activities Major presence in UK utility sector Scottish Water • Involved in the management or operation of assets of four UK water companies • £1.5bn contract to operate Northern Gas electricity distribution assets in Networks the North West to 2015 UU Water • Provide gas network s
Slide 32: 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 33: Non-regulated activities: Successful contract renewals
Non-regulated activities Successful contract renewals • £1.5bn electricity outsourcing contract to 2015 following sale of UUE • Southern Water contract extension secured for 2010-15 period – current contract worth £700m to 4D consortium (UU has a 40% share) • 18-month extension to British Gas Tradin
Slide 34: Agenda
Agenda • Overview • Portfolio, capital structure and return of value • Business update • Summary and outlook • Supporting information 33
Slide 35: Growth drivers for United Utilities
Growth drivers for United Utilities • Water regulatory capital value to grow by 25%+ in 2005-10 period – underpinned by around £3bn of capex – £4bn capex programme proposed in draft business plan for 2010-15 • Financing outperformance – around £1.5bn of inflation index-linked debt at an average cost
Slide 36: Summary and outlook
Summary and outlook Good results for 2007/08 & confident of further strong financial performance Operational performance 2005-10 regulatory contract • Efficiency initiatives delivering • Ofwat agreement on new sewage benefits sludge strategy • Outperformed leakage target • Spend and outputs broadly
Slide 37: Supporting information
Supporting information Geographical location 2007/08 results Re-presented 2006/07 results Financing, liquidity and debt structure Market to asset ratio UK water regulation
Slide 38: Geographical location
Geographical location Regulated water and wastewater business Customers Water 3.2m Wastewater 3.2m Regional population of 6.8m Liverpool Manchester 37
Slide 39: Monopoly assets owned
Monopoly assets owned Wastewater Water 43,419km of sewers 42,219km of distribution main 1,826 pumping stations 609 pumping stations 143 detention tanks 138 impounding reservoirs 2,275 combined sewer overflows 100 water treatment works 375 emergency overflows 450 service reservoir
Slide 40: 2007/08 results
0, United Utilities 2007/08 results
Slide 41: Regulated activities
Regulated activities £m 2008 2007 Revenue 1,416.3 1,320.8 +7% Operating profit1 611.6 581.0 +5% Adjustments: Restructuring costs 2.6 5.3 Settlement claims2 - (27.6) Ofwat transfer pricing fine - 8.5 Underlying operating profit 614.2 567.2 +8% • Strong growth in regulated business • Underpinned by al
Slide 42: Regulated activities: Operating expenses
Regulated activities Operating expenses £m 2008 2007 Depreciation and amortisation 222.9 195.5 Infrastructure renewals expenditure (IRE) 120.1 101.2 Power 42.5 49.1 Property rates 59.6 54.7 Bad debts 51.4 38.9 Other expenses 305.6 314.2 Operating expenses 802.1 753.6 (before restructuring costs and
Slide 43: Non-regulated activities
Non-regulated activities £m 2008 2007 Revenue 949.2 729.2 +30% Operating profit1,2 50.6 62.6 -19% Adjustments: Restructuring costs3 11.6 0.3 Settlement claims4 - (3.0) Underlying operating profit 62.2 59.9 +4% • First time contribution from electricity distribution contract • Peak contribution from
Slide 44: Finance expense
Finance expense Continuing operations £m 2008 2007 Published finance expense 331.6 258.1 IAS 39 net fair value (losses)/gains (42.7) 26.0 Add back interest on swaps and debt under fair value option 41.7 57.3 Underlying interest payable 330.6 341.4 Investment income (146.7) (118.3) Adjust for net pen
Slide 45: Profit before tax
Profit before tax Continuing operations £m 2008 2007 Operating profit1 663.2 642.1 Investment income and finance expense1 (184.9) (139.8) Profit before tax1 478.3 502.3 -5% Adjustments: Restructuring costs2 14.0 10.6 Settlement claims2 - (30.6) Ofwat transfer pricing fine2 - 8.5 IAS 39 net fair valu
Slide 46: Discontinued operations
Discontinued operations £m Post-tax Profit/(loss) Total profit/(loss) on disposal 2008 2008 United Utilities Electricity1 121.8 371.2 493.0 Industrial liquid waste operations2 (0.1) (4.9) (5.0) Facilities management operations3 1.3 9.1 10.4 Telecoms4 - (5.5) (5.5) 123.0 369.9 492.9 • Discontinued op
Slide 47: 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 48: Re-presented 2006/07 results
Re-presented 2006/07 results 47
Slide 49: Re-presented financial results
Re-presented financial results Year ended 31 March 2007 Discontinued £m As reported operations Re-presented Regulated activities 750.1 (169.1) 581.0 (formerly included within United Utilities North West) Non-regulated activities 69.1 (6.5) 62.6 (formerly included within United Utilities Contract Sol
Slide 50: Financing, liquidity and debt structure
Financing, liquidity and debt structure 49
Slide 51: Financing & liquidity as at 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 loan, £209m EIB loans, £205m Yankee bonds1 (USD), £771m Medium-term committed bank facilities2 1,549.6 Joint venture debt,
Slide 52: Debt structure at March 2008
Debt structure at 31 March 2008 United Utilities PLC BBB+ stable; Baa1 stable Yankees: Euro MTN: • $500m in 08’s3 • USD10m in 08’s • $250m in 18’s • USD10m in 09’s • $350m in 19’s • EUR 10m in 08’s • $400m in 28’s • GBP 6.5m in 13’s Loan to UUW United Utilities Water PLC A3 stable; A- Stable Ring-fe
Slide 53: Debt structure following new parent company
Debt structure following new parent company1 United Utilities Group PLC United Utilities PLC BBB+ stable; Baa1 stable Yankees: Euro MTN: • $500m in 08’s • USD10m in 08’s • $250m in 18’s • USD10m in 09’s • $350m in 19’s • EUR 10m in 08’s • $400m in 28’s • GBP 6.5m in 13’s Loan to UUW United Utilities
Slide 54: 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 53
Slide 55: MAR - Market to asset ratio
0, United Utilities MAR - Market to asset ratio
Slide 56: Market to Asset Ratios for Listed UK WaSCs
165 +—- PROS —+ 147 1.24% 084 06+ 0, United Utilities Market to Asset Ratios for Listed UK WaSCs PRO4 — Northumbrian — South West — Severn Trent — United Utilities ~—— Anglian Industry Aggregate 04 T 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: NERA analysis of Bloomberg data and a
Slide 57: MAR definition
MAR definition MAR = Market Cap* – Net Debt* Regulatory capital value *The values of net debt and equity relate to the value of regulated business only 56
Slide 58: 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 59: Inflation & financeability
Inflation & financeability • RAV indexed to UK inflation (RPI) • Like fine art – Asset growth – But … no immediate cashflow 58
Slide 60: 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 61: 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 62: UK water regulation
0, United Utilities UK water regulation
Slide 63: 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 64: 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 65: 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 66: 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 65
Slide 67: 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 66
Slide 68: 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% 67
Slide 69: 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% 68
Slide 70: Ofwat price review timetable
Ofwat 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 draf