UUE sells £100m 40 year index-linked notes

28 March 2006

United Utilities Electricity PLC (A2, stable; A-, stable) has agreed to sell GBP 100 million 40 year index-linked notes to Barclays Capital.  The issue will be made via the group's existing E5,000 million Euro medium note programme.  Barclays is a dealer under the programme.

This is the first time that UUE has raised funding via the group's EMTN programme.  It is also the first time UUE has sold index-linked notes and, with a maturity of 6 April 2046, it is its longest issue to date.  UUE's only existing other public issue is its conventional fixed rate Eurobond, GBP 450 million 8.875% due 2026.  Consequently, the new issue extends UUE's funding profile by some 20 years.

The principal amount of the new notes will be adjusted upward with inflation or downward with deflation and track the UK retail price index ("RPI").  This form of very long term index-linked liability is a perfect match for UUE's assets which are also explicitly matched to RPI via Ofgem's adjustments to UUE's regulatory asset value. 

The notes were priced at a real yield of 1.453% per annum.  Reflecting the rate of inflation for the first interest period, UUE will pay a fixed annual coupon of 1.4746% calculated on the index-linked principal amount throughout the life of the notes.  The notes yield a premium above the risk free rate (the rate on UK government bonds with a similar maturity) in order to compensate investors for taking UUE's credit risk for the next 40 years.  The credit spread UUE will pay is a little over half of one percent.

Within the last six months, United Utilities' group companies have sold or agreed the sale of long term index-linked notes with a notional value totalling GBP 550 million.  These notes have been priced at real yields ranging from 1.3 to 2.0% per annum and have maturity dates of 30, 35, 36 and 40 years.  Assuming RPI inflation of 2.65% (broadly equivalent to the UK monetary policy committee's CPI target of 2%), these notes are expected to provide financing of some GBP 1.4 billion by their maturity. 

In addition to these long dated issues in the credit market, the group raised GBP 508 million from the issue of ordinary shares in the equity market in June 2005 completing the second stage of  a GBP 1 billion rights issue.

The new UUE notes are scheduled to close on 6 April 2006, shortly after the group's 31 March 2006 financial year end.