UUW sells £100m 36 year index-linked notes

16 March 2006

United Utilities Water PLC (A2, stable; A-, stable) has agreed to sell GBP 100 million 36 year index-linked notes to Deutsche Bank AG.  The issue will be made via the group's existing E5,000 million Euro medium note programme.   Deutsche Bank is a dealer under the programme and since inception has been the programme arranger.

The principal amount of these 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 UUW's assets which are also explicitly matched to RPI via Ofwat's adjustments to UUW's regulatory asset value.

The notes were priced at a real yield of 1.549% per annum.  Reflecting the rate of inflation for the first interest period, UUW will pay a fixed annual coupon of 1.5802% 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 UUW's credit risk for the next 36 years.  Measured in basis points, the credit spread UUW will pay is in the 50s.

Within the last six months, UUW has agreed the sale of long term index-linked notes with an initial notional value totalling GBP 400 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 &  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 totalling  GBP 970 million by their maturity.