UUW sells £50m of 40 year index-linked bonds

09 February 2006

Since the beginning of October 2005, United Utilities Water PLC (A2, stable; A-, stable) has sold a total of GBP 300 million in 30, 35 and 40 year index-linked bonds.

The principal amount of these bonds 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 most recent issue (announced Thursday 9 February 2006) was for 40 years and represents our longest bond issue to date.  These bonds 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 40 years.  UUW will pay an annual coupon of 1.397% per annum.  Timing adjustments on the cash flows however reduce the all in funding cost to 1.381% per annum.

The importance of index linked debt for utilities was again raised by Ofwat and Ofgem in a discussion paper published this month (February 2006)  regarding the financing of UK networks utilities. It is likely that this will be a major topic of discussion in the lead up to the 2009 price reviews.

Credit investors holding bonds in regulated utility networks have until 5 May 2006 to inform Ofgem and Ofwat on their views on the issues raised in this discussion paper.