REG-United Utilities PLC Interim Results - Part 1

03 December 2003

REG-United Utilities PLC Interim Results - Part 1
03 December 20033 December 2003
 
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003
IMPROVED PERFORMANCES ACROSS ALL BUSINESSES DRIVE PROFIT GROWTH

• Profit before tax* - increased by 4.4 per cent to £171 million
• Licensed multi-utility operations - innovative rights issue and IDoK ahead of next review period
• Business process outsourcing - operating profit* increased by 41 per cent to £12 million
• Infrastructure management - operating profit* increased by 14 per cent to £32 million
• Telecommunications - turnover increased by 10 per cent to £87 million
• Interim dividend per ordinary share of 14.43 pence, an increase of 2.6 per cent (post rights issue)
  

* Unless otherwise stated, amounts and percentage movements throughout this document relating to the profit and loss account are stated before goodwill amortisation and exceptional items (see note 3).

Chief Executive John Roberts said:
"I'm pleased to report that improved performances across all of our businesses have contributed to profit growth in the first half of the year. This maintains our record of continuously improving profit throughout the current regulatory period.

"During the period, the extent of the future investment demands for our licensed multi-utility operations business became clearer, principally driven by European Union directives. The funding requirements of our regulated businesses drove our decision to raise £1 billion from our shareholders,through an innovative two-stage rights issue. The resolution approving the issue of new equity was passed at our EGM with 98.2 per cent of votes cast in favour. 91.3 per cent of the Initial A Shares were taken up and the balance was successfully placed in the market at a premium.

"Recently we received Ofwat's draft decision on our Interim Determination of K("IDoK") application, which recognises additional costs which were not predicted by Ofwat when prices were set at the last periodic review. In its draft determination, Ofwat proposed that United Utilities Water be allowed to increase real prices by a further 3.7 per cent, to a total real increase of 8.2per cent, in 2004/05. Ofwat has also confirmed our concerns with regard to the value for money on part of the capital programme dealing with unsatisfactory intermittent discharges. As it's unlikely that this issue will be resolved by next week, when Ofwat release their final IDoK determination, recognition of these costs will probably be deferred until AMP4.

"Our support services businesses continue to make significant progress, with operating profit from these businesses tripling since 2000. Vertex, our business process outsourcing business, has had a particularly pleasing six months, having seen a substantial increase in operating profit as the start-up costs associated with our major public sector contracts with Westminster City Council and the Department for Work and Pensions, have come to an end.

Operating margins also improved, to 6.8 per cent, having almost doubled in the last three years.

"In addition, Vertex has achieved some notable renewals and extensions of contracts in the period. For example, it has signed a nine-year contract with Powergen, which replaces its previous contract with TXU Europe, and has recently agreed terms for an extended range of customer management services to Vodafone.

"United Utilities Contract Solutions has continued to grow operating profit.The Scottish Water contract, which involves the management of the delivery of new capital expenditure in Scotland, mainly to improve environmental standards,commenced in the summer, and further confirms our position as the leading player in the UK outsourced utility infrastructure market.

"Our telecommunications business, Your Communications, continues to be on track to be a net cash contributor to the group on a post-tax basis this year. We've had continued success in growing sales, which increased by 10 per cent compared to the corresponding period last year, and reducing operating losses, which have fallen as we've increased turnover and controlled operating costs."

Commenting on the outlook for United Utilities, John Roberts said:
"We expect that operating profits in our water business will benefit significantly from an expected allowed real price increase of at least 8.2 percent next year. Our support services businesses are also set to grow, as they benefit from recent contract wins and renewals with Scottish Water, Powergen and Vodafone.

"The next year will also provide greater clarity for our water and electricity businesses as we enter the final stages of the periodic review process. The challenge for both regulators now is to meet the requirements of all stakeholders. In particular they need to balance the desire for environmental improvements with prices for customers which represent value for money.

"We welcome the increased transparency Ofwat has brought to the review process.This has served to reduce regulatory uncertainty, which can only help to improve the industry's access to capital markets over the longer term. In light of Ofwat's recent announcements, we continue to expect that the water review will provide acceptable returns for shareholders, with the potential for further upside from regulatory out performance."

In conclusion, the Chairman, Sir Richard Evans, said:
"I'm pleased that the business has moved forward significantly over the past six months, by delivering on key strategic objectives. In line with our promise to maintain dividends in real terms, the board has decided to increase the interim dividend, after adjusting for the rights issue, by 2.6 per cent. The board is also pleased that shareholders demonstrated their support for the group's management and prospects, through their take-up of the rights issue." 
 
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For further information on the day, please contact: John Roberts - Chief Executive 020 7307 0300
Simon Batey - Finance Director 020 7307 0300
Simon Bielecki - Investor Relations Manager 07810 157649
Evelyn Brodie - Head of Corporate and Financial Communications 020 7307 0309
 
A presentation to investors and analysts will commence at 9.00 am on Wednesday,3 December 2003, at the City Presentation Centre, 4 Chiswell Street, London,EC1Y 4UP. The presentation can also be accessed via a one-way listen in conference call facility, by dialing: + 44 (0) 20 7162 0191, and quoting United Utilities. This recording will be available for7 days following the presentation, on +44 (0) 20 8288 4459, access code 272690.

The presentation, together with further information on United Utilities, will be available later in the day on our web site at: http://www.unitedutilities.com and on Bloomberg at: UUIR, where a multimedia version is available. Photographs for media use supporting these results can be downloaded via http://www.vismedia.co.uk.

DIVIDEND
Prior period dividends have been re-presented for comparative purposes to take account of the bonus element of the first stage of the rights issue. The factor applied to the prior period dividends is 0.9072, calculated using 576.0 pence per ordinary share, this being the closing price on 25 July 2003, the last business day prior to the announcement of the rights issue.

The board has declared an interim dividend in respect of the six months ended30 September 2003 of 14.43 pence per ordinary share, and 7.215 pence per A share. This is an increase of 2.6 per cent on last year's re-presented interim dividend of 14.06 pence. These dividends will be paid on 9 February 2004 to shareholders on the register at the close of business on 19 December 2003. The ex-dividend date for the interim dividend is 17 December 2003.

FINANCIAL PERFORMANCE
Turnover (including share of joint ventures) rose 12.0 per cent to £1,024.6million, reflecting growth across all businesses.

Operating profit* (including share of joint ventures) rose 4.6 per cent to £290.9 million compared with the same period in the previous year. This increase primarily reflected improved operating profits in infrastructure management,business process outsourcing and licensed multi-utility operations, and reduced operating losses in telecommunications.

After a 5.0 per cent increase to £119.9 million in net interest payable, profit on ordinary activities before tax* increased by 4.4 per cent to £171.0 million. Interest charges increased due to the higher level of borrowings to fund our capital expenditure programme, mitigated by lower average borrowing costs.

Goodwill amortisation was £4.3 million, compared with £3.5 million in the corresponding period last year. The increase principally reflects the goodwill arising from the acquisition of 7C by Vertex in December 2002.

The group recorded a current tax credit of £2.4 million during the period. The deferred tax credit on ordinary activities was £7.1 million, compared with a charge of £49.4 million in the corresponding period last year. This credit is principally due to the increased discount applied to the gross provision,reflecting the movement in gilt yields in the period.

Basic earnings per share increased by 35.1 per cent to 28.5p. Basic earnings per share have been restated for all periods prior to the rights issue to reflect the bonus element of the first stage of the rights issue.

Adjusted basic earnings per share have been restated for all periods prior to the rights issue to reflect the full bonus element of the rights issue. The adjustment factor is 0.8646, calculated using 531.5p per ordinary share, this being the closing price on 26 August 2003, the date of approval of the rights issue at the Extraordinary General Meeting.

Adjusted basic earnings per share increased by 48.9 per cent to 27.7p, largely as a result of the reduction in the deferred tax charge. Excluding deferred tax, adjusted basic earnings per share increased by 1.1 per cent to 26.6p.Net debt at 30 September 2003 was £3,228.0 million, a reduction of £145.9million compared with 31 March 2003. This is after the receipt of around £500million from the first stage of the rights issue, and also reflects the earlier payment of the 2002/03 final dividend, totalling £178.2 million, which was brought forward from October to August.

Gearing, calculated as net debt divided by net debt plus equity shareholders' funds, fell from 57.1 per cent, at 31 March 2003, to 50.9 per cent at 30September 2003.

Since 31 March 2003 the group has issued £373 million of various long-dated bonds and there have also been time extensions on existing medium term committed bank facilities of £50 million. Cash and short term investments at 30September 2003 were £967 million which, together with net un drawn facilities of£675 million and committed but un drawn term funding of £10 million, provides substantial pre-funding for the group's capital investment programme.

OPERATING PERFORMANCE
LICENSED MULTI-UTILITY OPERATIONS

• Turnover increased by 6.4 per cent to £642.5 million
• Operating profit increased by 1.3 per cent to £254.9 million
• Net operating assets of £6,870.0 million

Turnover increased by 6.4 per cent to £642.5 million, principally reflecting an allowed real price increase of 4 per cent in our water and wastewater charges. Operating profit increased by 1.3 per cent to £254.9 million for the period.This was mainly as a result of the allowed real price increase for United Utilities Water, partially offset by a number of factors, principally higher operating costs and depreciation due to the expanding asset base resulting from capital expenditure on quality related obligations.

In November, United Utilities received Ofwat's draft determination on its Interim Determination of K ("IDoK") application, which was submitted earlier in the year. In its draft determination Ofwat has issued a counter notice relating to costs already incurred and forecast to be incurred on part of the capital programme dealing with unsatisfactory intermittent discharges ("UIDs"), and has stated that it wishes to consider further evidence on this programme before arriving at a final conclusion.

Ofwat confirmed United Utilities' concerns regarding value for money with respect to a proportion of the UID programme. In arriving at its draft determination Ofwat eliminated the allowed expenditure for these projects, and expects to substitute the costs of revised schemes as agreed by the company with the Environment Agency and DEFRA. As it is unlikely that such revised schemes will be agreed in a time frame to allow recovery of these costs in the prices set from 1 April 2004, recognition of these costs will probably be deferred until the price review, and recovered in prices from 1April 2005.Ofwat is due to announce its final determination on United Utilities' IDoK application on 11 December 2003.

By 31 March 2004 the water regulator requires United Utilities to have delivered around three-quarters of its 840 AMP3 capital enhancement outputs.The company anticipates that it will still be ahead of its regulatory schedule at the end of the financial year.

Capital investment in the period was £473.2 million, the highest ever by United Utilities during a six month period, of which £409.0 million related to water and wastewater and £64.2 million to electricity distribution. The company continues to expect capital expenditure in the full year to be around £1billion.

Charlie Cornish has been appointed as Managing Director of United Utilities Service Delivery, with effect from 12 January 2004. Mr Cornish, aged 43, is currently Chief Operating Officer for Thames Water, responsible for service delivery, including operations and capital programmes. Prior to working for Thames he was Chief Executive of West of Scotland Water Authority.

INFRASTRUCTURE MANAGEMENT

• Turnover increased by 18.1 per cent to £207.2 million
• Operating profit* (including share of joint ventures) increased by 14.3 per cent to £32.0 million
• Net operating assets of £103.2 million

United Utilities Contract Solutions applies the core infrastructure management skills of the licensed multi-utility businesses to growth markets, serving over10 million people throughout the UK and overseas.

Operations management
Operations management develops and operates contracts in selected markets based on the group's core infrastructure management skills. It has a focused approach to pursuing opportunities with the objective of securing long-term relationships and operational sources of income whilst limiting financial exposure.

During the period, Scottish Water Solutions was established. This is a joint venture company consisting of United Utilities (in conjunction with Galliford Try and Morgan Est), Stirling Water and Scottish Water. Scottish Water Solutions will deliver the bulk of Scottish Water's four-year £1.8 billion capital investment programme, the funding for which will be provided by Scottish Water. Martin Bradbury, previously the Asset Management Director within United Utilities Service Delivery, has been seconded as Scottish Water Solutions' Chief Operating Officer.

The key objectives of Scottish Water Solutions are to deliver Scottish Water's capital programme on time, whilst making efficiencies both in terms of delivery and whole life asset costs. A management team has already been established,which now leads a workforce of over 400 employees, who have been seconded from partners within the consortium. Having commenced operations in the summer, the consortium is expecting to have delivered over £200 million of the programme by the end of this financial year.

In November, United Utilities, in partnership with the European Bank for Reconstruction and Development ("EBRD"), increased its shareholdings in its European concessions, subject to regulatory approval, by agreeing to buy International Water's shareholdings in Sofijska Voda AD in Bulgaria, AST allinna Vesi in Estonia and Przedsiebiorstwo Komunalne Aqua SA in Bielsko-Biala in Poland.

Following the acquisition, the shareholdings will be held in a joint venture company that is owned equally by United Utilities and the EBRD. This is the first time that the EBRD has taken a substantial equity position alongside at water utility, giving United Utilities a strong strategic partner in Europe,and a platform for further growth.

The Welsh Water contract continues to perform well, both in terms of service levels and costs. Glas Cymru has published its plans for the letting of the contract post 31 March 2005 and United Utilities has made a pre-qualification submission. Based on United Utilities' performance the company believes that it is well placed to win further business with Glas Cymru.

Green energy
United Utilities is also developing a number of schemes, with a potential capacity of up to 100MW, that capitalise on the group's presence as owner of electricity, water and land assets in NorthWest England. Plans for the wind farm at Scout Moor, in Lancashire, which has a potential capacity of up to 65MW, have now been lodged with the Department of Trade and Industry, which decides on planning consents for all developments over 50MW in England.

United Utilities is continuing to appraise and develop its offshore wind farm opportunity at Scar weather Sands, which has a potential capacity of 90MW. The public inquiry into this project started in November 2003.

Network services
United Utilities Networks is a national market leader in the rapidly developing multi-utility metering and connections markets. The business provides gas,water, electricity and telecommunications connections and metering to domestic,commercial and industrial developers.

Due to an increasingly tough regulatory climate, and its relatively small scale, United Utilities sold its private gas networks business, in October2003, to East Surrey Holdings plc for £3.1 million.

The metering services contract with British Gas Trading continues in its formative stages, as BGT and United Utilities align their business processes to address the expected separation issues accompanying this innovative contract. Activity levels in the second half and beyond should grow further as the contract moves out of its mobilisation phase.

BUSINESS PROCESS OUTSOURCING

• Turnover increased by 25.3 per cent to £178.9 million
• Operating profit* increased by 40.7 per cent to £12.1 million
• Operating margin* increased from 6.0 per cent to 6.8 per cent
• Net operating assets of £114.6 million

Vertex provides business process outsourcing services to utilities, local and central government and the service segment of the private sector. Vertex specialises in transforming front and back-office processes and the management of customer relationships. This is particularly relevant to clients with large customer bases, such as in the utility and public sectors, who require customer management and transformational capability, and the associated cost savings,when outsourcing their business processes.

Sales growth in the period was principally due to new contributions from public sector contracts with the Department for Work and Pensions and Westminster City Council, both of which commenced in the second half of the previous year. Vertex's operating margin* improved to 6.8 per cent from 6.0 per cent in the same period last year. This increase reflects the increasing maturity of the external contract portfolio and the relatively low level of contract mobilisation costs during the period.

In July Vertex signed a contract with Powergen, replacing Vertex's previous contract with TXU Europe. It has an overall term of nine years and is subject to review after four years. Vertex had been providing services to Powergen since Powergen acquired TXU Europe's retail business in October 2002, and this contract consolidates the relationship between the two companies. Prior to the acquisition, Vertex had been providing services to TXU Europe under a 10-yearcontract, which was signed in August 2002.

Vertex has recently agreed renewal terms for its contract to provide customer management services with Vodafone. The new contract also expands the range of services provided to Vodafone.

In addition Vertex has also signed a contract with Lloyds TSB to provide customer management and IT related billing services for its home energy and telephony offering, which was launched in the summer.

During the period Vertex has agreed terms with Orange to provide a range of inbound customer management services. Under the terms of the new contract,Vertex will provide customer services support for Orange pay-as-you-go customers including customer registrations, phone code unlock assistance and phone credit activation.

Capacity at Vertex's Indian contact centre, which was acquired from 7C in December 2002, has increased from around 220, to nearly 900 employees. This front and back-office capability is currently being utilised by a number of Vertex's private sector clients.

In the period, just over half of Vertex's revenues were derived from contracts renewed or secured in the last eighteen months, testament to the increasing momentum of the business.

TELECOMMUNICATIONS

• Business turnover increased by 11.0 per cent to £70.5 million
• Turnover increased by 9.6 per cent to £86.9 million
• Operating loss* reduced by 7.8 per cent to £9.4 million
• Net operating assets of £199.5 millionYour Communications offers voice, basic and advanced data communication services to the public sector, and small and medium-sized corporate customers,predominantly in the Midlands and North of England.

Business sales from voice and data services increased by 11.0 per cent to £70.5million, and premium rate services increased by 3.8 per cent to £16.4 million.This reflects further progress in the changing of Your Communications' sales mix to higher margin business customers.

Operating losses* fell by 7.8 per cent to £9.4 million, due to increased turnover and control of operating costs. Headcount has been reduced by around a third since April 2001, as the network building phase of the business has been completed.