Q&A: Tim Weller, FD of United Utilities, on its latest results

Q What’s behind these numbers?
A A very strong performance in our regulated water business,
driven by a mixture of allowed price increases and efficiencies. Those price
increases are intended to fund the significant capital investment programme
we’re making in our regulated business.

Q Your financing costs have risen. What’s happening there?

A The average cost of financing increased from about 5.8% last
year to around 6.2% in the current period. That reflects the impact of a high
level of inflation on our index linked debt.
Index linked debt is a very good hedge or match against our regulated assets,
which also increased in value in line with inflation.

Q The price you got for the electricity business was higher than some
were expecting. What was the basis for this valuation?

A The £1.78bn we are due to receive on the sale of the
electricity business represents around a 45% premium to the March 2008 regulated
asset base of the business, which does compare favourably with recent
transactions in the price-regulated utility sector.

Q Why is it that only £1bn of the proceeds from the £1.78bn sale of
your electricity business will be returned to shareholders?

A When you deduct the debt and the cost of the transaction
[from the £1.78bn sale of United Utilities Electricity] that results in net
equity proceeds of about £1.05bn, which we are returning to our shareholders.

Q Why are you returning the proceeds as shares and not cash?

A We’re proposing to issue B shares to our shareholders to
effect the capital return. That should allow our shareholders to elect to take
the receipt of those funds either as income or capital, depending on their

Q What are you expecting from the second half?
A By the end of December, we should have completed the sale of
our electricity assets. Looking beyond that, [we expect] a continued strong
financial performance from our water business ­ once again driven by allowed
price increases and delivery of cost efficiencies ­ and we will also continue to
focus on improving the operational performance of both the water business and
the rest of our operating contract portfolio.

Q What are you expecting from the next regulatory review

A We welcome the emphasis that the regulator, Ofwat, is placing
on the environment and sustainability in its initial consultation around that
price review. We also welcome the fact it is talking more about incentives to
improve the operational performance of the water businesses, but we believe
there is more it can do in that area.

We’re due to publish our 25-year, forward-looking, strategic direction
statement this month. You will see there what we think the business will need in
terms of investment over that length of time, including significant continuing
investment in improving the quality of our assets, customer service and in
mitigating flooding risk and the impact of climate change.

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