In this important year, which has seen the company make further progress against its strategic objectives and agree price limits for the next five years with the regulator, we have delivered a sound underlying financial performance in both our regulated and non-regulated activities. The group continues to benefit from a strong financing position and has headroom to cover its projected financing needs through to the spring of 2012.
In order to meet the requirements of the water price review, we need to retain a robust and sustainable capital structure. At the same time, we are very mindful of the importance of income to our shareholders. In view of this, the board intends to pay a dividend of 30 pence per share for the 2010/11 financial year and thereafter continue with our policy of targeting dividend growth of RPI plus two per cent per annum through to 2015.
We aim to provide an attractive return, coupled with the continuation of the target to deliver real dividend growth, whilst retaining a robust and sustainable financial profile for the group. We believe the actions we have taken strike the right balance.
Strategy
United Utilities has a consistent strategy of focusing on its core activities. During 2009/10 we continued to concentrate on the same four key areas that underpin our commitment to delivering value for our shareholders and serving our customers:
- Improving operational performance;
- Delivering our regulatory contract;
- The 2009 water price review; and
- Our non-regulated activities.
Improving operational performance
We have maintained our focus on operational performance and made good progress during the year. We have consistently highlighted a number of performance indicators against which our stakeholders can assess our progress. These include: relative efficiency; security of water supply (leakage); serious pollution incidents; and overall customer satisfaction in response to enquiries.
In terms of relative efficiency, the company has a continuing focus on cost efficiency and is implementing a range of cost control measures, as we aim to lower the cost to serve our customers whilst maintaining and improving levels of service.
We are pleased to report that overall customer satisfaction is at its highest level for many years and that we met our regulatory leakage target for the fourth consecutive year. This was achieved despite exceptionally difficult winter weather conditions and highlights the commitment of our employees. We have also halved the number of serious pollution incidents over the last few years. Although we have made good progress, we know that there is more to do and are focused on delivering further improvements.
Delivering our regulatory contract
We have completed the 2005-10 regulated water and wastewater contract in the North West of England. Over the five-year period we invested over £3 billion in our infrastructure, which allows us to maintain and improve the service we provide to our customers and to meet tough environmental standards. However, there is no time to sit back and we have already embarked on delivering the next five-year regulatory contract.
The 2009 water price review
2009/10 was an important year for the water sector in England and Wales as the economic regulator, Ofwat, set price limits for the five years from 1 April 2010 to 31 March 2015. We considered the contents carefully before deciding that, on balance, it was in shareholders’ and customers’ best interests to accept the regulator’s proposals.
There is no doubt this is a challenging price review. However, we are well prepared to meet the requirements of the review given the detailed plans that we have already started to implement.
Non-regulated activities
Consistent with our strategy of focusing on our core activities, we completed the disposals of our holdings in Northern Gas Networks and Manila Water Company for a combined price of £132 million. We have also agreed to sell our Australian business for approximately £135 million, increasing the total value from non-regulated disposals to approximately £267 million. We are continuing to evaluate the expressions of interest we have received for our remaining non-regulated businesses.
Our employees
Last November, we dealt with record levels of rain and the flooding in Cumbria that occurred as a result. I witnessed the huge operational challenge it caused and I would again like to thank our people across the business for their superb response, often in very difficult conditions. This commitment from our staff was evident throughout the year, particularly in January, during the exceptional wintry conditions.
United Utilities has been set new efficiency targets as part of the regulator’s price limit proposals and we have had to make some difficult decisions with regard to the internal structure of the group. As a result, approximately 500 people left the group during the 2009/10 year.
A committed workforce is central to delivering our objectives for the next five years and beyond and we continue to communicate regularly and openly with our workforce, affirming the core values of our business: passion, trust, team and commitment.
Our environment
Embedded within the group’s strategic objectives is the goal to operate in a more sustainable manner. With long life assets we believe it is essential to take a long-term view of our operations. We recently updated our strategic direction statement which considers the needs of our region out to 2035 and takes account of the recent final determination of prices by Ofwat. We have factored into our business plan ways in which we can adapt to climate change, whilst ensuring the continuity of water supplies for our customers.
In September 2009, we published our water resources management plan. This aims to identify the best strategy to balance supply reliability, whilst protecting the environment and having due regard for the affordability of bills. It focuses on how we adapt to meet the challenge of climate change, ensuring the abstraction of water in our region is sustainable given the increasing drought risk. We will continue to look at ways of reducing demand for water to help alleviate the impact of climate change.
Our customers
We are aware of the impact on our household customers of reduced economic activity and higher unemployment and have increased the funding of our charitable trust by two-thirds to £5 million per year. Our water and wastewater services currently cost households approximately £1 per day on average. Over the next five years, the average annual household bill will fall by £9 in real terms. We believe this represents excellent value for money, providing our customers with high quality drinking water to meet all their daily needs and for environmentally responsible wastewater collection and treatment.
Outlook
Based on Ofwat’s final determination, prices to UUW’s customers across the 2010-15 regulatory period will decrease in real terms by an annual average of 0.4 per cent with a 4.3 per cent real decrease in 2010/11. We are implementing a range of detailed efficiency and performance improvement initiatives and believe we can deliver outperformance in respect of the new regulatory contract. Our early capital investment planning should facilitate a smooth transition into the 2010-15 period and we expect capital expenditure to continue at high levels in 2010/11. Overall, we are well positioned for the next five years.
Philip Green
Chief executive officer