Water charges must reflect higher costs, United Utilities tells Ofwat

United Utilities is calling on the water regulator to let prices rise to reflect both higher energy costs and the effects of the credit squeeze.

The company does not anticipate bills will go up faster than salaries, despite a balancing act between investment and outgoings that Philip Green, the chief executive, described yesterday as "a tough challenge". But United's formal response to the price review for 2010 to 2015, to be submitted in August, will include a strong plea for Ofwat to consider both the short and long term economic data, and the implications for the investment-heavy industry.

"It is imperative that both equity and credit investors receive an acceptable return on their investment," Mr Green said. "In particular, raising debt finance will remain vital in supporting the water industry's future investment requirements, which will include addressing flooding risk and climate change. Maintaining a solid investment grade credit rating is therefore essential."

Energy costs are the other growing challenge. Although United Utilities cut its bill by £7m in the last 12 months, costs for the current year could rise by as much as 60 per cent, according to company estimates. The group has already invested in combined heat and power facilities as part of its environmental agenda, and is set to increase the programme to help mitigate rising bills.

Annual financial results published yesterday showed a strong performance. Revenue for the year to March was up by 19 per cent to £2.36bn, pre-tax profits were up by 17 per cent to £476m, and net profit more than doubled from £434m to £909m. The company raised its full-year dividend by 4 per cent to 46.7p per share, and is on track to meet its pledge to return £1.5bn to shareholders following the sale of its electricity distribution arm to North West Electricity Networks in December for £1.78bn.

"We have had a successful year," Mr Green told City analysts. "We have sold United Utilities Electricity (UUE) for a substantial premium to the regulatory asset value, focused the portfolio, addressed the capital structure of the group and announced a new dividend policy."

The numbers are helped by the outcome of Ofwat's last price review, concluded in 2004 for the current period from 2005 to 2010. The regulator agreed that United Utilities could raise water prices by 4.5 per cent per year to fund infrastructure investments, including improved water treatment works and upgraded pumping stations. Capital expenditure last year was up by 45 per cent to £826m, and will remain at a similar level for the immediate future.

Improving customer service is also central to the group's investment programmes. Bills have been redesigned so they are easier to understand, and the online and telephone services have been upgraded. In the recent billing cycle, calls to automated payment lines are up by 83 per cent, web payments are up by 87 per cent, and online direct debits are up by 68 per cent. "Reducing unnecessary customer contacts is critical to both improving service and reducing costs," Mr Green said.

United Utilities, which provides water to seven million homes, met its leakage target for 2007 of an average 465 megalitres per day.

Its shares price closed up 1.85 per cent yesterday at 771.5p.

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