Return of Capital
Published: 20/05/2005, 07:00
Bristol Water PLC 20 May 2005 20 May 2005 Not for release, publication or distribution in or into the United States, Canada, Australia or Japan. Bristol Water plc Recommended proposals by Bristol Water Group for a return of 148 pence per Ordinary Share and a 10 for 13 Consolidation of Bristol Water Group plc's Ordinary Shares Bristol Water plc notes the announcement released by Bristol Water Group plc relating to the proposed return to its shareholders of 148 pence per Ordinary Share (representing approximately £30 million) (the "Return") and a 10 for 13 consolidation of its Ordinary Shares. Highlights • The Return is subject to Bristol Water Group plc shareholder and Court approval and the availability of finance • The Return will be financed, in part, by raising approximately £22 million of additional long term borrowings within Bristol Water plc through the Artesian Programmes. This will be loaned to Bristol Water Group on commercial terms. It is currently anticipated to draw these funds ahead of obtaining shareholder approval • Bristol Water plc will raise an additional £35 million of long term borrowings at the same time to finance the capital expenditure and debt maturity requirements for the current year and part of 2006/07 and to make additional pensions contributions • The new borrowings are expected to be index-linked • The deficit on Bristol Water plc's section of the Water Companies Pension Scheme amounts to approximately £12 million before tax as at 31 March 2005. It is the board's intention (subject to the Return being made) to make an additional one-off contribution of £7 million, and additional payments of £1 million in each of the four years beginning 1 April 2006 and £0.9 million for the year beginning 1 April 2010. The full text of the announcement made by Bristol Water Group plc is set out below: Bristol Water Group plc Recommended proposals for a return of 148 pence per Ordinary Share and 10 for 13 Consolidation Highlights • Return of approximately £30 million to shareholders (equivalent to 148 pence per Ordinary Share) expected to be paid by 15 July 2005 • Financed from existing cash balances and the raising of additional borrowings within the regulated water business, increasing net indebtedness to regulatory capital value, on a pro forma basis, to approximately 75 per cent. of the 1 April 2005 value • Achieved through the issue of B Shares to maintain distributable reserves as far as possible • Subject to approval of shareholders and the Court and the availability of finance • Shareholders representing 32.58% of the issued share capital have irrevocably undertaken or given letters of intent to vote in favour of the proposals at the EGM • 10 for 13 Consolidation to seek to ensure comparability of share price • Dividends • Total anticipated dividend for year ended 31 March 2005 of approximately £5.3 million • Board anticipates recommending dividends for the year ending 31 March 2006 of approximately £5.8 million representing a further significant increase in the level of underlying dividends. • Board's intention to pursue a dividend policy that maintains this level in real terms for the period to March 2010 Commenting on the proposals, Moger Woolley, Chairman of Bristol Water Group plc, said: "Having completed Ofwat's Periodic Review process and increased the focus on the regulated water business, we concluded that shareholders interests were best served by increasing the capital efficiency of the Group." Introduction The Board of Bristol Water Group plc ("Bristol Water Group" or the "Company") is pleased to announce proposals to effect a return to its shareholders of 148 pence per Ordinary Share, being approximately £30 million. This follows a review by the Board of the capital requirements of the Group having accepted Ofwat's price limits for the period 1 April 2005 - 31 March 2010 for its regulated water business and actions taken by the Board to focus on its regulated water business. This will be achieved through the issue of B Shares paid up from the Company's merger reserve, and then a cancellation and repayment of the B Shares. In order to make the future share price more comparable with the historic share price and to try to maintain the value of options over Ordinary Shares, the Company is also proposing a consolidation of its Ordinary Shares to become effective immediately following the issue of the New B Shares. For every 13 Ordinary Shares held at the Consolidation Record Time, Shareholders will receive 10 Consolidated Ordinary Shares. The Proposals are subject to the approval of Shareholders and the Court and the availability of additional finance. A circular setting out the details of the Proposals, together with the notice of an Extraordinary General Meeting at which Shareholder approval will be sought, is expected to be sent to Shareholders later today. The proceeds are expected to be posted to shareholders by 15 July 2005 following, inter alia, obtaining Shareholder approval at the EGM expected to be held at 11.00 a.m. on 16 June 2005 and Court approval at a hearing expected to be held on 6 July 2005. The Board considers the Proposals to be in the best interests of Shareholders as a whole and unanimously recommends that Shareholders vote in favour of the special resolution to be proposed at the EGM. Background to and reasons for the Return In February 2004, the Group returned approximately £51 million of capital to Shareholders by increasing the level of indebtedness in the Group's regulated water business to increase the capital efficiency of the Group. This followed the Board's earlier decision to focus on its regulated water business and reduce the risk profile and capital requirements of the Group. Ofwat has completed its determination of price limits for the five year period 1 April 2005 to 31 March 2010 for the Group's regulated water business as part of the industry wide review. In December 2004, Ofwat set out its Final Determination which after careful consideration the board of Bristol Water plc, the Group's regulated water business, accepted. In February 2005, in line with the Board's strategy of concentrating on its regulated water business, it announced the sale of Lawrence, the Group's contracting business. The Group will receive additional consideration should Lawrence win specific additional contracts that it was negotiating at the time of sale. Certain liabilities have been retained by the Group. The Group has also agreed with its partners to end its involvement in Watergrid Limited (a joint venture with British Waterways Board, AWG and Partnerships UK) which was created to utilise the canal network for water and waste water services. Accordingly, the Group's potential capital commitments to Watergrid Limited will be terminated. The Group has also disposed of its overseas leakage reduction business which comprised the majority of the activities of Bristol Water Services Limited and its subsidiaries. Accordingly, the Group will in the foreseeable future undertake no material activities apart from its regulated water business. In light of the finalisation of the price limits and related output assumptions for the regulated water business for the period 1 April 2005 to 31 March 2010 and the disposal of Lawrence and the other non-regulated businesses, the Board carried out a review of the Group's capital requirements. The review concluded that Shareholders' interests are best served by increasing the level of gearing in its regulated water business, increasing its inter-company loan to Bristol Water Group and reducing the level of cash held elsewhere in the Group. This will increase the capital efficiency of the Group and allow a further return to Shareholders. Financing and financial effects of the Return It is the Board's intention to finance the Return by raising approximately £22 million of additional borrowings within the regulated water business through the Artesian Programmes and from existing cash balances within the non-regulated entities of the Group of approximately £8 million. Approximately £35 million of additional borrowings will be raised through the Artesian Programmes at the same time to finance the capital expenditure and debt maturity requirements of the Group's regulated water business for the current year and part of 2006/07 and to make a £7 million contribution to reduce the deficit in Bristol Water plc's final salary pension scheme. Whilst the capital expenditure for at least the next 12 months could be financed from existing facilities, the Board is taking the opportunity to obtain longer term borrowing. The Artesian Programmes were used to help finance the return of capital in 2004. It is the Board's current intention that the additional borrowings will be index-linked. The Board has held detailed discussions with the Royal Bank of Scotland, the arranger of the Group's participation in the Artesian Programmes, and the key documentation has been discussed and agreed. The Board has yet to sign final documentation and draw the finance, hence the Return remains subject to the approximately £57 million of additional finance being available prior to the cancellation of the New B Shares. The Board currently intends to draw the funds ahead of obtaining approval of the Shareholders. Should approval for the Return not be obtained, the surplus funds will be used to finance the regulated water business's longer term capital expenditure, debt maturity and working capital requirements. On a pro forma basis including the contribution to its final salary pension scheme, the Return will increase the net indebtedness in Bristol Water plc from approximately £140 million at 1 April 2005 to approximately £169 million, representing approximately 62 per cent. and 75 per cent. respectively of Bristol Water plc's Regulatory Capital Value (''RCV'') at 1 April 2005, and will also reduce the pro forma level of cash balances held elsewhere in the Group by approximately £9 million to approximately £5 million. Pension arrangements for the majority of the Group's employees are provided through the Group's membership of the Water Companies Pension Scheme (''WCPS'') which provides defined benefits based on final pensionable pay. The Group has separate sections within WCPS for Bristol Water plc and for the retained liabilities related to its previous non-regulated activities. As at 31 March 2005, the deficits in the two sections in WCPS were approximately £11.9 million and £0.9 million respectively calculated on an FRS 17 basis. In considering the Return, the Directors have taken into account the Group's obligations in respect of both its sections of WCPS. Accordingly, Bristol Water plc intends to make a one-off contribution to WCPS of £7.0 million. It also intends to make additional contributions of £1.0 million in each of the four years beginning 1 April 2006 and £0.9 million for the year beginning 1 April 2010. Bristol Water Group has also agreed to make a one-off contribution of £0.3 million to the non-regulated section in addition to its existing commitment for annual contributions of £0.2 million. These amounts are in addition to the normal pension contributions required by WCPS's trustee to the two sections. These respective additional annual contributions will not need to be made once the scheme actuary has advised that the deficit has been eliminated for the relevant section. The additional contributions to the Bristol Water plc section and the £0.3 million contribution to the non-regulated section are conditional on the Return being made. Whilst Bristol Water plc will need to raise additional debt over the current regulatory period to fund its capital expenditure obligations, debt maturity and working capital requirements, the board of Bristol Water plc believes that it will be able to maintain a debt to RCV ratio in the range 75 to 80 per cent. over the current regulatory period. The cash balances retained by the Group will assist the Group in managing its working capital requirements and any outstanding obligations from its previous non-regulated activities. Summary of the Proposals The Return Bristol Water Group intends to return 148 pence per Ordinary Share (approximately £30 million in aggregate) to Shareholders through the issue and subsequent cancellation and repayment of New B Shares. Subject to Shareholder approval and the additional financing being in place, the New B Shares will be issued on the basis of one New B Share for each Ordinary Share held at the New B Share Issue Record Time, which is expected to be 5.00 p.m. on 5 July 2005. The New B Shares, which will be paid up out of the Company's merger reserve, will be issued in certificated form only. Subject to the approval of Shareholders and the Court, and to the additional financing being in place, the New B Shares will be cancelled in return for a cash payment by 15 July 2005 of 148 pence per New B Share. Further details of the additional financing are set out above. The creation, issue and cancellation of the New B Shares require the passing of a special resolution, which will also make appropriate changes to the Bristol Water Group Articles. The Consolidation Under the Consolidation, Shareholders will be entitled to 10 Consolidated Ordinary Shares for every 13 Ordinary Shares held at the Consolidation Record Time, which is expected to be 6.00 p.m. on 5 July 2005. Dealings in Consolidated Ordinary Shares are expected to commence at 8.00 a.m. on 6 July 2005. The Consolidation ratio has been determined by reference to a price of 657.5 pence per Ordinary Share, being the closing mid-market price on 18 May 2005 (the last practicable date prior to this announcement). Upon implementation of the Consolidation the nominal value of each Consolidated Ordinary Share will be 6.5 pence. The effect of the Consolidation will be to reduce the number of Ordinary Shares in issue by approximately 23 per cent. to reflect the fact that this proportion of the Company's market capitalisation is being returned to Shareholders. The Consolidated Ordinary Shares will have the same rights attaching to them as the Ordinary Shares in all material respects. Holders of Ordinary Shares whose holdings are registered in CREST will automatically have their new Consolidated Ordinary Shares credited to their CREST account. It is expected that definitive share certificates in respect of the Consolidated Ordinary Shares will be despatched by first class post by 15 July 2005 to Shareholders who hold their Ordinary Shares in certificated form. Following the Consolidation, certificates in respect of the Ordinary Shares will no longer be of value and such certificates should be destroyed on receipt of certificates for Consolidated Ordinary Shares. Taxation A guide to the general tax position of Shareholders who are resident or, if individuals, ordinarily resident in the UK is set out in the Shareholder circular. Shareholders' attention is drawn in particular to the fact that, in general terms and subject as mentioned in the Shareholder circular, the amount paid by Bristol Water Group on the Return comprises for tax purposes both a capital element (which is expected to be treated as the proceeds of a disposal for the purposes of UK taxation of chargeable gains) and an income element (which is expected to be treated in the same way as a dividend for UK tax purposes). The capital element will amount to 119 pence per New B Share and the income element to 29 pence per New B Share. Shareholders will be notified of the total amount of the Capital Element and the Income Element attributable to their New B Shares in the documentation they receive accompanying the cheque to be despatched to them in respect of the Return. Bristol Water Savings Related Share Option Schemes As a result of the Consolidation, the value of options over Ordinary Shares in the Bristol Water Savings Related Share Option Schemes should remain approximately unchanged. Optionholders will retain the same number of options as they currently hold following the Consolidation. However, the proportion of the Company's issued share capital under option will be increased through the Consolidation. Current trading and prospects The Board of Bristol Water plc has instigated a restructuring programme to improve its operating efficiency and anticipates making a charge of approximately £2 million in respect of the costs of the restructuring programme within its accounts for the year ended 31 March 2005. The Group will be reporting its results for the year ended 31 March 2005 on 26 May 2005 and anticipates reporting consolidated net debt of approximately £126 million. Following the disposal of all material non-regulated businesses and the focus on the regulated water business, the Group's future performance will be closely linked to that of its regulated water business. Ofwat's Final Determination has now set price limits and related service output assumptions for the regulated water business for the five years to 31 March 2010. The K factors, approximately equivalent to average annual real price increases or decreases, set for Bristol Water plc for the five years are +13.8 per cent., +2.8 per cent., +1.5 per cent., +0.7 per cent. and -2.3 per cent. Although Ofwat set challenging efficiency targets, the board of Bristol Water plc believes that it will be able to deliver the relevant service outputs within the targets set. As a result, the Board is confident in the prospects for the Group. Dividend policy As previously announced, for the financial year ended 31 March 2005, the Board currently anticipates proposing, as with the interim dividend already paid, a final dividend equivalent to that for the preceding year. This will result in the total for the interim and final ordinary share dividends for each of the two financial years being approximately £5.3 million. Given the return of value completed in February 2004, this represents a significant increase in the level of underlying dividends. Assuming the Proposals are approved by Shareholders, the final dividend will be proposed and paid on a per Consolidated Ordinary Share basis. Accordingly, the final dividend is expected to be 24.43 pence per Consolidated Ordinary Share, equivalent to 18.79 pence per existing Ordinary Share. The following table summarises actual and proposed dividends per share and their equivalents in relation to the February 2004 consolidation and the proposed Consolidation: Relating to ordinary shares held Prior to the 2004 After the 2004 After the proposed Financial year 53 for 100 53 for 100 10 for 13 ended consolidation consolidation consolidation 31 March 2004 Interim dividend paid 4.16p ---------- Equivalent per share after the February 2004 consolidation to 7.85p Final dividend proposed and paid 18.79p --------- Total 26.64p ========= 31 March 2005 Interim dividend paid 7.85p Equivalent per share after the proposed Consolidation to 10.20p Final dividend per Consolidated Ordinary Share expected to be proposed at the 2005 Annual General Meeting 24.43p Equivalent per Ordinary Share prior to the proposed Consolidation to 18.79p --------- -------- Total 26.64p 34.63p ========= ======== The Board anticipates recommending dividends for the year ended 31 March 2006 of approximately £5.8 million. Whilst actual dividends declared or recommended will depend, inter alia, on the trading performance of the Group, pension charges, the cost of debt and the effect of the implementation of International Financial Reporting Standards, it remains the Board's intention to pursue a dividend policy that maintains such value in real terms for the period to March 2010. This represents a significant underlying increase in the dividend per share given the reduction in the equity base of the Company when the Proposals are implemented. Board changes Following the decision to focus on its regulated water business, the Board is seeking ways to simplify the membership of the boards within the Group and has agreed with Ofwat a method of doing so while satisfying Ofwat's existing requirement for independent non-executive directors on the Bristol Water plc board. Ofwat has agreed that any independent non-executive director of Bristol Water Group may, if appointed to the board of Bristol Water plc, be regarded as independent for Ofwat's purposes. In planning for the expected retirement of Roger Wyatt in March 2006, reflecting the focused nature of the Group going forward, the Board currently expects his duties to be shared between the other executive directors rather than seeking a replacement. Moger Woolley has been asked by his fellow directors to seek re-election at the forthcoming annual general meeting of the Company and continue as Chairman for a further year, which he has agreed to do. Sir Richard Gaskell has decided to retire and not seek re-election having served as a non-executive for 15 years. Subject to his re-election at at the forthcoming Annual General Meeting Trevor Smallwood will become Deputy Chairman and Senior Independent Director. Shareholders' undertakings and statements of intention Ecofin Water & Power Opportunities plc has given a written undertaking to vote or to procure a vote in favour of the special resolution to be proposed at the EGM in respect of 4,575,332 Ordinary Shares representing 22.90 per cent. of the total issued share capital of Bristol Water Group." Enquiries Bristol Water plc Tel: 0117 953 6407 Alan Parsons, Chairman Andy Nield, Finance Director Dresdner Kleinwort Wasserstein Tel: 020 7623 8000 Christian Littlewood, Director cityProfile Tel: 020 7448 3244 Oliver Winters Dresdner Kleinwort Wasserstein Limited, which is authorised and regulated by the Financial Services Authority, is acting for Bristol Water Group plc and no one else in connection with the Proposals and is not acting for any person other than Bristol Water Group plc and will not be responsible to any person other than Bristol Water Group plc for providing the protections afforded to its customers or for providing advice in connection with the Proposals and the other matters described herein. Definitions The following definitions shall apply to words and phrases used in this announcement except where the context requires otherwise. ''Artesian Programmes'' the Artesian Finance plc monoline wrapped index-linked bond programme and/or the Artesian Finance II plc monoline wrapped fixed-rate bond programme; ''Board'' or ''Directors'' the directors of Bristol Water Group, whose names are set out on page 4 of this document; ''Bristol Water plc'' Bristol Water plc, incorporated and registered in England and Wales under the Companies Act with registered number 2662226; ''Bristol Water Group'' or the ''Company'' Bristol Water Group plc, incorporated and registered in England and Wales under the Companies Act with registered number 4789566; ''Bristol Water Group Articles'' the current articles of association of Bristol Water Group; ''Bristol Water Holdings'' Bristol Water Holdings plc, incorporated and registered in England and Wales under the Companies Act with registered number 2630760; 'Bristol Water Savings Related Share Option Schemes'' the Bristol Water Group 2003 Savings Related Share Option Scheme and the BristolWater Holdings 2001 Savings Related Share Option Scheme; ''Companies Act'' the Companies Act 1985, as amended; ''Consolidated Ordinary Share(') the ordinary share(s) of 6.5 pence each in the capital of Bristol Water Group, arising as a result of the Consolidation, and following the Return to be referred to as ordinary shares; ''Consolidation'' the proposed sub-division and consolidation of share capital, as more fully described in Part 2 of this document; ''Consolidation Record Time'' expected to be 6.00 p.m. on 5 July 2005, being the day immediately preceding the day on which it is expected that the Court will hear the petition to confirm the Return (or such later date as the Directors may determine); ''Court'' the High Court of Justice in England and Wales; ''Court Hearing'' the hearing of the petition to sanction the Return expected to be on 6 July 2005; ''CREST'' the system for the paperless settlement of trades in securities and the holding of uncertificated securities operated by CRESTCo Limited in accordance with the Uncertificated Securities Regulations 2001; ''Dresdner Kleinwort Wasserstein'' Dresdner Kleinwort Wasserstein Limited; ''EGM'' the extraordinary general meeting of Bristol Water Group, notice of which is set out in Part 6 of this document, and any adjournment of that meeting; ''Final Determination'' Bristol Water plc's price limits for the period 1 April 2005 to 31 March 2010 set by Ofwat in December 2004; ''Group'' Bristol Water Group and its subsidiary undertakings; ''Lawrence'' Walter Lawrence (Civil & Mechanical) Limited; ''New B Share Issue'' the proposed issue of New B Shares to Shareholders on the register of members at the New B Share Issue Record Time, as more fully described in this document; ''New B Share Issue Record Time'' expected to be 5.00 p.m. on 5 July 2005, the day immediately preceding the day on which it is expected that the Court will hear the petition to confirm the Return (or such other time and date as the Directors may determine); ''New B Shares'' the B Shares of nominal value of 119 pence each in the capital of Bristol Water Group carrying the rights and restrictions set out in Part 6 of this document including the right to 148 pence each on cancellation; ''Ofwat'' the Office of Water Services, a department of the UK Government headed by the Director General of Water Services whose functions include, inter alia, the making of the Final Determination and whose office is to be replaced under the Water Act 2003 by the Water Services Regulation Authority; ''Ordinary Share(s)'' the ordinary share(s) of 5 pence each in the capital of Bristol Water Group; ''Proposals'' the New B Share Issue, the Return and the Consolidation; ''RCV'' Bristol Water plc's Regulatory Capital Value as published by Ofwat adjusted as appropriate for inflation effects; ''Return'' the proposed repayment of share capital by the cancellation and repayment of New B Shares as more fully described in this document; ''Shareholder(s)'' holder(s) of Ordinary Shares and, where the context so requires, holder(s) of New B Shares; ''UK'' or ''United Kingdom'' the United Kingdom of Great Britain and Northern Ireland; ''uncertificated'' or ''in uncertificated form'' when used in relation to shares, recorded on the relevant register ''in uncertificated form'' as being held in uncertificated form in CREST and title to which, by virtue of the Uncertificated Securities Regulations 2001, may be transferred by means of CREST; and ''WCPS'' the Water Companies Pension Scheme. 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