United to expand by alliances

United Utilities, the group created through the merger of North West Water and the electricity supplier Norweb, yesterday unveiled plans to expand through a series of strategic alliances into the gas and power markets.

The new strategy is likely to see the combined utility signing deals with North Sea gas suppliers and electricity generators rather than buying another water or regional electricity company outright.

Sir Desmond Pitcher, chairman, said: We are not on the prowl. We have plenty to do integrating the businesses we have at the moment."

He was speaking as the company, the first of the wave of multi-utilities being created through the consolidation of the water and electricity industries, reported a 4 per cent drop in pre-tax profits to pounds 273m after heavy restructuring charges at Norweb, increased drought costs and spending on discretionary customer initiatives.

The shares, which have put in a pedestrian performance since the merger on 1 January, slid 15p to close at 580p despite further bullish comments about the progress of integrating Norweb.

Brian Staples, chief executive, said cost savings could be achieved by supply utilities such as United Utilities working more closely with electricity generators such as National Power, particularly as the domestic energy markets will be opened up to competition in 1998 and prices squeezed.

"If you want to be a winner, then the sensible thing to do is to share the squeeze," he added.

The results, which included a pounds 99m contribution to operating profits from Norweb, were affected by pounds 124m of restructuring costs, including pounds 104m for the integration of Norweb. Drought costs were also higher at pounds 24.4m while a further pounds 23.4m was spent on discretionary customer initiatives.

Stripping out Norweb and the exceptional costs of restructuring, operating profits rose from pounds 344m to pounds 365m.

Mr Staples said it remained his view that the consolidation of the utilities sector would result in the sector being dominated by no more than six to 10 multi-utilities. United Utilities believes that its own announcement in March of cost savings that the Norweb merger would achieve helped prompt the renewed round of merger activity.

United Utilities estimates that the merger will be delivering an extra pounds 140m to its bottom line by the end of the decade. Yesterday it said that pounds 73m, or 78 per cent, of the pounds 94m benefits forecast for the current year had already been confirmed while pounds 92m of the pounds 105m benefit projected for 1997/98 had been attained.

The cost reductions will include the closure and sale of Norweb's headquarters in Manchester and 2,500 job losses, 1,160 of which have already been achieved in the regulated electricity and water businesses.

Sir Desmond also said that the group's pounds 350m disposal programme was on course. This will involve the sale of Norweb Retail, the third largest electrical retailer in the country, Norweb's contracting and generation businesses and North West Water's process equipment division.