TIDMUU.
FULL YEAR RESULTS FOR THE YEAR ENDED 31 MARCH 2012
GBPm Year ended
(Continuing operations) 31 March 2012 31 March 2011
Underlying operating profit* 594.1 596.4
Underlying profit before 327.0 329.2
taxation*
Underlying profit after 240.9 239.2
taxation*
Underlying earnings per share*, 35.3 35.1
** (pence)
Revenue 1,564.9 1,513.3
Operating profit 591.5 580.2
Profit before taxation 280.4 327.1
Profit after taxation 311.4 354.5
Basic earnings per share** 45.7 52.0
(pence)
Total dividends per ordinary 32.01 30.0
share (pence)
*Underlying profit measures have been provided to give a more representative
view of business performance and are defined in the underlying profit measure
tables
**Earnings per share and underlying earnings per share are explained in the
earnings per share section
* Further customer service improvements delivered: significantly improved Ofwat
SIM scores
* Met regulatory leakage target for sixth consecutive year
* On track to meet regulatory outperformance targets
* Continued progress on capex programme: invested GBP680m, an increase of 12% on
prior year
* Underlying operating profit of GBP594m down GBP2m reflecting higher
infrastructure renewals expenditure
* Robust financial position: substantially repaid all term debt due in 2010-15
period
* Final dividend of 21.34 pence per share, an increase of 6.7% in line with
policy
Steve Mogford, Chief Executive Officer, said:
"Our focus on operational performance is delivering further service
improvements for customers. Our revised customer handling arrangements have led
to a marked improvement in customer satisfaction, resulting in significant
progress on Ofwat's service incentive mechanism. We have met our regulatory
leakage target for the sixth consecutive year and our water supply and demand
balance remains robust, with reservoirs in line with typical levels for this
time of year.
"Our business improvement initiatives are progressing well and we remain on
course to meet our regulatory outperformance targets. Alongside this, we
increased capital investment in our assets to GBP680 million for the year,
providing benefits for our customers, the regional economy and the wider
environment. This investment included GBP154 million of infrastructure renewals
expenditure, an increase of GBP24 million on the previous year, which helps
maintain and improve the resilience of our network.
"We are pleased with the recent progress we have made and believe there is
plenty of opportunity to deliver further improvements.
"We have delivered another good set of results, despite the tough economic
climate. In line with our dividend policy of targeting annual growth of two per
cent above RPI inflation, we have proposed a final dividend of 21.34 pence per
share, an increase of 6.7 per cent. This takes the total dividend for the 2011/
12 financial year to 32.01 pence per share."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622282
Darren Jameson - Head of Investor Relations +44 (0) 7733 127707
Peter Hewer/Michelle Clarke - Tulchan Communications +44 (0) 20 7353 4200
A presentation to investors and analysts starts at 9.00 am on Thursday 24 May
2012, at the Auditorium, Deutsche Bank, Winchester House, 1 Great Winchester
Street, London, EC2N 2DB. The presentation can be accessed via a live listen in
conference call facility by dialling: +44 (0) 20 7162 0025, access code 916639.
A recording of the call will be available for seven days following Thursday 24
May 2012 on +44 (0) 20 7031 4064, access code 916639.
This results announcement and the associated presentation will be available on
the day at: http://corporate.unitedutilities.com/investors.aspx
BUSINESS REVIEW
KEY OPERATIONAL ACHIEVEMENTS
United Utilities (UU) aims to deliver long-term shareholder value by providing:
* The best service to customers
* At the lowest sustainable cost
* In a responsible manner
Operational performance and customer service are top priorities for UU and the
company aims to deliver significant improvements in these areas and outperform
its regulatory contract. The business has a range of key performance indicators
(KPIs) to enhance the visibility of its performance and help drive
improvements.
This increasing focus on operational performance since the start of the 2010-15
regulatory period is delivering a number of improvements, as outlined below:
* Significant improvements in customer service - UU has broadly halved its
points score on Ofwat's quantitative service incentive mechanism (SIM)
assessment in each of the last two years. UU has achieved the joint best
improvement on Ofwat's qualitative SIM score in 2011/12, moving up five places
to 16th position out of the 21 water companies.
* Capital delivery - more effective and efficient delivery of capital
programme, reflected in an improvement in our Time: Cost: Quality index (TCQi)
score from around 50% last year to over 80% for 2011/12. Approximately GBP1.3
billion invested in the 2010-12 period, which is broadly in line with the
regulatory allowance and UU is on track to deliver its outputs.
* Regulatory outperformance - clear targets set for 2010-15 period with UU on
track to deliver these targets: GBP300 million of financing outperformance, at
least GBP50 million of operating expenditure outperformance and expect to meet
Ofwat's capital expenditure allowance. UU has now delivered cumulative
operating expenditure outperformance of over GBP20 million in the first two years
of the regulatory period and has already secured over GBP300 million of financing
outperformance across its debt portfolio.
* Leakage - met or outperformed regulatory leakage target for the sixth
consecutive year.
* Corporate responsibility - attained Dow Jones Sustainability Index `World
Class' rating and the highest platinum plus ranking in Business in the
Community's (BITC) CR index. UU is one of only six FTSE 100 companies to hold
both awards.
Financial overview
The group has delivered a good set of financial results for the year ended 31
March 2012. Revenue was up by GBP52 million to GBP1,565 million, principally as a
result of the impact of the regulated price increase for 2011/12 of 4.5%
nominal (0.2% real price decrease plus 4.7% RPI inflation) partially offset by
the ongoing impact of customers switching to meters and lower commercial
volumes. Reflecting continued progress on the capital investment programme,
infrastructure renewals expenditure was up GBP24 million. This expenditure,
alongside increases in depreciation and property rates, in addition to the
impact of the transfer of private sewers and the new carbon reduction
commitment charge, resulted in underlying operating profit decreasing
marginally by GBP2 million to GBP594 million.
Regulatory capital investment in the year, including GBP154 million of
infrastructure renewals expenditure, was GBP680 million, an increase of 12%
compared with last year. This represents good progress in the early part of the
2010-15 period, as management has sought to deliver a smoother investment
profile to support efficient delivery of outputs and reduce risk.
Underlying profit before taxation was down, by less than 1%, at GBP327 million.
This reflected a lower underlying operating profit, with the underlying net
finance expense broadly flat year on year.
Underlying profit after taxation was slightly higher than last year, reflecting
the 2% reduction in the mainstream UK corporation taxation rate. Reported
profit after taxation benefited from a GBP105 million deferred taxation credit,
which follows the UK government's changes to reduce the mainstream corporation
taxation rate. A similar credit of GBP99 million was recognised in the previous
financial year.
UU has a robust capital structure and gearing (measured as group net debt to
regulatory capital value) as at 31 March 2012 was 59%, comfortably within
Ofwat's assumed range of 55% to 65%, supporting a solid investment grade credit
rating. United Utilities Water PLC (UUW) has a long-term credit rating of A3
from Moody's Investors Service with a stable outlook.
The group has now raised a total of GBP400 million of debt finance from the
European Investment Bank (EIB) thus far in the 2010-15 regulatory period.
Following agreement of the latest GBP200 million index-linked loan facility with
the EIB, the group now benefits from headroom to cover its projected financing
needs into 2014. This provides good flexibility in terms of when and how
further debt finance is raised to help fund the regulated capital expenditure
programme. This GBP200 million loan facility was drawn down in a number of
tranches between November 2011 and March 2012 at an average interest rate of
0.9% real, the best rate UU has secured, and the average interest rate on the
group's GBP2.7 billion index-linked debt portfolio has now reduced to 1.7% real.
Reflecting this robust financing position, UU made an early repayment, in March
2012, of a GBP150 million loan from the EIB, which was due for redemption in June
2012. This transaction provided a small net interest saving and the group has
now substantially repaid all of its term debt due in the current 2010-15
regulatory period. In addition, in September 2011, UU accelerated approximately
GBP100 million of previously agreed pension deficit repair payments, providing a
higher return for the group than could have been achieved through short-term
deposits.
In line with its policy, the board has proposed a final dividend of 21.34 pence
per ordinary share, an increase of 6.7%. This produces a total dividend of
32.01 pence per ordinary share relating to the 2011/12 financial year. The
intention is to continue with this policy of targeting dividend growth of
RPI+2% per annum through to at least 2015.
Outlook
We are encouraged by our recent progress and will continue with our strong
operational and customer focus, with the aim of delivering further service
improvements for customers combined with greater efficiency. Our business
improvement initiatives are progressing well and we remain on track to meet our
regulatory outperformance targets, with substantial financing outperformance
already secured. The group has a sustainable dividend policy, targeting 2% per
annum growth above the rate of RPI inflation through to at least 2015,
supported by a robust capital structure. We are actively engaged in the ongoing
regulatory and political developments and will continue to work with all key
parties to help achieve the optimal outcome for all our stakeholders.
OPERATIONAL PERFORMANCE
Supporting our drive to improve operational performance, a revised management
structure was put in place earlier in the year with a strong focus on
accountability and delivery. The company has moved, from its previous
functional structure, to an organisational structure and managers are now
responsible for end to end delivery of capital projects and operational
performance within their respective regions, providing a more integrated
approach. This revised management structure is now well embedded in the
business and is helping to deliver performance improvements. A `whole company'
scorecard has also been introduced and short-term incentives are now more
directly aligned with operational performance. Long-term incentives are aligned
with shareholders' and customers' interests, being linked to total shareholder
return and regulatory outperformance.
Best service to customers
Actions:
Customer initiatives - We established a customer experience programme last year
to help understand better the needs and issues of our customers and this is
already delivering improvements in the levels of customer service we are
providing. We offer additional contact options for customers, such as an online
account management facility, to provide more choices as to when and how they
can contact us. Staff availability has been extended, coupled with an online
call back facility. A priority is to improve customer data management to ensure
this provides a single view of the customer to help improve the efficiency and
quality of service. We have focused on root cause analysis to help us
understand better the reasons for customers contacting us. Supporting this
customer experience programme, we increased staff training, better aligned
staff incentive mechanisms, put new service level arrangements in place and we
proactively contact customers to keep them informed of progress in respect of
their enquiries. We have extended our focus to identifying potential customer
queries in advance, through, for example, more proactive exception billing
reporting and contacting the customer before the bill is sent to discuss the
matter. Operationally, we are aiming for prompt completion of jobs and, where
practicable, via a single visit, to improve the customer experience and reduce
the need for unnecessary calls. We are also making ongoing improvements to our
processes based on customer feedback.
We have made a significant improvement in our performance on Ofwat's service
incentive mechanism (SIM), reflecting our increased focus on dealing with
customer enquiries. The number of customer complaints made to the Consumer
Council for Water (CCW) has reduced by 27% in 2011/12, compared with last year,
following a similar improvement in the previous year. This represents a
reduction of close to a half in the number of complaints to the CCW over the
last two years. We have also substantially reduced the number of escalated
complaints assessed by the CCW in 2011/12, with zero assessments in several
months of the year. This has helped UU improve its quantitative SIM performance
by 49% in 2011/12, compared with 2010/11. This follows a similar significant
improvement of more than 40% in 2010/11, versus the indicative score for 2009/
10. UU has also moved up five places into the third quartile on qualitative SIM
for 2011/12, representing the joint best improvement of the 21 water companies
in the year. Encouragingly, we delivered continued improvement in the second
half of the year on both SIM measures providing a strong platform from which to
build in the forthcoming year. Improving customer service remains a significant
area of continued management focus and we see plenty of opportunity to deliver
further improvements.
Safe, clean drinking water - We have an action plan to maintain safe, clean
drinking water through improving the robustness of our water treatment
processes, refurbishing service reservoir assets, ongoing mains cleaning and
optimising water treatment to reduce discoloured water events. UU continues to
supply a high quality of drinking water, with a mean zonal compliance water
quality performance of 99.95%.
Water supply and demand balance - To help ensure a continuous water supply to
our customers, our action plan includes innovation and investment in remote
monitoring to better manage and control the company's water supply system. We
also have investment projects to optimise water pressures and improve network
resilience. In addition, we are improving our response to burst mains to help
keep the water flowing, supported by `wet' repairs to water mains where the
supply remains on through the repair process. UU completed the West East Link
in 2011/12, a significant capital project designed to improve further the water
supply and demand balance in its region and enhance network resilience to
climate change. In addition, our reservoir levels are robust and in line with
typical levels for this time of year.
Wastewater - UU has a range of actions to help support the serviceability of
its wastewater assets. To help reduce sewer flooding, these actions include
incident based targeting to focus on areas more likely to experience flooding,
effective intervention in cleaning and rehabilitation or refurbishment of
sewers and advising customers about items not suitable for sewer disposal. The
plan also includes an improved approach to risk assessment to identify and
reduce the risk profile of the company's wastewater treatment works.
Key performance indicators:
* Serviceability - Long-term stewardship of assets is critical and Ofwat
measures this through its serviceability assessment (Ofwat defines
serviceability as the capability of a system of assets to deliver a reference
level of service to customers and to the environment now and in the future).
Ofwat currently assesses one asset class (wastewater non-infrastructure) as
"improving" and two asset classes (water infrastructure and water
non-infrastructure) continue to be rated "stable". UU is currently assessed by
the regulator as "marginal" in respect of wastewater infrastructure and the
company is implementing an action plan to return this asset class back to a
"stable" rating. The aim is to hold at least a "stable" rating for all four
asset classes, which is aligned with Ofwat's target.
* Service incentive mechanism (SIM) - UU improved its quantitative score for
2011/12 by 49%, compared with 2010/11, to 273 points. This follows an
improvement of over 40% in the previous year. On the qualitative measure, UU
has improved its 2011/12 score by 0.39 points to 4.18 points and has moved up
five places into 16th position (out of 21 water companies). This represents 6th
position when compared with the ten water and sewerage companies. This early
progress is encouraging and the aim is to move to the first quartile in the
medium-term.
Lowest sustainable cost
Actions:
Asset optimisation - Our asset optimisation programme continues to progress
well, providing the benefits of increased and more effective use of operational
site management to optimise power and chemical use and the development of more
combined heat and power (CHP) assets to improve energy efficiency. The
implementation phase is well underway at over half of the 30 sites covered by
the programme and a large number of schemes came on line in 2011, with further
projects being scoped. The optimisation programme is targeting approximately GBP9
million of annual savings by 2013/14.
Proactive asset management - We are continuing to introduce a more proactive
approach to asset and network management, with the aim of improving our
modelling and forecasting to enable us to address more asset and network
problems before they affect customers, thereby reducing the level of reactive
work and improving efficiency and customer service.
Power costs - UU has substantially locked in the cost of its power requirements
through to 2014/15, via hedging, securing outperformance. Power unit costs for
2011/12 were similar to the prior year and approximately 20% lower compared
with 2009/10. Although power unit costs beyond 2011/12 have been secured at
higher levels than those for 2011/12, this still delivers additional
outperformance versus the regulatory contract.
Debt collection - We are adopting a more proactive approach to debt collection
and have delivered another good performance in the year. We are implementing a
detailed action plan, which includes enhancing systems to improve customer
segmentation analysis and to obtain better data on customers who have changed
address, coupled with a more proactive debt follow up strategy. To support
this, a proportion of our debt collection function which was previously
off-shored has been brought back in-house and this has helped improve our debt
collection performance. Bad debts as a proportion of regulated revenue improved
from 2.5% in 2009/10 to 2.1% in 2010/11. The North West faces a particularly
tough economic environment with unemployment having increased at a faster rate
than any other UK region in 2011/12, particularly in the second half of the
year. Despite this, we have again delivered a good performance with bad debts
standing at 2.2% of regulated revenue for 2011/12. Debt collection will remain
a significant area of focus for the business.
Lean principles - Supporting the company's efficiency drive is its lean
principles approach to doing business. Systems and processes continue to be
streamlined and the business is rationalising its infrastructure and has
in-sourced its IT provision to provide greater control of its IT assets and
applications.
Pensions - The group placed its pension provision on a more sustainable footing
in 2010 and has subsequently taken additional steps to de-risk the pension
scheme further. An inflation funding mechanism has been introduced, which has
facilitated a move to a lower risk investment strategy with the proportion of
pension assets invested in equities or other high risk assets now reduced to
around 25%. More prudent longevity assumptions have also been recently
introduced. Further details on the group's pension provision are provided in
the pensions section.
Capital delivery - The business is strongly focused on delivering its
commitments efficiently and on time. We utilised previous experience to improve
the terms and conditions of our supplier contracts and have a robust commercial
capital delivery framework in place for the 2010-15 period. Contractor
performance is aligned with the company's business plan through appropriate
incentive arrangements. In addition, the business has introduced a more
disciplined approach to spend and outputs through a Time: Cost: Quality index
(TCQi). This enhances the capital investment governance process and provides a
sharper focus on the delivery of commitments, with a direct link to the
executive remuneration scheme. The TCQi performance score has improved from
around 50% last year to over 80% for 2011/12 and the company's long-term goal
is to achieve over 90%. Regulatory capital investment in 2011/12, including GBP
154 million of infrastructure renewals expenditure, was GBP680 million, an
increase of 12% compared with last year. UU has now delivered approximately GBP
1.3 billion of capital investment in the first two years of the 2010-15 period.
This spend is broadly in line with the regulatory allowance, after adjusting
for the construction output price index (COPI) which is consistent with Ofwat's
methodology. Good progress in the delivery of outputs has also been achieved in
the early part of the new regulatory period, reflecting a smoother and more
efficient investment profile than that experienced in the 2005-10 period. We
expect regulatory capital expenditure to be around GBP700 million in the 2012/13
financial year, consistent with our five-year programme.
Sludge processing - A new GBP100 million sludge processing centre is being
developed at the company's Davyhulme wastewater treatment works in Manchester.
Sludge will arrive from seven feeder treatment works and will be processed
using advanced thermal hydrolysis technology. The new facility will provide a
range of benefits including energy self-sufficiency for the whole site, greater
sludge disposal flexibility, with a wider choice of land disposal due to the
advanced stage of the treated product, and improved sludge condition to enhance
the efficiency of incineration. There will also be the option to pump the
treated sludge to UU's Shell Green sludge processing centre in Widnes.
Private sewers - The ownership of and responsibility for private sewers was
transferred to the wastewater companies in England and Wales from 1 October
2011. We have been preparing for this for some time resulting in a smooth
transition. The number of customer contacts, the increase in work volumes and
the level of expenditure, thus far, has been a little below initial
expectations. In addition, the mix of work has been slightly different to that
initially anticipated, with a greater proportion of expenditure relating to
enhancement capex, as we undertake investigations and remedial work on these
newly acquired assets. As we have evolved our operating model, we have seen an
increasing proportion of work relating to enhancement expenditure as we have
progressed through the period since 1 October. We are attaining better asset
information and, in addition to jetting and cleaning activity, we are
undertaking remedial work to improve and, where appropriate, enhance the
quality of the infrastructure, to bring it more in line with UU's asset
standards and to reduce the risk of future problems for our customers. This is
all consistent with our drive to deliver good customer service, where we aim to
complete the job efficiently and effectively and in a single visit where
practicable. We have also experienced lower levels of operating expenditure and
infrastructure renewals expenditure (IRE) than anticipated. In the second half
of 2011/12, operating expenditure was GBP6 million and capital expenditure was GBP
15 million, of which GBP9 million was IRE. This has also resulted in a positive
impact on operating profit in the second half of 2011/12. In light of this, we
have outlined a revision to the level and mix of our cost estimates for the
period October 2011 to March 2015. This reduces our total estimate for
operating expenditure by GBP15 million to around GBP40 million, with a GBP5 million
reduction in total capital expenditure to around GBP120 million. Importantly, the
mix is now expected to be more evenly split between IRE and enhancement capex,
reflecting experience over the last few months, with a revised estimate of GBP60
million for each of these expenditure categories. This lower rate of spend is
positive for customers as it should be beneficial to bills at the next price
review and, alongside this, we are raising asset standards. It is also
beneficial for our investors, as costs are lower, a greater proportion of spend
should be recoverable and we have the opportunity for additional growth in the
regulatory capital value. We are still early into the transfer and will
continue to review these cost estimates based on the levels and type of
workload and activity experienced and will provide updated forecasts as
appropriate.
Key performance indicators:
* Financing outperformance - UU has secured over GBP300 million of financing
outperformance across the 2010-15 period, when compared with Ofwat's allowed
cost of debt of 3.6% real, based on an average RPI inflation rate of 2.5% per
annum. Should average RPI inflation outturn at 3.5% per annum across the
five-year period, this would increase financing outperformance to around GBP400
million, net of the impact of the pensions inflation funding mechanism. UU
agreed a GBP200 million index-linked loan with the European Investment Bank
(EIB), drawn down between March and May 2011, at an average real interest rate
of 1.2%, which secures financing outperformance of around GBP20 million through
to 2015. Subsequently, a further GBP200 million index-linked loan facility was
agreed with the EIB and was drawn down in a number of tranches between November
2011 and March 2012 at an average interest rate of 0.9% real. This is the best
rate UU has secured and generates further outperformance of over GBP15 million
through to 2015.
* Operating expenditure outperformance - The business is targeting total
operating expenditure outperformance over the 2010-15 period of at least GBP50
million, or approximately 2%, compared with the regulatory allowance. This is
in addition to the base operating expenditure efficiency targets set by Ofwat,
which equate to a total of approximately GBP150 million over the five years. UU
is on track to meet its five year target and has now delivered cumulative
operating expenditure outperformance of over GBP20 million in the first two years
of the regulatory period.
* Capital expenditure outperformance - UU is delivering significant
efficiencies in the area of capital expenditure and expects to meet Ofwat's
allowance after adjusting, through the regulatory methodology, for the impact
of lower construction output prices. Capital expenditure and the delivery of
outputs remain on track.
Responsible manner
Actions:
Sustainability is fundamental to the manner in which we undertake our business
and the group has for many years included corporate responsibility (CR) factors
as a strategic consideration in its decision making. This has contributed to UU
retaining the highest platinum plus ranking in Business in the Community's
(BITC) CR index, as well as again being rated `World Class' in the Dow Jones
Sustainability Index. UU is one of only six FTSE 100 companies to hold both
awards. UU's Business Principles set out its commitment to environmental,
social and economic improvements and this is communicated in a way that enables
all employees to recognise how their roles and responsibilities contribute to
maintaining and improving sustainability performance.
Environment
Leakage management - The performance of the business in meeting its regulatory
leakage target for 2010/11 was excellent, given the extreme winter weather, and
UU was one of only four water and sewerage companies to meet its regulatory
leakage target in that year. This reflected strong year round operational focus
on leakage, an approach which we continued through 2011/12 and UU has now met
its leakage target for the sixth consecutive year. To help customers protect
their homes in winter and prevent leakage from their own pipes, we undertook a
customer awareness campaign and distributed over 100,000 advice packs.
Environmental performance - This is a high priority for the company and UU has
more than halved the number of major pollution incidents over the last few
years. Wastewater treatment works compliance remains high at over 98%, a
slight improvement compared with the previous year. UU is working more closely
with the Environment Agency (EA), through its agreed protocol, to help minimise
the occurrence and environmental impact of pollution incidents. This includes
the sharing of resources, knowledge and expertise. The company is also
enhancing its telemetry and flow monitoring equipment to provide early
identification of incidents to enable prompt action to be taken to minimise the
potential impact. Recognising that environmental performance is wide-ranging,
the company is measuring itself against an EA composite measure as detailed in
the key performance indicators below.
Sustainable catchment management programme - UU owns over 56,000 hectares of
land in the North West which it holds to protect the quality of water entering
its reservoirs. The company has developed a sustainable catchment management
programme which will help to protect and improve water quality and enhance
biodiversity.
Renewable energy - UU has a detailed carbon and renewable energy plan, which
both contributes to sustainability and reduces costs. We are on track to meet
our target of a 21% reduction in carbon emissions by 2015 (measured from a 2005
/06 baseline). Emissions in 2011/12 were 522,003 tonnes of carbon dioxide
equivalent, a reduction of 9% on last year. We are now 13% below our baseline
position. UU has consistently generated over 100 GWh of renewable electricity
annually for the past three years, principally from sludge processing, with
renewable energy equating to approximately 14% of the group's total electricity
consumption. UU also reduced its energy purchases by over 20 GWh in 2011/12.
The group has plans in place to increase renewable energy generation to 125 GWh
per annum by 2015.
Liverpool wastewater treatment works enhancement - UU has received planning
permission for a GBP200 million plant expansion to its existing wastewater
treatment works in Liverpool, which serves over half a million customers. This
will enhance the capacity of the treatment works to handle up to 11,000 litres
of wastewater per second and the treated water leaving the plant will be of a
higher standard. The project will create up to 350 jobs during the construction
period. The project will deliver both environmental benefits and growth in the
company's regulatory capital value.
Employees
We continue to be successful in attracting and retaining people and in
achieving UK high performing levels of employee engagement. We have, over a
period of 12 months, delivered much more training of a higher standard and at
the same time reduced the associated cost. This year we delivered 24,000 days
of training to employees, of which more than 6,700 days were health and safety
related. In addition, over 300 employees have been supported through a wide
range of further education courses. We currently have 80 apprentices and plan
to recruit up to a further 40 apprentices each year through to 2015. We have
also re-energised our graduate recruitment programme and in 2012 expect to
recruit up to 20 graduates. The past year has seen us strengthen our focus on
improving health and safety, with a programme led by UU's executive team. This
has helped reduce our accident frequency rate for employees from 0.386
accidents per 100,000 hours worked in 2010/11, to 0.215 accidents per 100,000
hours worked in 2011/12. More detail is provided in our annual CR report.
Health and safety performance will continue to be a significant area of focus
for the company, as we strive to improve our performance further.
Communities
We actively support our local communities and we have a number of community
partnerships to help us engage with the people in our region. This year we have
increased the number of partnerships that address social issues in our region,
such as education, water efficiency and employability skills. We understand the
impact we can have on the communities where we operate and undertake capital
projects so we seek to work with those communities to leave a positive legacy
after our projects have been delivered. We have continued our award winning
`United Futures' programme with our partner, Groundwork, to help regenerate
neighbourhoods after we have finished our work there. In addition, we have
expanded our innovative `Community Fund' where local community groups are
invited to apply for small scale grants to support their work. During the year,
we have contributed approximately GBP2 million supporting our local communities,
providing debt advisory services and over 19,000 hours volunteered by our
employees.
Key performance indicators:
* Leakage - UU met its economic level of leakage rolling target for the sixth
consecutive year in 2011/12, with a performance of 453 megalitres per day
versus the regulatory target of 464 megalitres per day. The aim is to meet our
regulatory leakage target each year.
* Environmental performance - The EA computes a composite measure which
incorporates a broad range of areas including pollution. UU improved to a
mid-ranking position for 2009/10 improving from its position in 2008/09, when
it was ranked tenth out of ten water and sewerage companies. The company has
reduced further the number of major pollution incidents and this has
contributed to an improved performance score for 2010/11 (the latest assessment
available) and UU retains a mid-ranking position. UU aims to move from this
average relative position to the first quartile in the medium-term.
* Corporate responsibility - UU has a strong focus on corporate responsibility
and is the only UK water company to have a `World Class' rating as measured by
the Dow Jones Sustainability Index. The group aims to retain this `World Class'
rating each year.
Political and regulatory developments
UU is actively involved in political and regulatory developments that relate to
the UK water sector and has a proactive programme to regularly engage with the
key parties. The UK Government published a Water White Paper `Water for Life'
in December 2011, which reaffirmed the success of the privatisation of the
water industry, with companies having invested over GBP90 billion to maintain and
improve assets, customer service and the environment. The paper highlights that
the water industry needs to evolve in order to meet the challenges arising from
factors such as climate change and a growing population to help ensure that
high quality water is supplied reliably while remaining affordable. In line
with expectations, a draft Water Bill was announced in the Queen's Speech on 9
May 2012 and is due to be published before Parliament Summer Recess which
commences on 18 July 2012. In addition, Ofwat published its statement of
principles for the 2014 price review on 15 May 2012.
We are pleased that the government recognised the need for evolutionary, rather
than revolutionary, changes to the successful existing water model. We are in
agreement with many of the aims set out in this paper, such as tackling water
pollution, over abstraction, affordability and water efficiency, as well as
protecting water and the natural environment. Indeed, much of what we already
do supports many of the Government's aspirations.
Our sustainable catchment management programme (SCAMP) is perhaps the most high
profile example of how we address sustainable abstraction. This model has been
adopted as best practice in the sector. We do benefit from having robust water
resources in our region and continue to enhance our regional network to provide
resilience to local water stress.
We have been undertaking water trading for many years, albeit on a fairly small
scale, but certainly have the potential to do more within the right industry
framework. In addition to our existing water trading arrangements, we are
looking at further options to help other parts of the country deal with drought
conditions and we have a number of connections which can be used for short
periods when required. Looking ahead, there is potential to develop more
cross-border export options and we are in a strong position to contribute in
such a future market scenario, although we envisage the financial quantum of
this to be fairly small relative to the size of the industry. However, water
trading is not the sole answer to addressing drought conditions. The
longer-term answer must be comprehensive and include more large capacity
pipelines, enhanced storage capacity, flexible abstraction and water efficiency
measures.
UU believes that water companies are in a unique position to help facilitate
the use of scarce water resources by customers. In the area of water
efficiency, this is something we continue to focus on and UU has one of the
lowest per capita consumption levels in the industry. Recent measures adopted
by the company include distributing shower regulators and devices to reduce
flush volumes in toilets and rolling out education programmes. UU believes that
more can be done to promote water efficiency and the company supports the
refinement of the regulatory framework to provide companies with incentives to
encourage the wise use of water.
Underpinning all of this, and the plans to increase competition for
non-domestic customers, is the need to retain investor confidence in the
sector. This is of paramount importance and we are pleased that the strengths
of the current industry structure will be retained and that the historical
regulatory capital value will be protected. Key issues that are currently
undergoing industry consultation include possible modifications to water
companies' licences and the replacement of the `costs principle', which governs
access pricing, along with Ofwat's proposed average cost to serve methodology
for the retail price control. On the matter of licence modifications, we are
supportive of the simple changes necessary to implement the government's
decision for expanded non-domestic competition and those necessary to
facilitate the 2014 price review. With regard to the `costs principle', it is
important that, in order to ensure fair network access, that any parliamentary
bill or act encourages only efficient entry and protects customers not eligible
for competition from cross-subsidy. In respect of retail price controls, we
believe it is essential that the regulator continues to take account of
regional socio-economic conditions, addresses reporting inconsistencies between
companies, retains the RPI inflation link and makes adjustments to reflect the
number of customers that receive only water or wastewater service. We will
continue with our active involvement on these issues.
FINANCIAL PERFORMANCE
Revenue
UU has delivered a good set of financial results for the year ended 31 March
2012. Revenue increased by GBP52 million to GBP1,565 million, principally
reflecting a 4.5% nominal (0.2% real price decrease plus 4.7% RPI inflation)
regulated price increase, partially offset by the ongoing impact of customers
switching to meters and lower commercial volumes. The impact of meter switching
was in line with our expectations, although commercial volumes were lower than
expected, particularly in the second half of the year when the North West
experienced an increase in unemployment. We would expect to recover the
majority of this revenue shortfall through the regulatory methodology at the
next price review.
Operating profit
Underlying operating profit decreased slightly by GBP2 million to GBP594 million,
primarily as a result of increases in infrastructure renewals expenditure,
depreciation and property rates, the impact of the transfer of private sewers
and the new carbon reduction commitment charge, largely offset by the increase
in revenue. Reported operating profit rose by 2% to GBP592 million, as last year
was impacted by one-off restructuring costs of GBP16 million which reduced
operating profit in the prior period.
Investment income and finance expense
Investment income and finance expense of GBP311 million was GBP58 million higher
than last year, principally reflecting GBP43 million of net fair value losses on
debt and derivative instruments, compared with GBP19 million of net fair value
gains in 2010/11. The GBP43 million net fair value loss in the period is largely
due to losses on the regulatory swap portfolio resulting from a significant
decrease in sterling interest rates during the period. The group uses these
swaps to effectively fix interest rates on a substantial proportion of its debt
to better match the financing cash flows allowed by the regulator at each price
review. The group has continued to benefit from fixing the majority of its
remaining debt for the 2010-15 financial period, providing a net effective
nominal interest rate of approximately 5%. Partially offsetting these losses,
there has been a net fair value gain during the period due to widening credit
spreads in the market, affecting the fair value of our fair value option debt.
The indexation of the principal on index-linked debt amounted to a net charge
in the income statement of GBP100 million, compared with a net charge of GBP103
million last year. This reflected lower RPI inflation in respect of the
group's index-linked debt with a three month lag. This reduction was primarily
offset by additional finance expense relating to the GBP400 million index-linked
loan facilities provided by the European Investment Bank (EIB), which were
drawn down in various tranches between March 2011 and March 2012. The first GBP
200 million of facilities were drawn down at an average real interest rate of
1.2%, with the second GBP200 million at 0.9%, the lowest rate the company has
achieved to date. The indexation charge does not represent a cash flow and is
more than matched by an inflationary uplift to the regulatory capital value.
The group had approximately GBP2.7 billion of index-linked debt as at 31 March
2012.
These offsetting factors resulted in the underlying net finance expense of GBP267
million being flat compared with the prior year, despite a slightly higher
level of average net debt. The lower RPI indexation charge contributed to the
group's average underlying interest rate of 5.5% for 2011/12 being a little
lower than the rate in 2010/11 of 5.7%.
Profit before taxation
Underlying profit before taxation was GBP327 million, GBP2 million lower than last
year in line with the reduction in underlying operating profit. This underlying
measure adjusts for the impact of one-off items, principally from restructuring
and reorganisation within the business, and fair value movements in respect of
debt and derivative instruments. Reported profit before taxation decreased by
14% to GBP280 million, primarily as a result of net fair value losses on debt and
derivative instruments.
Taxation
The current taxation charge was GBP46 million in the year and the current
taxation effective rate was 16%, compared with 11% in the previous year. The
current year charge includes a GBP16 million credit following agreement with the
UK tax authorities of prior years' taxation matters, without which the
effective rate would have been 22%.
The group has recognised a net deferred taxation credit of GBP77 million for the
year. This includes a GBP105 million credit, of which GBP50 million had already
been recognised in first half of 2011/12, relating to the changes substantively
enacted by the UK government to reduce the mainstream rate of corporation
taxation from 26% to 24% from 1 April 2012. A net deferred taxation credit of
GBP99 million was also recognised in 2010/11, to reflect a similar 2% staged
reduction in the rate of corporation taxation.
An overall taxation credit of GBP31 million has been recognised for the year
ended 31 March 2012. Excluding the impact of the reduction in the corporation
taxation rate and the impact of the prior year taxation adjustments, the total
taxation charge would have been GBP74 million or 26% compared with an GBP89 million
charge or 27% last year.
The taxation benefit of GBP33 million relating to pension contributions for
deficit funding has been recorded in the statement of comprehensive income,
rather than the income statement, as the actuarial movements giving rise to the
deficit were previously recorded there. Associated deferred taxation movements
of GBP29 million are also included in the statement of comprehensive income.
The group made a net cash taxation payment during the year of GBP5 million,
primarily reflecting the GBP35 million cash taxation inflow relating to prior
years' taxation matters, which largely offset the cash taxation paid in the
year. In the previous year, the group's net taxation payment was GBP47 million.
Profit after taxation
Underlying profit after taxation was GBP241 million. This is based on the
underlying profit before taxation figure less an underlying taxation charge of
GBP86 million, which includes an adjustment for the deferred taxation credit in
relation to the change in the mainstream rate of corporation taxation and the
credit relating to prior years' taxation matters. Reported profit after
taxation was GBP311 million compared with GBP355 million last year.
Earnings per share
Underlying earnings per share increased slightly from 35.1 pence to 35.3 pence.
This underlying measure is derived from underlying profit before taxation less
underlying taxation. This includes the adjustments for the deferred taxation
credits in 2011/12 and 2010/11, associated with the reductions in the
corporation taxation rate, and the taxation credits in both years relating to
prior years' taxation matters. Basic earnings per share decreased from 52.0
pence to 45.7 pence, principally reflecting net fair value losses on debt and
derivative instruments.
Dividend per share
The board has proposed a final dividend of 21.34 pence per ordinary share in
respect of the year ended 31 March 2012. Taken together with the interim
dividend of 10.67 pence per ordinary share paid in February, this produces a
total dividend per ordinary share for 2011/12 of 32.01 pence. This is an
increase of 6.7%, compared with the dividend relating to the previous year, in
line with group's dividend policy of targeting a real growth rate of RPI+2% per
annum through to at least 2015. The inflationary increase of 4.7% is based on
the RPI element included within the allowed regulated price increase for the
2011/12 financial year (i.e. the movement in RPI between November 2009 and
November 2010).
The final dividend is expected to be paid on 3 August 2012 to shareholders on
the register at the close of business on 22 June 2012. The ex-dividend date is
20 June 2012.
Cash flow
Net cash generated from continuing operating activities for the year ended 31
March 2012 was GBP560 million, compared with GBP563 million last year. This small
reduction reflected the accelerated pension deficit repair payment and an
increase in operating costs, partly offset by a rise in revenue and the minimal
amount of cash taxation paid in 2011/12 as the group benefited from a taxation
rebate relating to prior years. The group's net capital expenditure was GBP502
million, principally in the regulated water and wastewater investment
programmes. This excludes infrastructure renewals expenditure which is treated
as an operating cost under International Financial Reporting Standards.
Net debt including derivatives at 31 March 2012 was GBP5,076 million, compared
with GBP4,778 million at 31 March 2011. This expected increase reflects
expenditure on the regulatory capital investment programmes and payments of
dividends and interest, alongside the accelerated pension deficit repair
payment, partly offset by operating cash flows.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital value
adjusted for actual capital expenditure) remained flat at 59% at 31 March 2012,
compared with the position at 31 March 2011, and remains comfortably within
Ofwat's 55% to 65% assumed gearing range. This is the net effect of three main
factors: indexation of the principal of the group's index-linked debt, the
accelerated pension deficit repair payment and growth in the regulatory capital
value. The group's pensions deficit has reduced to GBP92 million, on an
accounting basis, compared with a deficit of GBP195 million at 31 March 2011.
Taking account of this small deficit, and treating it as debt, gearing
increases slightly to 60%.
At the year end, United Utilities Water PLC had long-term credit ratings of A3/
BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB- from
Moody's Investors Service and Standard & Poor's Ratings Services respectively.
The split rating reflects differing methodologies used by the credit rating
agencies.
Cash and short-term deposits at 31 March 2012 amounted to GBP321 million. Between
March and May 2011 UUW drew down a GBP200 million index-linked loan facility with
the EIB. The group also renewed GBP150 million of bank facilities during 2011/12.
In addition, in November 2011, UUW agreed a further GBP200 million index-linked
loan facility with the EIB which was drawn down between then and March 2012. UU
has headroom to cover its projected financing needs into 2014.
The group has access to the international debt capital markets through its EUR7
billion euro medium-term note programme which provides for the periodic
issuance by United Utilities PLC and United Utilities Water PLC of debt
instruments on terms and conditions determined at the time the instruments are
issued. The programme does not represent a funding commitment, with funding
dependent on the successful issue of the debt securities.
Long-term borrowings are structured or hedged to match assets and earnings,
which are largely in sterling, indexed to UK retail price inflation and subject
to regulatory price reviews every five years.
Very long-term sterling inflation index-linked debt is the group's preferred
form of funding as this provides a natural hedge to assets and earnings. At 31
March 2012, approximately 53% of the group's net debt was in index-linked form,
representing around 31% of UUW's regulatory capital value, with an average real
interest rate of 1.7%. The long-term nature of this funding also provides a
good match to the company's long-life infrastructure assets and is a key
contributor to the group's average term debt maturity profile which is
approximately 25 years.
Where nominal debt is raised in a currency other than sterling and/or with a
fixed interest rate, to manage exposure to long-term interest rates, the debt
is generally swapped to create a floating rate sterling liability for the term
of the liability. To manage exposure to medium-term interest rates, the group
fixed interest costs for a substantial proportion of the group's debt for the
duration of the 2010-15 regulatory period at around the time of the price
review.
Following the 2009 price review, the group re-assessed its interest rate
hedging policy with a view to further reducing regulatory risk. To help address
the uncertainty as to how Ofwat may approach the setting of the cost of debt
allowance at the next price review in 2014, UU has revised its interest rate
management strategy to extend its fixed interest rate hedge out to a ten year
maturity on a reducing balance basis. The intention is to extend the interest
rate hedge each year to eventually achieve a ten year rolling average interest
rate on the group's nominal debt. UU believes that this revised interest rate
hedging policy, which provides for a longer fixing of interest rates, will put
the company in a more flexible position to respond to whatever approach Ofwat
adopts to the industry cost of debt in future.
Liquidity
Short-term liquidity requirements are met from the group's normal operating
cash flow and its short-term bank deposits. The group has a EUR2 billion
euro-commercial paper programme and further liquidity is provided by committed
but undrawn credit facilities.
In line with the board's treasury policy, UU aims to maintain a robust headroom
position. Available headroom at 31 March 2012 was GBP614 million based on cash,
short-term deposits and medium-term committed bank facilities, net of
short-term debt. This headroom is sufficient to cover the group's projected
financing needs into 2014.
UU believes that it operates a prudent approach to managing banking
counterparty risk. Counterparty risk, in relation to both cash deposits and
derivatives, is controlled through the use of counterparty credit limits. UU's
cash is held in the form of short-term (generally no longer than three months)
money market deposits with prime commercial banks.
UU operates a bilateral, rather than a syndicated, approach to its core
relationship banking facilities. This approach spreads maturities more evenly
over a longer time period, thereby reducing refinancing risk and providing the
benefit of several renewal points rather than a large single refinancing
requirement.
Pensions
As at 31 March 2012, the group had a net retirement benefit, or pension,
deficit of GBP92 million, compared with a net pension deficit of GBP195 million at
31 March 2011. This GBP103 million positive movement principally reflects payment
of the GBP100 million accelerated deficit repair contribution.
The group has sought to adopt a more sustainable approach to the delivery of
pension provision and in advance of the start of the 2010-15 regulatory period
amended the terms of its defined benefit pension schemes, the details of which
were included in the 2010 annual report and financial statements. UU also
reduced its future pension obligations as a result of the sale of non-regulated
activities.
The group stated previously that it would continue to evaluate its pensions
investment strategy to de-risk further its pension provision and introduced an
inflation funding mechanism (the details of which were included in the 2011
annual report and financial statements), which facilitates a move to a lower
risk investment strategy. This has allowed UU to reduce the allocation of its
pension assets to 25% in equities and other high risk assets, from 34% at 31
March 2011. In addition, UU has adopted the use of more prudent longevity
assumptions. The group has also increased its interest rate hedge to around 65%
of pension scheme liabilities. Although any additional payments under this
mechanism would reduce financing outperformance, there would be a positive
benefit to the pensions surplus or deficit position.
From an accounting perspective, IAS 19 treats the inflation funding mechanism
as a schedule of contributions rather than a pension scheme asset. This means
that the liabilities position can change to reflect a change in market
expectations of long-term inflation, without a commensurate movement in assets.
The change in inflation has decreased the present value of the liabilities
during the year to 31 March 2012. This accounting treatment means that there is
likely to be a degree of volatility in future IAS 19 pension valuations.
Further detail is provided in note 9 ("Retirement benefit obligations") of
these condensed consolidated financial statements.
Underlying profit
In considering the underlying results for the period, the directors have
excluded fair value movements on debt and derivative instruments and one-off
items. Reported operating profit and profit before taxation from continuing
operations are reconciled to underlying operating profit, underlying profit
before taxation and underlying profit after taxation (non-GAAP measures) as
follows:
Continuing operations
Year ended Year ended
Operating profit 31 March 2012 31 March 2011
GBPm GBPm
Operating profit per published results 591.5 580.2
One-off items* 2.6 16.2
------ ------
Underlying operating profit 594.1 596.4
------ ------
Net finance expense
GBPm GBPm
Finance expense (315.5) (255.9)
Investment income 4.4 2.8
------ ------
Net finance expense per published results (311.1) (253.1)
Net fair value losses/(gains) on debt and 43.2 (19.2)
derivative instruments
Adjustment for interest on swaps and debt under 7.2 5.7
fair value option
Adjustment for net pension interest expense 3.3 3.8
Adjustment for capitalised borrowing costs (9.7) (4.4)
------ ------
Underlying net finance expense (267.1) (267.2)
------ ------
Profit before taxation
GBPm GBPm
Profit before taxation per published results 280.4 327.1
One-off items* 2.6 16.2
Net fair value losses/(gains) on debt and 43.2 (19.2)
derivative instruments
Adjustment for interest on swaps and debt under 7.2 5.7
fair value option
Adjustment for net pension interest expense 3.3 3.8
Adjustment for capitalised borrowing costs (9.7) (4.4)
------ ------
Underlying profit before taxation 327.0 329.2
------ ------
Profit after taxation
GBPm GBPm
Underlying profit before taxation 327.0 329.2
Reported taxation 31.0 27.4
Deferred taxation credit - change in taxation (104.6) (99.0)
rate
Agreement of prior years' UK taxation matters (0.4) (17.8)
Taxation relating to underlying profit before (12.1) (0.6)
taxation adjustments
------ ------
Underlying profit after taxation 240.9 239.2
------ ------
* Principally relates to restructuring and other reorganisation costs within
the business
Underlying operating profit reconciliation
2011/12 is the first year in which the group has presented the consolidated
financial statements as a single segment and therefore the table below provides
a reconciliation between group underlying operating profit and United Utilities
Water PLC historical cost regulatory underlying operating profit (non-GAAP
measures) as follows:
Continuing operations
Year ended
Underlying operating profit 31 March
2012
GBPm
Group underlying operating profit 594.1
Underlying operating profit not relating to United (10.9)
Utilities Water
Infrastructure renewals accounting 40.2
Other differences (3.9)
------
United Utilities Water statutory underlying operating 619.5
profit
Revenue recognition 2.6
Infrastructure renewals accounting (2.5)
Non-appointed business (7.0)
------
United Utilities Water regulatory underlying operating 612.6
profit
------
PRINCIPAL RISKS AND UNCERTAINTIES
We manage risk through our corporate risk management framework. As part of this
we maintain a process that regularly assesses the nature and magnitude of
internal and external risks. Mitigation measures are used in a prioritised
manner to reduce exposure and ensure resilience. The executive reviews
significant risks so that the board can determine the nature and extent of
those risks it is willing to take in achieving our strategic objectives. The
audit and risk committee regularly reviews the framework's effectiveness and
the group's compliance with it.
Key developments during the year
The risk profile of our group is now largely confined to the regulated water
and wastewater business in the North West of England following the sale of the
vast majority of our non-regulated businesses in 2010.
The legislative reform proposed by the government's recently published Water
White Paper (Water for Life) is now one stage nearer. More information is set
out in the `Government Market Reform Agenda' section below but the likely
impact on the industry, positive or negative, will not be fully understood
until the draft Water Bill is published and ultimately becomes legislation.
Ofwat has also started the process of preparing the ground for the 2014 price
review process. This includes a consultation with stakeholders about `Future
Price Limits' which asks for consideration of a number of proposals for change
that may be required to facilitate the aims of the Water White Paper.
Government market reform agenda
The government's White Paper (Water for Life) highlights a number of areas
which government will focus on to reform the water industry. These include:
* protecting water and the natural environment;
* tackling water pollution;
* tackling over abstraction;
* water and the green economy;
* reforming and extending competition;
* supporting growth and innovation;
* affordability and bad debt; and
* changing the way we use and value water.
A draft Water Bill is expected to be published before Parliament Summer Recess,
which commences on 18 July 2012, and should deliver many of the aspects set out
in the White Paper. Changes to the industry are expected to include extending
competition to all non-household customers for both water and wastewater, the
removal of barriers to the trading of abstraction licences and facilitating
bulk supplies of water, reform of the special merger regime to allow more
mergers of water companies and reform of the inset appointment regime. There is
also a proposal (in the government's White Paper) to replace the `costs
principle' which underpins network access.
Ofwat plans to consult on the methodology for the 2014 price review in the
autumn of 2012.
The group has been fully engaged in all government and Ofwat consultations in
relation to competition, industry reform and the price setting process.
In respect of competition, a relatively small proportion of the group's profits
derive from the retailing of water and wastewater services to non-household
customers. If competition is expanded, there would be opportunities for the
group to participate in a wider market in England and potentially Scotland.
However, we recognise that reforms to the pricing rules that govern access to
the group's water network and greater upstream competition could put at risk a
greater proportion of the group's profits.
We have raised our concerns with Ofwat and will be proposing an alternative to
the `costs principle', seeking to ensure that key underlying principles (on
both cost of entry and efficiency of provision) are reflected in any
replacement.
Future price limits - average cost to serve
It is expected that market reform will result in two price limits, one for
retail and one for wholesale. Ofwat proposes to set an average cost to serve
for non-contestable customers in the retail price limit. This proposal could
result in us having a significant cost recovery shortfall over the next
five-year price control period. We have raised and explained our concerns with
Ofwat and made alternative proposals as part of the consultation process and
continue to make strong representation to Ofwat on this issue, citing the
market evidence from investors and analysts to support our case.
Future price limits - licence modifications
Ofwat has made proposals to modify the licences of the water and wastewater
industry to:
* allow it to remove reference to the use of the retail price index (RPI) in
price setting; and
* allow flexibility in the number of price limits set and the duration of price
controls.
All 21 water companies have rejected Ofwat's proposals and the regulator is now
consulting with the wider water sector before making its decision on this later
in 2012.
Capital investment programmes
The core business requires significant capital expenditure, particularly in
relation to new and replacement plant and equipment for water and wastewater
networks and treatment facilities.
Delivery of capital investment programmes could be affected by a number of
factors including adverse legacy effects of earlier capital investments (such
as increased maintenance, repair, reinstatement or renewal costs) or amounts
budgeted in prior capital investment programmes proving insufficient to meet
the actual amount required. This may affect the group's ability to meet
regulatory and other environmental performance standards.
Capital investment programmes are regularly monitored to identify the risk of
time, cost and quality variances from plans and budgets and to identify, where
possible, any appropriate opportunities for outperformance and any necessary
corrective actions.
Executive directors are incentivised, as part of their bonusable measures, on
time, cost and quality of delivery of our capital investment programme.
Service incentive mechanism
For the 2010-15 period, Ofwat has introduced a new comparative incentive
mechanism to reward or penalise water companies' service performance, replacing
the Overall Performance Assessment (OPA). The Service Incentive Mechanism (SIM)
compares companies' performance in terms of the number of `unwanted' contacts
received from customers and how well they deal with those contacts. Depending
on UUW's relative performance under SIM it could receive a revenue penalty (up
to one per cent of turnover) or reward (up to 0.5 per cent of turnover) when
price limits are next reset in 2014.
The group has been monitoring and measuring customer satisfaction for a number
of years and results have been improving consistently. We have already improved
our SIM score, as detailed in our KPIs. To build on this success we have a
dedicated project team to ensure our processes, behaviours and systems provide
consistent and excellent service to our customers. The company's focus is on
ensuring right first time service delivery to its customers, thus avoiding the
need for `unwanted' contacts and reducing associated operating costs. Where
`unwanted' contacts do arise, then there is a clear focus on identifying the
root causes to improve the overall customer experience and the SIM score.
Capital costs of enhanced systems to improve performance are dealt with through
the Capital Incentive Scheme. These actions are intended to ensure that the
company's performance under SIM is optimised thereby mitigating the risk of a
penalty at the next price setting.
Serviceability assessment
The group is required to maintain the serviceability of its water and
wastewater assets, ensuring they continue to deliver a level of service and
performance that is at least as good as in the past. Where serviceability falls
below required reference levels of performance, Ofwat deploys a staged approach
to regulatory action to secure corrective actions and could make financial
adjustments at the next price setting if these actions did not restore service
performance. If performance was to continue to decline, the group may incur
additional operating or capital expenditure to restore performance.
The various indicators of performance are closely and routinely monitored by
management. The company's capital investment programme is targeted to seek to
maintain stable serviceability of the company's water and wastewater assets.
Similarly, operational practice is intended to ensure stable serviceability.
Where adverse trends develop and there is a risk of serviceability deviating
from stable, then corrective action can be identified and taken.
Pension scheme obligations
The group participates in a number of pension arrangements. The principal
schemes are defined benefit schemes, although these have been closed to new
employees since October 2006. The assets of these schemes are held in trust
funds independent of group finances, with the funds being well diversified and
professionally managed.
The group's current schemes had a combined IAS 19 deficit of GBP92 million as at
31 March 2012, compared with a deficit of GBP195 million as at 31 March 2011.
Increases to pension fund deficits may result in an increased liability for the
group, the size of the liability depending on a number of factors, including
levels of contributions and actuarial assumptions. In the 2009 water price
review, Ofwat took account of broadly 50 per cent of the pension deficit shown
in UUW's final business plan over a ten-year period (subject to reaffirmation
at the next price review) for the regulated business and allowed for half of
this deficit when setting its overall price controls for the 2010-15 period. In
response to the size of its ongoing pension risks and pension costs the group
introduced a series of changes for employees in its defined benefit (DB)
schemes. These changes, which came into force on 31 March 2010, should result
in reduced costs and risks, including deficit, associated with DB liabilities
in future. In conjunction with the trustees, the group continues to monitor and
to look to reduce the investment strategy risks for the pension schemes,
including the group's exposure to investment risks.
Failure to comply with applicable law or regulations
The group is subject to various laws and regulations in the UK and
internationally. Regulatory authorities may, from time to time, make enquiries
of companies within their jurisdiction regarding compliance with regulations
governing their operations. In addition to regulatory compliance proceedings,
the group could become involved in a range of third party proceedings relating
to, for example: land use; environmental protection; health and safety and
water quality. Amongst others, these may include civil actions by third parties
for infringement of rights or nuisance claims relating to odour or other
matters. Furthermore, the impact of future changes in laws or regulations or
the introduction of new laws or regulations that affect the business cannot
always be predicted and, from time to time, interpretation of existing laws or
regulations may also change or the approach to their enforcement may become
more rigorous. If the group fails to comply with applicable law or regulations,
in particular in relation to its water and wastewater licences, or has not
successfully undertaken corrective action, regulatory action could be taken
that could include the imposition of a financial penalty (of up to 10 per cent
of relevant regulated turnover) or the imposition of an enforcement order
requiring the group to incur additional capital or operating expenditure to
remedy its non-compliance. In the most extreme cases, non-compliance may lead
to revocation of a licence or the appointment of a special administrator.
The group endeavours to comply with all legal requirements in accordance with
its business principles and robust processes are in place to seek to mitigate
against non-compliance. The group continually monitors legislative and
regulatory developments and, where appropriate, participates in consultations
to seek to influence their outcome, either directly or through industry trade
associations for wider issues. The group seeks appropriate funding for any
additional compliance costs in the regulated business as part of the price
determination process.
Events, service interruptions, systems failures, water shortages or
contamination of water supplies
The group controls and operates water and wastewater networks and maintains the
associated assets with the objective of providing a continuous service. The
group is also dependent on the ability to access, utilise and communicate
remotely via electronic software applications mounted on corporate information
technology hardware and communicating through internal and external networks
which are not wholly under its control.
In exceptional circumstances, such as prolonged drought, system failure or
catastrophic damage, a significant interruption of service provision could
occur.
Such consequences may arise due to a number of circumstances either within or
outside the company's control. For example from water shortages, the failure of
an asset or an element of a network or supporting plant and equipment, human
error, an individual's malicious intervention or unavoidable resource
shortfalls.
Such instances have a low probability, but if materialised could result in
significant loss of life, environmental damage and/or economic and social
disruption.
The group could be fined for breaches of statutory obligations or be held
liable to third parties or be required to provide an alternative water supply
of equivalent quality, which could increase costs.
The group operates long-standing, well tested and appropriately resourced
incident response and escalation procedures. The processes continue to be
refined, alongside related risk management and business continuity procedures
which complement the governance and inspection regimes for key infrastructure
assets such as aqueducts, dams, reservoirs and treatment works. Disaster
Recovery processes also exist for the recovery of applications, all recognising
that possible events can have varying causes, impacts and likelihoods.
Sustainability of our water supply is also managed through regional aqueduct
networks which will be enhanced by the West East Link pipeline. While the group
seeks to ensure that it has appropriate processes and preventative controls in
place, there can be no certainty that such measures will be effective in
preventing or, when necessary, managing large-scale incidents to the
satisfaction of customers, regulators, government and the wider stakeholder
community. The group also maintains insurance cover in relation to losses and
liabilities likely to be associated with such significant risks, although
potential liabilities arising from a catastrophic event could exceed the
maximum level of insurance cover that can be obtained cost-effectively. The
licence of the regulated business also contains a `shipwreck' clause that, if
applicable, may offer a degree of recourse to Ofwat/customers (by way of
interim determination) in the event of a catastrophic incident.
Material litigation
In February 2009, United Utilities International Limited (UUIL) was served with
notice of a multiparty `class action' in Argentina related to the issuance and
payment default of a US$230 million bond by Inversora Eléctrica de Buenos Aires
S.A. (IEBA), an Argentine project company set up to purchase one of the
Argentine electricity distribution networks which was privatised in 1997. UUIL
had a 45 per cent shareholding in IEBA which it sold in 2005. The claim is for
a non-quantified amount of unspecified damages and purports to be pursued on
behalf of unidentified consumer bondholders in IEBA. UUIL has filed a defence
to the action and will vigorously resist the proceedings given the robust
defences that UUIL has been advised that it has on procedural and substantive
grounds.
In March 2010, Manchester Ship Canal Company (MSCC) issued proceedings seeking,
amongst other relief, damages alleging trespass against United Utilities Water
PLC (UUW) in respect of UUW's discharges of water and treated effluent into the
canal. UUW filed a Defence and Counterclaim in support of its believed
entitlement to make discharges into the canal without charge and await MSCC's
response. Although UUW won a `summary judgment' application against MSCC in
January on a significant element of the claim, MSCC have served notice that
they intend to appeal this decision.
The group faces the general risk of litigation in connection with its
businesses. In most cases, liability for litigation is difficult to assess or
quantify; recovery may be sought for very large and/or indeterminate amounts
and the existence and magnitude of liability may remain unknown for substantial
periods of time. The group robustly defends litigation, where appropriate, and
seeks to minimise its exposure to such claims by early identification of risks
and compliance with its legal and other obligations. Based on the facts and
matters currently known and the provisions carried in the group's statement of
financial position, the directors are of the opinion that the possibility ofthe disputes referred to in this risk section having a material adverse effect
on the group's financial position is remote.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking statements with respect
to the operations, performance and financial condition of the group. By their
nature, these statements involve uncertainty since future events and
circumstances can cause results and developments to differ materially from
those anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial report and
the company undertakes no obligation to update these forward-looking
statements. Nothing in this financial report should be construed as a profit
forecast.
Certain regulatory performance data contained in this financial report is
subject to regulatory audit.
Consolidated income statement
Re-presented*
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Continuing operations
------ ------
Revenue 1,564.9 1,513.3
------ ------
Employee benefits expense:
- excluding restructuring costs (135.4) (142.8)
- restructuring costs (2.6) (3.1)
------ ------
Total employee benefits expense (138.0) (145.9)
------ ------
Other reorganisation costs - (13.1)
Other operating costs (388.0) (358.1)
Other income 4.8 4.9
Depreciation and amortisation expense (297.8) (290.5)
Infrastructure renewals expenditure (154.4) (130.4)
------ ------
Total operating expenses (973.4) (933.1)
------ ------
Operating profit 591.5 580.2
Investment income (note 3) 4.4 2.8
Finance expense (note 4) (315.5) (255.9)
------ ------
Investment income and finance expense (311.1) (253.1)
------ ------
Profit before taxation 280.4 327.1
Current taxation charge (45.5) (34.6)
Deferred taxation charge (28.1) (37.0)
Deferred taxation credit - change in taxation rate 104.6 99.0
------ ------
Taxation (note 5) 31.0 27.4
------ ------
Profit after taxation from continuing operations 311.4 354.5
Discontinued operations
Profit after taxation from discontinued operations 5.1 103.7
(note 6)
------ ------
Profit after taxation 316.5 458.2
------ ------
Earnings per share
from continuing and discontinued operations (note 7)
Basic 46.4p 67.2p
Diluted 46.4p 67.2p
Earnings per share
from continuing operations (note 7)
Basic 45.7p 52.0p
Diluted 45.6p 52.0p
Dividend per ordinary share (note 8) 32.01p 30.00p
* The comparatives have been re-presented to include loss on disposal of
property, plant and equipment of GBP2.7 million within other operating costs
rather than other income, as previously presented, as this better reflects the
nature of the expenditure.
Consolidated statement of comprehensive income
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Profit after taxation 316.5 458.2
Other comprehensive income
Actuarial losses on defined benefit pension schemes (24.3) (44.7)
(note 9)
Net fair value losses on cash flow hedges - (0.2)
Revaluation of investments - 1.1
Reclassification from other reserves arising on
disposal of financial asset investment (note 6) - (6.6)
Reclassification from other reserves arising on - 1.8
disposal of subsidiaries (note 6)
Reclassification from cumulative exchange reserve
arising on disposal of subsidiaries (note 6) - (26.1)
Taxation on items taken directly to equity (note 5) 4.4 11.7
Foreign exchange adjustments (1.9) 0.7
------ ------
Total comprehensive income 294.7 395.9
------ ------
Consolidated statement of financial position
31 March 31 March
2012 2011
GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 8,644.5 8,274.9
Goodwill 5.0 5.0
Other intangible assets 89.5 93.9
Investments 3.3 2.3
Trade and other receivables 1.1 -
Derivative financial instruments 567.5 363.3
------ ------
9,310.9 8,739.4
------ ------
Current assets
Inventories 47.4 47.6
Trade and other receivables 301.4 296.8
Cash and short-term deposits 321.2 255.2
Derivative financial instruments 49.9 2.0
------ ------
719.9 601.6
------ ------
------ ------
Total assets 10,030.8 9,341.0
------ ------
LIABILITIES
Non-current liabilities
Trade and other payables (378.0) (249.8)
Borrowings (5,728.1) (5,203.6)
Retirement benefit obligations (note 9) (92.0) (195.0)
Deferred taxation liabilities (1,245.2) (1,293.1)
Provisions (4.0) (9.3)
Derivative financial instruments (159.7) (84.6)
------ ------
(7,607.0) (7,035.4)
------ ------
Current liabilities
Trade and other payables (447.6) (433.0)
Borrowings (127.1) (109.7)
Current income taxation liabilities (78.1) (70.5)
Provisions (6.3) (14.5)
Derivative financial instruments (0.1) (0.4)
------ ------
(659.2) (628.1)
------ ------
Total liabilities (8,266.2) (7,663.5)
------ ------
Total net assets 1,764.6 1,677.5
------ ------
EQUITY
Share capital 499.8 499.8
Share premium account 2.4 1.3
Revaluation reserve 158.8 158.8
Cumulative exchange reserve (5.0) (3.1)
Merger reserve 329.7 329.7
Retained earnings 778.9 691.0
------ ------
Shareholders' equity 1,764.6 1,677.5
------ ------
Consolidated statement of changes in equity
Year ended 31 March 2012
Share Share Revaluation Cumulative Merger Retained Total
capital premium reserve exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2011 499.8 1.3 158.8 (3.1) 329.7 691.0 1,677.5
Profit after taxation - - - - - 316.5 316.5
Other comprehensive
income
Actuarial losses on - - - - - (24.3) (24.3)
defined benefit
pension schemes (note
9)
Taxation on items - - - - - 4.4 4.4
taken directly to
equity (note 5)
Foreign exchange - - - (1.9) - - (1.9)
adjustments
------ ------ ------ ------ ------ ------ ------
Total comprehensive - - - (1.9) - 296.6 294.7
(expense)/income
------ ------ ------ ------ ------ ------ ------
Transactions with
owners
Dividends (note 8) - - - - - (209.0) (209.0)
New share capital - 1.1 - - - - 1.1
issued
Equity-settled - - - - - 1.2 1.2
share-based payments
Exercise of share - - - - - (0.9) (0.9)
options - purchase of
shares
------ ------ ------ ------ ------ ------ ------
At 31 March 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6
------ ------ ------ ------ ------ ------ ------
Year ended 31 March 2011
Share Share Revaluation Treasury Cumulative Merger Other Retained Total
capital premium reserve shares exchange reserve reserves earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2010 499.8 0.9 158.8 (0.1) 22.3 329.7 3.8 492.7 1,507.9
Profit after - - - - - - - 458.2 458.2
taxation
Other
comprehensive
income
Actuarial losses - - - - - - - (44.7) (44.7)
on defined
benefit pension
schemes (note 9)
Net fair value - - - - - - (0.2) - (0.2)
losses on cash
flow hedges
Revaluation of - - - - - - 1.1 - 1.1
investments
Reclassification - - - - - - (6.6) - (6.6)
from other
reserves arising
on disposal of
financial asset
investment (note
6)
Reclassification - - - - - - 1.8 - 1.8
from other
reserves arising
on disposal of
subsidiaries
(note 6)
Reclassification - - - - (26.1) - - - (26.1)
from cumulative
exchange reserve
arising on
disposal of
subsidiaries
(note 6)
Taxation on - - - - - - 0.1 11.6 11.7
items taken
directly to
equity
(note 5)
Foreign exchange - - - - 0.7 - - - 0.7
adjustments
------ ------ ------ ------ ------ ------ ------ ------ ------
Total - - - - (25.4) - (3.8) 425.1 395.9
comprehensive
(expense)/income
------ ------ ------ ------ ------ ------ ------ ------ ------
Transactions
with owners
Dividends (note - - - - - - - (225.8) (225.8)
8)
New share - 0.4 - - - - - - 0.4
capital issued
Shares disposed - - - 0.1 - - - (0.1) -
of from employee
share trust
Equity-settled - - - - - - - (0.1) (0.1)
share-based
payments
Exercise of - - - - - - - (0.8) (0.8)
share options
------ ------ ------ ------ ------ ------ ------ ------ ------
At 31 March 2011 499.8 1.3 158.8 - (3.1) 329.7 - 691.0 1,677.5
------ ------ ------ ------ ------ ------ ------ ------ ------
Consolidated statement of cash flows Re-presented*
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Operating activities
Cash generated from continuing operations 727.4 771.9
Interest paid (167.2) (165.8)
Interest received and similar income 4.4 3.1
Tax paid (39.8) (46.5)
Tax received 35.0 -
------ ------
Net cash generated from operating activities 559.8 562.7
(continuing operations)
------ ------
Net cash generated from operating activities - 13.7
(discontinued operations)
------ ------
Investing activities
Proceeds from disposal of discontinued operations 3.5 268.4
Transaction costs, deferred consideration and cash 2.0 (97.9)
disposed
------ ------
Proceeds from disposal of discontinued operations
net of transaction costs, deferred consideration and 5.5 170.5
cash disposed
Purchase of property, plant and equipment (502.2) (475.4)
Purchase of increased shareholding in joint venture - (5.0)
Purchase of other intangible assets (17.3) (20.2)
Proceeds from sale of property, plant and equipment 4.8 9.8
Grants and contributions received 13.0 12.7
Purchase of investments (2.2) -
------ ------
Net cash used in investing activities (continuing (498.4) (307.6)
operations)
------ ------
Net cash used in investing activities (discontinued - (52.7)
operations)
------ ------
Financing activities
Proceeds from issue of ordinary shares 1.1 0.4
Proceeds from borrowings 446.3 94.1
Repayment of borrowings (231.7) (88.0)
Exercise of share options - purchase of shares (0.9) -
Dividends paid to equity holders of the company (209.0) (225.8)
------ ------
Net cash generated from/(used in) financing 5.8 (219.3)
activities (continuing operations)
------ ------
Net cash used in financing activities (discontinued - (4.8)
operations)
------ ------
Effects of exchange rate changes (continuing 0.5 -
operations)
Effects of exchange rate changes (discontinued - (1.3)
operations)
------ ------
Net increase in cash and cash equivalents 67.7 35.8
(continuing operations)
------ ------
Net decrease in cash and cash equivalents - (45.1)
(discontinued operations)
------ ------
Cash and cash equivalents at beginning of the year 244.4 253.7
------ ------
Cash and cash equivalents at end of the year 312.1 244.4
------ ------
* The comparatives have been re-presented to show grants and contributions
received of GBP12.7 million separately within investing activities (2011:
previously included within decrease in provisions and payables as part of cash
generated from continuing operations).
Cash generated from continuing operations
Re-presented*
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Operating profit 591.5 580.2
Adjustments for:
Depreciation of property, plant and equipment 278.0 258.3
Amortisation of other intangible assets 19.8 32.2
Loss on disposal of property, plant and equipment 5.5 2.7
Loss on disposal of other intangible assets 2.6 2.8
Amortisation of deferred grants and contributions (6.9) (6.9)
Equity-settled share-based payments charge/(credit) 1.2 (0.1)
Other non-cash movements (0.1) -
Changes in working capital:
(Increase)/decrease in inventories (0.1) 2.1
Increase in trade and other receivables (8.2) (20.1)
Decrease in provisions and payables (155.9) (79.3)
------ ------
Cash generated from continuing operations 727.4 771.9
------ ------
* The comparatives have been re-presented to show amortisation of deferred
grants and contributions separately (2011: previously included within decrease
in provisions and payables) along with the reclassification of grants and
contributions received which were previously included in decrease in provisions
and payables, now shown separately on the consolidated statement of cashflows,
within investing activities.
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year ended 31 March
2012 have been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Services Authority.
The accounting policies, presentation and methods of computation have been
prepared on a basis consistent with the United Utilities Group PLC full
financial statements which are prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union (EU)
that are effective for the year ended 31 March 2012.
The adoption of the following standards and interpretations, at 1 April 2011,
had no material impact on the group's financial statements:
`Improvements to IFRSs (2010)' - This is a collection of amendments to seven
standards as part of the International Accounting Standards Board's (IASB)
programme of annual improvements. The improvements were issued in May 2010, are
effective for periods commencing on or after 1 January 2011 and were endorsed
by the EU on 18 February 2011.
IFRIC 14 `IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction'
The interpretation addresses the interaction between a minimum funding
requirement and the limit placed by IAS 19 on the measurement of the defined
benefit asset or liability. The interpretation was issued in July 2007 and
amended in November 2009. It is effective for periods commencing on or after 1
January 2011 and was endorsed by the EU on 19 July 2010.
The condensed consolidated financial statements do not include all of the
information and disclosures required for full annual financial statements, do
not comprise statutory accounts within the meaning of section 434 of the
Companies Act 2006 and should be read in conjunction with the group's annual
report and financial statements for the year ended 31 March 2012.
The comparative figures for the year ended 31 March 2011 do not comprise the
group's statutory accounts for that financial year. Those accounts have been
reported upon by the group's previous auditor and delivered to the registrar of
companies. The report of the auditor was unqualified and did not include a
reference to any matters to which the auditor drew attention by way of emphasis
without qualifying their report and did not contain a statement under section
498(2) or (3) of the Companies Act 2006.
Going concern
The directors have a reasonable expectation that the group has adequate
resources available to it to continue in operational existence for the
foreseeable future and have therefore continued to adopt the going concern
policy in preparing the financial statements. This conclusion is based upon,
amongst other matters, a review of the group's financial projections together
with a review of the cash and committed borrowing facilities available to the
group.
2. Segmental reporting
As previously reported, United Utilities has reshaped its portfolio over the
last few years, from a group with a wide-ranging set of activities and
interests, such as telecommunications, business process outsourcing, gas and
electricity distribution and metering and international utility operations,
into a focused regulated UK water and wastewater business. The group completed
its non-regulated disposal programme in November 2010 and the residual
non-regulated activities now represent less than two per cent of operating
profit.
The board of directors of United Utilities Group PLC (the board) are provided
with information on a single segment basis for the purposes of assessing
performance and allocating resources. The board reviews revenue, underlying
operating profit, operating profit, assets and liabilities at a consolidated
level.
In light of this, the group has a single segment for financial reporting
purposes and the segmental information presented in previous years is no longer
required to be disclosed separately within this note.
Statutory operating profit is reconciled to underlying operating profit as
follows:
Continuing operations Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Operating profit 591.5 580.2
Restructuring and other reorganisation costs 2.6 16.2
------ ------
Underlying operating profit 594.1 596.4
------ ------
3. Investment income
Continuing operations Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Interest receivable 4.4 2.8
------ ------
4. Finance expense
Continuing operations Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Interest payable (269.0) (271.3)
Net fair value (losses)/gains on debt and derivative (43.2) 19.2
instruments
------ ------
(312.2) (252.1)
Expected return on pension schemes' assets 100.5 102.2
Interest cost on pension schemes' obligations (103.8) (106.0)
------ ------
Net pension interest expense (note 9) (3.3) (3.8)
------ ------
(315.5) (255.9)
------ ------
The group has fixed interest costs for a substantial proportion of the group's
net debt for the duration of the regulatory pricing period and following the
revision to its interest rate management strategy, has extended its hedge out
to a 10-year maturity on a reducing balance basis. In addition, the group has
hedged currency exposures for the term of each relevant debt instrument. The
group has hedged its position through the use of interest rate and cross
currency swap contracts where applicable.
The economic underlying net finance expense for the continuing group of GBP267.1
million (2011: GBP267.2 million) is derived as shown in the table below.
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Finance expense (315.5) (255.9)
Investment income (note 3) 4.4 2.8
Net fair value losses/(gains) on debt and derivative 43.2 (19.2)
instruments
Interest on swaps and debt under fair value option 7.2 5.7
Adjustment for net pension interest expense (note 9) 3.3 3.8
Adjustment for capitalised borrowing costs (9.7) (4.4)
------ ------
Underlying net finance expense (267.1) (267.2)
------ ------
5. Taxation
Continuing operations Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Current taxation
UK corporation tax 60.1 61.8
Foreign tax 1.3 1.9
Adjustments in respect of prior years (15.9) (29.1)
------ ------
45.5 34.6
------ ------
Deferred taxation
Current year 12.6 25.7
Adjustments in respect of prior years 15.5 11.3
------ ------
28.1 37.0
Change in taxation rate (104.6) (99.0)
------ ------
Total deferred taxation credit for the year (76.5) (62.0)
------ ------
------ ------
Total taxation credit for the year (31.0) (27.4)
------ ------
The deferred taxation credit for the year ended 31 March 2012 includes a credit
of GBP104.6 million to reflect the change enacted on 5 July 2011 to reduce the
mainstream rate of corporation tax from 26 per cent to 25 per cent and the
subsequent change enacted on 26 March 2012 to reduce the mainstream rate of
corporation tax further to 24 per cent effective from 1 April 2012. A related
deferred taxation charge of GBP3.9 million is included within items taken
directly to equity.
The deferred taxation credit for the year ended 31 March 2011 includes GBP99.0
million which reflects both the change enacted on 27 July 2010 to reduce the
mainstream rate of corporation tax from 28 per cent to 27 per cent and the
subsequent change enacted on 29 March 2011 to reduce the mainstream rate of
corporation tax from 27 per cent to 26 per cent effective from 1 April 2011.
There will be a further phased reduction in the mainstream rate of corporation
tax to 22 per cent by 1 April 2014. The total deferred taxation credit in
respect of this further reduction is expected to be in the region of GBP100.0
million.
The adjustments in respect of prior years of GBP0.4 million credit (2011: GBP17.8
million) relate to agreement of prior years' UK taxation matters.
Taxation on items taken directly to equity
The taxation credit relating to items taken directly to equity is as follows:
Continuing operations Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Current taxation
Relating to other pension movements (33.1) -
------ ------
Deferred taxation
On actuarial losses on defined benefit pension (5.8) (11.6)
schemes
Relating to other pension movements 30.6 -
Change in taxation rate 3.9 -
On net fair value losses on cash flow hedges - (0.1)
------ ------
28.7 (11.7)
------ ------
------ ------
Total taxation credit on items taken directly to (4.4) (11.7)
equity
------ ------
6. Discontinued operations
During the prior year, the group completed its non-regulated disposal
programme, which, including 2009/10 investment disposals, achieved a total
enterprise value of GBP579.2 million. In accordance with IFRS 5 `Non-current
Assets Held for Sale and Discontinued Operations' the relevant disposal groups
were therefore classified as discontinued operations in the consolidated income
statement and consolidated statement of cash flows.
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Revenue - 353.4
Total operating expenses - (317.6)
------ ------
Operating profit - 35.8
Investment income and finance expense - (7.0)
Evaluation and disposal costs relating to - (5.0)
discontinued operations
------ ------
Profit before taxation - 23.8
Taxation - (9.2)
------ ------
Profit after taxation - 14.6
Profit on disposal of discontinued operations after 5.1 89.1
taxation
------ ------
Total profit after taxation from discontinued 5.1 103.7
operations
------ ------
The profit on disposal of discontinued operations after taxation is analysed as
follows:
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Total proceeds 3.5 268.4*
Net assets disposed of (0.4) (164.3)
Transaction and other costs of disposal 2.0 (45.9)
Reclassification from other reserves arising on - 6.6
disposal of financial asset investment
Reclassification from other reserves arising on - (1.8)
disposal of subsidiaries
Reclassification from cumulative exchange reserve - 26.1
arising on disposal of subsidiaries
------ ------
Profit on disposal of discontinued operations after 5.1 89.1
taxation
------ ------
* Total fair value of the 2010/11 proceeds comprised cash of GBP268.4 million.
The enterprise value of GBP447.1 million incorporates cash consideration received
added to the market value of the net debt disposed of which, at the date of
disposal, totalled GBP178.7 million. Combined with the cash consideration
received from the disposal of investments in 2009/10 of GBP132.1 million, the
non-regulated disposal programme achieved a total enterprise value of GBP579.2
million.
The profit on disposal of discontinued operations after taxation for the year
ended 31 March 2012 relates primarily to the receipt of contingent
consideration and the release of accrued costs of disposal in respect of
certain elements of the group's prior year non-regulated disposal programme.
7. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit after
taxation by the following weighted average number of shares in issue:
Basic Diluted
million million
Year ended 31 March 2012 681.8 682.2
Year ended 31 March 2011 681.6 681.9
The difference between the weighted average number of shares used in the basic
and diluted earnings per share calculations arises due to the group's operation
of share-based payment compensation arrangements. The difference represents
those ordinary shares deemed to have been issued for no consideration on the
conversion of all potential dilutive ordinary shares in accordance with IAS 33
`Earnings per Share'.
The basic and diluted earnings per share for the current and prior years are as
follows:
Year ended Year ended
31 March 31 March
2012 2011
From continuing and discontinued operations
Basic 46.4p 67.2p
Diluted 46.4p 67.2p
From continuing operations
Basic 45.7p 52.0p
Diluted 45.6p 52.0p
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Profit after taxation - continuing and discontinued 316.5 458.2
operations
Adjustment for profit after taxation from (5.1) (103.7)
discontinued operations
------ ------
Profit after taxation - continuing operations 311.4 354.5
------ ------
8. Dividends
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Dividends relating to the year comprise:
Interim dividend 72.7 68.2
Final dividend 145.5 136.3
------ ------
218.2 204.5
------ ------
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Dividends deducted from shareholders' equity
comprise:
Interim dividend 72.7 68.2
Final dividend 136.3 157.6
------ ------
209.0 225.8
------ ------
The proposed final dividends for the years ended 31 March 2012 and 31 March
2011 were subject to approval by equity holders of United Utilities Group PLC
and hence have not been included as liabilities in the consolidated financial
statements at 31 March 2012 and 31 March 2011 respectively.
The final dividend of 21.34 pence per ordinary share (2011: final dividend of
20.00 pence per ordinary share) is expected to be paid on 3 August 2012 to
shareholders on the register at the close of business on 22 June 2012. The
ex-dividend date for the final dividend is 20 June 2012.
The interim dividend of 10.67 pence per ordinary share (2011: interim dividend
of 10.00 pence per ordinary share) was paid on 1 February 2012 to shareholders
on the register at the close of business on 16 December 2011.
9. Retirement benefit obligations
The main financial assumptions used by the group's actuary to calculate the
defined benefit obligations of the United Utilities Pension Scheme (UUPS) and
the United Utilities Group PLC section of the Electricity Supply Pension Scheme
(ESPS) were as follows:
Year ended Year ended
31 March 31 March
2012 2011
%pa %pa
Discount rate 5.00 5.50
Expected return on assets - UUPS 4.45 5.65
Expected return on assets - ESPS 5.00 6.10
Pensionable salary growth and pension increases 3.25 3.35
Price inflation 3.25 3.35
The current life expectancies at age 60 underlying the value of the accrued
liabilities for the schemes are:
Year ended Year ended
31 March 31 March
2012 2011
years years
Retired member - male 26.5 25.1
Non-retired member - male 28.3 26.6
Retired member - female 29.8 28.9
Non-retired member - female 31.7 30.4
Current studies continue to show faster rates of life expectancy improvement
than had previously been forecast. Studies have also illustrated that mortality
rates vary significantly according to the demographics of the schemes' members.
These factors have been considered in order to update the life expectancies
disclosed above and the resulting calculation of the defined benefit pension
obligations of the group during the year.
The net pension expense before taxation for continuing operations in the income
statement in respect of the defined benefit schemes is summarised as follows:
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Current service cost (13.3) (11.9)
Curtailments/settlements arising on reorganisation (5.4) (3.4)
------ ------
Pension expense charged to operating profit (18.7) (15.3)
------ ------
Expected return on pension schemes' assets 100.5 102.2
Interest cost on pension schemes' obligations (103.8) (106.0)
------ ------
Net pension interest expense charged to finance (3.3) (3.8)
expense (note 4)
------ ------
Net pension expense charged before taxation (22.0) (19.1)
------ ------
The net pension (expense)/income (charged)/credited before taxation for
discontinued operations in the income statement in respect of defined benefit
pension schemes is summarised as follows:
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Current service cost - (3.5)
Curtailments/settlements arising on reorganisation - 3.0
------ ------
Pension expense charged to operating profit - (0.5)
------ ------
Expected return on pension schemes' assets - 6.9
Interest cost on pension schemes' obligations - (6.6)
------ ------
Net pension interest income credited to investment - 0.3
income and finance expense
Curtailment/settlement arising on disposal and
(charged)/credited to profit on disposal of (0.4) 7.3
discontinued operations
------ ------
Net pension (expense)/income (charged)/credited (0.4) 7.1
before taxation
------ ------
The reconciliation of the opening and closing net pension obligations included
in the statement of financial position is as follows:
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
At the start of the year (195.0) (271.3)
Expense recognised in the income statement - (22.0) (19.1)
continuing operations
(Expense)/income recognised in the income statement (0.4) 7.1
- discontinued operations
Contributions paid 149.7 133.0
Actuarial losses gross of taxation (24.3) (44.7)
------ ------
At the end of the year (92.0) (195.0)
------ ------
The closing obligations at each reporting date are analysed as follows:
31 March 31 March
2012 2011
GBPm GBPm
Present value of defined benefit obligations (2,205.0) (1,912.9)
Fair value of schemes' assets 2,113.0 1,717.9
------ ------
Net retirement benefit obligations (92.0) (195.0)
------ ------
10. Related party transactions
Transactions between the company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note.
The following trading transactions were carried out with the group's joint
ventures:
Year ended Year ended
31 March 31 March
2012 2011
GBPm GBPm
Sales of services 1.1 44.2
Purchases of goods and services 0.3 9.5
------ ------
Included within the comparatives in the table above are amounts relating to
entities disposed of during the year ended 31 March 2011.
Amounts owed by the group's joint ventures are as follows:
31 March 31 March
2012 2011
GBPm GBPm
Amounts owed by related parties 1.0 2.7
------ ------
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled in accordance with
normal credit terms. The group has issued guarantees of GBP5.4 million (2011: GBP
5.9 million) to its joint ventures.
No allowance has been made for doubtful receivables in respect of the amounts
owed by related parties (2011: GBP0.3 million). No expense has been recognised
for bad and doubtful receivables in respect of the amounts owed by related
parties (2011: GBPnil).
11. Contingent liabilities
The group has entered into performance guarantees as at 31 March 2012 where a
financial limit has been specified of GBP85.2 million (2011: GBP104.5 million).
12. Changes in circumstances significantly affecting the fair value of
financial assets and financial liabilities
From 1 April 2011 to 31 March 2012 market interest rates have fallen
significantly, which has been partially offset by an increase in credit spread
in relation to the group's borrowings.
The group's borrowings have a carrying amount of GBP5,855.2 million (2011:
GBP5,313.3 million). The fair value of these borrowings is GBP5,830.3 million (2011:
GBP5,065.0 million). There has been a net increase in funds from new borrowings
during the year of GBP214.6 million (2011: GBP6.1 million). The group's derivatives
measured at fair value are a net asset of GBP457.6 million (2011: GBP280.3
million).
13. Events after the reporting period
There were no events arising after the reporting date that required recognition
or disclosure in the financial statements for the year ended 31 March 2012.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The responsibility statement below has been prepared in connection with the
company's full annual report for the year ended 31 March 2012. Certain parts
thereof are not included within this announcement.
Responsibility statement
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with IFRSs as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the company and the undertakings included in the
consolidation taken as a whole; and
* the management report, which is incorporated into the directors' report,
includes a fair review of the development and performance of the business and
the position of the company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and
uncertainties that they face.
The directors of United Utilities Group PLC at the date of this announcement
are listed below:
Dr John McAdam
Steve Mogford
Russ Houlden
Dr Catherine Bell CB
Paul Heiden
David Jones CBE
Nick Salmon
Sara Weller (appointed 1 March 2012)
This responsibility statement was approved by the board and signed on its
behalf by:
............................. ............................
Steve Mogford Russ Houlden
23 May 2012 23 May 2012
Chief executive officer Chief financial officer
END
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