TIDMUU.
RNS Number : 1001P
United Utilities Group PLC
24 May 2018
United Utilities Group PLC
24 May 2018
FULL Year RESULTS FOR THE YEARED 31 MARCH 2018
Putting customers first
-- Customers benefiting from better service, greater resilience and improved efficiency
-- Delivering value through greater use of innovation and
advanced technology alongside our GBP3.8bn AMP6 capital investment
programme
-- Sharing outperformance through additional investment in
resilience increased from GBP100m to GBP250m
-- Leading customer satisfaction scores achieved
-- Supporting more than 50,000 customers in need of help through
our Priority Services scheme
Strong operational performance enables improved AMP6
guidance
-- Industry leading environmental and water quality performance scores achieved
-- Confident of delivering totex outperformance of GBP100m against our AMP6 allowance
-- Expect cumulative AMP6 ODI reward
Preparing well for AMP7 and beyond
-- Advanced in our PR19 plans informed by extensive engagement
with customers, balancing investment with affordability
-- Leading performer giving us confidence heading into AMP7 and beyond
Strong financial performance
-- Underlying operating profit of GBP645.1m (reported operating profit of GBP636.4m)
-- Dividend in line with AMP6 growth policy
-- Robust capital structure, leading pensions position and
consistently responsible gearing
Key financials
Year ended
Continuing operations 31 March 2018 31 March 2017
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Revenue GBP1,735.8m GBP1,704.0m
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Reported operating profit GBP636.4m GBP605.5m
-------------- --------------
Underlying operating profit(1) GBP645.1m GBP622.9m
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Reported profit after tax GBP354.6m GBP433.9m
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Underlying profit after tax(1) GBP304.9m GBP313.4m
-------------- --------------
Total dividend per ordinary
share (pence) 39.73p 38.87p
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Net regulatory capital spend GBP816.1m GBP803.7m
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RCV gearing(2) 61% 61%
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(1) Underlying profit measures have been provided to give a more
representative view of business performance and are defined in the
underlying profit measure tables
(2) Regulatory capital value (RCV) gearing calculated as group
net debt/United Utilities Water's shadow RCV (outturn prices)
Steve Mogford, Chief Executive Officer, said:
"We continue to put customers first. Our approach to
vulnerability and affordability is setting new benchmarks for the
industry and our sustained improvement in customer satisfaction
positions us as a leader in the sector. This year, we achieved our
best ever scores against Ofwat's qualitative Service Incentive
Mechanism (SIM), positioning us first in the industry in the final
survey of the year. Our best practice in this area has received
external recognition through several awards, many of which look
beyond the water sector.
"Our approach to innovation and Systems Thinking is radically
changing the way we operate and leading the way for the industry.
We are using advanced technology from around the world and across
different sectors to deliver better service, greater resilience and
improved efficiency. This is contributing to outperformance in the
current regulatory period which we are sharing with customers in
the form of GBP250 million of additional investment in resilience
projects.
"The significant progress we have made positions us well as we
look towards the next regulatory period and gives us confidence
that we can rise to the longer-term challenges resulting from a
growing population, affordability concerns and the impact of more
volatile weather. We will build on the trust our customers place in
us to provide an outstanding service, invest wisely and
efficiently, driving further innovation and creating value for all
our stakeholders."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622 282
Robert Lee - Head of Investor Relations +44 (0) 7500 087 704
Peter Hewer / Graeme Wilson - Tulchan Communications +44 (0) 2073 534 200
A presentation to investors and analysts starts at 9.00am on
Thursday 24 May 2018, at the Auditorium, Deutsche Bank, Winchester
House, 1 Great Winchester Street, London, EC2N 2DB.
The presentation can be accessed via a live webcast facility at
the following link:
https://edge.media-server.com/m6/p/gbgheg6d
The presentation can be accessed via a live listen only call
facility by dialling:
UK toll: +44 (0) 2071 928 016 / UK toll free: +44 (0) 800 376
6220
Passcode: 2249170
The webcast will be available on demand from Friday 25 May 2018
at the following link:
https://www.unitedutilities.com/corporate/investors/financial-news/latest-financial-news/
This results announcement and the associated presentation will
be available on the day at:
http://corporate.unitedutilities.com/investors.aspx
KEY OPERATIONAL PROGRESS
Our use of data and technology and our innovative Systems
Thinking approach is setting new benchmarks for the sector. This is
delivering continued levels of enhanced service and resilience and
sustainable improvements in efficiency.
-- Sustained improvements in customer satisfaction - achieved
our best ever scores against Ofwat's qualitative Service Incentive
Mechanism (SIM), positioning us first in the final wave and
achieving an upper quartile position for the year overall. This
performance is mirrored across other customer satisfaction metrics
including an upper quartile performance and the most improved
company for the utilities sector in the UK Customer Satisfaction
Index and the leading listed water company against the Consumer
Council for Water's customer satisfaction research. In January, we
hosted the first ever North West Affordability summit, engaging
with customers and key stakeholders with an interest in this topic
and building on our already leading position on affordability and
vulnerability.
-- Innovation through Systems Thinking - through Systems
Thinking, we have invested in the technology and infrastructure to
allow us to capture huge volumes of data from our assets and the
surrounding catchment. This allows us to focus on the interactions
of the constituents of the system on a much larger scale,
understanding the part our assets play within a catchment and the
impact of other factors such as the weather, and to monitor and
control the system centrally from our Integrated Control Centre.
This allows us to take a much more informed and proactive approach
to operations and is delivering enhanced levels of service and
resilience along with sustainable improvements in efficiency. This
radically different approach is on track to deliver GBP100 million
of totex savings in the current regulatory period.
-- Efficient delivery of investment plan - driving efficiency
into the delivery of our investment programme for the 2015-20
regulatory period through changes to our delivery model, harnessing
innovation and embracing the digital world. This has provided
customer service, operational and environmental benefits and
optimised performance under our ODIs. This significant change in
approach has delivered efficiency savings contributing to
regulatory outperformance whilst also maintaining highly effective
capital delivery as reflected in our Time: Cost: Quality index
(TCQi) score which remains high at over 90 per cent.
-- Leading performance with integrity - in July, we retained
Industry Leading Company status, as measured through the
Environment Agency's (EA) annual assessment and achieved frontier
performance for the sector with the lowest number of pollution
incidents alongside our best-in-sector level of self-reporting. Our
drinking water quality has improved and is the best it has ever
been and we are leading the industry in our approach to
resilience.
-- Delivering shareholder value through regulatory
outperformance - the low cost of debt we have already locked-in
places us in a strong position to substantially outperform the
industry allowed cost. The efficient delivery of our investment
plan and our approach to innovation and Systems Thinking also gives
us confidence in delivering totex outperformance of GBP100 million
against our AMP6 allowance.
-- Sharing outperformance - sharing net outperformance through
additional investment increased from GBP100 million to GBP250
million. This is delivering industry leading, long-term resilience
for the benefit of customers and helping to mitigate future bill
increases.
-- Strong environmental, social and governance (ESG) credentials
- we have retained a World Class rating in the Dow Jones
Sustainability Index for the tenth consecutive year, a very good
achievement in light of the ever evolving standards. In addition,
our best practice in the areas of affordability and vulnerability
has received external recognition through several awards, many of
which look beyond the water sector.
-- Preparations for AMP7 and beyond - we approach AMP7 as a
strong, high performing and responsible company in which customers
can have trust and confidence. We are on track to submit our PR19
business plan in September 2018, informed by extensive engagement
with customers regarding their needs and priorities, and this will
set out how we intend to build on our already leading position. We
are planning and preparing for the long-term challenges through our
new 25-year Water Resources Management Plan. Through this, we will
ensure that we remain resilient in the face of increasingly extreme
weather and prepare to support a growing population in the North
West.
Financial overview
The group has delivered a strong set of financial results for
the year ended 31 March 2018.
-- Revenue - was up GBP32 million, at GBP1,736 million,
reflecting our allowed regulatory revenue changes partly offset by
the accounting impact of our Water Plus JV, which completed on 1
June 2016 and other regulatory adjustments.
-- Operating profit - underlying operating profit was up GBP22
million, at GBP645 million. This reflects our allowed regulatory
revenue changes and lower total costs partly offset by an increase
in depreciation and amortisation and the accounting impact of our
Water Plus JV. Reported operating profit was GBP636 million, up
GBP31 million reflecting the movements in underlying operating
profit and reduced profits last year due to costs associated with
preparing the business for open competition in the business retail
sector and other restructuring costs.
-- Capex - total regulatory capital investment in the year,
including GBP147 million of infrastructure renewals expenditure,
was GBP816 million. As announced today, we are sharing our net
outperformance by increasing the additional investment available
over the remainder of the 2015-20 regulatory period to improve
resilience for customers from GBP100 million to GBP250 million.
This takes our five-year regulatory capex programme to cGBP3.8
billion. In addition, we expect to invest up to GBP100 million in
non-regulated projects, subject to acceptable returns. In the first
three years of the 2015-20 regulatory period we have invested GBP59
million in non-regulated projects, primarily in solar power.
-- Profit before tax - underlying profit before tax was down
GBP19 million to GBP370 million, as the increase in underlying
operating profit was more than offset by a GBP40 million increase
in the underlying net finance expense. The increase in the
underlying net finance expense is mainly due to the impact of
higher RPI inflation on our index-linked debt. Reported profit
before tax was GBP432 million, reflecting fair value movements and
other adjusting items as outlined in the underlying profit measures
table.
-- Profit after tax - underlying profit after tax was down by
GBP8 million to GBP305 million. Reported profit after tax was GBP50
million higher at GBP355 million, reflecting the adjusting items as
outlined in the underlying profit measures table.
-- Capital structure - the group has a robust capital structure
with gearing of 61 per cent as at 31 March 2018 (measured as group
net debt to 'shadow' regulatory capital value). Our shadow RCV
adjusts for actual spend and was GBP11.2 billion as at 31 March
2018. This gearing level is comfortably within our target range, of
55 per cent to 65 per cent, supporting a solid investment grade
credit rating. United Utilities Water Limited (UUW) has long-term
credit ratings of A3 from Moody's and A- from Standard &
Poor's, both on stable outlook.
-- Financing headroom - the group benefits from headroom to
cover its projected needs into 2020, enhanced by new finance raised
in the period. This headroom provides good flexibility in terms of
when and how further debt finance is raised to help refinance
maturing debt and support the delivery of our regulatory capital
investment programme.
-- Water Plus JV - during the year, our Water Plus joint venture
with Severn Trent has experienced an increase in its working
capital arising from data and billing issues following market
opening. As a consequence loans owed to the group by Water Plus
have increased by GBP17 million to GBP136 million.
-- Dividend - the board has proposed a final dividend of 26.49
pence per ordinary share (taking the total dividend for 2017/18 to
39.73 pence), an increase of 2.2 per cent, in line with our policy
of targeting an annual growth rate of at least RPI inflation
through to 2020.
Outlook
Our use of data and technology and our innovative Systems
Thinking approach is helping deliver our leading operational
performance and is supported by a robust financing position. We are
outperforming the regulatory contract for the 2015-20 regulatory
period allowing us to fund additional investment for the benefit of
customers. We have plans in place to improve yet further giving us
confidence heading into AMP7 and beyond and deliver long-term value
for customers, the environment and for shareholders.
OPERATIONAL PERFORMANCE
United Utilities aims to deliver long-term shareholder value by
providing:
-- The best service to customers;
-- At the lowest sustainable cost;
-- In a responsible manner.
Our operational performance is presented under each of these
strategic themes.
Best service to customers
Customer service - sitting at the core of everything we do, our
strong focus on customer service has helped us deliver substantial
improvements in recent years, becoming the most improved company in
the 2010-15 regulatory period with a reduction of around 75 per
cent in the overall number of customer complaints.
This year, we have seen another step change in our customer
satisfaction performance. We achieved our highest ever scores
against Ofwat's qualitative Service Incentive Mechanism (SIM)
measure, finishing first in the final survey of the year and third
for the year overall. This performance is mirrored in the number of
complaints that we receive. These have reduced by over 34 per cent
in two years and the number of repeat complaints have reduced by 63
per cent over the same period.
We have added to our already leading position on affordability
and vulnerability. We are now supporting more than 50,000 customers
in need of help through our Priority Services scheme, providing
more targeted support for customers experiencing short or long-term
personal or financial difficulties in their lives, with tailored
assistance. In January we hosted the first ever North West
Affordability summit, engaging with customers and key stakeholders
with an interest in this topic.
We have an industry leading digital capability informed by
customers with more than 750,000 customers now registered for our
online customer portal, My Account, and we have launched the
sector's first truly integrated mobile app allowing customers to
complete a variety of interactions with us using their preferred
channel.
Improving customer service will continue to be a key area of
focus, and we have identified a range of opportunities to deliver
further benefits for customers.
Leading North West service provider - we are consistently ranked
third out of ten leading organisations in the North West, through
an independent brand tracker survey which is undertaken quarterly.
This covers key attributes such as reputation, trustworthiness and
customer service. We are behind only Marks & Spencer and John
Lewis, and ahead of seven other major organisations covering
utilities, telecoms, media and banking services.
Robust water supply - our customers benefit from our robust
water supply and demand balance, along with high levels of water
supply reliability. Our overall water quality continues to be good,
and although our water quality service index has slightly
deteriorated compared with the prior year, it remains above our
historical average and we have plans in place to deliver improved
performance going forward. We have consistently delivered a
reliable water service, although we have experienced some water
no-supply incidents in the 2015-20 regulatory period. Whilst this
is disappointing, our Systems Thinking approach is helping us to
respond to these events and avoid them in future.
Reducing sewer flooding - we have continued to invest heavily in
schemes, projects and programmes of work designed to reduce the
risk of flooding of our customers' homes, including incidence based
targeting on areas more likely to experience flooding and defect
identification through CCTV sewer surveys and other innovative
technologies. Our plan for the 2015-20 regulatory period includes a
target of reducing sewer flooding incidents by over 40 per cent, in
line with customers' affordability preferences, and we are making
good progress. We have achieved our best ever five-year performance
on our repeat flooding and internal operational flooding measures.
Our wastewater network will continue to benefit from significant
investment going forward and we will continue to seek to work in
collaboration with other external lead flood authorities and
associated partners to address the widespread flooding events that
hit our region, as we aim to help mitigate changing weather
patterns likely to result from climate change.
Key performance indicators:
-- Outcome delivery incentives (ODIs) - we have 19 wholesale
financial ODIs and as was supported by customers, the risk is
skewed to the downside with only ten providing the potential to
earn a reward in the 2015-20 regulatory period.
Our performance for 2017/18 has resulted in a GBP7.0 million net
penalty. Overall, performance was again good against our wastewater
measures but we recognise that there are still areas in which we
can improve against our water measures, and we are committed to
achieving this.
We are pleased with our cumulative performance over the first
three years of the current regulatory period resulting in a net
reward of GBP2.2 million, exceeding our initial expectations.
Whilst a number of our ODI measures are susceptible to one-off
events and, on the whole, our ODI targets get tougher each year,
our strong performance to date coupled with continued targeted
investment alongside our Systems Thinking and innovative approach
to the way we operate, gives us confidence that we will achieve a
cumulative net ODI outcome over the 2015-20 regulatory period in
positive reward territory.
Our main areas of reward to date have come through our
performance in the areas of private sewers, pollution and leakage,
with our main penalty being on reliable water service and water
quality service.
-- Service incentive mechanism (SIM) - we have previously stated
our target was to move towards the upper quartile in the
medium-term, and we are particularly pleased with the progress we
have made this year, ending the year as a leading company in our
peer group.
Qualitative: Ofwat has undertaken the four surveys for 2017/18
and United Utilities has improved its score to 4.49 points,
compared with 4.42 points in 2016/17, putting us in third position
for the year out of the 18 water companies, and also third position
out of the 10 companies providing both water and wastewater
services. We ended the year with our highest ever score of 4.61 in
wave 4, which placed us in first position in this wave for the
sector overall. In particular, customers scored us highly for our
billing and wastewater services.
Quantitative: the quantitative assessment measures customer
contacts and performance is assessed on both an absolute and
relative basis. Whilst relative performance can only be assessed in
full following the end of each financial year when the other
companies publish their respective results, on absolute performance
for 2017/18, our score of 71 points represents a marked improvement
on our 2016/17 score of 77 points. For the first nine months of the
year, of the companies that share data on quantitative SIM, we were
first of the seven water and wastewater companies and fourth of the
11 water companies.
Lowest sustainable cost
Power and chemicals - our asset optimisation programme continues
to provide 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 assets to generate
renewable energy. In addition to the electricity we generate from
bioresources, we are developing other renewable energy facilities.
This is primarily in the area of solar, where we have invested
GBP53 million in the first three years of the 2015-20 regulatory
period and contributing towards our expected investment of up to
GBP100 million across the five-year period. We have also
substantially locked-in our power commodity costs across 2015-20,
providing greater cost certainty for the regulatory period.
Proactive network management - through our Systems Thinking
approach we are more proactive in the management of our assets and
networks. We have improved our predictive modelling and forecasting
through better use of sensors in our network and better analysis of
other data, such as weather forecasting, enabling us to address
more asset and network problems before they affect customers. This
reduces the level of reactive work and improves our performance and
efficiency.
Debt collection - our region suffers from high levels of income
deprivation and we offer wide-ranging schemes to help customers
struggling to pay. We now have over 100,000 customers on
affordability schemes, almost double the commitment we made at the
start of AMP6. Notwithstanding our industry-leading debt management
processes, deprivation remains the principal driver of our higher
than average bad debt and cost to serve and we expect this to
continue to be a challenging area for us.
Reflecting our ongoing focus on bad debt through initiatives
such as our affordability schemes, our household bad debt expense
has reduced to 2.3 per cent of regulated revenue from 2.5 per cent
last year.
Pensions - United Utilities has taken progressive steps to
de-risk its pension provision. The group had an IFRS retirement
benefit surplus of GBP344 million as at 31 March 2018, compared
with a surplus of GBP248 million as at 31 March 2017. Further
details of the group's pension provision are provided in the
pensions section.
From 1 April 2018, the majority of active members in the defined
benefit sections of the group's pension schemes transitioned to a
hybrid section incorporating both defined benefit and defined
contribution elements. The changes have had no impact on the
financial statements for the year ended 31 March 2018 as they have
only taken effect for pensionable service from 1 April 2018.
Capital delivery and regulatory commitments - we are strongly
focused on delivering our commitments efficiently and on time, and
have a robust commercial capital delivery framework in place.
Across the 2015-20 regulatory period, we are working with a single
engineering partner and four design and construction partners to
deliver our regulatory capital investment programme of around
GBP3.8 billion. We are involving our partners much earlier in
project definition and packaging projects by type, geography and
timing in order to deliver efficiencies. Projects are allocated on
an incentive or competitive basis leading to our partners
presenting a range of solutions, innovations and pricing.
We have accelerated our 2015-20 investment programme in order to
improve services for customers and deliver early operational and
environmental benefits. Regulatory capital investment in 2017/18,
including GBP147 million of infrastructure renewals expenditure,
was GBP816 million, including additional investment that we have
committed to, sharing our overall regulatory outperformance with
customers. This, combined with GBP1.6 billion invested in the first
two years of the regulatory period, brings our total spend to
around GBP2.4 billion of our planned GBP3.8 billion capital
investment across the 2015-20 regulatory period.
We are also driving more effective and efficient delivery of our
capital programme and applying a tougher measurement mechanism to
our Time: Cost: Quality index (TCQi) score for this regulatory
period. Despite this tougher approach, our TCQi score remains high
at 93 per cent, representing very good performance.
Key performance indicators:
-- Total expenditure (totex) performance - our totex allowance
for the 2015-2020 regulatory period represented a significant
challenge compared with the costs we originally submitted as part
of our business plan. We have not only closed the gap to our
allowance but we are now also confident of outperforming that
allowance by GBP100 million. This has been achieved through a
combination of driving efficiency into our capital programme and
also through Systems Thinking.
-- Financing outperformance - the low cost of debt we have
already locked-in places United Utilities in a strong position to
deliver significant outperformance for the 2015-20 regulatory
period compared with the industry allowed cost.
-- Household retail cost to serve - we continue to deliver
against a challenging benchmark set for AMP6. Our target is to
minimise our costs compared with our revenue allowance and we have
delivered a good performance in 2017/18, outperforming this year's
revenue allowance by around GBP9 million. By 2020, we are
forecasting a cost to serve in line with the regulatory cost
allowance and we are hopeful that our cost plans will move us
towards upper quartile performance in AMP7.
Responsible manner
Behaving responsibly is fundamental to the manner in which we
undertake our business, and the group has for many years included
corporate responsibility factors in its strategic decision making.
Our environmental, social and governance performance across a broad
front has received external recognition. Earlier in the 2017/18
financial year, United Utilities retained a World Class rating in
the Dow Jones Sustainability Index for the tenth consecutive year,
again achieving industry leading performance status in the
multi-utility/water sector. Retaining 'World Class' status for this
length of time is a significant achievement, particularly as the
assessment standards continue to increase and evolve.
Leakage - we have continued our strong operational focus on
leakage, alongside our network resilience improvements and a range
of initiatives such as active pressure management, satellite
technology and the UK's first leakage sniffer dog specially trained
to pinpoint the exact location of leaks. This has delivered good
performance against our leakage targets in 2017/18. Encouraging our
customers to save water through water efficiency programmes not
only enables them to help preserve this precious resource but can
also save money on their water bill.
Environmental performance - this is a high priority for United
Utilities and we were delighted to have retained our Industry
Leading Company status in the Environment Agency's latest
performance metrics, as described in the KPIs section below. This
is a result of our approach to managing our assets in an integrated
way and has resulted in reduced environmental incidents. We still
don't always get it right and this year we delivered the
obligations under our first enforcement undertakings, investing in
catchment schemes rather than accepting formal prosecutions.
Carbon footprint - by 2020, we aim to reduce our carbon
footprint by 50 per cent compared with a 2005/06 baseline and we
are on track to do so. This year our carbon footprint has reduced
to 391,640 tonnes of carbon dioxide equivalent, a reduction of
one-third since 2005/06, helped by a 4 per cent reduction in
electricity use. In addition, we generated more renewable energy
than ever before, at 167 gigawatt hours, up 12 per cent on the
previous year. This illustrates good progress in the company's
energy strategy to use less and generate more renewable energy.
Employees - we continue to work hard to engage all of our
employees in the transformation of the group's performance.
Employee engagement was at 79 per cent this year, higher than the
UK norm. We remain focused on maintaining high levels of employee
engagement.
We have been successful in attracting and retaining people and
have continued to expand our apprentice and graduate programmes for
2017/18. We now have a total of 55 graduates and 118 apprentices
across the business. Our investment in recruiting graduates and
apprentices is already benefiting the company with 153 employees
securing permanent roles across our business, having previously
been on either the graduate or apprentice scheme.
Over the last year, we have continued our sustained focus on
health, safety and wellbeing. In this period we retained our Gold
award status with the Royal Society for the Prevention of Accidents
and our status under the UK workplace wellbeing charter. Our
employee accident frequency rate for 2017/18 reduced to 0.101
accidents per 100,000 hours, compared with a rate of 0.196 in
2016/17. For the same period, our contractor accident frequency
rate increased slightly to 0.092 per 100,000 hours, compared with a
rate of 0.087 in 2016/17. We recognise that there is always more to
do, and health, safety and wellbeing will continue to be a
significant area of focus as we strive for continuous
improvement.
Communities - we continue to support partnerships, both
financially and in terms of employee time through volunteering,
with other organisations across the North West. Our approach to
integrated catchments helps to tackle water quality issues in
lakes, rivers and coastal waters across the North West, and our
LoveMyBeach contribution includes employees volunteering to help to
keep our region's beaches tidy. We continue to support local
communities through contributions and schemes such as providing
debt advisory services and, our work with Youth Focus North West
engages the region's young people, and our future customers, with
our business planning process.
Key performance indicators:
-- Leakage - Although leakage is included within our outcome
delivery incentives, we intend to continue publishing our leakage
position separately, with it being an important measure from a
corporate responsibility perspective. In 2017/18 we have again met
our regulatory leakage target of 463 megalitres per day.
-- Environmental performance - On the Environment Agency's
latest annual assessment, published in July 2017, we were awarded
Industry Leading Company status across the range of operational
metrics for the second year running and were one of only two
companies to achieve this status. This aligns with our medium-term
goal of being a first quartile company on a consistent basis.
-- Corporate responsibility - United Utilities has a strong
focus on operating in a responsible manner and is the only UK water
company to have a World Class rating as measured by the Dow Jones
Sustainability Index. In 2017/18, United Utilities retained its
World Class rating for the tenth consecutive year.
FINANCIAL PERFORMANCE
United Utilities delivered a strong set of financial results for
the year ended 31 March 2018.
Revenue
Revenue was up GBP32 million, at GBP1,736 million, reflecting
our allowed regulatory revenue changes, partly offset by the impact
of our Water Plus JV, which completed on 1 June 2016 and the below
regulatory adjustments.
With regard to Ofwat's revenue correction mechanism relating to
the 2014/15 financial year, we have around GBP9 million to return
to customers. As we have previously indicated, we have begun to
return this to customers with a revenue reduction of around GBP3
million in 2017/18, with further revenue reductions proposed of
around GBP3 million in both of 2018/19 and 2019/20. This approach
has been adopted to help aid a smoother bill profile.
Separately, consistent with Ofwat's annual wholesale revenue
forecasting incentive mechanism (WRFIM), revenue has also been
reduced in 2017/18 by GBP10 million as actual volumes in 2015/16
were higher than our original assumptions. We will further be
reducing revenues in 2018/19 by GBP4 million as actual volumes in
2016/17 were also higher than our original assumptions.
Operating profit
Reported operating profit increased by GBP31 million, to GBP636
million, reflecting the increase in underlying operating profit,
along with a reduction in adjusted items. Adjusted items for
2017/18 amounted to GBP9 million, GBP6 million of which related to
restructuring costs. Adjusted items in the prior year amounted to
GBP17 million, GBP10 million of which related to restructuring
costs.
Underlying operating profit at GBP645 million was GBP22 million
higher than last year. This reflects our allowed regulatory revenue
changes, partly offset by an expected increase in depreciation and
the accounting impact of our Water Plus JV. The JV completed on 1
June 2016 and, from that date, its contribution is no longer
included within operating profit and is, instead, included within
the share of profits of joint ventures line in the income
statement.
Investment income and finance expense
Reported net finance expense of GBP207 million was higher than
the GBP189 million expense in 2016/17. This GBP18 million increase
principally reflects the increased indexation charge in the year of
GBP57 million which has been partly offset by an increase in the
fair value gains on debt and derivative instruments, from a GBP24
million gain in 2016/17 to a GBP47 million gain in 2017/18.
The underlying net finance expense of GBP277 million was GBP40
million higher than last year, mainly due to the impact of higher
RPI inflation on the group's index-linked debt, particularly on the
portion of index-linked debt with a three-month lag. Interest on
non index-linked debt of GBP92 million was GBP17 million lower than
last year, due to the lower rates locked in on our interest rate
swaps and the re-couponing of a portion of our regulatory swap
portfolio. The indexation of the principal on our index-linked debt
amounted to a net charge in the income statement of GBP138 million,
compared with a net charge of GBP81 million last year. As at 31
March 2018, the group had approximately GBP3.7 billion of
index-linked debt at an average real rate of 1.3 per cent.
The higher RPI inflation charge compared with last year
contributed to the group's average underlying interest rate of 4.2
per cent being higher than the rate of 3.8 per cent for the year
ended 31 March 2017. The average underlying interest rate
represents the underlying net finance expense divided by average
debt.
The group has fixed the substantial majority of its non
index-linked debt for the 2015-20 regulatory period.
Profit before tax
Reported profit before tax was GBP432 million, GBP10 million
lower than last year due to the increase in operating profit being
more than offset by fair value movements, as outlined in the
underlying profit measures tables and the GBP22 million profit in
2016/17 on disposal of the non-household business.
Underlying profit before tax was GBP370 million, GBP19 million
lower than last year, primarily reflecting the GBP22 million
increase in underlying operating profit more than offset by the
GBP40 million increase in underlying net finance expense. This
underlying measure reflects the adjusting items, as outlined in the
operating profit section above, and other items such as fair value
movements in respect of debt and derivative instruments, as
outlined in the underlying profit measures table.
Tax
In addition to corporation tax, the group pays significant other
contributions to the public finances on its own behalf as well as
collecting and paying over further amounts for its 5,000 strong
workforce. The total payments for 2017/18 were around GBP242
million and included business rates, employment taxes,
environmental taxes and other regulatory service fees such as water
abstraction charges as well as corporation tax.
In 2017/18, we paid corporation tax of GBP36 million, which
represents an effective cash tax rate on underlying profits of 10
per cent, which is 9 per cent lower than the headline rate of
corporation tax of 19 per cent. Consistent with prior years, the
key reconciling item to the headline rate was allowable tax
deductions on capital investment. We have expressed the effective
cash tax rate in terms of underlying profits as this measure
excludes fair value movements on debt and derivative instruments
and thereby enables a medium-term cash tax rate forecast. We would
expect the average cash tax rate on underlying profits through to
the end of the current regulatory period in March 2020 to be around
12 per cent. The key risk to sustaining this rate is any unexpected
changes in tax legislation or practice and, as necessary, we would
actively engage with the relevant authorities in order to manage
this risk.
The current tax charge was GBP25 million in 2017/18, compared
with GBP54 million in the previous year; the main differences being
timing in nature with a corresponding equal and opposite adjustment
to deferred tax. There were current tax credits of GBP7 million in
2017/18 and GBP23 million in 2016/17, following agreement of prior
years' tax matters; in addition to UK tax, the prior year figure
also included the release of a provision in relation to agreed
historic overseas tax matters.
For 2017/18, the group recognised a deferred tax charge of GBP52
million, compared with a charge of GBP28 million for 2016/17. In
addition, the group recognised a deferred tax charge of GBP7
million in both 2016/17 and 2017/18 relating to prior years' tax
matters. In 2016/17, the group also recognised a deferred tax
credit of GBP58 million relating to the enacted reduction in the
headline rate of corporation tax from 18 per cent to 17 per cent
from 1 April 2020.
The total tax charge for 2017/18 was GBP78 million as compared
to a total tax charge of GBP9 million for 2016/17, the main
differences being the GBP58 million deferred tax credit relating to
changes in tax rates in 2016/17 together with the higher current
tax credit in 2016/17 in respect of prior years. For both periods,
the total underlying tax effective rate was in line with the
headline rate (currently at 19 per cent) and subject to any
legislative or tax practice changes, we would expect this to
continue for the medium-term.
Profit after tax
Reported profit after tax was GBP355 million, compared with
GBP434 million in the previous year, due to the GBP10 million
reduction in reported profit before tax and the GBP69 million
higher tax charge as 2016/17 included a deferred tax credit of
GBP58 million relating to changes in the Government's future
planned tax rate and a further tax credit of GBP16 million relating
to prior years' tax matters.
Underlying profit after tax of GBP305 million was GBP8 million
lower than last year, principally reflecting the GBP19 million
decrease in underlying profit before tax partly offset by lower
underlying tax on lower profits and the reduction in the headline
rate of corporation tax.
Earnings per share
Basic earnings per share decreased from 63.6 pence to 52.0
pence, for the same reasons that decreased profit after tax.
Underlying earnings per share decreased from 46.0 pence to 44.7
pence. This underlying measure is derived from underlying profit
after tax which decreased by GBP8 million.
Dividend per share
The board has proposed a final dividend of 26.49 pence per
ordinary share in respect of the year ended 31 March 2018. Taken
together with the interim dividend of 13.24 pence per ordinary
share, paid in February, this produces a total dividend per
ordinary share for 2017/18 of 39.73 pence. This is an increase of
2.2 per cent, compared with the dividend relating to last year, in
line with the group's dividend policy of targeting a growth rate of
at least RPI inflation each year through to 2020. The inflationary
increase of 2.2 per cent is based on the RPI element included
within the allowed regulated revenue increase for the 2017/18
financial year (i.e. the movement in RPI between November 2015 and
November 2016).
The final dividend is expected to be paid on 3 August 2018 to
shareholders on the register at the close of business on 22 June
2018. The ex-dividend date is 21 June 2018.
Our dividend policy targets a growth rate of at least RPI
inflation each year through to 2020, with further details set out
below.
-- Policy period - the dividend policy aligns with the five-year
regulatory period which runs from 1 April 2015 to 31 March
2020.
-- Policy approval process - the dividend policy was considered
and approved by the United Utilities Group Board in January 2015,
as part of a comprehensive review of the 2015-20 regulatory final
determination in the context of a detailed business planning
process, with due regard for the group's financial metrics, credit
ratings and long-term financial stability, and is reviewed at least
annually.
-- Distributable reserves - as at 31 March 2018, the company had
distributable reserves of GBP3,163 million. The total external
dividends relating to the 2017/18 financial year amounted to GBP271
million. The company distributable reserves support over 11 times
this annual dividend.
-- Financing headroom - supporting the group's cash flow, United
Utilities adopts a funding/liquidity headroom policy of having
available resources to cover the next 15-24 months of projected
cash outflows on a rolling basis.
-- Cash flows from subsidiaries - the directors consider that
the group's principal operating subsidiary, United Utilities Water
Limited, has sufficient resources to pay dividends to United
Utilities Group PLC for the duration of the current dividend policy
period to support the external payment of dividends to
shareholders.
-- Financial stability - the water industry has invested
significant capital since privatisation in 1989 to improve services
for customers and provide environmental benefits, a large part of
which is driven by legislation. Water companies have typically
raised borrowings to help fund the capital investment programme.
Part of total expenditure is additive to the regulatory capital
value, or RCV, on which water companies earn a return allowed by
the economic regulator, Ofwat. RCV gearing is useful in assessing a
company's financial stability in the UK water industry and is one
of the key credit metrics that the credit rating agencies focus on.
United Utilities has had a relatively stable RCV gearing level over
the last seven years, always comfortably within its target range of
55 per cent to 65 per cent, supporting a solid A3 credit rating for
UUW with Moody's. RCV gearing at 31 March 2018 was 61 per cent and
the movement in net debt is outlined in the cash flow section
below.
-- Dividend sustainability - in approving the policy, the board
is satisfied that across the current regulatory period, the
projected dividend is adequately covered by underlying profit after
tax. Separately, the executive directors' long-term remuneration
plan is directly linked to a measure of sustainable dividends.
Whilst specific targets are not disclosed in advance, for
commercial sensitivity reasons, there is a major focus on the
creation of strong earnings that ensure the sustainability of
dividends.
-- Viability statement - the dividend policy is underpinned by
the group's long-term viability statement (contained within the
group's annual report and financial statements). Assurance
supporting this statement is provided by the review of: the group's
key financial measures; the key credit financial metrics; the
group's liquidity position; the contingent liabilities of the
group; and the key risks of the group together with the associated
mitigating actions.
-- Annual dividend approval process - the group places
significant emphasis on strong corporate governance, and before
declaring interim and proposing final dividends, the United
Utilities Group board undertakes a comprehensive assessment of the
group's key financial metrics.
-- Policy sustainability
2015-20
the policy is considered by the board to be robust to reasonable
changes in assumptions, such as inflation, opex, capex and interest
rates;
extreme economic, regulatory, political or operational events,
which could lead to a significant deterioration in the group's
financial metrics during the policy period, may present risks to
policy sustainability;
2020-25
a dividend policy for the 2020-25 regulatory period will be
formulated after Ofwat announces the outcome of the regulatory
price review (currently expected in December 2019).
Cash flow
Net cash generated from continuing operating activities for the
year ended 31 March 2018 was GBP816 million, and therefore broadly
consistent with GBP821 million in the previous year. The group's
net capital expenditure was GBP710 million, principally in the
regulated water and wastewater investment programmes. This excludes
infrastructure renewals expenditure which is treated as an
operating cost under IFRS. Cash flow capex differs from regulatory
capex, since regulatory capex includes infrastructure renewals
expenditure and is based on capital work done in the period, rather
than actual cash spent.
Net debt including derivatives at 31 March 2018 was GBP6,868
million, compared with GBP6,579 million at 31 March 2017. This
increase reflects regulatory capital expenditure, payments of
dividends, interest and tax, the inflationary uplift on
index-linked debt and loans to joint ventures, partly offset by
operating cash flows.
Fair value of debt
The group's gross borrowings at 31 March 2018 had a carrying
value of GBP7,912 million. The fair value of these borrowings was
GBP9,052 million. This GBP1,140 million difference principally
reflects the significant fall in real interest rates, compared with
the rates at the time we raised a portion of the group's
index-linked debt. This difference has decreased from GBP1,218
million at 31 March 2017 due primarily to an increase in credit
spreads.
Debt financing and interest rate management
Gearing, measured as group net debt divided by UUW's shadow
(adjusted for actual spend) regulatory capital value, was 61 per
cent at 31 March 2018. This is the same gearing as at 31 March 2017
and remains comfortably within our target range of 55 per cent to
65 per cent.
UUW has long-term credit ratings of A3/A- and United Utilities
PLC (UU PLC) has long-term credit ratings of Baa1/BBB from Moody's
Investors Service (Moody's) and Standard & Poor's (S&P)
Ratings Services respectively. The split rating for UU PLC reflects
differing methodologies used by the credit rating agencies. Both
Moody's and S&P have the group's ratings on a stable
outlook.
The group has access to the international debt capital markets
through its EUR7 billion euro medium-term note (EMTN) programme.
The EMTN programme does not represent a funding commitment, with
funding dependent on the successful issue of the notes.
Cash and short-term deposits at 31 March 2018 amounted to GBP510
million. Over 2015-20 we have financing requirements totalling
around GBP2.5 billion to cover refinancing and incremental debt,
supporting our five-year investment programme, and we have now
raised over GBP2.2 billion of this requirement.
In April 2016, UUW signed a GBP250 million index-linked term
loan facility with the European Investment Bank (EIB) to support
the delivery of UUW's AMP6 investment programme. In October 2017
the final GBP75 million was drawn down such that as at 31 March
2018, the full GBP250 million had been drawn down. This is an
amortising facility with an average loan life of 10 years and a
final maturity of 18 years from draw down.
In December 2017, UUW's financing subsidiary, United Utilities
Water Finance PLC (UUWF), raised around GBP23 million of term
funding, via the issue of EUR26 million private placement notes,
with a 15-year maturity, off our EMTN programme. In January 2018,
UUWF raised around GBP27 million of term funding, via the issue of
EUR30 million private placement notes, with a 15-year maturity, off
our EMTN programme. In February 2018, UUWF raised around GBP68
million of term funding, via the issue of HKD739 million private
placement notes, with an 8-year maturity, off our EMTN programme.
Also in February 2018, UUWF issued GBP300 million fixed rate notes
in the public bond market, with a 7-year maturity. This was the
group's first public bond issue since 2009 and was well received by
the market with good investor participation generating an order
book in excess of GBP600 million. Notwithstanding a degree of
market volatility at the time of issuance, we were pleased to price
the bond at a very satisfactory level.
We remain the sector leader in the issuance of CPI-linked debt
having previously raised GBP165 million, in response to Ofwat's
decision to transition away from RPI inflation linkage.
In addition, since September 2017, the group has renewed GBP100
million of committed bank facilities.
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.
Long-term sterling inflation index-linked debt provides a
natural hedge to assets and earnings. At 31 March 2018,
approximately 54 per cent of the group's net debt was in
index-linked form, representing around 33 per cent of UUW's
regulatory capital value, with an average real interest rate of 1.3
per cent. 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 just under 20 years.
Recognising Ofwat's intention to transition to the use of CPIH
as part of its PR19 methodology, the group has undertaken a review
of its inflation hedging policy. This review involved a balanced
assessment across a range of factors including maintaining an
appropriate economic hedge of the RCV and associated cash flows,
the availability and costs of hedging instruments, the impact of
different hedging strategies on key financial indicators including
income statement metrics, along with a consideration of broader
sector positioning. Taking account of these factors, along with the
intention of the group's defined benefits pension schemes to
implement further de-risking by increasing their hedges of RPI
inflation with a corresponding reduction/removal of the pension
Inflation Funding Mechanism, has resulted in a revised inflation
hedging policy whereby the group intends to maintain around half of
net debt in index-linked form.
Where nominal debt is raised in a currency other than sterling
and/or with a fixed interest rate, the debt is generally swapped to
create a floating rate sterling liability for the term of the debt.
To manage exposure to medium-term interest rates, the group fixes
underlying interest costs on nominal debt out to ten years on a
reducing balance basis. Historically, this has been supplemented by
fixing substantially all remaining floating rate exposure across
the forthcoming regulatory period around the time of the price
control determination. In line with this, the group has fixed
interest costs for substantially all of its floating rate exposure
over the 2015-20 regulatory period, locking in an average annual
interest rate of around 3.2 per cent nominal (inclusive of credit
spreads).
Recognising Ofwat's intention to apply debt indexation for new
debt raised during the 2020-25 regulatory period, we will retain
the hedge to fix underlying interest costs on nominal debt out to
ten years on a reducing balance basis, but we will no longer
supplement this with the additional 'top up' hedge at the start of
each new regulatory period.
Liquidity
Short-term liquidity requirements are met from the group's
normal operating cash flow and its short-term bank deposits and
supported by committed but undrawn credit facilities. The group's
EUR7 billion EMTN programme provides further support.
Available headroom at 31 March 2018 was GBP435 million based on
cash, short-term deposits and committed bank facilities, net of
short-term debt as well as committed facilities and term debt
falling due within 12 months.
United Utilities 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. United Utilities' cash is held
in the form of short-term money market deposits with prime
commercial banks.
United Utilities 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 2018, the group had an IAS 19 net pension surplus
of GBP344 million, compared with a net pension surplus of GBP248
million at 31 March 2017. This GBP97 million increase mainly
reflects the impact of a decrease in credit spreads and the
favourable impact of updating mortality assumptions. The scheme
specific funding basis does not suffer from volatility due to
inflation and credit spread movements as it uses a fixed inflation
assumption via a blend of the inflation market hedge and the
Inflation Funding Mechanism and a prudent, fixed credit spread
assumption. Therefore, any inflation and credit spread movements
have not had a material impact on the deficit calculated on a
scheme specific funding basis or the level of deficit repair
contributions.
Further detail on pensions is provided in note 11 ('Retirement
benefit surplus') of these condensed consolidated financial
statements.
Underlying profit
The underlying profit measures in the following table represent
alternative performance measures (APMs) as defined by the European
Securities and Markets Authority (ESMA). These measures are linked
to the group's financial performance as reported under
International Financial Reporting Standards (IFRSs) as adopted by
the European Union in the group's consolidated income statement. As
such, they represent non-GAAP measures.
These APMs have been presented in order to provide a more
representative view of business performance. The group determines
adjusted items in the calculation of its underlying measures
against a framework which considers significance by reference to
profit before tax, in addition to other qualitative factors such as
whether the item is deemed to be within the normal course of
business, its assessed frequency of reoccurrence and its volatility
which is either outside the control of management and/or not
representative of current year performance.
Adjusted item Rationale
Flooding incidents Two significant flooding incidents in the year
ended 31 March 2016 caused extensive damage to
localised parts of our infrastructure, resulting
in significant levels of remedial operating expenditure
and a large claim under the group's insurance
cover. Management's view is that these were significant
and infrequent events and, as such, were not part
of the normal course of business.
------------------------------------------------------------
Non-household retail The group has incurred significant costs since
market reform the year ended 31 March 2015 relating to the non-household
retail market opening to competition in April
2017. This represents a one-off event and as such,
is not considered part of the normal course of
business.
------------------------------------------------------------
Restructuring costs The group has incurred restructuring costs in
the past in relation to a number of discrete events
which can cause volatility in the reported results.
Management adjusts internally for these costs
to provide an underlying view of performance which
it views as being more representative of the normal
course of business and more comparable period
to period.
------------------------------------------------------------
Net fair value (gains)/losses Fair value movements on debt and derivatives can
on debt and derivative be both very significant and volatile from one
instruments period to the next. These movements are determined
by macro-economic factors which are outside the
control of management and these instruments are
purely held for funding and hedging purposes (not
for trading purposes). Taking these factors into
account, management believe it is useful to adjust
for this to provide a more representative view
of performance.
------------------------------------------------------------
Interest on swaps Net fair value losses on debt and derivative instruments
and debt under fair includes interest on swaps and debt under fair
value option value option. In adjusting for the former, it
is appropriate to add back interest on swaps and
debt under fair value option to provide a view
of the group's cost of debt which is better aligned
to the return on capital it earns through revenue.
------------------------------------------------------------
Net pension interest This item can be very volatile from one period
(income)/ expense to the next and it is a direct function of the
extent to which the pension scheme is in an accounting
deficit or surplus position. Management believe
it is useful to adjust for this to provide a more
representative view of performance which is better
aligned to the return on capital it earns through
revenue.
------------------------------------------------------------
Capitalised borrowing Accounting standards allow for the capitalisation
costs of borrowing costs in the cost of qualifying assets.
Management believe it is appropriate to adjust
for these significant costs to provide a representative
cost of borrowings and current year performance
which is better aligned to the return on capital
it earns through revenue.
------------------------------------------------------------
Profit on disposal This relates to the disposal of the group's non-household
of business retail business during the year ended 31 March
2017 which represents a significant one-off event
and, as such, is not considered part of the normal
course of business.
------------------------------------------------------------
Deferred tax credit-change The deferred tax impact from changes to the corporation
in tax rate tax rate announced by the UK Government represent
both significant and volatile impacts which are
outside the control of management. Management
adjust for this to provide a more representative
view of current year performance.
------------------------------------------------------------
Agreement of prior The agreement of prior years' tax matters can
years' tax matters be significant, volatile and often related to
final settlement with tax authorities of numerous
prior year periods. Management adjust for this
to provide a more representative view of the tax
charge/credit in relation to current year performance.
------------------------------------------------------------
Tax in respect of Management adjust for the tax impacts of the above
adjustments to underlying adjusted items to provide a more representative
profit before tax view of current year performance.
------------------------------------------------------------
Operating profit Year ended Year ended
31 March 2018 31 March 2017
GBPm GBPm
Operating profit per published results 636.4 605.5
Flooding incidents (net of insurance proceeds) 1.7 1.5
Non-household retail market reform 1.0 5.8
Restructuring costs 6.0 10.1
Underlying operating profit 645.1 622.9
-------------- --------------
Net finance expense
GBPm GBPm
Finance expense (218.6) (202.7)
Investment income 12.0 13.7
Net finance expense per published results (206.6) (189.0)
-------------- --------------
Adjustments:
Net fair value (gains)/losses on debt and derivative
instruments (47.3) (24.3)
Interest on swaps and debt under fair value
option 23.5 15.4
Net pension interest (income)/expense (7.1) (10.2)
Capitalised borrowing costs (39.7) (29.2)
Underlying net finance expense (277.2) (237.3)
-------------- --------------
Profit before taxation
GBPm GBPm
Share of profits of joint ventures 2.3 3.8
Profit before taxation per published results 432.1 442.4
Adjustments:
Flooding incidents 1.7 1.5
Business retail market reform 1.0 5.8
Restructuring costs 6.0 10.1
Net fair value (gains)/losses on debt and derivative
instruments (47.3) (24.3)
Interest on swaps and debt under fair value
option 23.5 15.4
Net pension interest (income)/expense (7.1) (10.2)
Capitalised borrowing costs (39.7) (29.2)
Profit on disposal of business - (22.1)
Underlying profit before taxation 370.2 389.4
-------------- --------------
Profit after taxation
GBPm GBPm
Underlying profit before taxation 370.2 389.4
Reported tax credit/(charge) (77.5) (8.5)
Deferred tax credit - change in tax rate - (58.2)
Agreement of prior years' UK tax matters 0.4 (15.5)
Taxation in respect of adjustments to underlying
profit before taxation 11.8 6.2
Underlying profit after taxation 304.9 313.4
-------------- --------------
Earnings per share
GBPm GBPm
Profit after taxation per published results
(a) 354.6 433.9
Underlying profit after taxation (b) 304.9 313.4
Weighted average number of shares in issue,
in millions (c) 681.9m 681.9m
Earnings per share per published results, in
pence (a/c) 52.0p 63.6p
Underlying earnings per share, in pence (b/c) 44.7p 46.0p
Dividend per share 39.73p 38.87p
Underlying operating profit reconciliation
The table below provides a reconciliation between group
underlying operating profit and United Utilities Water Limited
(UUW) historical cost regulatory underlying operating profit
(non-GAAP measures) as follows:
Continuing operations
Underlying operating profit
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Group underlying operating profit 645.1 622.9
Underlying operating (profit) / loss not relating
to UUW (2.3) 1.0
UUW statutory underlying operating profit (unaudited) 642.8 623.9
Revenue recognition (2.8) 5.4
Capitalised borrowing costs 4.1 3.6
Reclassification of regulatory other income (not
included in UUW operating profit) (29.1) (30.5)
Other differences (including non-appointed business) (3.9) (5.0)
UUW regulatory underlying operating profit (unaudited) 611.1 597.4
----------- -----------
Return on Regulated Equity (RoRE)
Whilst RoRE has been evolving as a measure for the last few
years, Ofwat has helpfully clarified the definition to reduce the
risk of any material inconsistencies.
UUW's RoRE, presented on a real return basis, for both the year
ended 31 March 2018 and the cumulative position for the first three
years of AMP6 are as below:
Year ended AMP 6
31 March 2018 to date
Base return 5.5% 5.6%
Totex performance (0.5%) (0.2%)
Retail performance 0.0% 0.0%
ODI performance (0.2%) 0.0%
SIM performance 0.0% 0.0%
Financing performance 2.8% 1.7%
-------------- --------
RoRE(1) 7.7% 7.1%
-------------- --------
(1) Calculated in accordance with RAG 4.07, published in
November 2017
(2) Total RoRE for the year ended 31 March 2018 differs to the
sum of the lines above due to roundings.
PRINCIPAL RISKS AND UNCERTAINTIES
We continue to focus on creating sustainable value by delivering
a high quality customer service, at the lowest sustainable cost,
while acting in a responsible manner at every level within our
organisation. In our day-to-day operations we encounter a wide
variety of risks which can challenge the quality,
cost-effectiveness and timescales for the delivery of our aims and
ambitions. We identify and plan for mitigation of these risks under
our established risk management framework which includes:
-- An enterprise-wide approach to risk management;
-- Oversight and control of risk through a well-established
governance and reporting process;
-- A risk assessment and management process which aligns to ISO 31000:2018; and
-- Training materials, accessible policies and guidance to help
our people to identify and manage risk in a consistent manner.
Our individual business areas and functions take responsibility
for identifying, quantifying, communicating and controlling the
risks relevant to their own business activities. We also use a
forward looking approach to take into account new and emerging
areas of concern and the long-term impact of risk. The identified
risks cover a very wide range of potential events including
regulatory, legal, core operations, service and hazard risks. They
are reviewed and scored for likelihood as well as for financial and
reputational impact should the identified event occur. Initially we
use the gross position when assessing risk, i.e. we assume that any
controls over the risk are absent or have failed. We then assess
the current position of the risk including considering existing
controls and their effectiveness. This is then followed by a
targeted risk position which introduces further mitigating controls
where the current state does not fully align with objectives and/or
obligations.
Our governance and reporting process includes twice-yearly
reports to our group board on the character of the group's risk
profile, informed by the above risk identification and assessment
approach. Individual event-based risks are identified and then
categorised within ten inherent risk areas known as principal risks
(see below). We also build on this overview in the board report,
highlighting two key categories of risk: i) the most significant
group-wide business risks; and ii) wholesale operational risks.
These are represented by the 10 highest ranked risks (based on the
scores awarded for likelihood x 'full life' financial impact) for
each of the two categories plus a further five risks with
potentially very high impact severity in their current state (net
of control effectiveness). In addition, the report also identifies
risks that could create potentially significant reputational
impacts or are associated with potentially significant emerging
topics but have not already been covered by the other reported
categories.
Our approach aligns with the UK Corporate Governance Code and
includes reports to the group board for every full and half year
statutory accounting period so that the board is in a position
to:
-- Determine the nature and extent of the principal risks it is
willing to take in achieving its strategic objectives;
-- Oversee the management of those risks and provide challenge
to executive management where appropriate;
-- Express an informed opinion on the long-term viability of the company; and
-- Monitor risk management and internal control systems and review their effectiveness.
Key developments
Key developments in the last 12 months include a maturing of and
increased formalisation of our risk appetite framework. Our
framework supports our assessment of the extent of risk we are
willing to take based on obligations, stakeholders' requirements
and the company's capacity and capability to manage risk. By doing
this we aim to influence the target position for individual risks
underpinning the principal risks through improved consistency. This
approach also enables better benchmarking of individual risks
against the appetite limits and boundaries. We have also sought to
make an incremental governance improvement in our sign-off
processes for all risks and also in relation to the wholesale risk
and resilience board and the core risk team meetings which focus on
long-term resilience. Associated with this is a focus on asset
health and operational hazard risk assessment in advance of and
beyond PR19. This supports our understanding of the long-term risk
profile of our asset base and improves our capability to deliver
the most cost-effective and proportionate risk management response
as a result.
Profile features
Our risk profile currently consists of around 200 event-based
risks. By their nature, these will include all combinations of high
to low likelihood and high to low impact. Heat maps are typically
used in various managerial and group reports either as a method to
evaluate the extent of multiple risks within a certain profile or
to evaluate the effectiveness of mitigation for a single risk
relative to the initial gross position.
Political and regulatory risk and uncertainty feature
prominently within the profile, notably with the outcome of PR19
which is expected to be even tougher than previous price reviews.
The possibility of 'Renationalisation' is a key area of uncertainty
as is the opening up to competition of wholesale operations
(including the current focus on possible competition in
bioresources and water abstraction) and the potential for
competition covering domestic retail activities.
Our operations continue to be substantially UK-based, but the
potential impacts of 'Brexit' remain under review and have been
reported to the group board. In common with other UK companies, a
significant issue is the uncertainty surrounding the effects of the
Brexit deal that the UK Government ultimately delivers. Our review
has considered the availability of European funding, the price of
goods and services, exchange rate impacts, possible impacts on our
ability to collect cash were there to be an economic downturn and
the effect of any potential inflationary shift outside current
predicted parameters. We continue to keep this area under
review.
Following the launch of non-household retail competition in
April 2017, we have continued to monitor our operations within the
market to review compliance risks and ensure that we continue to
operate in a manner that complements and promotes the 'level
playing field'.
From an operational risk perspective, the dominance of the
penalty element of Ofwat's outcome delivery incentive mechanism and
the effect following changes to the Environmental Sentencing
Guidelines are key features of evolving exposure. Reputationally,
our core operations/service provision (notably water service) and
health, safety and environmental risks have the highest focus for
monitoring and reviewing control effectiveness based on the
potential impact should the risk event occur.
We continue to adapt to and plan for climate change and its
significant and permanent impacts on the water cycle, our
operations and the broader operating environment. This includes
consideration of the long-term viability of water and wastewater
services such as water abstraction, drinking water supply and
treatment capability, drainage and sewer capacity, wastewater
treatment and its discharge efficiency and effectiveness. The
recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD) support and reinforce the need to consider
climate-related risks and uncertainties. These continue to be
factored into risk management and the likely effects of future
changes are a critical consideration in our long and medium-term
risk, operational and financial planning. Our water service and
wastewater service risks summarised below also reflect current key
risks including the potential for extreme weather and climate
change.
The principal risks (combinations of event-based risks), which
have been set out below reflect the categories of risks that define
business activity or contributing factors where value can be lost
or gained and could have a material impact on the business model,
future performance, solvency or liquidity of the group. In each
case the nature and the extent of exposure is highlighted together
with the extent of management/mitigation. To ensure relevance with
the current environment, issues or areas of uncertainty are also
illustrated.
1. Political and regulatory risk - potential change in the
political and regulatory environment and/or frameworks
Principal/significant impacts could include:
-- A potential increase in costs of administration, reduced
income, margin and greater variability of returns;
-- A potential loss of confidence of equity investors and
challenging debt market conditions creating funding pressures given
the need to raise finance and refinance debt on an on-going basis;
and
-- The possibility on a potential Renationalisation that the
business is acquired below fair value.
To manage and mitigate this risk we engage in relevant
government and regulatory consultations which may affect policy and
regulation in the sectors where we operate. We also consult with
customers to understand their requirements and proactively consider
all the opportunities and threats associated with any potential
change; exploiting opportunities and mitigating risks where
appropriate. We keep customers and the public informed. We also
provide information to the government, regulators, customers and
the public as appropriate to help them to make informed
decisions.
Current key risks, issues or uncertainties include: potential
Renationalisation of the water sector; market reform including
upstream competition and, further ahead, the potential for the
introduction of domestic competition; change from using the retail
prices index to the consumer prices index for regulatory
indexation; and Brexit.
2. Compliance risk - failure to meet all legal and regulatory
obligations and responsibilities
Principal/significant impacts could include the potential to
receive penalties of up to ten per cent of relevant turnover and
ultimately revocation of our licence or the appointment of a
special administrator.
To manage and mitigate this risk we continually monitor
legislative and regulatory developments and the governance
framework utilised by the group. Risk-based training of employees
is undertaken and we participate in consultations to influence
legislative and regulatory developments. Allowance for any material
additional compliance costs in the regulated business is sought as
part of the price determination process. The group also robustly
defends litigation where appropriate and seeks to minimise its
exposure by establishing provisions and seeking recovery wherever
possible.
Current key risks, issues or uncertainties include: competition
law and regulatory compliance while preparing for and operating
within a changing competitive market; level playing field
requirements in relation to the non-household retail market;
current material litigation; higher fine levels for environmental
offences; and the introduction of material pieces of legislation
e.g. the General Data Protection Regulation.
3. and 4. Water service and wastewater service risks - A failure
to provide a secure supply of clean, safe drinking water and the
potential for negative impact on public confidence in water supply
or a failure to remove and treat wastewater
Principal/significant impacts could include:
-- The potential for public health issues associated with poor water quality;
-- The potential for supply interruptions that could affect
large populations within the region for long durations; and
-- The potential for serious pollution (including sewer
flooding) leading to disruption to the public, businesses and the
environment (wildlife, fish and natural habitats) resulting in
fines and reputational damage.
We manage and mitigate these risks through core business
processes, including centralised planning and control, quality
assurance procedures, risk assessments and rigorous
sampling/testing regimes. Optimisation of operational and
maintenance tasks together with targeted capital interventions help
to ensure services to customers are maintained. Our 25-year Water
Resources Management Plan defines our strategy to achieve a
long-term, best-value and sustainable plan for water supplies in
the North West including consideration of over 20 different climate
change scenarios including a 2degC or lower global warming scenario
(assessing systems resilience). We continue to develop innovative
solutions and invest in resilience to further support the delivery
of water and wastewater services in the long-term.
Current key risks, issues or uncertainties include: population
growth; extreme weather and climate change; meeting infrastructure
investment requirements; expected change to the abstraction
licensing regime; catchment management; raw water quality; drinking
water safety and security; critical asset failure; and drought.
5. Retail and commercial risk - Failing to provide good and fair
service to domestic customers and third party retailers
Principal/significant impacts could include:
-- The potential for significant regulatory penalties and
long-term reputational damage associated with poor customer
satisfaction; and
-- The potential for a significant increase in the bad debt
charge, reducing profitability.
To manage and mitigate this risk we have a wide range of
initiatives and activities focused on improving customer
satisfaction, including proactive incident communication,
complaints handling and use of appropriate tariffs. Bad debt risk
is managed through the adoption of best practice collection
techniques, segmentation of customers based on their credit risk
profile and the use of data sharing to better understand customers'
circumstances to determine the most appropriate collection and
support activities. Our wholesale business maintains processes,
systems, data and organisational capacity and capability to deal
fairly with market participants and the central market operator in
the Business Retail market in order to generate and collect
revenue.
Current key risks, issues or uncertainties include:
socio-economic deprivation in the North West; welfare reform and
the impact on domestic bad debt; competition in the water and
wastewater market and competitor positioning; Brexit; and
non-household retail competition and the ability to treat other
participants equally.
6. Financial risk - Potential inability to finance the business
appropriately
Principal/significant impacts could include:
-- The potential for worse credit ratings, associated funding
costs or reduced access to debt capital markets leading to lower
liquidity and adversely impacting the economic return on the
regulatory capital value (RCV); and
-- The potential for a worsening of the pension scheme funding
position leading to a requirement for the group to make additional
contributions.
To manage and mitigate this risk refinancing is long-term with
staggered maturity dates to minimise the effect of short-term
downturns. Counterparty credit exposure and settlement limits exist
to reduce any potential future impacts. These are based on a number
of factors, including the credit rating and the size of the asset
base of the individual counterparty. The group also employs hedging
strategies to manage the impact of market fluctuations for
inflation, interest rates and energy prices. Sensitivity analysis
is carried out as part of the business planning process,
influencing the various financial limits employed. Continuous
monitoring of the markets takes place including movements in credit
default swap prices and movements in equity levels.
Current key risks, issues or uncertainties include: stability of
financial institutions and the world economy; economic uncertainty;
inflation/deflation; financial market conditions, interest rates
and funding costs; and Brexit.
7. Supply chain and programme delivery risk - Potential
ineffective delivery of capital, operational and change
programmes/processes
Principal/significant impacts could include the potential
failure to meet our obligations and customer outcomes resulting in
an impact at future price reviews, negative reputational impact
with customers and regulators.
To manage and mitigate this risk supply chain management is
utilised to deliver an end-to-end contract management service,
including contract strategy, tendering and category management,
which provides a risk-based approach and relationship management
programmes for suppliers. We prioritise our investment programmes,
projects and integrated business and asset plans. We have created
better alignment and integration between our capital delivery
partners and engineering service providers including alignment with
our operating model. Our programme and project management
capabilities are well-established with strong governance and
embedded processes to support delivery, manage risks and achieve
business benefits. We utilise a time, cost and quality index (TCQi)
as a key performance indicator and enhance our performance through
a dedicated programme change office to deliver change in a
structured and consistent way.
Current key risks, issues or uncertainties include: security of
supply; delivery of solutions, technical quality and innovation;
and Brexit.
8. Resources Risk - Failing to provide appropriate resources
(human, technological or physical resource) required to support
business activity
Principal/significant impacts could include:
-- The potential inability to recruit and retain knowledge/expertise; and
-- The potential inability to respond and recover due to
ineffective non-resilient business activity.
Manage and mitigation of this risk includes developing our
people to have the right skills and knowledge, combined with
delivering effective technology to support the business to meet its
objectives. Employees are kept informed regarding business strategy
and progress through various communication channels. Training and
personal development programmes exist for all employees in addition
to talent management programmes and apprentice and graduate
schemes. We focus on change programmes and innovative ways of
working to deliver better, faster and more cost-effective
operations.
Current key risks, issues or uncertainties include: delivering
required employee engagement; personal development and talent
management; technological innovation; and asset management.
9. Security risk - Potential for malicious activity (physical or
technological) against people, assets or operations
Principal/significant impacts could include:
-- The potential for loss of data / information and the
consequent effect on service provision; and
-- The potential for catastrophic damage to UU property,
infrastructure and non-infrastructure and the consequent effect on
service provision.
To manage and mitigate this risk we utilise physical and
technological security measures and awareness training combined
with strong governance and inspection regimes which aim to protect
infrastructure, assets and operational capability. Externally, we
work closely with our industry peers, the Centre for the Protection
of National Infrastructure (CPNI), the National Cyber Security
Centre (NCSC) and Defra to shape the sector approach to security,
particularly cyber security, and to understand how we can best
deliver the appropriate levels of protection to our business.
Ongoing system and network integration improves operational
resilience and we maintain robust incident response, business
continuity and disaster recovery procedures. We also maintain
insurance cover for loss and liability and the licence of the
regulated business also contains a 'shipwreck' clause that, if
applicable, may offer a degree of recourse to Ofwat/customers in
the event of a catastrophic incident.
Current key risks, issues or uncertainties include: cybercrime;
terrorism; fraud; and ownership of Critical National Infrastructure
and National Infrastructure.
10. Health, safety and environmental risk - Potential harm to
people (employees, contractors or the public) and the
environment
Principal/significant impacts could include:
-- The potential for serious injury or loss of life in remote, extreme circumstances;
-- The potential for catastrophic damage to private, public or
commercial property / infrastructure including the consequent
effect on water and wastewater service provision; and
-- The potential for serious impact to wildlife, fish or natural
habitats resulting in significant fines and reputational
damage.
To manage and mitigate this risk we have developed a strong
health and safety culture where 'nothing we do at United Utilities
is worth getting hurt for', supported by strong governance and
management systems certified to OHSAS 18001. We actively seek to
improve health, safety and wellbeing across the group through
targeted improvements and benchmarking against our peers. Also
certified to ISO 14001, we seek to protect and improve the
environment through the responsible delivery of our services. This
includes helping to support rare species and habitats through
targeted engagement and activity and commitment to reducing our
carbon emissions by designing out waste from our operations,
generating our own energy and looking at ways to reduce our use of
raw materials. We also recognise the impact the environment can
have on our service provision with extreme weather and climate
change being integrated into our risk, planning and decision-making
processes.
Current key risks, issues or uncertainties include: impounding
reservoirs containing significant volumes of water; other critical
asset failure; process safety; excavation, tunnelling and
construction work; working with chemicals; and fluvial and coastal
flooding.
Material Litigation
The group robustly defends litigation where appropriate and
seeks to minimise its exposure by establishing provisions and
seeking recovery wherever possible. Litigation of a material nature
is regularly reported to the group board. While our directors
remain of the opinion that the likelihood of a material adverse
impact on the group's financial position is remote, based on the
facts currently known to us and the provisions in our statement of
financial position, the following two cases are worthy of note:
-- 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. There have been no material developments in
this matter over the last 12 months; and
-- In March 2010, Manchester Ship Canal Company (MSCC) issued
proceedings seeking, amongst other relief, damages alleging
trespass against United Utilities Water Limited (UUW) in respect of
UUW's discharges of water and treated effluent into the canal.
While the matter has not reached a final conclusion, the Supreme
Court has found substantively in UUW's favour on a significant
element of the claim and the High Court has upheld UUW's position
on the remainder of the proceedings. MSCC have now instigated
further heads of claim against UUW in order that they may continue
to challenge UUW's rights to discharge water and treated effluent
into the canal.
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.
This announcement contains inside information, disclosed in
accordance with the Market Abuse Regulation which came into effect
on 3 July 2016 and for UK Regulatory purposes the person
responsible for making the announcement is Simon Gardiner, Company
Secretary.
LEI 2138002IEYQAOC88ZJ59
Classification - Full Year Results
Consolidated income statement
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Revenue 1,735.8 1,704.0
------------ ------------
Employee benefit expense (note 3) (153.5) (151.9)
Other operating costs (note 4) (423.4) (435.1)
Other income 3.8 4.2
Depreciation and amortisation expense (376.8) (364.9)
Infrastructure renewals expenditure (149.5) (150.8)
------------ ------------
Total operating expenses (1,099.4) (1,098.5)
------------ ------------
Operating profit 636.4 605.5
Investment income (note 5) 12.0 13.7
Finance expense (note 6) (218.6) (202.7)
------------ ------------
Investment income and finance expense (206.6) (189.0)
Profit on disposal of business - 22.1
Share of profits of joint ventures (note 10) 2.3 3.8
Profit before tax 432.1 442.4
Current tax charge (18.7) (31.5)
Deferred tax charge (58.8) (35.2)
Deferred tax credit - change in tax rate - 58.2
------------ ------------
Tax (note 7) (77.5) (8.5)
Profit after tax 354.6 433.9
------------ ------------
All of the results shown above relate to continuing
operations.
Earnings per share (note 8)
Basic 52.0p 63.6p
Diluted 51.9p 63.5p
Dividend per ordinary share (note 9) 39.73p 38.87p
Consolidated statement of comprehensive income
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Profit after tax 354.6 433.9
Other comprehensive income
Remeasurement gains/(losses) on defined benefit
pension schemes (note 11) 50.2 (76.7)
Tax on items taken directly to equity
(note 7) (8.5) 17.3
Foreign exchange adjustments 0.2 3.7
------------
Total comprehensive income 396.5 378.2
------------ ------------
Consolidated statement of financial position
31 March 31 March
2018 2017
GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 10,790.5 10,405.5
Intangible assets 197.7 187.7
Interests in joint ventures (note 10) 75.2 75.2
Investments 7.1 9.0
Trade and other receivables 141.1 112.3
Retirement benefit surplus (note 11) 344.2 247.5
Derivative financial instruments 297.8 731.0
11,853.6 11,768.2
----------- -----------
Current assets
Inventories 16.8 22.4
Trade and other receivables 260.9 303.9
Current tax asset 24.5 7.1
Cash and short-term deposits 510.0 247.8
Derivative financial instruments 337.7 76.7
1,149.9 657.9
Total assets 13,003.5 12,426.1
----------- -----------
LIABILITIES
Non-current liabilities
Trade and other payables (642.7) (589.3)
Borrowings (note 12) (7,072.8) (7,058.4)
Deferred tax liabilities (1,098.8) (1,031.5)
Derivative financial instruments (96.8) (235.5)
----------- -----------
(8,911.1) (8,914.7)
----------- -----------
Current liabilities
Trade and other payables (275.7) (323.0)
Borrowings (note 12) (839.5) (326.1)
Provisions (22.1) (26.5)
Derivative financial instruments (4.2) (14.2)
----------- -----------
(1,141.5) (689.8)
----------- -----------
Total liabilities (10,052.6) (9,604.5)
----------- -----------
Total net assets 2,950.9 2,821.6
----------- -----------
EQUITY
Share capital 499.8 499.8
Share premium account 2.9 2.9
Cumulative exchange reserve (1.8) (2.0)
Merger reserve 329.7 329.7
Retained earnings 2,120.3 1,991.2
----------- -----------
Shareholders' equity 2,950.9 2,821.6
----------- -----------
Consolidated statement of changes in equity
Year ended 31 March 2018
Share Cumulative
Share premium Exchange Merger Retained
capital account reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2017 499.8 2.9 (2.0) 329.7 1,991.2 2,821.6
Profit after tax - - - - 354.6 354.6
Other comprehensive income/(expense)
Remeasurement gains on
defined benefit pension
schemes (note 11) - - - - 50.2 50.2
Tax on items taken directly
to equity (note 7) - - - - (8.5) (8.5)
Foreign exchange adjustments - - 0.2 - - 0.2
Total comprehensive income - - 0.2 - 396.3 396.5
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Dividends (note 9) - - - - (267.0) (267.0)
Equity-settled share-based
payments - - - - 3.2 3.2
Exercise of share options
- purchase of shares - - - - (3.4) (3.4)
-------------------------------------- --------- --------- ----------- --------- ---------- --------
At 31 March 2018 499.8 2.9 (1.8) 329.7 2,120.3 2,950.9
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Year ended 31 March 2017
Share Cumulative
Share Premium Exchange Merger Retained
capital Account reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 499.8 2.9 (5.7) 329.7 1,878.8 2,705.5
Profit after tax - - - - 433.9 433.9
Other comprehensive income/(expense)
Remeasurement losses
on defined benefit pension
schemes (note 11) - - - - (76.7) (76.7)
Tax on items taken directly
to equity (note 7) - - - - 17.3 17.3
Foreign exchange adjustments - - 3.7 - - 3.7
Total comprehensive income - - 3.7 - 374.5 378.2
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Dividends (note 9) - - - - (263.1) (263.1)
Equity-settled share-based
payments - - - - 3.4 3.4
Exercise of share options
- purchase of shares - - - - (2.4) (2.4)
-------------------------------------- --------- --------- ----------- --------- ---------- --------
At 31 March 2017 499.8 2.9 (2.0) 329.7 1,991.2 2,821.6
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Consolidated statement of cash flows
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Operating activities
Cash generated from operations (note 14) 989.8 1,018.1
Interest paid (144.6) (161.0)
Interest received and similar income 5.9 4.9
Tax paid (35.5) (42.4)
Tax received - 1.2
Net cash generated from operating activities 815.6 820.8
------------
Investing activities
Purchase of property, plant and equipment (698.6) (672.4)
Purchase of intangible assets (36.1) (52.4)
Proceeds from sale of property, plant
and equipment 1.1 4.1
Grants and contributions received 23.7 29.0
Loans to joint ventures (26.5) (109.0)
Investment in joint ventures - (13.5)
Proceeds from disposal of business 8.9 3.3
Dividends received from joint ventures 3.3 5.4
Proceeds from investments 1.0 0.9
Net cash used in investing activities (723.2) (804.6)
Financing activities
Proceeds from borrowings 801.0 736.2
Repayment of borrowings (345.9) (448.7)
Dividends paid to equity holders of the
company (note 9) (267.0) (263.1)
Exercise of share options - purchase of
shares (3.4) (2.4)
Net cash generated from financing activities 184.7 22.0
------------ ------------
Net increase in cash and cash equivalents 277.1 38.2
Cash and cash equivalents at beginning
of the year 220.3 182.1
------------ ------------
Cash and cash equivalents at end of the
year 497.4 220.3
------------ ------------
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year
ended 31 March 2018 have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Conduct
Authority.
The accounting policies, presentation and methods of computation
are consistent with those applied in the audited financial
statements of United Utilities Group PLC for the year ended 31
March 2017 and are prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union (EU).
The condensed consolidated financial statements do not include
all of the information and disclosures required for full annual
financial statements and do not comprise statutory accounts within
the meaning of section 434 of the Companies Act 2006, but are
derived from the audited financial statements of United Utilities
Group PLC for the year ended 31 March 2018, for which the auditors
have given an unqualified opinion.
The comparative figures for the year ended 31 March 2017 do not
comprise the group's statutory accounts for that financial year.
Those accounts have been reported upon by the group's 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 for a period of at least 12 months from the date
of approval of the condensed consolidated financial statements and
have therefore assessed that the going concern basis of accounting
is appropriate in preparing the condensed financial statements and
that there are no material uncertainties to disclose. This
conclusion is based upon a review of the resources available to the
group, taking account of the group's financial projections together
with available cash and committed borrowing facilities as well as
consideration of the group's capital adequacy and any material
uncertainties. In reaching this conclusion, the board has
considered the magnitude of potential impacts resulting from
uncertain future events or changes in conditions, the likelihood of
their occurrence and the likely effectiveness of mitigating actions
that the directors would consider undertaking.
2. Segmental reporting
The board of directors of United Utilities Group PLC (the board)
is provided with information on a single segment basis for the
purposes of assessing performance and allocating resources. The
group's performance is measured against financial and operational
key performance indicators which align with our three strategic
themes to deliver the best service to customers, at the lowest
sustainable cost, in a responsible manner. The board reviews
revenue, operating profit, and gearing, along with operational
drivers, at a consolidated level. In light of this, the group has a
single segment for financial reporting purposes and therefore no
further detailed segmental information is provided in this
note.
3. Employee benefits expense
Included within employee benefits expense were GBP6.0 million
(31 March 2017: GBP10.1 million) of restructuring costs.
Employee benefits expense is stated net of GBPnil (31 March
2017: GBP4.0 million) costs recharged to Water Plus at GBPnil
margin under transitional service agreements.
4. Other operating costs
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Hired and contracted services 97.7 101.5
Property rates 90.5 91.6
Power 70.4 68.7
Materials 67.3 67.7
Regulatory fees 29.7 28.6
Charge for bad and doubtful receivables 20.8 29.9
Cost of properties disposed 9.8 8.6
Loss on disposal of property,
plant and equipment 6.8 3.3
Legal and professional expenses 5.8 6.5
Operating leases payable 4.2 4.4
Third party wholesale charges - 3.0
Impairment of property, plant
and equipment - 0.2
Compensation from insurers (3.6) (12.3)
Amortisation of deferred grants
and contributions (6.4) (6.7)
Other expenses 30.4 40.1
423.4 435.1
------------- -------------
As a result of two significant flooding incidents caused by
Storms Desmond and Eva in December 2015, there were GBP5.3 million
(31 March 2017: GBP13.8 million) of expenses incurred, comprising
GBP2.9 million (31 March 2017: GBP11.1 million) of operating costs,
GBP2.4 million (31 March 2017: GBP2.5 million) of infrastructure
renewals expenditure, and a GBPnil (31 March 2017: GBP0.2 million)
impairment of property, plant and equipment. Insurance compensation
of GBP3.6 million (31 March 2017: GBP12.3 million) relating to the
flooding incidents has been recognised as part of a final
settlement of the insurance claim. The group does not expect there
to be any further costs or insurance receipts in respect of the
flooding incidents.
In addition, there were GBP1.0 million (31 March 2017: GBP5.8
million) of market reform restructuring costs relating to the
non-household retail market opening to competition in April
2017.
Total other operating costs are stated net of GBP1.4 million (31
March 2017: GBP14.5 million) of costs recharged to Water Plus at
nil margin under transitional service agreements.
5. Investment income
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Interest receivable 4.9 3.5
Net pension interest income (note
11) 7.1 10.2
12.0 13.7
------------- -------------
6. Finance expense
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Interest payable 265.9 227.0
Net fair value gains on debt and derivative
instruments (47.3) (24.3)
------------- -------------
218.6 202.7
------------- -------------
Interest payable is stated net of GBP39.7 million (31 March
2017: GBP29.2 million) borrowing costs capitalised in the cost of
qualifying assets within property, plant and equipment and
intangible assets during the year. Interest payable includes a
GBP137.8 million (31 March 2017: GBP80.7 million), non-cash
inflation uplift expense repayable on maturity in relation to the
group's index-linked debt.
Net fair value gains on debt and derivative instruments includes
GBP23.5 million income (31 March 2017:
GBP15.4 million) due to net interest on swaps and debt under
fair value option.
7. Tax
During the year ended 31 March 2018 there was a current tax
credit of GBP6.7 million (31 March 2017: GBP22.5 million) and a
deferred tax charge of GBP7.1 million (31 March 2017: GBP7.0
million) relating to agreed matters in relation to prior years; the
prior year figure includes the release of a provision in relation
to agreed historic overseas tax matters. During the prior year
there was also a deferred tax credit of GBP58.2 million reflecting
the substantive enactment of the reduction in the headline rate of
corporation tax to 17 per cent from 1 April 2020.
After adjusting for the above tax credits, the total effective
tax charge for the current and prior years was in line with the
headline rate of corporation tax, currently 19 per cent (31 March
2017: 20 per cent). The split of the total tax charge between
current and deferred tax relates to ongoing timing differences in
relation to tax deductions on pension contributions, capital
investment, and unrealised gains and losses on treasury
derivatives.
The tax adjustments taken to equity primarily relate to
remeasurement movements on the group's defined benefit pension
schemes.
8. Earnings per share
Basic and diluted earnings per share are calculated by dividing
profit after tax by the weighted average number of shares in issue
during the year. The weighted average number of shares in issue as
at 31 March 2018 for the purpose of the basic earnings per share
was 681.9 million (31 March 2017: 681.9 million) and for the
diluted earnings per share was 683.1 million (31 March 2017: 683.0
million).
9. Dividends
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Dividends relating to the year
comprise:
Interim dividend 90.3 88.3
Final dividend 180.6 176.8
----------- ------------
270.9 265.1
----------- ------------
Dividends deducted from shareholders' equity
comprise:
Interim dividend 90.3 88.3
Final dividend 176.7 174.8
----------- ------------
267.0 263.1
----------- ------------
The proposed final dividends for the years ended 31 March 2018
and 31 March 2017 were subject to approval by equity holders of
United Utilities Group PLC as at the reporting dates, and therefore
have not been included as liabilities in the consolidated financial
statements as at 31 March 2018 and 31 March 2017 respectively.
At March 2017, the proposed final dividend was GBP176.8 million
although the final dividend amount actually paid was GBP176.7
million. This difference is due to a higher than anticipated number
of shares purchased cum dividend to satisfy the dividend
reinvestment plan. Dividends in relation to these shares are
waived.
The final dividend of 26.49 pence per ordinary share (2017:
25.92 pence per ordinary share) is expected to be paid on 3 August
2018 to shareholders on the register at the close of business on 22
June 2018. The ex-dividend date for the final dividend is 21 June
2018.
The interim dividend of 13.24 pence per ordinary share (2017:
12.95 pence per ordinary share) was paid on 1 February 2018 to
shareholders on the register at the close of business on 22
December 2017.
10. Joint ventures
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
At the start of the year 75.2 35.1
Additions - 39.1
Share of profits of joint ventures 2.3 3.8
Dividends received from joint
ventures (3.3) (5.4)
Currency translation differences 1.0 2.6
----------- ------------
At the end of the year 75.2 75.2
----------- ------------
The group's interests in joint ventures mainly comprise its
interests in Water Plus Group Limited (Water Plus) and AS Tallinna
Vesi (Tallinn Water). Water Plus is jointly owned and controlled by
the group and Severn Trent PLC under a joint venture agreement.
Joint management of Tallinn Water is based on a shareholders'
agreement.
Tallinn Water has disclosed a new contingent liability of EUR
26.5 million in its latest financial statements relating to
possible third-party claims. If this contingent liability
materialises in the future this would impact the group's share of
profits of the joint venture and the joint venture's carrying value
under the equity method of accounting.
Details of transactions between the group and its joint ventures
are disclosed in note 17.
11. Retirement benefit surplus
The main financial assumptions used by the company's actuary to
calculate the defined benefit surplus of the United Utilities
Pension Scheme (UUPS) and the United Utilities PLC Group of the
Electricity Supply Pension Scheme (ESPS) were as follows:
Year ended Year ended
31 March 31 March
2018 2017
%pa %pa
Discount rate 2.60 2.55
Pensionable salary growth and pension
increases 3.35 3.40
Price inflation - RPI 3.35 3.40
Price inflation - CPI 1.95 -
At both 31 March 2018 and 31 March 2017, mortality in retirement
is assumed to be in line with the Continuous Mortality
Investigation's (CMI) S2PA year of birth tables, with scaling
factor of 108 per cent for males and 102 per cent for females,
reflecting actual mortality experience. At 31 March 2018, mortality
in retirement is based on CMI 2016 (31 March 2017: CMI 2015)
long-term improvement factors, with a long-term annual rate of
improvement of 1.75 per cent (31 March 2017: 1.75 per cent).
The net pension expense before tax in the income statement in
respect of the defined benefit schemes is summarised as
follows:
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Current service cost 27.3 19.7
Curtailments/settlements 2.3 3.1
Administrative expenses 2.6 2.7
Pension expense charged to operating profit 32.2 25.5
Net pension interest credited to investment
income (note 5) (7.1) (10.2)
----------- -----------
Net pension expense charged before tax 25.1 15.3
----------- -----------
The reconciliation of the opening and closing net pension
surplus included in the statement of financial position is as
follows:
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
At the start of the year 247.5 275.2
Expense recognised in the income
statement (25.1) (15.3)
Contributions paid 71.6 64.3
Remeasurement gains/(losses) gross
of tax 50.2 (76.7)
----------- -----------
At the end of the year 344.2 247.5
----------- -----------
The closing surplus at each reporting date is analysed as
follows:
31 March 31 March
2018 2017
GBPm GBPm
Present value of defined benefit
obligations (3,498.7) (3,615.5)
Fair value of schemes' assets 3,842.9 3,863.0
---------- ----------
Net retirement benefit surplus 344.2 247.5
---------- ----------
In the year ended 31 March 2018 the discount rate has increased
by 0.05 per cent, which includes a 0.05 per cent decrease in credit
spreads and a 0.1 per cent increase in swap yields over the year.
The GBP50.2 million remeasurement gain has largely resulted from
the impact of the decrease in credit spreads during the year,
partially offset by the reduction in gilt-swap spreads, growth
asset gains, and the favourable impact of changes in mortality
during the year. Further details on the approach to managing
pension scheme risk are set out in the audited consolidated
financial statements of United Utilities Group PLC for the year
ended 31 March 2018.
Member data used in arriving at the liability figure included
within the overall IAS 19 surplus has been based on the finalised
actuarial valuation as at 31 March 2016 for the group's UUPS and
ESPS schemes.
12. Borrowings
New borrowings raised during the year ended 31 March 2018 were
as follows:
-- On 21 July 2017 the group drew down GBP100.0 million and on 2
October 2017 the group drew down the remaining GBP75.0 million
against its GBP250.0 million term loan facility signed in April
2016 with the European Investment Bank. These floating rate loans
are structured on an amortising basis with final repayments due in
July and October 2035 respectively.
-- On 4 October 2017 the group issued HKD 830.0 million fixed
interest rate notes due October 2027.
-- On 5 October 2017 the group issued GBP32.0 million CPI
index-linked notes due October 2048 and GBP33.0 million CPI
index-linked notes due October 2057. The issue of these notes is
connected to the partial close out of GBP50.0 million RPI
index-linked notes due April 2043 with a nominal value of GBP30.0
million (carrying value GBP41.3 million) at a fair value of GBP64.4
million. The purchase of the RPI index-linked notes resulted in a
GBP23.1 million fair value loss.
-- On 6 October 2017 the group issued EUR 28.0 million fixed
interest rate notes due October 2032.
-- On 6 December 2017 the group issued EUR 26.0 million fixed
interest rate notes due December 2032.
-- On 23 January 2018 the group issued EUR 30.0 million fixed
interest rate notes due January 2033.
-- On 14 February 2018 the group issued GBP300.0 million fixed
interest rate notes due February 2025.
-- On 23 February 2018 the group issued HKD 739.0 million fixed
interest rate notes due February 2026.
The notes were issued through private placement under the Euro
medium-term note programme.
13. Fair values of financial instruments
The fair values of financial instruments are shown in the table
below.
31 March 31 March
2018 2017
Fair Carrying Fair Carrying
value value value value
GBPm GBPm GBPm GBPm
Available for sale financial assets
Investments 7.1 7.1 9.0 9.0
Financial assets at fair value
through profit or loss
Derivative financial assets - fair
value hedge 455.7 455.7 591.1 591.1
Derivative financial assets - held
for trading 179.8 179.8 216.6 216.6
Financial liabilities at fair value
through profit or loss
Derivative financial liabilities
- fair value hedge (24.2) (24.2) - -
Derivative financial liabilities
- held for trading (76.8) (76.8) (249.7) (249.7)
Financial liabilities designated
as fair value through profit or
loss (347.7) (347.7) (375.5) (375.5)
Financial instruments for which
fair value does not approximate
carrying value
Financial liabilities in fair value
hedge relationships (2,905.9) (2,895.3) (2,544.6) (2,522.4)
Other financial liabilities at
amortised cost (5,798.4) (4,669.3) (5,682.8) (4,486.6)
---------- ---------- ---------- ----------
(8,510.4) (7,370.7) (8,035.9) (6,817.5)
---------- ---------- ---------- ----------
A decrease in underlying interest rates on index-linked debt
during the year is the principal reason for the reduction in the
difference between the fair value and carrying value of the group's
borrowings.
The group has calculated fair values using quoted prices where
an active market exists, which has resulted in 'level 1' fair value
liability measurements under the IFRS 13 'Fair value measurement'
hierarchy of GBP2,192.4 million (31 March 2017: GBP1,766.1 million)
for financial liabilities in fair value hedge relationships and
GBP2,425.6 million (31 March 2017: GBP937.9 million) for other
financial liabilities at amortised cost.
The GBP1,914.0 million increase (31 March 2017: GBP755.4 million
reduction) in 'level 1' fair value liability measurements is
largely due to an increase in the number of observable quoted bond
prices in active markets at 31 March 2018. In the absence of an
appropriate quoted price, the group has applied discounted cash
flow valuation models utilising market available data which are
classified as 'level 2' valuations. More information in relation to
the valuation techniques used by the group and the IFRS 13
hierarchy can be found in the audited financial statements of
United Utilities Group PLC for the year ended 31 March 2018.
14. Cash generated from operations
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
Operating profit 636.4 605.5
Adjustments for:
Depreciation of property, plant and
equipment 348.4 336.2
Amortisation of intangible assets 28.4 28.7
Impairment of property, plant and equipment - 0.2
Loss on disposal of property, plant
and equipment 6.8 3.3
Loss on disposal of intangible assets - 0.5
Amortisation of deferred grants and
contributions (6.4) (6.7)
Equity-settled share-based payments
charge 3.2 3.4
Other non-cash movements (3.3) (3.0)
Changes in working capital:
Decrease in inventories 5.6 6.9
Decrease in trade and other receivables 27.5 71.1
Decrease in trade and other payables (13.0) (0.6)
(Decrease)/increase in provisions (4.4) 11.4
Pension contributions paid less pension
expense charged to operating profit (39.4) (38.8)
---------- ----------
Cash generated from operations 989.8 1,018.1
---------- ----------
15. Net debt
Year ended Year ended
31 March 31 March
2018 2017
GBPm GBPm
At the start of the year 6,578.7 6,260.5
Net capital expenditure 701.0 691.7
Dividends (note 9) 267.0 263.1
Interest 138.7 156.1
Inflation uplift on index-linked
debt (note 6) 137.8 80.7
Tax 35.5 41.2
Loans to joint ventures 26.5 109.0
Other (0.7) 4.4
Fair value movements (26.9) (9.9)
Cash generated from operations
(note 14) (989.8) (1,018.1)
----------- -----------
At the end of the year 6,867.8 6,578.7
----------- -----------
Net debt comprises borrowings, net of cash and short-term
deposits and derivatives. As such, movements in net debt during the
year reflected in the above reconciliation are impacted by net cash
generated from financing activities as disclosed in the
consolidated statement of cash flows.
Fair value movements includes net fair value gains on debt and
derivative instruments of GBP47.3 million (31 March 2017: GBP24.3
million net fair value gains) less net receipts on swaps and debt
designated at fair value of GBP20.4 million (31 March 2017: GBP14.4
million).
Notional net debt totals GBP6,830.2 million as at 31 March 2018
(31 March 2017: GBP6,385.2 million). Notional net debt is
calculated as the principal amount of debt to be repaid at the
31(st) March 2018 net of interest related mark-to-market
adjustments.
16. Commitments and contingent liabilities
At 31 March 2018 there were commitments for future capital
expenditure contracted but not provided for of GBP432.9 million (31
March 2017: GBP336.9 million).
The group has determined that the possibility of any outflow in
respect of performance guarantees issued is remote and, as such, no
contingent liabilities are disclosed (31 March 2017: none).
17. Related party transactions
The related party transactions with the group's joint ventures
during the period and amounts outstanding at the period end date
were as follows:
Year ended Year Ended
31 March 31 March
2018 2017
GBPm GBPm
Sales of services 496.3 404.3
Purchases of goods and services 0.7 0.7
Costs recharged at nil margin under transitional
service agreements 1.4 18.5
Interest income and fees recognised on loans
to related parties 3.4 2.6
Amounts owed by related parties 179.7 163.5
Amounts owed to related parties 1.4 12.1
Sales of services to related parties during the year mainly
represent non-household wholesale charges and were on the group's
normal trading terms.
At 31 March 2018 amounts owed by joint ventures, as recorded
within trade and other receivables in the statement of financial
position, were GBP179.7 million (31 March 2017: GBP163.5 million),
comprising GBP42.5 million (2017: GBP41.5 million) of trade
balances, which are unsecured and will be settled in accordance
with normal credit terms, and GBP137.2 million (2017: GBP122.0
million) relating to loans. Included within these loans receivable
were the following amounts owed by Water Plus:
-- GBP100.0 million outstanding on a GBP100.0 million revolving
credit facility provided by United Utilities Water Limited, which
is guaranteed by United Utilities PLC, with a maturity date of 30
September 2019, bearing a floating interest rate of LIBOR plus a
credit margin;
-- GBP9.3 million receivable being the fair value of amounts
owed in relation to a GBP12.5 million unsecured loan note held by
United Utilities PLC, with a maturity date of 28 March 2027. This
is an interest-free shareholder loan with a total amount
outstanding at 31 March 2018 of GBP12.5 million, comprising the
GBP9.3 million receivable held at fair value, and GBP3.2 million
recorded as an equity contribution to Water Plus recognised within
interests in joint ventures; and
-- GBP26.5 million outstanding on a GBP32.5 million revolving
credit facility provided by United Utilities PLC, with a maturity
date of 30 September 2019, bearing a floating interest rate of
LIBOR plus a credit margin.
A further GBP1.4 million of non-current receivables (31 March
2017: GBP3.3 million) was owed by other related parties at 31 March
2018.
No expense or allowance has been recognised for bad and doubtful
receivables in respect of the amounts owed by related parties (31
March 2017: GBPnil).
During the year, United Utilities PLC provided guarantees in
support of Water Plus in respect of certain amounts owed to
wholesalers. The aggregate limit of these guarantees was GBP42.5
million (31 March 2017: GBP42.5 million), of which GBP24.0 million
(31 March 2017: GBP24.0 million), related to guarantees to United
Utilities Water Limited.
At 31 March 2018, amounts owed to joint ventures were GBP1.4
million (31 March 2017: GBP12.1 million). The amounts outstanding
are unsecured and will be settled in accordance with normal credit
terms (31 March 2017: same).
18. 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 2018.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The responsibility statement below has been prepared in
connection with the group's full annual report for the year ended
31 March 2018. Certain parts thereof are not included within this
announcement.
Responsibilities Statement
We confirm that to the best of our knowledge:
-- the financial statements have been prepared in accordance
with IFRS 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 strategic report includes a fair review of the
development and performance of the business and the position of the
issuer and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
We consider the annual report, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the group's position and performance,
business model and strategy.
The directors of United Utilities Group PLC at the date of this
announcement are listed below:
Dr John McAdam
Steve Mogford
Stephen A Carter
Mark Clare
Steve Fraser
Alison Goligher
Russ Houlden
Brian May
Paulette Rowe
Sara Weller
This responsibility statement was approved by the board and
signed on its behalf by:
Steve Mogford Russ Houlden
23 May 2018 23 May 2018
Chief Executive Officer Chief Financial Officer
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SELFADFASESI
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May 24, 2018 02:00 ET (06:00 GMT)
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