TIDMUU.
RNS Number : 6888N
United Utilities Group PLC
22 May 2020
United Utilities Group PLC
22 May 2020
FULL Year RESULTS FOR THE YEARED 31 MARCH 2020
Key financials
Year ended
31 March 2020 31 March 2019
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Revenue GBP1,859.3m GBP1,818.5m
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Reported operating profit GBP630.3m GBP634.9m
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Underlying operating profit(1) GBP743.9m GBP684.8m
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Reported profit after tax GBP106.8m GBP363.4m
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Underlying profit after tax(1,2) GBP429.6m GBP407.9m
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Total dividend per ordinary
share (pence) 42.60p 41.28p
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Net regulatory capital spend GBP722.4m GBP821.0m
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RCV gearing(4) 62% 61%
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Supporting customers and protecting our colleagues through the
COVID-19 outbreak
-- Relentless focus on delivering reliable water and waste services during the pandemic
-- Financial support schemes helping 120,000 customers; GBP3.5m made available immediately
-- Increasing the number of customers eligible for social tariff support
-- Robust business continuity plans to protect employees - 60% working from home
-- No employees furloughed; 80% designated as key workers
Strong financial position to manage the impact of COVID-19
-- Reported profit after tax of GBP107m impacted by adjusted items of GBP323m(1)
-- Underlying(1,2) profit after tax of GBP430m up 5% on prior year
-- GBP56m of costs associated with COVID-19 treated as adjusted items(1)
-- Around GBP1.2bn of available liquidity(3)
-- RCV gearing(4) of 62% supports A3 stable credit rating with Moody's
-- Underlying results for 2019/20 and robust liquidity, support
paying final dividend in line with AMP6 policy
AMP6 operational transformation has improved customer service
and delivered shareholder value
-- Unique Systems Thinking approach is a competitive advantage -
and delivers better service for customers
-- Upper quartile customer satisfaction performance achieving SIM outperformance in AMP6
-- Operational excellence has delivered net wholesale ODI outperformance of GBP44m
-- Totex outperformance of around GBP100m delivered against our AMP6 scope
-- Well prepared for AMP7 - GBP100m of GBP350m outperformance
reinvestment to achieve a flying start
Long-term commitment to ESG benefiting our stakeholders
-- 10% real reduction in average household bills since 2010, further 7% reduction in 2020/21
-- GBP71m AMP7 voluntary funding to provide financial assistance
to customers struggling to pay their bills
-- Six pledges (5) to mitigate climate change
-- Rated World Class on Dow Jones Sustainability Index for 13 consecutive years
(1) Underlying profit measures are defined in the underlying
profit measures tables
(2) Approach used to derive underlying profit after tax has been
changed to exclude the impact of deferred tax to better reflect the
regulatory revenue allowances, with prior year numbers restated for
comparability
(3) Covering GBP0.7bn of debt that falls due for repayment
across the next 12 months
(4) Regulatory capital value (RCV) gearing calculated as group
net debt/United Utilities Water's shadow RCV (outturn prices)
(5) Further detail on six climate change mitigation pledges
included in operational performance section
Steve Mogford, Chief Executive Officer, said:
"The COVID-19 pandemic is an unprecedented challenge for our
country. At United Utilities, we have focused relentlessly on
supporting customers and colleagues through these difficult times.
We offer the sector's widest range of assistance schemes to help
those struggling to pay their bills and have increased the number
of customers eligible for reduced tariffs. We have also made GBP3.5
million available immediately to those most in need, with GBP71
million committed to help customers over the next five years.
"None of this would be possible without the incredible team at
United Utilities. I want to pay tribute to the hard work and
dedication of my colleagues through this challenging period,
including the many key workers who have continued to carry out
essential repairs and maintenance in our communities. We will focus
on the safety of our people and support for our customers over any
short term impact on our financial and operational targets.
"We can reflect on our performance improvements across the last
five year price review period with pride. We have shared GBP350
million of our outperformance through additional investment,
providing better service to customers and enhancing the
environment. We have committed company funding to supporting
customers in financial difficulty and to our pension schemes,
achieving low dependency and mitigating risk for employees past and
present, and we have delivered financial performance that supports
the payment of the final dividend in August 2020, in line with our
AMP6 commitment.
"The economic implications of COVID-19 will provide a
challenging backdrop to the AMP7 regulatory period. United
Utilities will continue to prioritise the implementation of its
delivery plans, albeit reviewing and adapting these plans as
necessary, and we fully intend to play our part in the recovery of
the North West economy. It is, however, too early to predict the
full impact of COVID-19 on inflation, the economy more generally
and on our business, and we will review our dividend policy for
AMP7 as a clearer picture of the post COVID-19 economic environment
emerges."
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
Graeme Wilson - Tulchan Communications +44 (0) 2073 534 200
We will be hosting a webcast presentation at 9.00am on Friday 22
May 2020. The webcast can be accessed via the following link:
https://www.investis-live.com/united-utilities/5eb022fa7b676e1e00c92444/ytgd
The presentation can also be accessed via a live listen only
call facility by dialling:
UK toll: +44 (0)20 3936 2999
Passcode: 370591
The results presentation slides will be available from 8.30am on
Friday 22 May 2020 at the following link:
https://www.unitedutilities.com/corporate/investors/Reports-and-presentations/full-and-half-year-results/
The webcast will be available on demand at the following link:
https://www.unitedutilities.com/corporate/investors/Reports-and-presentations/full-and-half-year-results/
OPERATIONAL OVERVIEW
Over the 2015-20 period we have delivered significant and
sustainable improvements in operational performance that have seen
us cement our position as a leading company in the sector.
Fundamental to these improvements has been our innovative Systems
Thinking approach which provides better service to customers,
greater efficiency and underpins our ability to continue to provide
services critical for public health during the current COVID-19
crisis.
-- COVID-19: We have responded to the COVID-19 pandemic by
focusing on the essential services we provide, with our primary
concern being the safety of our people and those they work
alongside. Many of our employees are designated as key workers and
it is important that during this crisis customers know they can
rely on us to continue to supply their drinking water and take away
their wastewater. Where customers have found it difficult to pay
their bills we have increased the extensive financial assistance
available, for instance by increasing the number eligible for
social tariff support, alongside encouraging vulnerable customers
to sign up to our Priority Services scheme. For our employees, we
have put safeguarding measures in place, distributed additional
personal protective clothing and issued key worker cards to
frontline employees to explain their presence in communities. We
have not furloughed any employees and recognising that some may
face challenging financial issues within their own families as a
result of changing circumstances, we created a Staff Outreach
Scheme to provide one-off grants through a confidential application
process. To assist our suppliers and contractors we have
accelerated payment times to seven days. To safeguard communities,
we injected GBP3.5 million into the United Utilities Trust Fund and
took the difficult decision to close our recreational car parks,
whilst keeping pathways open for local walking and exercise.
Recognising the difficulty being experienced by many customers in
our region, all members of the board volunteered to a 20 per cent
reduction in their salary/fees for three months, with the value
paid towards local charitable causes. This money will be shared
with organisations supporting those in the front line helping
communities cope with COVID-19.
-- Strong environmental, social and governance (ESG)
credentials: We have a strong track record of delivering against
ESG factors having achieved our World Class rating in the Dow Jones
Sustainability Index for thirteen consecutive years, and performing
well against a range of other ESG indices. We met our 2020 carbon
emissions target early having reduced our carbon footprint by 73
per cent since 2005/06 and have committed to six pledges to
mitigate climate change including eliminating our emissions by
2050. Over AMP6, we have invested over GBP35 million in local
communities, addressing issues that matter to them.
-- Sustained improvements in customer satisfaction: We continue
to build on the outperformance delivered against Ofwat's Service
Incentive Mechanism (SIM) in the first four years of AMP6. In
2019/20, Ofwat has been piloting its new customer service metric,
C-MeX, for which we finished in third place overall (out of the
water and wastewater companies) across the year and first in the
third and fourth quarter surveys of customers who have contacted
us. This performance is mirrored across other indices and through
awards and accreditations we receive for our great performance in
customer service, collections and debt management, and complaint
handling.
-- Innovation through Systems Thinking: Our Systems Thinking
approach has transformed the way that we run the business, our
relationship with customers and our use of technology. This has
delivered enhanced levels of service and resilience along with
sustainable improvements in efficiency and will underpin our
continuous improvement in AMP7.
-- Delivering shareholder value through regulatory
outperformance: We have outperformed against all areas of the
regulatory contract in AMP6. Our leading treasury management
secured a low cost of debt compared with industrywide regulatory
assumptions for AMP6. We have delivered our AMP6 scope for around
GBP100 million less than the Final Determination totex assumption
and have delivered net outperformance of GBP44 million against our
Outcome Delivery Incentives (ODIs), along with outperforming on
SIM.
-- Sharing outperformance: We have a long track record of
sharing outperformance, with additional investment of GBP350
million for AMP6 and over GBP600 million across AMPs 5 and 6.
-- Prepared for AMP7: In January 2020 we accepted the final
determination for United Utilities Water Limited (UUW). Having been
fast-tracked through the price review process, we are already well
underway with implementing our plans for AMP7 and have invested
GBP100 million (out of the total GBP350 million AMP6 outperformance
reinvestment) in the last year of AMP6 in order to achieve a flying
start. This additional investment, together with our strong
performance in AMP6, gives us confidence heading into AMP7.
Financial overview
The group has delivered a robust set of financial results for
the year ended 31 March 2020.
-- Revenue : Revenue was up GBP41 million, at GBP1,859 million,
largely reflecting our allowed regulatory revenue changes.
-- Operating profit: Underlying operating profit was up GBP59
million, at GBP744 million. This reflects the GBP41 million
increase in revenue, a GBP22 million decrease in underlying IRE and
a GBP4 million decrease in operating expenses partly offset by a
GBP7 million increase in underlying depreciation. Reported
operating profit was down GBP5 million, at GBP630 million, impacted
by the same movements as underlying operating profit as well as
adjusted items of GBP114 million compared with adjusted items of
GBP50 million last year.
-- Capex: Total net regulatory capital investment in the year
was GBP722 million. This includes GBP143 million of IRE, GBP184
million of additional investment made available through sharing our
net outperformance and GBP13 million additional capex associated
with the dry weather in the summer of 2018. Neither the additional
investment from sharing outperformance nor the additional capex
resulting from the dry weather was anticipated at the time of the
PR14 settlement. Our five-year regulatory capex investment was just
under GBP4.0 billion including the additional investment from
sharing outperformance and the dry weather capex.
-- Profit before tax: Underlying profit before tax was up GBP32
million, at GBP492 million, largely reflecting the increase in
underlying operating profit partly offset by a GBP15 million
increase in the underlying net finance expense and a GBP6 million
share of underlying losses of joint ventures compared with a GBP7
million share of profits last year. 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
GBP303 million, reflecting fair value movements and other adjusted
items as outlined below and in the underlying profit measures
table.
-- Profit after tax : Underlying profit after tax was up by
GBP22 million, at GBP430 million, largely reflecting the increase
in underlying profit before tax partly offset by a higher
underlying tax charge. The approach used to derive underlying
profit after tax has been changed to exclude the impact of deferred
tax to better reflect the regulatory revenue allowances, with prior
year numbers restated for comparability. Reported profit after tax
was GBP107 million and therefore GBP323 million lower than
underlying profit after tax reflecting adjusted items as outlined
below and in the underlying profit measures table.
-- Water Plus JV: The impact COVID-19 has had on the ability of
business customers to pay has resulted in a far more challenging
operating environment for our joint venture, Water Plus. Our share
of Water Plus losses for the year amounted to GBP51 million, of
which GBP46 million has been recognised in the income statement,
comprising our GBP14 million share of Water Plus underlying losses
and our GBP32 million share of Water Plus losses arising as a
result of COVID-19. As a result of the GBP46 million of losses
recognised in the income statement, our long-term interest
(comprising our equity investment in and zero coupon shareholder
loans to Water Plus) has been written down to GBPnil. In addition
we have recognised an allowance for expected credit losses of GBP5
million on our loans to Water Plus. Further detail is provided in
note 11 ('Joint Ventures) of these condensed consolidated financial
statements.
-- Adjusted items: GBP83 million relates to the accelerated
depreciation of Bioresources assets that have been taken out of
use. A further GBP56 million of adjusted items relate to costs
associated with COVID-19 and of this, GBP32 million represents our
share of COVID-19 related losses at Water Plus and a further GBP5
million of expected credit losses in relation to loans to Water
Plus. The remaining GBP19 million of COVID-19 related adjusted
items principally relate to an increased bad debt charge
recognising the higher risk of future non-payment of household
customer bills. A further adjusted item of GBP158 million relates
to the change in the approach that we use to derive our underlying
profit measures to exclude the impact of deferred tax to better
reflect the regulatory revenue allowances. Other adjusted items are
consistently applied presentational adjustments with the full list
provided in the underlying profit measures table.
-- Capital structure: The group has a robust capital structure
with gearing of 62 per cent as at 31 March 2020 (measured as group
net debt to 'shadow' regulatory capital value, or RCV). Our shadow
RCV adjusts for actual spend and was GBP11.9 billion as at 31 March
2020. This gearing level is within our target range, of 55 to 65
per cent, supporting a solid investment grade credit rating. United
Utilities Water Limited's (UUW's) senior unsecured debt obligations
are rated A3 with Moody's, A- with Fitch and BBB+ with Standard
& Poor's, all on stable outlook.
-- Financing headroom: At 31 March 2020, the group had around
GBP1.2 billion of available liquidity, comprising cash and
short-terms deposits (enhanced by new finance raised in the
period), plus committed undrawn revolving credit facilities. Of
this, GBP722 million covers short term debt and debt maturities
which fall due across the next 12 months. After taking this into
account, the group has headroom of GBP436 million providing
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. The group plans to raise
between GBP500 million and GBP800 million of term funding in
2020/21.
-- 2019/20 final dividend: Reflecting performance in the year
and across AMP6 more generally, the board has proposed a final
dividend of 28.40 pence per ordinary share (taking the total
dividend for 2019/20 to 42.60 pence), an increase of 3.2 per cent,
in line with our policy of targeting an annual growth rate of at
least RPI inflation through to 2020.
-- AMP7 dividend policy: We will review our dividend policy for
AMP7 as a clearer picture of the post COVID-19 economic environment
emerges.
Outlook
We can reflect on our performance improvements across the last
five year price review period with pride. We have shared GBP350
million of our outperformance through additional investment,
providing better service to customers and enhancing the
environment. We have committed company funding to supporting
customers in financial difficulty and to our pension schemes,
achieving low dependency and mitigating risk for employees past and
present, and we have delivered financial performance that supports
the payment of the final dividend in August 2020, in line with our
AMP6 commitment.
The economic implications of COVID-19 will provide a challenging
backdrop to the AMP7 regulatory period. United Utilities will
continue to prioritise the implementation of its delivery plans,
albeit reviewing and adapting these plans as necessary, and we
fully intend to play our part in the recovery of the North West
economy. It is, however, too early to predict the full impact of
COVID-19 on inflation, the economy more generally and on our
business, and we will review our dividend policy for AMP7 as a
clearer picture of the post COVID-19 economic environment
emerges.
Further detail of the potential impacts of COVID-19 is provided
in "Principal risks and uncertainties" section.
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 : Putting customers at the heart of everything
we do has helped us deliver substantial improvements in customer
service in recent years, becoming the most improved company in the
2010-15 regulatory period with a reduction of over 70 per cent in
the overall number of customer complaints.
We have continued to improve at a faster rate than the industry
average in AMP6, positioning us as one of the leading water and
wastewater companies. We outperformed against Ofwat's SIM measure
across the first four years of AMP6 (the measurement period) and
have performed well this year against the shadow C-MeX pilots
having finished third out of the water and wastewater companies,
and fourth out of the 17 companies in the sector in total, for the
year overall, and first in the third and fourth quarter surveys of
customers who have contacted us. This performance is mirrored in
the number of complaints that we receive. Since 2015/16 we have
seen a 41 per cent reduction in complaints and a 65 per cent
reduction in repeat complaints.
During AMP6, we have developed new services that increase the
speed and quality of the customer service we provide. These include
a new system that enables us to proactively keep customers informed
of events on our network, increasing the hours we are available for
customers to contact us, and increasing the channels by which they
can contact us so they do not always need to call.
We have driven an increase in digital engagement through a new
customer centric website, the introduction of an easy to use mobile
app and a substantially enhanced social media presence on commonly
used platforms such as Facebook and Twitter. In support of our most
vulnerable customers we launched our Priority Services proposition,
setting up dedicated teams for those that need it most and now have
over 100,000 customers registered.
We have received external recognition for the improvements that
we have made in the quality of service that we deliver to
customers. We are one of only 14 companies nationally to be awarded
the Service Mark with Distinction from the Institute of Customer
Service, the only water company to receive Shaw Trust Accessibility
status for our website and the only water company to be awarded the
"Best Practice" Accreditation (CICMQ) from the Chartered Institute
of Credit Management.
Leading North West service provider: We are consistently ranked
in the top three out of ten leading organisations in the North
West, through an independent brand tracker survey which is
undertaken three times per year. This covers key attributes such as
reputation, trustworthiness and customer service and in the most
recent survey, we have been ranked first for being both
environmentally and socially responsible. We are behind only Amazon
and Aldi, and ahead of seven other major organisations across
utilities, telecoms, media, banking and retail.
Robust water supply : Customers benefit from our robust water
supply and demand balance, along with high levels of water supply
reliability although, with our water resources predominantly being
from impounding reservoirs, we remain at risk from short intense
dry periods of weather. Our overall water quality continues to be
good, and our water quality service index and Mean Zonal compliance
both slightly improved compared with the prior year. We have
consistently delivered a reliable water service. Although we have
experienced some water no-supply incidents in the 2015-20
regulatory period, our Systems Thinking approach and the largest
water tanker fleet in the industry has resulted in sustainable year
on year performance improvements.
Throughout February 2020 the UK experienced a succession of
severe winter storms. Although the storms did cause some service
interruptions, our workforce worked tirelessly throughout this
period to minimise the impact on customers and the environment.
Reducing sewer flooding: We have continued to invest heavily in
schemes, projects and programmes of work designed to reduce the
risk of flooding of 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 included a
target of reducing sewer flooding incidents by over 40 per cent, in
line with customers' affordability preferences. During that period,
we have delivered an average reduction of 38 per cent. Although
marginally below our target, this represents strong performance
given the unprecedented storm events over the five year period. In
terms of internal repeat flooding (occurring more than once in 10
years) we have delivered a reduction of over 70 per cent over
AMP6.
Our final determination for the 2020-25 regulatory period
includes a target of reducing internal sewer flooding by 73 per
cent. Although a challenging target, we have invested some of our
outperformance reinvestment in 2019/20 targeting improved
performance in this area. Our wastewater network will continue to
benefit from significant investment going forward in terms of
innovative proactive targeting of operational flood risk and
through ground-breaking monitoring of the sewer network which will
be underpinned by artificial intelligence techniques to interpret
and forecast flood risk. In addition, we will continue to seek to
work in collaboration with other external flood authorities and
associated partners, paying our fair share, to address the
widespread flooding events that hit our region, as we aim to help
mitigate the effect of changing weather patterns likely to result
from climate change.
Key performance indicators :
-- Outcome delivery incentives (ODIs): We have 19 wholesale
financial ODIs, ten of which are structured to provide the
potential to earn a reward for good performance or for us to be
penalised for poor performance. The other nine wholesale financial
ODIs are structured in order to protect customers in key areas and
do not offer a reward for good performance, only a penalty for poor
performance.
In 2019/20 we have delivered another strong performance against
our ODIs resulting in a net outperformance payment of GBP22.4
million. During the year we achieved the final AMP6 milestone in
relation to our West Cumbria project earning an outperformance
payment of GBP21.6 million. We are pleased with our overall AMP6
performance having earned a total net outperformance payment of
GBP43.9 million over the five year period. This demonstrates the
benefits of our targeted investment alongside our Systems Thinking
approach and given the ODI targets have typically become tougher
each year, it is particularly pleasing that our best performance
has been achieved in the final two years of the AMP. This gives us
confidence heading into AMP7.
-- 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 over AMP6, ending the four year period to 2018/19 in
fourth place overall for the water and wastewater companies and
earning an outperformance payment of GBP6 million.
In AMP7, SIM will be replaced by a new customer service measure,
C-MeX, with the industry reporting against C-MeX for the year
2019/20 (although not contributing to any outperformance or
underperformance) before the measurement period begins in AMP7.
There are two elements to C-MeX, a contactor survey based on a
survey of customers who have contacted the company and a perception
survey of a random selection of individuals who may or may not have
had a previous interaction with the company.
For the contactor element, we achieved first place (out of 17
companies) in each of the final two quarters. For the perception
survey, we achieved eighth place in the fourth and final quarter.
This means on the combined scores we were fourth in the final
quarter and also fourth out of the 17 companies and third out of
the water and wastewater companies for the year overall.
Lowest sustainable cost
Power and chemicals : Our Systems Thinking approach and more
effective use of operational site management continues to optimise
power and chemical usage alongside 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 GBP62 million across the 2015-20 regulatory period.
We also continue to lock-in our power commodity costs, providing
greater cost certainty for the next 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.
Customer receipts and financial support: Our region suffers from
high levels of income deprivation and we offer wide-ranging schemes
to help customers struggling to pay. We now have 120,000 customers
on affordability schemes, more than double the commitment we made
at the start of AMP6. Notwithstanding our industry-leading debt
management processes, we expect bad debt to continue to be a
challenging area for us due to the level of deprivation in our
region and the impact COVID-19 will have on the ability of
customers to pay their bills.
Prior to any COVID-19 impact, our household bad debt expense had
been maintained at the 1.8 per cent of revenue we communicated at
the half year. This is a reduction from the 2.1 per cent last year,
reflecting our ongoing attention to bad debt through initiatives
such as our affordability schemes. At 31 March 2020, recognising
the higher risk of future non-payment of household customer bills
as a result of COVID-19, we have increased our reported bad debt
expense by GBP17 million. Although this is excluded from underlying
profit measures as an adjusted item, on a reported basis the impact
is to increase household bad debt to 3.1 per cent of revenue.
Pensions: We have taken progressive steps to de-risk our pension
provision. The group had an IFRS retirement benefit surplus of
GBP754 million as at 31 March 2020, compared with a surplus of
GBP484 million as at 31 March 2019. Further details of the group's
pension provision are provided within note 13 to the financial
statements within this results announcement.
In April 2019, the group accelerated GBP103 million of deficit
repair contributions to its defined benefit pension schemes. This
represents the final acceleration of deficit repair contributions
agreed with the schemes' trustees and reduces the pension scheme
deficit repair contributions due from the company down to
GBPnil.
Capital delivery and regulatory commitments : We place great
emphasis 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 have worked with a single
engineering partner and four design and construction partners to
deliver our regulatory capital investment programme of just under
GBP4.0 billion. We have involved our partners much earlier in
project definition and have packaged projects by type, geography
and timing in order to deliver efficiencies. Projects have been
allocated on an incentive or competitive basis leading to our
partners presenting a range of solutions, innovations and
pricing.
We accelerated our 2015-20 investment programme in order to
improve services for customers and deliver early operational and
environmental benefits. Regulatory capital investment in 2019/20,
was GBP722 million including GBP143 million of IRE, GBP184 million
of additional investment made available through sharing our net
outperformance and GBP13 million additional capex associated with
the dry weather in the summer of 2018. This, combined with our
investment in the first four years of the regulatory period, brings
our total spend to just under GBP4.0 billion 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 95 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. Not only have we closed the gap but we have
now delivered the original scope for around GBP100 million less
than our allowance. This has been achieved through a combination of
driving efficiency into our capital programme and also through
Systems Thinking.
-- Financing outperformance: Our leading treasury management
helped lock in a low cost of debt, delivering significant financing
outperformance for the 2015-20 regulatory period compared with the
industry allowed cost.
-- Household retail cost to serve: We have continued to deliver
against a challenging benchmark set for AMP6. Our target has been
to minimise our costs compared with our revenue allowance and on an
underlying basis we have delivered a good performance in 2019/20,
outperforming this year's revenue allowance (including margin) by
around GBP13 million. This reflects underlying performance and
therefore excludes an additional regulatory bad debt charge
associated with the higher risk of future non-payment of household
customer bills as a result of COVID-19. The statutory bad debt
charge component of this (GBP17 million) is excluded from
underlying profit measures as an adjusted item as outlined in the
underlying profit measures table. On an underlying basis, cost to
serve is in line with the regulatory cost allowance of GBP35 per
household and we are confident that our cost plans will move us
towards upper quartile performance in AMP7.
Responsible manner
Behaving responsibly is fundamental to delivering on our
purpose, 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 year, we
achieved a World Class rating in the Dow Jones Sustainability Index
for the thirteenth consecutive year, again achieving industry
leading performance status in the multi-utility/water sector. We
look at our performance across a range of other Environmental,
Social and Governance (ESG) indices, where we also perform
well.
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, acoustic
loggers, satellite technology and the UK's first leakage sniffer
dogs specially trained to pinpoint the exact location of leaks.
Additionally, we continue to encourage customers to save water
through water efficiency programmes as this not only enables them
to help preserve this precious resource but can also save money on
their water bill.
Our final determination for 2020-25 assumes a 15 per cent
reduction in leakage. Although a challenging target, we have
invested some of our outperformance reinvestment in 2019/20 in our
water network to help improve our performance in this area
further.
Environmental performance : This is a high priority for us and
an area where we have performed well achieving Industry Leading
Company status in the Environment Agency's annual assessment in
three of the last four years. This is a result of our approach to
managing our assets in an integrated way to minimise the number of
environmental incidents. Further detail is provided in the KPI
section below on our in year performance.
Carbon footprint : We set a target to reduce our carbon
footprint by 50 per cent by 2020 compared with a 2005/06 baseline
and achieved this target a year early. A major contributor to this
has been the purchase of certified renewable electricity, with over
95 per cent of the electricity we use having zero emissions. This
year our total greenhouse emissions were 159,243 tonnes of carbon
dioxide equivalent, a reduction of 73 per cent since 2005/06.
In addition, we generated the equivalent of 191 gigawatt hours,
an increase of 18 gigawatt hours on the previous year. This
illustrates good progress in our energy strategy to use less and
generate more renewable energy.
Going forward, we have committed to six climate change
mitigation pledges with further detail provided below.
Climate change mitigation pledges: Our six pledges to reduce our
carbon footprint are:
-- Pledge 1: Commitment to meet science based targets in
relation to our direct emissions and grid electricity use, with a
42 per cent reduction by 2030 and 100 per cent by 2050 from 2019/20
baseline.
-- Pledge 2: 100 per cent renewable electricity by 2021.
-- Pledge 3: 100 per cent green fleet by 2028.
-- Pledge 4: 1,000 hectares of peat restoration by 2030.
-- Pledge 5: Planting 1 million trees to create 550 hectares of woodland by 2030.
-- Pledge 6: Commitment to set a science based target for Scope
3 emissions (those outside of our direct influence) by 2021.
Employees : Our primary concern throughout the COVID-19 crisis
has been to protect the safety of our employees and those they work
alongside. We have put safeguarding measures in place, distributed
additional personal protective clothing and issued key worker cards
to frontline employees to explain their presence in communities. We
have not furloughed any employees and recognising that some may
face challenging financial issues within their own families as a
result of changing circumstances, we created a Staff Outreach
Scheme to provide one-off grants through a confidential application
process.
We continue to work hard to engage all of our employees in the
transformation of the group's performance. Employee engagement was
at 84 per cent this year, consistent with the UK high performing
norm. We remain committed to maintaining high levels of employee
engagement.
We have been successful in attracting and retaining people and
have continued with our apprentice and graduate programmes for
2019/20. We now have a total of 36 graduates and 102 apprentices
across the business. Our investment in recruiting graduates and
apprentices is already benefiting the company, with 269 employees
who have previously been on either the graduate or apprentice
scheme having secured permanent roles across our business.
Over the last 12 months all of our employees have attended
health, safety and wellbeing training as part of our home safe and
well programme, which has been designed to support colleagues
understand how our individual decision making and behaviour can
ensure we look after ourselves and each other.
More than 300 colleagues then volunteered to become front line
coaches and following their training are now 'peer influencing'
colleagues to think again about the activities they are undertaking
and consider if there is a safer way to do it. We are seeing a
positive improvement in our performance.
Our employee accident frequency rate for 2019/20 was 0.110
accidents per 100,000 hours, representing a 27.6 per cent
improvement on last year's outturn of 0.152. Our contractor
accident frequency also showed improvement, with 0.083 accidents
per 100,000 hours compared to 0.092 in 2018/19. We retained our
Gold award status with the Royal Society for the Prevention of
Accidents, achieving this status for the eighth year.
We are continuing our strong focus on health, safety and
wellbeing and have undertaken extensive engagement across our
business to enable the further development of our plans.
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 partnership with Beamont Collegiate
Academy FabLab and STEM centre which will enable students from
across the North West to gain first-hand experience of using
hi-tech equipment and learn more about STEM in a fun and engaging
way.
Key performance indicators :
-- Leakage : Although leakage is included within our outcome
delivery incentives, we publish our leakage position separately,
with it being an important measure from a corporate responsibility
perspective. In 2019/20 we have again met our regulatory leakage
target of 463 megalitres per day.
-- Environmental performance : In the Environment Agency's
latest assessment, published in July 2019, we were awarded three
stars (out of four) across a range of operational metrics. This is
lower than our performance in the previous year where we were
awarded the industry leading four star status for the third
consecutive year. Our lower score in the most recent assessment was
primarily the result of a slight deterioration of performance
against the delivery of our National Environment Programme where
two projects were delivered late. The two projects were delayed due
to unforeseen issues with land purchase, planning difficulties and
complex interactions with a flood risk scheme. We have since made
good progress with delivery and we are now operating the relevant
assets in line with their new Environmental Permit requirements. We
also brought forward the delivery of two other major schemes to
offset the environmental impact. Overall, our performance, earning
industry leading four star status in three of the last four years
is in line with our medium-term goal of being an upper quartile
company on a consistent basis.
-- Corporate responsibility : We are committed to operating in a
responsible manner and are the only UK water company to have a
World Class rating as measured by the Dow Jones Sustainability
Index. For 2018/19, we achieved our World Class rating for the
thirteenth consecutive year. We also demonstrate a very strong
performance across a number of leading corporate responsibility
indices and report these publicly in our annual report and on our
website - for example, we have been named in the FTSE4Good Index
every year for the last 17 years, and reconfirmed as part of the
Euronext Vigeo Index UK 20.
KEY PERFORMANCE INDICATORS (KPIs) FOR 2020-25
Measurement of our progress in delivering our plans over the
next regulatory period will use a mixture of existing and new
measures. As a purpose-led organisation we have reported against a
range of operational KPIs in AMP6 that are aligned to our strategic
themes as a means to demonstrate how we operate in order to work
towards our vision and deliver our purpose. These three strategic
themes of "The best service to customers", "At the lowest
sustainable cost" and "In a responsible manner" are not changing
and our operational KPIs in AMP7 will support these strategic
themes. However, given that we aim to create long-term value for
all of our stakeholders, we feel it is appropriate to report
against operational KPIs in AMP7 that are linked to each
stakeholder group. We will therefore measure performance against
the following operational KPIs for AMP7:
-- Shareholders: Return on Regulated Equity (RoRE) - target not disclosed
-- Customers: Targeting upper quartile performance against Ofwat's C-MeX measure
-- Communities: Increase community investment by 10 per cent over AMP7
-- Employees: Targeting employee satisfaction at least as high as the UK high performing norm
-- Environment: Targeting upper quartile performance against the
Environment Agency's annual performance assessment
-- Suppliers: Targeting at least 95 per cent of invoices paid within 60 days
Our financial KPIs remain unchanged except for the inclusion of
an additional KPI that targets maintaining a low dependency
position in relation to our defined benefit pension schemes. A
company's pension position will likely have increasing importance
in the next five years as The Pensions Regulator encourages
companies to achieve low dependency by the time their schemes are
significantly mature. We will therefore measure performance against
the following financial KPIs for AMP7:
-- Underlying operating profit
-- Underlying earnings per share
-- Dividend per share
-- Gearing: net debt to RCV
-- Total shareholder return
-- Pension position
FINANCIAL PERFORMANCE
United Utilities delivered a robust set of financial results for
the year ended 31 March 2020.
Revenue
Revenue was up GBP41 million, at GBP1,859 million, largely
reflecting our allowed regulatory revenue changes.
Consistent with Ofwat's annual wholesale revenue forecasting
incentive mechanism (WRFIM), we have reduced revenue by GBP14
million in 2019/20 (outturn prices). This consists of two
components; firstly reflecting actual volumes being higher than our
original assumptions during AMP6, and secondly reductions relating
to the 2014/15 "AMP5 blind year", which is GBP5 million in
2019/20.
The impact of COVID-19 has resulted in reduced consumption from
businesses and has therefore reduced revenue by around GBP5 million
in 2019/20 with a more significant impact likely in 2020/21. By way
of illustration, for every 1 per cent per annum reduction in
non-household consumption, revenue will reduce by around GBP4
million. However, a significant amount of uncertainty persists and
therefore, at this point, it is difficult to predict the impact for
2020/21. Furthermore, shortfalls in revenue are recovered in future
years under the regulatory revenue control.
Operating profit
Underlying operating profit at GBP744 million was GBP59 million
higher than last year. This reflects the GBP41 million increase in
revenue and a GBP22 million decrease in IRE partly offset by a GBP7
million increase in underlying depreciation. The remaining cost
base has decreased by GBP4 million as a result of a GBP19 million
decrease in property rates largely due to an GBP8 million refund
received and an GBP8 million reduction in accrued property rates
relating to wastewater assets, and smaller reductions across the
rest of the cost base partly offset by a GBP10 million credit in
the prior year resulting from the settlement of a historical
commercial claim and a GBP9 million increase in power costs largely
due to electricity price increases. During the current year
operating costs of GBP3 million and infrastructure renewal
expenditure of GBP4 million were incurred in response to Storms
Ciara and Dennis that occurred in February 2020.
Reported operating profit decreased by GBP5 million, to GBP630
million, reflecting the increase in underlying operating profit
being more than offset by an increase in adjusted items. Adjusted
items for 2019/20 included GBP83 million of accelerated
depreciation of Bioresources assets that have been taken out of
use. A further GBP19 million relates to costs associated with
COVID-19, principally reflecting a higher bad debt charge
recognising the higher risk of future non-payment of household
customer bills, and GBP12 million relates to restructuring costs.
In the prior year, adjusted items included GBP36 million of costs
associated with the dry weather of 2018, GBP7 million associated
with the equalisation of pension benefits between males and females
in relation to Guaranteed Minimum Pension (GMP) benefits, and GBP7
million of restructuring costs.
Investment income and finance expense
The underlying net finance expense of GBP246 million was GBP15
million higher than last year, mainly due to the impact of new debt
and interest rate swaps traded since March 2019, and higher RPI
inflation on the group's index-linked debt.
Interest of GBP95 million on non index-linked debt was GBP11
million higher than last year due to a higher level of debt
following new issuances and associated interest rate swaps traded
in the period. The indexation of principal on index-linked debt,
including the impact of inflation swaps, amounted to a net charge
in the income statement of GBP100 million, compared with a net
charge of GBP98 million last year. As at 31 March 2020, the group
had approximately GBP3.5 billion of RPI-linked debt at an average
real rate of 1.4 per cent, and GBP0.5 billion of CPI-linked debt at
an average real rate of 0.2 per cent.
The higher RPI inflation charge compared with last year
contributed to the group's average underlying interest rate of 3.4
per cent being higher than the rate of 3.3 per cent for the year
ended 31 March 2019. The average underlying interest rate
represents the underlying net finance expense divided by average
debt.
Reported net finance expense of GBP289 million was GBP84 million
higher than last year, principally reflecting an increase in the
fair value losses on debt and derivative instruments, from a GBP9
million gain in 2018/19 to a GBP76 million loss in 2019/20 and the
GBP5 million expected credit losses on our loans to Water Plus.
The group fixed the interest rates on the majority of its non
index-linked debt for the 2015-20 regulatory period at a net
effective nominal interest rate of around 3.2 per cent (excluding
the impact of cost of carry).
Profit before tax
Underlying profit before tax was GBP492 million, GBP32 million
higher than last year. This reflects the GBP59 million increase in
underlying operating profit, partly offset by the GBP15 million
increase in underlying net finance expense and a GBP6 million share
of underlying losses of joint ventures compared with a GBP7 million
profit last year.
Our joint venture Water Plus has been operating in a challenging
environment due to billing data issues stemming from the market
opening in April 2017, and delivered a disappointing operating
result for the year to March 2020. Prior to the onset of COVID-19,
Water Plus had been making progress with its recovery plan but the
impact COVID-19 has had on the ability of business customers to pay
has resulted in a far more challenging operating environment for
Water Plus. Our share of Water Plus losses for the year amounted to
GBP51 million, of which GBP46 million has been recognised in the
income statement, comprising our GBP14 million share of Water Plus
underlying losses and our GBP32 million share of Water Plus losses
arising as a result of COVID-19. As a result of the GBP46 million
of losses recognised in the income statement, our long-term
interest (comprising our equity investment in and zero coupon
shareholder loans to Water Plus) has been written down to GBPnil.
In addition we have recognised an allowance for expected credit
losses of GBP5 million on our loans to Water Plus. Further detail
is provided in note 11 ('Joint Ventures) of these condensed
consolidated financial statements.
The underlying measure of profit before tax reflects the
adjusted items, as outlined in the operating profit section above,
the Water Plus adjustments, and other consistently applied
presentational adjustments, as outlined in the underlying profit
measures.
Reported profit before tax decreased by GBP133 million to GBP303
million reflecting the GBP5 million reduction in reported operating
profit, a GBP84 million increase in reported net finance expense
including fair value movements and a GBP38 million share of losses
from joint ventures compared with a GBP7 million share of profits
last year.
Tax
The group continues to be fully committed to paying its fair
share of tax and acting in an open and transparent manner in
relation to its tax affairs and we were delighted to secure the
Fair Tax Mark in July last year.
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 2019/20 were around GBP250
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 2019/20, we paid corporation tax of GBP72 million, which
represents an effective cash tax rate on underlying profits of 15
per cent, which is 4 per cent lower than the headline rate of
corporation tax of 19 per cent. We paid six rather than the usual
four quarterly instalment payments as we transition to the new
quarterly instalment regime. After adjusting for these one off
additional payments, the key reconciling items to the headline rate
of corporation tax continue to be allowable tax deductions on
capital investment and pension payments, these being deductions put
in place by successive governments to encourage such investment and
thus reflecting responsible corporate behaviour in relation to
taxation.
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 expect the average cash tax rate on
underlying profits to remain below the headline rate of tax for the
medium term. 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.
As well as the payments we also received a repayment of
corporation tax of GBP16 million which relates to agreement of
prior years' UK tax matters.
The current tax charge was GBP51 million in 2019/20, compared
with GBP42 million in the previous year. There were current tax
credits of GBP12 million in 2019/20 and GBP3 million in 2018/19,
following agreement of prior years' tax matters.
For 2019/20, the group recognised a deferred tax charge of
GBP158 million, compared with GBP34 million for 2018/19. Of the
deferred tax charge for 2019/20, GBP136 million relates to the
Government's reversal of the planned reduction in the rate of
corporation tax from 19 per cent to 17 per cent from 1 April
2020.
Excluding the deferred tax adjustment for the change in tax rate
of GBP136 million in the current year, the total effective tax rate
was around 20 per cent for the current year and around 17 per cent
for the prior year. Subject to any legislative or tax practice
changes, we would expect the total effective tax rate to be in line
with the headline rate of corporation tax for the medium-term.
In 2019/20, there are GBP157 million of tax adjustments taken to
equity primarily relating to remeasurement movements on the group's
defined benefit pension schemes including the adjustment arising
from a change in the rate at which the deferred tax liabilities are
measured, from 17 per cent to 35 per cent, being the rate
applicable to refunds from a trust.
Profit after tax
Underlying profit after tax of GBP430 million was GBP22 million
higher than last year, principally reflecting the GBP32 million
increase in underlying profit before tax.
For 2019/20 we have changed the approach we use to derive
underlying profit after tax to exclude the impact of deferred tax.
This approach is in line with the regulatory model whereby cash tax
is recovered through revenues, with future revenues allowing for
cash tax including the unwinding of any deferred tax balance as it
becomes current. By making this adjustment, the group's underlying
tax charge does not include tax that will be recovered through
revenues in future periods, thus reducing the impact of timing
differences. This approach is consistent with the approach taken by
our listed peers and also with what we believe to be the direction
of travel of the International Accounting Standards Board's
(IASB's) rate-regulated activities project. Our prior year numbers
have been restated for comparability.
Reported profit after tax decreased by GBP257 million to GBP107
million, principally reflecting the GBP133 million decrease in the
reported profit before tax and a GBP124 million increase in the
reported deferred tax charge largely resulting from the
Government's reversal of the planned reduction in the rate of
corporation tax from 19 per cent to 17 per cent from 1 April
2020.
Earnings per share
Underlying earnings per share increased from 59.8 pence to 63.0
pence. This underlying measure is derived from underlying profit
after tax.
As noted above, we have changed the approach we use to derive
underlying profit after tax to exclude the impact of deferred tax,
with our prior year numbers restated for comparability.
Basic earnings per share decreased from 53.3 pence to 15.7 pence
for the same reasons that caused the decrease in profit after
tax.
Dividend per share
Reflecting performance in the year and across AMP6 more
generally, the board has proposed a final dividend of 28.40 pence
per ordinary share in respect of the year ended 31 March 2020.
Taken together with the interim dividend of 14.20 pence per
ordinary share, paid in February, this results in a total dividend
per ordinary share for 2019/20 of 42.60 pence. This is an increase
of 3.2 per cent, compared with the dividend relating to last year,
in line with the group's AMP6 dividend policy of targeting a growth
rate of at least RPI inflation each year through to 2020. The
inflationary increase of 3.2 per cent is based on the RPI element
included within the allowed regulated revenue increase for the
2019/20 financial year (i.e. the movement in RPI between November
2017 and November 2018).
The final dividend is expected to be paid on 3 August 2020 to
shareholders on the register at the close of business on 26 June
2020. The ex-dividend date is 25 June 2020.
The AMP7 dividend policy announced in January 2020 targets a
growth rate of CPIH inflation each year through to 2025, with
further details set out below. It is, however, too early to predict
the full impact of COVID-19 on inflation, the economy more
generally and on our business, and we will review our dividend
policy for AMP7 as a clearer picture of the post COVID-19 economic
environment emerges.
-- Policy period - the dividend policy aligns with the five-year
regulatory period which runs from 1 April 2020 to 31 March
2025.
-- Policy approval process - the dividend policy was considered
and approved by the United Utilities Group board in January 2020,
as part of a comprehensive review of the 2020-25 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 2020, the company had
distributable reserves of GBP3,105 million. The total external
dividends relating to the 2019/20 financial year amounted to GBP291
million. The company distributable reserves support over 10 times
this annual dividend.
-- Financing headroom - supporting the group's cash flow, we
adopt 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 basis for UUG dividend
distributions in AMP7 comprises expected returns from UUW based on
AMP7 performance, including the base dividend return of 4 per cent
(nominal) on the equity portion of the shadow RCV, together with
accumulated outperformance in prior periods that has been retained
by the group after sharing with customers. The UUW board has
determined that there should be no dividend payments made by UUW
during the financial year 2020/21 and that any eventual dividend
that may ultimately be earned relating to the 2020/21 financial
year will be deferred into the future when prevailing uncertainties
have been resolved and the financial position has become more
clear. This does not impact the UUG board's decision in relation to
the payment of dividends for 2020/21 and the UUG board will
continue to monitor UUW's AMP7 performance in order 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 regulated level of
return. 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. We have had a
relatively stable RCV gearing level over the last ten years, always
within our target range of 55 to 65 per cent, supporting a stable
A3 credit rating for UUW with Moody's. RCV gearing at 31 March 2020
was 62 per cent and the movement in net debt is outlined in the
cash flow section below. Given the level of uncertainty associated
with the economic impact of COVID-19, and specifically the future
outlook for inflation, it is probable that our RCV gearing will
increase above its current level and we will therefore continue to
monitor the position as greater clarity emerges.
-- 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 - at the time of approving the policy
in January 2020, the board was satisfied that on average across
AMP7 as a whole the projected dividend would be covered by
underlying profit after tax and that the policy would be sufficient
to withstand 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. In particular,
the longer term economic impacts resulting from COVID-19 could
impact the group's financial metrics, and these could include
sustained levels of high unemployment, corporate failures and lower
inflation affecting revenues, financing costs and RCV.
Cash flow
Net cash generated from continuing operating activities for the
year ended 31 March 2019 was GBP810 million, and therefore broadly
consistent with GBP832 million in the previous year. The group's
net capital expenditure was GBP645 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 2020 was GBP7,361
million, compared with GBP7,067 million at 31 March 2019. This
increase largely reflects regulatory capital expenditure, payments
of dividends, interest and tax, the inflationary uplift on
index-linked debt, fair value movements and the impact of IFRS16
resulting in a non-cash increase in lease liabilities, partly
offset by operating cash flows and a repayment of loans owed from
joint ventures.
Fair value of debt
The group's gross borrowings at 31 March 2020 had a carrying
value of GBP8,363 million. The fair value of these borrowings was
GBP8,834 million. This GBP471 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 GBP1,089
million at 31 March 2019 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 62 per
cent at 31 March 2020. This is slightly higher than the 61 per cent
as at 31 March 2019 and remains within our target range of 55 to 65
per cent.
UUW's senior unsecured debt obligations are rated A3 with
Moody's Investors Service (Moody's), A- with Fitch Ratings (Fitch)
and BBB+ with Standard & Poor's Ratings Services (S&P) and
all on stable outlook. United Utilities PLC's (UU PLC's) senior
unsecured debt obligations are rated Baa1 with Moody's, A- with
Fitch and BBB- with S&P, all on 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 2020 amounted to GBP528
million. Over 2015-20, we had a financing requirement totalling
around GBP2.5 billion. This was fully funded before the end of the
AMP with subsequent finance raised prefunding our AMP7 requirement.
In total over 2020-25, we expect to raise around GBP2.1 billion to
cover refinancing and incremental debt, supporting our five-year
investment programme.
We remain one of the sector leaders in the issuance of
CPI-linked debt having previously achieved CPI-linkage on GBP465
million of our debt portfolio, in response to Ofwat's decision to
transition away from RPI inflation linkage. In November 2019, we
increased the CPI-linkage in our debt portfolio by a further GBP50
million (to GBP515 million) by increasing the amount outstanding on
UUW's financing subsidiary, United Utilities Water Finance PLC's
(UUWF's) GBP250 million public bond with a maturity date in July
2033, by an additional GBP50 million and simultaneously swapping to
CPI.
In February 2020, UUWF, raised GBP250 million 1.75 per cent
fixed rate notes in the public bond market with an 18-year
maturity.
Since September 2019, the group has extended a GBP50 million
committed bank facility by one year out to 2024, and GBP100 million
of facilities by one year out to 2025. In addition, since March
2020, the group has renewed GBP50 million of committed bank
facilities for a 5-year term, and extended a GBP100 million
facility for approximately a further three years to April 2026.
Long-term borrowings are structured or hedged to match assets
and earnings, which are largely in sterling, indexed to UK 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 2020,
approximately 48 per cent of the group's net debt was in RPI-linked
form, representing around 30 per cent of UUW's regulatory capital
value, with an average real interest rate of 1.4 per cent. A
further 7 per cent of the group's net debt was in CPI-linked from,
representing around 4 per cent of UUW's RCV, with an average real
rate of 0.2 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 around 18 years.
Our inflation hedging policy is to target around 50 per cent of
net debt to be maintained in index-linked form. This reflects a
balanced assessment across a range of factors.
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 a forthcoming
regulatory period around the time of the price control
determination. Recognising Ofwat's intention to apply debt
indexation for new debt raised during the 2020-25 regulatory
period, we have retained the hedge to fix underlying interest costs
on nominal debt out to ten years on a reducing balance basis, but
have not supplemented this with the additional 'top up' fixing at
the start of the 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.
At 31 March 2020, the group had around GBP1.2 billion of
available liquidity, comprising cash and short-terms deposits
(enhanced by new finance raised in the period), plus committed
undrawn revolving credit facilities. Of this, GBP722 million covers
short term debt and debt maturities which fall due across the next
12 months. After taking this into account, the group has headroom
of GBP436 million providing 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. The group plans to raise between GBP500 million and
GBP800 million of term funding in 2020/21 and the group has
recently re-established a Euro Commercial Paper Programme, which
would facilitate access to the Bank of England's Covid Corporate
Financing Facility (CCFF), should the group need to do so. The Bank
of England has confirmed our eligibility to participate in the
CCFF. Whilst we do not expect to use this facility, we see it as
prudent contingency planning to have it available to the group.
We consider that we operate 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. Our cash is held in the form of
short-term money market deposits with prime commercial banks.
We operate a bilateral rather than a syndicated approach to our
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 2020, the group had an IAS 19 net pension surplus
of GBP754 million, compared with a net pension surplus of GBP484
million at 31 March 2019. This GBP270 million increase is as a
result of the acceleration of GBP103 million deficit repair
contributions to the group's defined benefit schemes made in April
2019, and a spike in credit spreads at 31 March 2020 due to
COVID-19 that resulted in a temporary decrease in the valuation of
liabilities. The scheme specific funding basis does not suffer
volatility due to credit spread movements to the same extent as it
uses a prudent, fixed credit spread assumption and is hedged for
inflation and interest rates. Any inflation and credit spread
movements are therefore not expected to have a material impact on
the pension liabilities calculated on a scheme specific funding
basis.
Further detail on pensions is provided in note 13 ('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
Dry weather An extreme period of hot and dry weather during the summer
event of 2018 led to significant strain being placed on our
water resources and network and as a result our reservoir
levels ran extremely low. Activities were carried out
to safeguard supplies, generating significant costs which
would not have been incurred under normal conditions.
Given the infrequent nature of periods of dry weather
of this severity, this event is not considered part of
the normal course of business.
-----------------------------------------------------------------
GMP equalisation The group has recognised an additional past service cost
in respect of its defined benefit pension schemes. This
reflects a change in benefits following a legal ruling
during the year relating to the equalisation of Guaranteed
Minimum Pension (GMP) benefits between males and females.
This one-off adjustment, which is not representative of
costs incurred in the normal course of business, is a
direct consequence of the ruling and is not expected to
reoccur in future years.
-----------------------------------------------------------------
Bioresources Following a strategic review of the group's Bioresources
asset write activities, the likelihood of future economic benefit
down being derived from certain assets is now considered remote
in light of improvements in alternative lower-cost and
more environmentally friendly processes. This has resulted
in a material asset write down resulting from a strategic
review coming out of the PR19 process and that considers
the group's zero-carbon commitments. As such, it is not
considered to be part of the normal course of business,
with similarly material write-downs not expected to reoccur
in future years.
-----------------------------------------------------------------
COVID-19 The group has incurred significant costs resulting from
the COVID-19 pandemic, including incremental expected
credit losses on household and non-household customer
receivables caused by the economic impact of business
closures and expected increases in unemployment, and operating
expenses relating to the response to the pandemic. The
group's joint venture, Water Plus, has also been significantly
impacted by the pandemic, resulting in the business recognising
an impairment of certain assets and a higher allowance
for expected credit losses, which feeds through to the
group's share of losses from joint ventures. This has
also caused the group to recognise an allowance for expected
credit losses in relation to loans extended to Water Plus.
Due to the unprecedented nature of the pandemic and the
associated economic shock in the current year, these costs
are not deemed to be representative of normal business
performance when compared against prior periods.
-----------------------------------------------------------------
Restructuring The group has incurred restructuring costs in the past
costs 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 Fair value movements on debt and derivatives can be both
losses/(gains) very significant and volatile from one period to the next.
on debt and These movements are determined by macro economic factors
derivative which are outside the control of management and these
instruments instruments are purely held for funding and hedging purposes
(not for trading purposes). Taking these factors into
account, management believes it is useful to adjust for
this to provide a more representative view of performance.
-----------------------------------------------------------------
Interest on Net fair value gains on debt and derivative instruments
derivatives includes interest on derivatives and debt under fair value
and debt under option. In adjusting for net fair value gains on debt
fair value and derivatives, it is appropriate to add back interest
option on derivatives 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 This item can be very volatile from one period to the
interest income next and it is a direct function of the extent to which
the pension scheme is in an accounting deficit or surplus
position. Management believes it is useful to adjust for
this to provide a more representative view of performance.
-----------------------------------------------------------------
Capitalised Accounting standards allow for the capitalisation of borrowing
borrowing costs in the cost of qualifying assets. Management believes
costs 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.
-----------------------------------------------------------------
Deferred tax Management adjusts to exclude the impact of deferred tax
adjustment in order to provide a more representative view of the
group's profit after tax and tax charge for the year given
that the regulatory model allows for cash tax to be recovered
through revenues, with future revenues allowing for cash
tax including the unwinding of any deferred tax balance
as it becomes current. By making this adjustment, the
group's underlying tax charge does not include tax that
will be recovered through revenues in future periods,
thus reducing the impact of timing differences. This adjustment
has been made for the first time in the current year,
with prior year comparatives re-presented to take account
of this adjustment.
-----------------------------------------------------------------
Agreement The agreement of prior years' tax matters can be significant,
of prior years' volatile and often related to final settlement of numerous
tax matters prior year periods. Management adjusts for this to provide
a more representative view of the tax charge/credit in
relation to current year performance.
-----------------------------------------------------------------
Tax in respect Management adjusts for the tax impacts of the above adjusted
of adjustments items to provide a more representative view of current
to underlying year performance.
profit before
tax
-----------------------------------------------------------------
Underlying profit Year ended Year ended
31 March 2020 31 March 2019
GBPm GBPm
Operating profit per published results 630.3 634.9
Dry weather event - 36.1
GMP equalisation - 6.6
Bioresources asset write down 82.6 -
COVID-19 - expected credit loss on non-household 1.4 -
receivables
COVID-19 - expected credit loss on household 16.7 -
receivables
COVID-19 - operating expenses 1.1 -
Restructuring costs 11.8 7.2
Underlying operating profit 743.9 684.8
-------------- --------------
Net finance expense
GBPm GBPm
Finance expense (313.0) (222.5)
Investment income 24.0 17.1
Net finance expense per published results (289.0) (205.4)
-------------- --------------
Adjustments:
COVID-19 - Expected credit losses on loans 5.0 -
to JVs
Net fair value losses/(gains) on debt and
derivative instruments 76.3 (9.5)
Interest on swaps and debt under fair value
option 16.5 30.6
Net pension interest income (14.0) (9.5)
Adjustment for capitalised borrowing costs (40.6) (37.4)
Underlying net finance expense (245.8) (231.2)
-------------- --------------
GBPm GBPm
Share of (losses)/profits of joint ventures (38.1) 6.7
Adjustments:
COVID-19 - Water Plus impairment losses and 32.0 -
expected credit losses
Underlying share of (losses)/profits of joint
ventures (6.1) 6.7
-------------- --------------
Profit before tax per published results 303.2 436.2
Adjustments:
In respect of operating profit 113.6 49.9
In respect of net finance expense 43.2 (25.8)
In respect of share of (losses)/profits of 32.0 -
joint ventures
Underlying profit before tax 492.0 460.3
-------------- --------------
Profit after tax per published results 106.8 363.4
Adjustments:
In respect of profit before tax 188.8 24.1
Deferred tax adjustment 157.5 34.0
Agreement of prior years' UK tax matters (12.2) (2.8)
Tax in respect of adjustments to underlying
profit before tax (11.3) (10.8)
Underlying profit after tax 429.6 407.9
-------------- --------------
Earnings per share
GBPm GBPm
Profit after tax per published results (a) 106.8 363.4
Underlying profit after tax (b) 429.6 407.9
Weighted average number of shares in issue,
in millions (c) 681.9m 681.9m
Earnings per share per published results,
in pence (a/c) 15.7 53.3
Underlying earnings per share, in pence (b/c) 63.0 59.8
Dividend per share, in pence 42.60p 41.28p
(1) Approach used to derive underlying profit after tax has been
changed to exclude the impact of deferred tax to better reflect the
regulatory revenue allowances, with prior year numbers restated for
comparability
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
2020 2019
GBPm GBPm
Group underlying operating profit 743.9 684.8
Underlying operating profit not relating to UUW (3.5) (11.3)
UUW statutory underlying operating profit (unaudited) 740.4 673.5
Revenue recognition (5.0) 0.7
Capitalised borrowing costs 5.6 5.3
Reclassification of regulatory other income (not included
in UUW operating profit) (20.2) (18.5)
Other differences (including non-appointed business) (2.2) (1.8)
UUW regulatory underlying operating profit (unaudited) 718.6 659.2
----------- -----------
Return on Regulated Equity (RoRE)
UUW's RoRE, presented on a real return basis, for both the year
ended 31 March 2020 and the cumulative position for AMP6 are as
below:
Year ended AMP 6
31 March
2020 total
Base return 5.52% 5.54%
Totex performance (2.24)% (0.78)%
Retail performance (0.38)% (0.11)%
ODI performance 0.48% 0.21%
SIM performance 0.00% 0.03%
Financing performance 2.46% 2.11%
----------- --------
RoRE (1) 5.84% 7.00%
----------- --------
(1) Calculated in accordance with RAG 4.08, published in March 2019.
PRINCIPAL RISKS AND UNCERTAINTIES
Our approach to risk management
Successful management of risks and uncertainties enables us to
deliver on our purpose to provide great water and more for the
North West. A key objective of our approach is to support the
sustainable achievement of the strategic themes that underpin our
vision to be the best UK water and wastewater company
delivering:
-- the best service to customers;
-- at the lowest sustainable cost;
-- in a responsible manner.
From this starting point our emphasis is on our capacity and
capability to manage risk and uncertainty, and to build and
maintain long term resilience across the corporate, financial and
operational structures of the group.
Our risk management framework provides the foundation for the
business to anticipate threats to delivering an effective service.
In addition, our approach enables us to understand the new and
emerging circumstances that present themselves in unstable and
challenging times. Key components of the framework include:
-- An embedded group-wide risk management process which is aligned to ISO 31000:2018;
-- A board-led approach to risk appetite, based on strategic goals;
-- A strong and well established governance structure giving the
board oversight of the nature and extent of risks the group faces,
as well as the effectiveness of risk management processes; and
-- A portfolio of policies, procedures, guidance and training to
enable consistent, group-wide participation by our people.
How we identify and assess risk
The risk profile is commensurate with the issues and
opportunities inherent to our operations as a listed water and
wastewater business, and takes into account our statutory and
regulatory obligations as well as the expectations of our
stakeholders. In this way the profile illustrates ri sks that
represent key elements of major end-to-end process es or system s,
in line with our Systems Thinking approach.
The assessment of individual risks considers both the internal
and external business environment as well as the effectiveness of
cross-business controls. Each risk is sponsored by a senior manager
who is responsible for the assessment of the risk, and for
implementing preventative and responsive controls, although
accountability for different aspects of the controls may lie across
various departments. Although operational and project level risk
assessment occurs continuously throughout the year, the activity
culminates in the biannual Business Unit Risk Assessment (BURA),
which reviews the strategic and tactical level business risks that
underpin our principal risks. Each business risk is event based,
with the assessment considering first the likelihood of the event
occurring based on multiple causal factors, and secondly the full
range of potential impacts and their severity should the event
occur, from a minimum (best case) to a maximum (worst case)
scenario.
All business areas are accountable for undertaking the BURA
process, which is aligned to the full and half year reporting
cycle. The process also involves group level evaluation,
benchmarking and calibration to enable a consistent approach, an
appreciation of the most significant risks from a financial and
reputational context, and an assessment of how these relate to our
risk appetite.
Oversight and Governance Process
The board ensures that its oversight of risk remains effective
through a number of established reporting routes.
Twice yearly the board receives a full update on the risk
profile as part of the full and half year reporting cycle. This
provides an overview of the nature and extent of risk exposure in
the context of the group's principal risks, and emphasises the most
significant risks in both their current state relative to the risk
appetite, and target state of acceptable exposure. This practice is
in compliance with the UK Corporate Governance Code, and enables
reports to be provided to the board for each full and half year
statutory accounting period. The board is therefore able to:
-- Make decisions on the level of risk it is prepared to manage
in order to deliver on the group's strategy;
-- Engage with the business to put appropriate controls in
place, and to ask questions and test the appropriateness of
plans;
-- Report externally on the long-term viability of the company in an informed manner; and
-- Monitor and review the effectiveness of procedures, systems and risk management thinking.
The most significant risks reflect three categories: the ten
highest business risk exposures (likelihood and impact) from across
the group; the ten highest risk exposures with an operational
context; and risks that have a remote likelihood of occurrence but
a significant impact should they occur. The board is also advised
of significant new or emerging risks pending assessment, risks
which carry serious reputational impact, and those which would not
otherwise be reported under the criteria described above, but
because of associated uncertainty are kept under a watching
brief.
Risk-specific governance and steering groups provide a picture
of ongoing individual risks, and these feed into the executive led
Group Audit and Risk Board (GARB), which focuses on governance,
risk and compliance.
The Audit Committee is also a fundamental component of the
governance structure. Supported by Company Secretariat and the
Corporate Audit teams, the Audit Committee reviews the
effectiveness of risk management and internal controls before these
are agreed by the board.
Key developments
Continuous improvement is a key feature of our business risk
management framework. In recent years we have matured fundamental
aspects of our enterprise-wide risk management approach. This has
been delivered through focusing on inherent risk, cross-business
assessment of control, response and recovery, as well as prevention
and consideration of extreme impacts in addition to more routine
impacts. These fully align to our business wide initiatives for
Systems Thinking and resilience, and going forward we will continue
to support the maturity of these through the further embedment of
the Business Risk Management Framework.
Aligned to this approach is the introduction of a separate New
and Emerging Risk forum over the last twelve months. This takes
place in addition to the BURA process to ensure that changing
circumstances from both the external and internal business
environments are taken into account, and we continue to consult
with external bodies to keep up to date with potential threats to
the sector. In January 2020 we undertook a cross-business
assessment of insider risk with the Centre for the Protection of
National Infrastructure (CPNI). We have also recently set up a
dedicated anti-fraud forum to understand potential threats and
impacts, and to develop mitigation strategies.
We have carried out a review of the National Risk Register for
Climate Change to cross reference our own risk profile and use the
assessment parameters to reassess our existing risks in the longer
term. This has better enabled us to understand potential impacts
and determine future strategies and associated funding
requirements.
As a utility company we take part in multi-agency partnerships
via Local Resilience Forums (LRFs) and in November 2018 we
developed a specific pandemic plan to provide support to our well
established incident management process. This plan has been the
basis for our COVID-19 incident management team, which was
established in January 2020 to maintain our key operations during
the incident, and to promote and support government advice on
containment, delay and social distancing.
Profile features
Our business risk profile, underpinning the principal risks,
consists of approximately 100 risks. Although the profile (as
reported to the board) remains relatively static in terms of its
headline inherent risk factors, the detail reflects the changing
nature of the political and regulatory environment, the transition
between the regulatory Asset Management Periods (AMPs), and
emerging circumstances including those associated with
COVID-19.
From a political and regulatory perspective the Final
Determination (FD) in December 2019 saw the crystallisation of
tougher targets and penalty/reward structures for operational
risks. Whilst we accepted the FD, four companies have made a
referral to the Competition and Markets Authority (CMA) which has
potential implications for the sector as we start to look at the
next price review (PR24). The General Election, which took place in
December 2019, ended the immediate threat of Nationalisation for
the water sector and also better informed some uncertainties around
Brexit. Despite this, uncertainty remains in respect of perceptions
of sector legitimacy and Brexit, including the potential for no
suitable trade deal with the EU and the potential implications for
our supply chain, particularly chemicals.
Looking more closely at operational and programme delivery risk,
the transition between AMPs is particularly relevant for our
Capital Programme. This involves AMP6 closedown work and related
AMP7 early start, working with new partners and contractors, and
delivering novel approaches. This will include the new Direct
Procurement for Customers (DPC) methodology and model which we are
utilising for our scheme to replace sections of the Haweswater
Aqueduct. Whilst DPC is Ofwat's favoured approach for certain types
of qualifying large projects of significant spend, it brings a
number of uncertainties, risks and challenges, including achieving
value for money, contract terms and risks and the effect on the
remainder of our operations and financial structures (including our
capital structure). Another key change for AMP7 is the introduction
of a new customer measure of experience (C-MeX) which looks beyond
direct customer experience of operational activity to a broader
perception of the company and brand orientation. Climate change
remains a key focus area, especially because of its impact on our
water resources, asset base and our operations, but also the
environment that we strive to protect and enhance. We are committed
to the principles set by the Financial Stability Board's Task Force
on Climate-related Disclosures (TCFD).
The COVID-19 pandemic has radically changed global economies,
compounding a number of the risk exposures already captured within
this business risk profile. These include risks in relation to
financing performance, revenue and cash collection, and supply
chain and operational delivery risks for water and wastewater. As
well as considering our existing risks, we work with our trade body
(Water UK) to understand additional potential scenarios, their
associated implications and to plan mitigation.
Principal risks
We have set out below the principal risks that could have a
material impact on the group's business model, future performance,
solvency or liquidity and reputation. These principal risks are a
combination of event-based risks and a description is provided as
to how they might cause losses or gains to arise. Areas of
potential exposure are illustrated and mitigating controls
described. Also shown are individual matters that are currently
significant risks, issues or areas of uncertainty, and which could
affect our overall risk exposure.
1. Political and regulatory risk - Developments connected with
the political and regulatory environment, including changes to
legislation. Risk decreased
Principal/significant impacts:
-- In view of the current global impact of COVID-19 and the
government's response to it, there is the potential for the costs
of administration to increase, for sources of income and funding to
be impacted and for greater uncertainty of returns as well as
increased uncertainty within the debt and equity markets causing
blockages to the raising of finance and the refinancing of debt in
the medium to long term;
-- Continuing challenges in relation to perceptions of
legitimacy of the water industry leading to increased scrutiny from
parliament, regulators and customers; and
-- The beginning of AMP7 from April 2020 and the delivery of our
new business plan in a period of great uncertainty.
Management and mitigation
We continue to take part in government and regulatory
consultations, despite the uncertain conditions associated with
COVID-19, in order to influence outcomes in respect of policy and
legislation. Our communications with customers continue so that
their needs and expectations can be factored into our thinking.
Current key risks, issues and uncertainties
The global COVID-19 pandemic and its impact on the stability and
certainty of regulation; challenges to the legitimacy of the water
industry; Ofwat's final determination and the commencement of AMP7;
greater regulatory scrutiny of competitive markets; ongoing and new
impacts of Brexit, including the effects on regulatory and
legislative regimes.
2. Conduct and compliance risk - The failure to adopt or apply
ethical standards, or to comply with legal and regulatory
obligations and responsibilities. Risk stable
Principal/significant impacts
Failure to comply with legal obligations could lead to financial
penalties, reputational harm and loss of customer and investor
confidence. Fines up to 10% of group turnover could be imposed,
particularly in the areas of environmental, health and safety,
competition and information and data security. Ultimately sanctions
could include revocation of the instrument of appointment (licence)
and the imposition of a special administration regime.
Management and mitigation
Despite the influence of the COVID-19 situation on all our
activities, we continue to place high importance and focus on
corporate responsibility. Our well established internal forums and
our work with communities, landowners, environmental groups and
other stakeholders allow us to remain engaged with and be aware of
issues and concerns including ethical supply chains, modern slavery
risks, the needs of vulnerable customers and diversity and equality
within our own employee population. We also monitor closely all
legislative and regulatory developments including in particular the
ongoing passage of the Environment Bill and the frameworks
regulating water quality, sludge and industrial emissions. The
revised requirements introduced by such changes are incorporated
into our operations and approach by means of policy, training and
working practices. We work with our regulators but challenge them
in a constructive and cost-effective manner where appropriate, and
we defend litigation involving third parties and seek recoveries of
outlay and losses.
Current key risks, issues and uncertainties
Developing competitive markets; material litigation; tighter
regulation of personal data (including GDPR); significant fines for
non-compliance.
3. Water service risk - A failure to provide a secure supply of
clean, safe drinking water and the potential for a negative impact
on public confidence in water supply. Risk stable
Principal/significant impacts :
-- Danger to public health caused by poor water quality;
-- The impact on communities caused by interruptions to water supply; and
-- COVID-19 restrictions affecting construction activity.
Management and mitigation
As a critical supplier we have continued to deliver on our
essential water supply duties during the COVID-19 pandemic. Our
centralised planning capabilities, use of Systems Thinking, risk
assessment, quality assurance and testing processes enable us to
maintain a resilient service. Our business plan for AMP7 contains
necessary capital programmes to enhance and maintain our service to
customers.
We embrace innovation and are working on projects to ensure
security of supplies in the long term. The continuation of our 25
year Water Resources Management Plan enables the delivery of
sustainable and secure water supplies, taking into account risk
factors including climate change, scarcity of supplies and
population growth.
Current key risks, issues and uncertainties
Failure of supply and distribution system; scarcity of supplies;
drought; population growth; adverse weather events; stricter
regulation of abstraction activities; uncertainty of global supply
chain in the light of Brexit; COVID-19 and its effect on the supply
chain and our construction activities.
4. Wastewater service risk - A failure to remove and treat wastewater. Risk stable
Principal/significant impacts
Pollution incidents, interruptions to drainage services and
sewer flooding could lead to damage to the natural environment,
disruption to businesses and domestic customers and could result in
significant fines and reputational harm. The evolving markets of
bioresources and sludge treatment introduce uncertainty. COVID-19
restrictions have affected construction activity.
Management and mitigation
Our innovative and efficient business processes, including
Systems Thinking, centralised planning and control, quality
assurance, risk management, sampling and monitoring of discharge
consents enable a proactive and predictive approach to controlling
and minimising incidents. Our business plan for AMP7 contains
necessary capital programmes to maintain and enhance our service to
customers.
Current key risks, issues and uncertainties
Failure of networks; adverse weather events and their effect on
the capacity of the sewer network; failure to treat wastewater;
pollution events; odour nuisance; population growth and its impact
on existing infrastructure; significant environmental fines;
COVID-19 and its effect on the supply chain and our construction
activities; changes to the regulatory regime; effects of Brexit on
the chemicals supply chain.
5. Retail and commercial risk - Failing to provide good and fair
service to domestic customers and third-party retailers or a
failure of or issue in relation to non-United Utilities Water
operations or businesses (including Water Plus). Risk
increased.
Principal/significant impacts
Particularly in the context of the economic downturn caused by
the measures taken to control the COVID-19 pandemic, there is a
risk of financial losses and an impact on profitability associated
with poor cash flow and an increase in bad debt and potential
regulatory penalties and reputational harm including as a result of
decreased customer satisfaction.
Management and mitigation
Our customer focused initiatives aim to drive excellent service
and enhance the experience of all our customers. We have an award
winning Priority Services programme for vulnerable customers and
those needing help to pay, which has driven up our success in
recovering charges in a personalised and sympathetic way. 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 where appropriate to better
understand customers' circumstances to determine the most effective
and collaborative collection and support activities. The 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. Similarly strong governance
applies to non-United Utilities Water operations and
businesses.
Current key risks, issues and uncertainties:
Competition in the bioresources, water and wastewater markets;
socio-economic deprivation in the North West; effects of COVID-19
on customers' ability to pay; economic downturn and the effect on
domestic bad debt; C-MeX and D-MeX; non-household retail
competition and the ability to treat other participants equally;
wholesale revenue collection; the challenges associated with being
involved in a joint venture water retail business (Water Plus)
operating in a competitive environment; business retail customer
payments, debt and bad debt during the period and aftermath of the
COVID-19 pandemic.
6. Financial risk - Potential inability to finance the business appropriately. Risk increased
Principal/significant impacts:
-- The COVID-19 pandemic has introduced significant uncertainty
into global financial markets, exacerbating 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
-- Tax inefficiencies, under or over payment of tax, deflation,
interest rates and energy prices and a potential worsening of the
pension scheme funding position could all lead to a significant
increase in costs to the group.
Management and Mitigation
Significant liquidity and refinancing which 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 and uncertainties:
Failure to achieve AMP7 financing outperformance; COVID-19;
lower inflation; financial market conditions; interest rates and
funding costs due to economic uncertainty associated with COVID-19
and Brexit; paying an appropriate amount of tax.
7. Supply chain and programme delivery risk - Potential
ineffective delivery of capital, operational and change
programmes/processes. Risk stable
Principal/significant impacts
The potential failure to meet our obligations and customer
outcomes, including DPC, resulting in an impact at future price
reviews, negative reputational impact with customers and
regulators. COVID-19 restrictions have challenged financial
resilience in supply chains and created an impact on cash flow.
Management and mitigation
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 programme 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 programmes 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 and uncertainties
New partnership structures and arrangements in AMP7; DPC,
including exit; technical quality and innovation; Brexit and
increased uncertainty of availability of materials sourced from
Europe; effects of COVID-19.
8. Resources risk - Failing to provide appropriate resources
(human, technological or physical resource) required to support
business activity. Risk stable
Principal/significant impacts:
-- The potential inability to recruit, retain or deploy knowledge and/or expertise;
-- The potential inability to respond and recover due to
ineffective non resilient business activity; and
-- COVID-19 could lead to significant staff absences, both
through illness and covering of other essential roles.
Management and mitigation
Developing our people with the right skills and knowledge,
combined with delivering effective technology to support the
business meeting 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. Resources are closely monitored
because of COVID-19, with homeworking and safe site working
practices being adopted. People with multiple skill sets are able
to add resilience across the business.
Current key risks, issues and uncertainties
Risks to health and safety of the workforce caused by COVID-19;
delivering required employee engagement; personal development,
talent management and succession planning; optimising technology
and innovation.
9. Security risk - Potential for malicious activity (physical or
technological) against people, assets or operations. Risk
stable
Principal/significant impacts:
-- The potential for a loss of data/information and the
consequent effect on service provision; and
-- The potential for catastrophic damage to our property,
infrastructure and non-infrastructure and the consequent effect on
service provision.
Management and mitigation
Physical and technological security measures and awareness
training combined with strong governance and inspection regimes 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), the Drinking Water Inspectorate 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 and in compliance with the
Network and Information Systems Directive (NIS). 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 instrument of appointment (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 and uncertainties
Cybercrime, particularly during the COVID-19 incident;
terrorism; fraud; 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.
Risk stable
Principal/significant impacts:
-- The effects of COVID-19 on employees, contractors and customers;
-- 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 on wildlife, fish or natural
habitats resulting in significant fines and reputational
damage.
Management and mitigation
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 and uncertainties
COVID-19; impounding reservoirs containing significant volumes
of water; other critical asset failure; multiple hazards including
process safety, use or accidental release of chemicals, excavation,
tunnelling and construction work; fluvial and coastal flooding
associated with climate change.
The group's top 10 event-based risks
As described above, the board regularly considers the group's
most significant risks in our business risk profile and which
underpin the principal risks set out above. The following are
summaries of the ten highest business risk exposures in an
operational context (likelihood and impact) from across the
group.
1. Failure of significant water supply systems with the current
lowest resilience due to asset deterioration, leading to water
quality issues and/or supply interruptions to a large proportion of
the UU customer base. Potential impacts include penalties,
additional cost, customer compensation and reputational damage .
Mitigation includes capital projects for asset replacement, as well
as extensive programmes of asset monitoring, surveys and
maintenance. RISK STABLE
2. Partial failure of the wastewater network owing to hydraulic
capacity, operational capacity or equipment failure relative to
changing and extreme weather conditions. Impacts include sewer
flooding and consequent penalties, additional cost, customer
compensation and reputational damage. Mitigation includes the
combination of the Drainage and Wastewater Management Plans (DWMP)
and embedment of the Wastewater Network Operating Model. These
include preventative maintenance, inspection regimes, asset
condition surveys, sewer rehabilitation projects, customer
campaigns and sewer cleaning programmes. RISK STABLE
3. Data and technology assets could be significantly compromised
due to malicious or accidental activity leading to a major impact
to key business processes and operations. Potential consequences
include penalties, additional costs, customer compensation and
reputational damage, as well as impacts to business services,
regulatory compliance, financial and operational performance.
Mitigation includes multiple layers of control with an approach
that covers people, process and technology. This includes a secure
perimeter with segmented internal network zones and a core data
network supported by infrastructure and system access controls,
with constant monitoring and 24/7 incident and forensic response
capability. RISK STABLE
4. Failure to adequately treat wastewater due to operational
capacity and capability of wastewater treatment works, leading to
environmental permit breaches, with potential impacts including
penalties, additional cost, customer compensation and reputational
damage . Mitigation includes an improved Effective Operations &
Maintenance (EO&M) programme and operating procedures including
proactive maintenance, operative training and compliance audits.
RISK STABLE
5. The unintended introduction of sewage and other pollutants
into the environment due the capacity and /or capability of
wastewater treatment or network assets, leading to extensive
environmental impact and pollution with potential ODI penalties,
prosecution fines, additional opex, capex and reputational damage.
Mitigation includes our proactive strategy of identifying defects
and collapses through the use of extensive field CCTV surveys,
staff training and incident analysis. In addition we are developing
a Pollution Incident Reduction Plan (PIRP) and are improving our
capabilities further through the development of IDAS (Integrated
Drainage Area Studies) and WwNM (Wastewater Network Management).
RISK STABLE
6. Competition in the bioresources market following the reforms
set out in the Water Act 2014, Water2020 and PR19 process, leading
to a loss of business and reduced operational efficiency.
Mitigation includes delivering operational efficiency, continued
engagement with Ofwat and a strategic review of the bioresources
business. RISK STABLE
7. Failure to achieve AMP 7 financing outperformance because of
falling CPIH inflation impacting the effective real rate on
embedded fixed rate nominal debt, resulting in a lower level of
financing outperformance than expected. Mitigation includes board
approval of our interest rates and inflation management strategies,
ongoing monitoring of markets and regulatory developments against
financial outperformance projections. RISK STABLE
8. Delay to the Haweswater Aqueduct Replacement Project,
triggered by exit from the DPC process. Causes could include the
market's failure to present a better value proposition than
in-house delivery, lack of market appetite/capability to deliver
the scheme, or unacceptable business impacts caused by financing.
Impacts include increased risks of failure due to project delays,
additional/unrecoverable cost and the requirement for significant
finance to be raised for in-house procurement. Mitigation includes
adoption of HM Treasury's Green Book process, regular liaison with
Ofwat, market engagement and financial modelling. We are also
progressing direct UU activity including ecological surveys and
ground investigations, which are both key activities to progressing
the planning applications, and developing the commercial aspects of
the DPC. RISK INCREASING
9. Partial failure of the water distribution system caused by
network characteristics, asset condition, operational strategies,
extreme weather or third party damage leading to the loss of
treated water and failure of the leakage target. Impacts include
incurring ODI penalties, extra opex to recover the leakage target
and reputational damage. Mitigation includes leakage detection
engineers, sounding valves and fittings within the network,
monitoring and managing pressure and flow and analysing and
interrogating system data to assess and allocate leak detection and
repairs to the right area. RISK DECREASING
10. Failure to treat sludge due to a combination of treatment
capacity and quality of sludge produced at WwTWs, leading to higher
operating costs, loss of revenue from renewable energy and the
potential for sludge to be inadequately disposed of. Mitigation is
by a Bioresource production planning process which incorporates
regular testing and analysis, a digester and tank cleaning
programme and a focused maintenance programme. RISK STABLE
New and emerging risks and issues
We continue to review and monitor external and internal risk
factors to understand and assess new and emerging risks, as well as
the evolution of existing risks. This enables us to plan our
strategy and operations to minimise threats of this nature. Notable
new and emerging risks and some possible impacts are set out
below.
-- No suitable trade deal with the EU: A dditional cost of
products sourced directly or indirectly from the EU. The most
critical product category is chemicals for the treatment of water
and sludge production.
-- COVID-19: In the short term there is a risk of reduced
recovery of household debtors, non-household charges to retailers
and the additional impact flowing from the risk of reduced recovery
of business customer receivables within Water Plus. In addition,
reduction in resource because of illness or self-isolation and the
impacts of social distancing have potential impacts on service
delivery, capital project delivery, ODIs and CMEX. In the longer
term, economic impacts resulting from COVID-19 could include
sustained levels of high unemployment and corporate failures
affecting debt collection and lower inflation affecting revenues,
financing costs and RCV.
-- Customer Measure of Experience (C-MeX): A new regulatory
customer service measure is being introduced for the new AMP which
introduces a much broader set of customer factors and measures than
the previous service element, opening up a new group of customers
and experiences which could affect our performance ratings.
-- Plastics: Implications associated with the current attention
on single use plastics and microplastic pollution in water,
wastewater effluent discharge and sludge disposal (see also
Biosolids Recycling below).
-- Biosolids Recycling to Agriculture: The practice of disposing
of biosolids to agriculture could be banned (partially or in full)
in the UK based on similar actions within Europe.
-- Water Scarcity & Water Trading: Water Scarcity is an
emerging issue within the UK which has knock on implications to UU
in relation to the proposed strategic transfer of water from the
North West to the South East of England and the associated service,
commercial and reputational impacts.
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. Beyond that reported in
previous years on the Argentina multiparty 'class action' and the
Manchester Ship Canal Company matters (to which there have been no
material developments), there is nothing specific to report on
material litigation.
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
2020 2019
GBPm GBPm
Revenue 1,859.3 1,818.5
------------ ------------
Employee benefit expense (note 4) (161.4) (169.6)
Other operating costs (note 5) (403.4) (422.8)
Allowance for expected credit losses - trade
and other receivables (41.8) (26.5)
Other income 3.4 3.6
Depreciation and amortisation expense (482.8) (393.2)
Infrastructure renewals expenditure (143.0) (175.1)
------------ ------------
Total operating expenses (1,229.0) (1,183.6)
------------ ------------
Operating profit 630.3 634.9
Investment income (note 6) 24.0 17.1
Finance expense (note 7) (308.0) (222.5)
Allowance for expected credit losses - loans
to joint ventures (5.0) -
------------ ------------
Investment income and finance expense (289.0) (205.4)
Share of (losses)/profits of joint ventures
(note 11) (38.1) 6.7
Profit before tax 303.2 436.2
Current tax charge (38.9) (38.8)
Deferred tax charge (157.5) (34.0)
Tax (note 8) (196.4) (72.8)
Profit after tax 106.8 363.4
------------ ------------
All of the results shown above relate to
continuing operations.
Earnings per share (note 9)
Basic 15.7p 53.3p
Diluted 15.6p 53.2p
Dividend per ordinary share (note 10) 42.60p 41.28p
Consolidated statement of comprehensive income
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Profit after tax 106.8 363.4
Other comprehensive income
Items that may be reclassified to profit or
loss in subsequent periods:
Cash flow hedge effectiveness (2.0) 0.4
Tax on items taken directly to equity (note
8) 0.4 (0.1)
Foreign exchange adjustments 1.3 (0.8)
------------ ------------
Other comprehensive income that may be reclassified
to profit or loss (0.3) (0.5)
Items that will not be reclassified to profit
or loss in subsequent periods:
Remeasurement gains on defined benefit pension
schemes (note 13) 154.6 73.0
Change in credit assumptions for debt reported
at fair value through profit or loss 34.2 6.6
Cost of hedging - cross currency basis spread
adjustment 1.3 (2.2)
Deferred tax adjustments in respect of prior
years on net fair value gains (2.4) -
Tax on items taken directly to equity (note
8) (157.1) (13.1)
------------ ------------
Other comprehensive income that will not be
reclassified to profit or loss 30.6 64.3
Total comprehensive income 137.1 427.2
------------ ------------
Consolidated statement of financial position
31 March 31 March
2020 2019
GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 11,510.9 11,153.4
Intangible assets 189.0 202.7
Investment in joint ventures (note 11) 46.8 79.0
Other investments (note 12) 0.1 11.5
Trade and other receivables 97.0 148.1
Retirement benefit surplus (note 13) 754.1 483.9
Derivative financial instruments 617.8 387.8
13,215.7 12,466.4
----------- -----------
Current assets
Inventories 16.6 14.9
Trade and other receivables 245.9 249.5
Current tax asset 37.7 16.4
Cash and short-term deposits 528.1 339.3
Derivative financial instruments 0.1 101.3
828.4 721.4
Total assets 14,044.1 13,187.8
----------- -----------
LIABILITIES
Non-current liabilities
Trade and other payables (761.2) (697.3)
Borrowings (note 14) (7,518.1) (7,115.6)
Deferred tax liabilities (1,462.6) (1,146.0)
Derivative financial instruments (135.4) (66.1)
----------- -----------
(9,877.3) (9,025.0)
----------- -----------
Current liabilities
Trade and other payables (334.4) (321.2)
Borrowings (note 14) (845.0) (700.2)
Provisions (16.4) (16.8)
Derivative financial instruments (8.9) (13.8)
----------- -----------
(1,204.7) (1,052.0)
----------- -----------
Total liabilities (11,082.0) (10,077.0)
----------- -----------
Total net assets 2,962.1 3,110.8
----------- -----------
EQUITY
Share capital 499.8 499.8
Share premium account 2.9 2.9
Other reserves (note 18) 336.7 338.3
Retained earnings 2,122.7 2,269.8
Shareholders' equity 2,962.1 3,110.8
----------- -----------
Consolidated statement of changes in equity
Year ended 31 March 2020
Share (1)
Share Premium Other Retained
capital account reserves earnings Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------------- --------- --------- ---------- ---------- --------
At 31 March 2019 499.8 2.9 338.3 2,269.8 3,110.8
----------------------------------------- --------- --------- ---------- ---------- --------
Profit after tax - - - 106.8 106.8
Other comprehensive income/(expense)
Remeasurement gains on defined benefit
pension schemes (note 13) - - - 154.6 154.6
Change in credit assumption for debt
reported at fair value through profit
or loss - - - 34.2 34.2
Cash flow hedge effectiveness - - (2.0) - (2.0)
Cost of hedging - cross currency basis
spread adjustment - - 1.3 - 1.3
Deferred tax adjustments in respect
of prior years on net fair value gains - - (2.4) - (2.4)
Tax on items taken directly to equity
(note 8) - - 0.2 (156.9) (156.7)
Foreign exchange adjustments - - 1.3 - 1.3
Total comprehensive income - - (1.6) 138.7 137.1
----------------------------------------- --------- --------- ---------- ---------- --------
Dividends (note 10) - - - (284.5) (284.5)
Equity-settled share-based payments - - - 1.5 1.5
Exercise of share options - purchase
of shares - - - (2.8) (2.8)
----------------------------------------- --------- --------- ---------- ---------- --------
At 31 March 2020 499.8 2.9 336.7 2,122.7 2,962.1
----------------------------------------- --------- --------- ---------- ---------- --------
Year ended 31 March 2019
Share (1)
Share Premium Other Retained
capital account reserves earnings Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- --------- --------- ---------- ---------- --------
At 31 March 2018 499.8 2.9 327.9 2,120.3 2,950.9
---------------------------------------- --------- --------- ---------- ---------- --------
Adjustment on initial adoption of
IFRS 9 (note 1) - - 12.7 (12.7) -
Adjustment on initial adoption of
IFRS 15 (note 1) - - - 5.9 5.9
---------------------------------------- --------- --------- ---------- ---------- --------
At 1 April 2019 499.8 2.9 340.6 2,113.5 2,956.8
---------------------------------------- --------- --------- ---------- ---------- --------
Profit after tax - - - 363.4 363.4
Other comprehensive income/(expense)
Remeasurement gains on defined benefit
pension schemes (note 13) - - - 73.0 73.0
Change in credit assumption for debt
reported at fair value through profit
or loss - - - 6.6 6.6
Cash flow hedge effectiveness - - 0.4 - 0.4
Cost of hedging - cross currency basis
spread adjustment - - (2.2) - (2.2)
Tax on items taken directly to equity
(note 8) - - 0.3 (13.5) (13.2)
Foreign exchange adjustments - - (0.8) - (0.8)
Total comprehensive income - - (2.3) 429.5 427.2
---------------------------------------- --------- --------- ---------- ---------- --------
Dividends (note 10) - - - (274.4) (274.4)
Equity-settled share-based payments - - - 4.0 4.0
Exercise of share options - purchase
of shares - - - (2.8) (2.8)
---------------------------------------- --------- --------- ---------- ---------- --------
At 31 March 2019 499.8 2.9 338.3 2,269.8 3,110.8
---------------------------------------- --------- --------- ---------- ---------- --------
(1) O ther reserves comprise the group's cumulative exchange
reserve, merger reserve, cost of hedging reserve, and cash flow
hedging reserve. Further detail of movements in these reserves is
included in note 18.
Consolidated statement of cash flows
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Operating activities
Cash generated from operations (note 16) 1,005.5 995.5
Interest paid (149.4) (143.0)
Interest received and similar income 9.9 7.3
Tax paid (71.5) (27.5)
Tax received 15.8 -
Net cash generated from operating activities 810.3 832.3
------------
Investing activities
Purchase of property, plant and equipment (652.8) (622.3)
Purchase of intangible assets (27.2) (39.9)
Proceeds from sale of property, plant
and equipment - 2.1
Grants and contributions received 34.7 35.2
Repayment/(extension) of loans to joint
ventures 34.5 (6.0)
Dividends received from joint ventures 4.9 2.2
Proceeds from disposal of investments 12.0 1.0
Net cash used in investing activities (593.9) (627.7)
Financing activities
Proceeds from borrowings net of issuance
costs 805.4 568.4
Repayment of borrowings (545.9) (668.6)
Dividends paid to equity holders of the
company (note 10) (284.5) (274.4)
Exercise of share options - purchase of
shares (2.8) (2.8)
Net cash used in from financing activities (27.8) (377.4)
------------ ------------
Net increase/(decrease) in cash and cash
equivalents 188.6 (172.8)
Cash and cash equivalents at beginning
of the year 324.6 497.4
------------ ------------
Cash and cash equivalents at end of the
year 513.2 324.6
------------ ------------
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year
ended 31 March 2020 have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Conduct
Authority.
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 2020, for which the auditors
have given an unqualified opinion.
The comparative figures for the year ended 31 March 2019 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.
The condensed consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union (EU). They have
been prepared on the going concern basis under the historical cost
convention, except for the revaluation of financial instruments,
accounting for the transfer of assets from customers and the
revaluation of infrastructure assets to fair value on transition to
IFRS.
The accounting policies, presentation and methods of computation
are prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union (EU) and are
consistent with those applied in the audited financial statement of
United Utilities Group PLC for the year ended 31 March 2019 with
the exception of the adoption of IFRS 16 'Leases'. Adoption of this
standard is in line with expectations set out in the March 2019
group financial statements.
Going concern
The financial statements have been prepared on the going concern
basis as the directors have a reasonable expectation that the group
has adequate resources for a period of at least 12 months from the
date of the approval of the financial statements and that there are
no material uncertainties to disclose.
In assessing the appropriateness of the going concern basis of
accounting the directors have reviewed the resources available to
the group in the form of cash and committed facilities as well as
consideration of the group's capital adequacy, along with a
baseline plan which reflects a view of the estimated impact of
COVID-19 on the group. This baseline plan assumes restrictions and
social distancing extend through the summer of 2020 resulting in a
one year GDP reduction of 8% which takes 10 quarters to recover,
unemployment peaking at 9%, CPIH inflation reducing to zero in the
year to 31 March 2021 and then increasing gradually, and
non-household business revenues reduced by around 30% in the year
to 31 March 2021 before being rebalanced through the revenue cap in
subsequent years. This baseline plan has then been subject to a
further more extreme downside stress scenario with elevated levels
of bad debt persisting in the medium term, increased totex costs,
outcome delivery incentive penalties and lower CPIH inflation.
Mitigating actions were considered to include access to new debt
finance; deferral of capital expenditure; close out of derivative
asset balances; access to additional equity and deferral of
dividends.
Having considered these matters, the directors do not believe
there are any material uncertainties to disclose in relation to the
group's ability to continue as a going concern.
Impact of newly adopted standards
IFRS 16 'Leases'
The group adopted IFRS 16 on 1 April 2019, applying the modified
retrospective transitional approach permitted by the standard in
which both the right-of-use assets and lease liabilities brought
onto the balance sheet were based on the present value of future
lease payments at the adoption date calculated using the
appropriate discount rate at 1 April 2019. Prior year comparatives
have not been restated. The group has utilised the practical
expedient permitted by the standard whereby a single discount rate
has been applied to portfolios of leases with reasonably similar
characteristics. Following initial adoption of the standard, lease
liabilities and right-of-use assets for new leases are based on the
appropriate discount rate at the date the new contract is entered
into.
The value of right-of-use assets and lease liabilities brought
onto the balance sheet on 1 April was GBP54.4 million; there has
been no effect on retained earnings at the adoption date. The
income statement charge during the year ending 31 March 2020 has
been GBP3.5 million, split between GBP1.9 million of depreciation
of the right-of-use assets and GBP1.6 million in relation to the
finance charge recognised on the lease liabilities. This compares
with GBP3.3 million of operating lease expenses that would have
been recognised under IAS 17. Although the adoption of IFRS 16 has
directly impacted the profit for the group during the period, the
modest GBP0.2m impact means that the EPS and diluted EPS of the
group have not been materially changed by the adoption of IFRS 16.
There has been no net cash flow impact arising from the application
of the new standard.
At 31 March 2020 the value of right-of-use assets included
within property, plant and equipment was GBP57.4 million and the
value of lease liabilities included within borrowings was GBP57.6
million, of which GBP54.7 million was classified as non-current and
GBP2.9 million was classified as current.
As part of the group's transition to IFRS 16 an exercise was
carried out to assess whether contracts it has entered into are, or
contain, leases as defined by the new standard. This has resulted
in some differences between the population of contracts identified
as containing leases under previous accounting standards, and for
which operating lease commitments were disclosed at 31 March 2019,
and the population of contracts deemed to contain leases under IFRS
16. Had all operating lease commitments disclosed under previous
accounting standards at 31 March 2019 been recognised as leases
under IFRS 16, by discounting future lease payments using the
group's weighted average incremental borrowing rate applied to
lease liabilities of 3.09 per cent, the right-of-use assets and
lease liabilities brought onto the balance sheet would have been
GBP18.0 million higher. Expenses relating to those contracts that
do not contain leases within the scope of IFRS 16 continue to be
recognised as operating expenses in the income statement over the
term of the agreement.
The typical items which the group leases include land,
buildings, operational assets and vehicles. The right-of-use assets
and lease liabilities are both based on the present value of lease
payments due over the term of the lease, with the asset being
depreciated in accordance with IAS 16 'Property, Plant and
Equipment' and the liability increased for the accretion of
interest (being the unwinding of the discounting applied to the
future lease payments) and reduced by lease payments.
The key judgements associated with applying this standard relate
to the identification and classification of contracts containing a
lease within the scope of IFRS 16 and the discount rate to use in
calculating the present value of future lease payments on which the
reported lease liability and right-of-use asset is based when it is
not implicit in the lease contract.
Due to the nature of the group's operations, many of the current
leases have long remaining terms, which causes the discount rate to
be a key factor in determining the value of the lease liability.
When the interest rate is not implicit in the lease, which is the
case for materially all of the group's leases recognised under IFRS
16, the discount rate which is used is based on the relevant group
company's nominal incremental borrowing rate adjusted for the
payment profile and term of each lease.
The group has applied recognition exemptions permitted by the
standard in relation to short-term leases and leases of low-value
items.
The adoption of IFRS 16 has not impacted the group's ability to
comply with any banking or financing covenants.
Clarifications on the application of IFRS 16 made in IFRIC
agenda decisions during the year ('Subsurface rights' - June 2019;
'Lessee's incremental borrowing rate' - September 2019; 'Lease term
and useful life of leasehold improvements' - November 2019;
'Definition of a lease - decision-making rights' - January 2020)
have not affected our application of the standard.
Early adopted new and revised standards
Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and
IFRS 7
In January 2020, the EU endorsed the IASB-published amendments
to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments:
Recognition and Measurement' and IFRS 7 'Financial Instruments:
Disclosures' in respect of interest rate benchmark reform,
effective for annual periods beginning on or after 1 January 2020
with early adoption permitted. These amendments provide temporary
exceptions from applying specific hedge accounting requirements
where a hedging relationship is directly or indirectly affected by
the market-wide interest rate benchmark reform, where certain
financial market benchmark reference rates (such as LIBOR) will be
required to be changed to nearly risk-free alternative rates.
As the group has a significant proportion of debt and derivative
financial instruments designated in fair value hedge relationships
that are linked to LIBOR, which is expected to be replaced by an
alternative interest rate benchmark after 2021, these amendments
are applicable to the group's hedge accounting. The temporary
exceptions provided for in the amendments mean that no changes to
the group's hedge accounting are expected to the extent that they
are impacted by interest rate benchmark reform. In accordance with
the published provisions, these amendments are adopted
retrospectively to hedging relationships that existed at the start
of the reporting period. The relief set out in this amendment will
end at the earlier of when the uncertainty regarding the timing and
amount of interest rate benchmark-based cash flows is no longer
present, or the discontinuation of the hedging relationship.
The group's treasury function is actively considering and
preparing for the potential implications of interest rate benchmark
reform in anticipation of any changes.
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. Revenue
31 March 31 March
2020 2019
GBPm GBPm
Wholesale water charges 784.8 767.4
Wholesale wastewater charges 939.5 905.8
Household retail charges 83.8 86.7
Other 51.2 58.6
-----------
1,859.3 1,818.5
----------- -----------
In accordance with IFRS 15, revenue has been disaggregated based
on what is recognised in relation to the core services of supplying
clean water and the removal and treatment of wastewater. Each of
these services is deemed to give rise to a distinct performance
obligation under the contract with customers, though following the
same pattern of transfer to the customer who simultaneously
receives and consumes both of these services over time.
Wholesale water and wastewater charges relate to services
provided to household customers and non-household retailers.
Household retail charges relate solely to the margin applied to the
wholesale amounts charged to residential customers. These wholesale
charges and the applicable retail margin are combined in arriving
at the total revenues relating to water and wastewater services
provided to household customers. No margin is applied to wholesale
water and wastewater services provided to non-household
retailers.
Other revenues comprise a number of smaller non-core income
streams including those relating to energy generation and export,
and those associated with activities, typically performed opposite
property developers, which impact the group's capital network
assets including diversions works to relocate water and wastewater
assets, and activities that facilitate the creation of an
authorised connection through which properties can obtain water and
wastewater services.
4. Employee benefits expense
Included within employee benefits expense were GBP11.8 million
(31 March 2019: GBP7.2 million) of restructuring costs.
In the prior year GBP6.6 million of costs associated with the
equalisation of Guaranteed Minimum Pension (GMP) benefits were
recognised, along with GBP1.4 million of employee costs incurred in
relation to the group's response to a severe dry weather event.
5. Other operating costs
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Hired and contracted services 96.6 112.2
Power 78.9 72.8
Property rates 75.9 94.7
Materials 75.1 77.8
Regulatory fees 28.3 32.5
Loss on disposal of property,
plant and equipment 13.9 3.9
Cost of properties disposed 0.4 4.7
Settlement of commercial claims - (9.9)
Other expenses 34.3 34.1
403.4 422.8
------------- -------------
During the current year the group incurred operating costs of
GBP19.2 million relating to the COVID-19 pandemic, comprising
GBP18.1 million in relation to incremental charges for bad and
doubtful receivables, and GBP1.1 million of operating costs
relating to the direct response to the pandemic.
Property rates expenses in the current year include the impact
of an GBP8.1 million refund in relation to rates paid in previous
years resulting from a revision to the rateable value of the
group's water assets as agreed with the Valuation Office Agency
(VOA). This reduction ensures that the cumulative property rates
paid by the group are appropriately recorded. In addition to this,
accrued property rates relating to wastewater assets have been
reassessed during the current year resulting in an GBP8.2 million
reduction in rates costs reflecting properties identified as being
non-rateable and management's revised estimate of the likely rates
payable on properties whose rateable values are yet to be
assessed.
During the current year, operating costs of GBP3.1 million and
infrastructure renewals expenditure of GBP4.7 million were incurred
in response to Storms Ciara and Dennis in February 2020.
During the prior year, as a result of the group's response to a
severe dry weather event, there were GBP36.1 million of expenses
incurred, comprising GBP24.2 million of other operating costs,
GBP10.1 million of infrastructure renewals expenditure, and GBP1.4
million of employee costs (see note 4).
6. Investment income
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Interest receivable 10.0 7.6
Net pension interest income (note
13) 14.0 9.5
24.0 17.1
------------- -------------
7. Finance expense
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Interest payable 231.7 232.0
Net fair value losses/(gains)
on debt and derivative instruments 76.3 (9.5)
------------- -------------
308.0 222.5
------------- -------------
Interest payable is stated net of GBP40.6 million (31 March
2019: GBP37.4 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
GBP100.8 million (31 March 2019: GBP98.3 million) non-cash
inflation expense in relation to the group's index-linked debt.
In addition to the GBP308.0 million finance expense, expected
credit losses of GBP5.0 million have been recognised during the
current year (31 March 2019: nil) in relation to loans extended to
the group's joint venture, Water Plus, following a significant
increase in credit risk resulting from the impacts of the COVID-19
pandemic on Water Plus's operations. (See note 20 for further
details on these related party balances).
Net fair value gains on debt and derivative instruments includes
GBP16.0 million income (31 March 2019:
GBP30.6 million) due to net interest on derivatives and debt
under fair value option, and GBP0.5 million income (31 March 2019:
nil) due to non-cash inflation uplift on the group's index-linked
derivatives.
8. Tax
During the year ended 31 March 2020 there was a current tax
credit of GBP12.2 million (31 March 2019: GBP2.8 million) and a
deferred tax charge of GBP5.6 million (31 March 2019: GBP1.4
million credit) relating to agreed matters in relation to prior
years.
Excluding the deferred tax adjustment for the change in tax rate
of GBP135.5 million in the current year, the total effective tax
rate for the current and prior period was in line with the headline
rate of 19 per cent. The split of the total tax charge between
current and deferred tax was due to ongoing timing differences in
relation to tax deductions on capital investment, pension
contributions, 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 including the adjustment arising from a change in the rate
at which the deferred tax liabilities are measured, from 17 per
cent to 35 per cent. This change in rate reflects a revised
judgement as to the most likely method by which the defined benefit
pension surplus would be realised. Whereas previously it was
assumed that the surplus could be realised through a reduction in
future contributions, management now consider that the most likely
method of realisation would be through a refund, which would be
taxed at the rate applicable to refunds from a trust (currently 35
per cent).
9. 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 2020 for the purpose of the basic earnings per share
was 681.9 million (31 March 2019: 681.9 million) and for the
diluted earnings per share was 683.6 million (31 March 2019: 683.4
million).
10. Dividends
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Dividends relating to the year comprise:
Interim dividend 96.8 93.8
Final dividend 193.7 187.7
----------- -----------
290.5 281.5
----------- -----------
Dividends deducted from shareholders' equity
comprise:
Interim dividend 96.8 93.8
Final dividend 187.7 180.6
----------- -----------
284.5 274.4
----------- -----------
The proposed final dividends for the years ended 31 March 2020
and 31 March 2019 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 2020 and 31 March 2019 respectively.
The final dividend of 28.40 pence per ordinary share (2019:
27.52 pence per ordinary share) is expected to be paid on 3rd
August 2020 to shareholders on the register at the close of
business on 26th June 2020. The ex-dividend date for the final
dividend is 25th June 2020.
The interim dividend of 14.20 pence per ordinary share (2019:
13.76 pence per ordinary share) was paid on 3rd February 2020 to
shareholders on the register at the close of business on 20
December 2019.
11. Investment in joint ventures
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
At the start of the year 79.0 75.2
Share of (losses)/profits of joint ventures (38.1) 6.7
Less: Losses allocated to other components 9.5 -
of long-term interest
Dividends received from joint ventures (4.9) (2.2)
Currency translation differences 1.3 (0.7)
----------- -----------
At the end of the year 46.8 79.0
----------- -----------
The group's interests in joint ventures mainly comprise its 50
per cent interest in Water Plus Group Limited (Water Plus) and its
35.3 per cent interest in 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.
The group's total share of Water Plus losses for the year was
GBP51.5 million (2019: GBP0.4 million share of losses), of which
GBP46.2 million has been recognised in the income statement and
GBP5.3 million has not been recognised as at 31 March 2020 (2019:
GBPnil not recognised). The GBP46.2 million recognised share of
losses comprises GBP36.7 million that has been allocated to the
group's equity investment, and GBP9.5 million allocated to the zero
coupon shareholder loan notes extended to Water Plus as these form
part of the group's long-term interest in the joint venture. The
share of losses recognised against each component of the group's
net investment in Water Plus has reduced each of them to GBPnil at
31 March 2020. Of the GBP46.2 million recognised share of losses,
GBP32.0 million represents the group's recognised share of Water
Plus's losses relating to the COVID-19 pandemic, including the
crystallisation of an impairment of goodwill and certain other
intangible assets recognised by Water Plus, and a significant
incremental charge to recognise additional expected credit losses
in relation to trade and other receivables. The remaining GBP14.2
million relates to the group's share of Water Plus's underlying
loss for the year.
Tallinn Water recognised a provision of EUR 13.2 million in its
latest financial statements relating to possible third-party
claims. The maximum potential undiscounted payments if potential
claims were recognised by the courts would amount to EUR 33.1
million. If the value of actual claims exceed the amount provided
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 in the period in which this occurs.
Details of transactions between the group and its joint ventures
are disclosed in note 20.
12. Other investments
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
At the start of the period 11.5 7.1
Change in fair value 0.6 4.4
Reduction in investment stake (1.1) (1.0)
Disposal of investment (10.9) -
Currency translation differences - 1.0
----------- -----------
At the end of the period 0.1 11.5
----------- -----------
On 3 December 2019 the group completed the disposal of its
overseas investment in the Muharraq sewerage treatment plant (STP).
Consideration for the disposal was equal to the fair value at which
the asset was carried resulting in no gain or loss on disposal.
13. 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
2020 2019
%pa %pa
Discount rate 2.30 2.40
Pension increases 2.80 3.45
Pensionable salary growth:
ESPS 2.80 3.45
UUPS 1.60 2.05
Price inflation - RPI 2.80 3.45
Price inflation - CPI 1.60 2.05
The discount rate is consistent with a high quality corporate
bond rate with 2.30 per cent being equivalent to gilts + 160 bps
(31 March 2019: 2.40 per cent being equivalent to gilts +
90bps).
In September 2019, the Chancellor of the Exchequer highlighted
the UK Statistics Authority's proposals to change RPI to align with
CPIH (Consumer Pricing Index, including housing costs). The
Chancellor commented that any change would not be made before 2025
and possibly not until 2030. At the March 2020 budget, the
Chancellor launched a public consultation on these proposals which
is due to close in August 2020. To provide an indication of the
differential between RPI and CPIH, broadly CPIH increases are
expected to average around 1% p.a. below RPI in the long-term
(about the same as CPI), so this change could have a significant
impact on many pension schemes. A reduction in RPI will result in a
reduction to pension scheme liabilities, however as our pension
schemes are hedged for RPI inflation this will also result in a
comparable reduction to pension scheme assets.
At both 31 March 2020 and 31 March 2019, 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 106 per cent and 109 per cent for male pensioners and
non-pensioners respectively, and 104 per cent and 105 per cent for
female pensioners and non-pensioners respectively, reflecting
actual mortality experience. At 31 March 2020, mortality in
retirement is based on CMI 2019 (31 March 2019: CMI 2018) long-term
improvement factors, with a long-term annual rate of improvement of
1.50 per cent (31 March 2019: 1.50 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
2020 2019
GBPm GBPm
Current service cost 6.1 6.2
Curtailments/settlements 4.6 9.0
Administrative expenses 1.6 2.8
Pension expense charged to operating profit 12.3 18.0
Net pension interest credited to investment
income (note 6) (14.0) (9.5)
----------- -----------
Net pension (income)/expense (credited)/charged
before tax (1.7) 8.5
----------- -----------
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
2020 2019
GBPm GBPm
At the start of the year 483.9 344.2
Income/(expense) recognised in the income
statement 1.7 (8.5)
Contributions 113.9 75.2
Remeasurement gains gross of tax 154.6 73.0
----------- -----------
At the end of the year 754.1 483.9
----------- -----------
The closing surplus at each reporting date is analysed as
follows:
31 March 31 March
2020 2019
GBPm GBPm
Present value of defined benefit obligations (3,057.6) (3,425.2)
Fair value of schemes' assets 3,811.7 3,909.1
---------- ----------
Net retirement benefit surplus 754.1 483.9
---------- ----------
The GBP154.6 million remeasurement gain has principally resulted
from an increase in credit spreads during the year. The impact of
movements in credit spreads is less pronounced on a scheme funding
basis compared with the remeasurement gain recognised on an IAS 19
accounting basis as the discount rate used for valuing obligations
utilises a fixed credit spread assumption.
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 2020.
In April 2019 accelerated deficit repair contributions of
GBP97.6 million and GBP5.4 million were made to the UUPS and ESPS
respectively. These payments represent the final acceleration of
deficit repair contributions set out in the schedules of
contributions agreed with the schemes' trustees as part of the 31
March 2018 valuation process, and reduce the pension scheme deficit
contributions due from the company down to GBPnil.
As the 2018 valuation basis was consistent with a long-term
target for self-sufficiency, the expectation is that the pension
schemes will be fully funded on a low dependency basis without
additional contributions from the company.
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 2018 for both the group's ESPS
and UUPS schemes.
On 26 October 2018 the High Court issued its ruling in a
landmark case involving Lloyds Banking Group on GMP. The
implication of the ruling is that GMP will be equalised for males
and females. The impact of GMP equalisation under the chosen C2
method of calculation is GBP5.5 million (0.2% of liability) for the
UUPS and GBP1.1 million (0.3% of liability) for the ESPS, resulting
in an overall increase in the prior year pension liability of
GBP6.6 million as a result of additional benefits being recognised,
with a corresponding amount recorded in past service costs in the
income statement. Any future true up costs will be accounted for in
OCI as a change in management estimate.
Defined contribution schemes
During the year, the group made GBP22.5 million (31 March 2019:
GBP23.0 million) of contributions to defined contribution schemes
which are included in employee benefits expense.
14. Borrowings
New borrowings raised during the year ended 31 March 2020, all
of which were issued under the Euro medium-term note programme,
were as follows:
-- On 17 April 2019, the group borrowed GBP100 million, CPI-linked, due April 2029.
-- On 3 July 2019, the group issued GBP250 million fixed rate
notes and on 3 December 2019, the group issued a further GBP50
million due July 2033.
-- On 10 February 2020, the group issued GBP250 million fixed rates notes due February 2038.
Borrowings at 31 March 2020 include GBP57.6 million in relation
to lease liabilities for the first time as a result of the adoption
of IFRS 16 'Leases' during the period, of which GBP54.7 million was
classified as non-current and GBP2.9 million classified as
current.
15. Fair values of financial instruments
The fair values of financial instruments are shown in the table
below.
31 March 31 March
2020 2019
Fair Carrying Fair Carrying
value value value value
GBPm GBPm GBPm GBPm
Financial assets at fair value through
profit or loss
Derivative financial assets - fair
value hedge 395.7 395.7 329.4 329.4
Derivative financial assets - held
for trading 222.0 222.0 158.5 158.5
Derivative financial assets - cash
flow hedge 0.2 0.2 1.2 1.2
Investments 0.1 0.1 11.5 11.5
Financial liabilities at fair value
through profit or loss
Derivative financial liabilities -
fair value hedge - - (2.3) (2.3)
Derivative financial liabilities -
held for trading (141.9) (141.9) (75.9) (75.9)
Derivative financial liabilities -
cash flow hedge (2.4) (2.4) (1.7) (1.7)
Financial liabilities designated as
fair value through profit or loss (397.5) (397.5) (373.9) (373.9)
Financial instruments for which fair
value does not approximate carrying
value
Financial liabilities in fair value
hedge relationships (2,440.0) (2,590.5) (2,749.3) (2,765.8)
Other financial liabilities at amortised
cost (5,996.0) (5,375.1) (5,781.9) (4,676.1)
---------- ---------- ---------- ----------
(8,359.8) (7,889.4) (8,484.4) (7,395.1)
---------- ---------- ---------- ----------
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 GBP1,981.5 million (31 March 2019: GBP2,316.9 million)
for financial liabilities in fair value hedge relationships and
GBP199.9 million (31 March 2019: GBP680.9 million) for other
financial liabilities at amortised cost.
The GBP816.4 million decrease (31 March 2019: GBP1,620.2 million
decrease) in 'level 1' fair value liability measurements is largely
due to a decrease in the number of observable quoted bond prices in
active markets at 31 March 2020. 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 2020.
The principal reason for the reduction in the difference between
the fair value and carrying value of the group's borrowings
compared with the position at 31 March 2019 is an increase in
credit spreads during the period.
16. Cash generated from operations
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
Operating profit 630.3 634.9
Adjustments for:
Depreciation of property, plant and equipment 441.6 357.3
Amortisation of intangible assets 41.2 35.9
Loss on disposal of property, plant and equipment 13.9 3.9
Amortisation of deferred grants and contributions (13.8) (12.9)
Equity-settled share-based payments charge 1.5 4.0
Changes in working capital:
(Increase)/Decrease in inventories (1.7) 1.9
Decrease in trade and other receivables 4.6 11.7
(Decrease)/increase in trade and other payables (10.1) 21.3
Decrease in provisions (0.4) (5.3)
Pension contributions paid less pension expense
charged to operating profit (101.6) (57.2)
---------- ----------
Cash generated from operations 1,005.5 995.5
---------- ----------
17. Net debt
Year ended Year ended
31 March 31 March
2020 2019
GBPm GBPm
At the start of the year 7,067.3 6,867.8
Net capital expenditure 645.3 624.9
Dividends (note 10) 284.5 274.4
Interest 139.5 135.7
Inflation expense on index-linked debt
(note 6) 100.8 98.3
Tax 55.7 27.5
Non-cash movements in lease liabilities 60.9 -
(Repayment)/extension of loans to joint
ventures (34.5) 6.0
Proceeds from disposal of investment (12.0) (1.0)
Dividends from joint ventures (4.9) (2.1)
Other 5.5 (4.1)
Fair value movements 58.8 27.3
Cash generated from operations (note
16) (1,005.5) (995.5)
----------- -----------
At the end of the year 7,361.4 7,067.3
----------- -----------
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 losses on debt and
derivative instruments of GBP43.5 million (31 March 2019: GBP14.3
million net fair value gains) less net receipts on derivatives and
debt designated at fair value of GBP15.3 million (31 March 2019:
GBP40.6 million) and foreign exchange gains on investments measured
at fair value through profit or loss of GBPnil (31 March 2019:
GBP1.0 million).
Notional net debt totals GBP7,181.3 million as at 31 March 2020
(31 March 2019: GBP6,995.9 million). Notional net debt is
calculated as the principal amount of debt to be repaid, net of
cash and short-term deposits, taking: the face value issued of any
nominal sterling debt; the inflation accreted principal of the
group's index-linked debt; and the sterling principal amount of the
cross-currency swaps relating to the group's foreign currency
debt.
18. Other reserves
Year ended 31 March 2020
Cost Cash
Cumulative Capital of flow
Exchange Redemption Merger Hedging Hedge
reserve reserve reserve reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2019 (3.7) 1,033.3 (703.6) 12.0 0.3 338.3
Changes in fair value recognised
in other comprehensive income - - - 1.3 (7.6) (6.3)
Amounts reclassified from
other comprehensive income
to profit or loss - - - - 5.6 5.6
Deferred tax adjustments in
respect of prior years on
net fair value gains - - - (2.4) - (2.4)
Tax on items taken directly
to equity (note 8) - - - (0.2) 0.4 0.2
Foreign exchange adjustments 1.3 - - - - 1.3
At 31 March 2020 (2.4) 1,033.3 (703.6) 10.7 (1.3) 336.7
---------------------------------- ----------- ------------ --------- --------- --------- ------
Year ended 31 March 2019
Capital Cost Cash
Cumulative Redemption Merger of flow
Exchange Reserve Reserve Hedging Hedge
reserve (restated) (restated) reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 March 2018 (1.8) 1,033.3 (703.6) - - 329.7
Adjustment on initial application
of IFRS 9 (1.1) - - 13.8 - 12.7
At 1 April 2018 (2.9) 1,033.3 (703.6) 13.8 - 340.6
Changes in fair value recognised
in other comprehensive income - - - (2.2) 3.5 1.3
Amounts reclassified from
other comprehensive income
to profit or loss - - - - (3.1) (3.1)
Tax on items taken directly
to equity (note 8) - - - 0.4 (0.1) 0.3
Foreign exchange adjustments (0.8) - - - - (0.8)
At 31 March 2019 (3.7) 1,033.3 (703.6) 12.0 0.3 338.3
----------------------------------- ----------- ------------ ------------ --------- --------- ------
The capital redemption reserve arose as a result of a return of
capital to shareholders following the reverse acquisition of United
Utilities PLC by United Utilities Group PLC in the year ended 31
March 2009. The merger reserve arose in the same year on
consolidation and represents the capital adjustment to reserves
required to effect the reverse acquisition. The prior year balances
for these reserves have been restated to better reflect the nature
of the transactions associated with the reverse acquisition in the
group's consolidated financial statements.
On adoption of IFRS 9 on 1 April 2018, the group recognised the
cost of hedging reserve as a new component of equity. This reserve
reflects accumulated fair value movements on cross-currency swaps
resulting from changes in the foreign currency basis spread, which
represents a liquidity charge inherent in foreign exchange
contracts for exchanging currencies and is excluded from the
designation of cross-currency swaps as hedging instruments.
On adoption of IFRS 9, the group designated a number of swaps
hedging non-financial risks in cash flow hedge relationships in
order to give a more representative view of operating costs. Fair
value movements relating to the effective part of these swaps are
recognised in other comprehensive income and accumulated in the
cash flow hedging reserve.
19. Commitments and contingent liabilities
At 31 March 2020 there were commitments for future capital
expenditure contracted but not provided for of GBP435.2 million (31
March 2019: GBP302.2 million).
Details of the group's contingent liabilities were disclosed in
the audited financial statements of United Utilities Group PLC for
the year ended 31 March 2020. There have been no significant
developments relating to contingent liabilities in the year.
The group has determined that the possibility of any outflow in
respect of performance guarantees issued is remote and, as such, no
contingent liabilities in respect of these are disclosed (31 March
2019: none).
20. 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
2020 2019
GBPm GBPm
Sales of services 438.3 455.8
Charitable contributions advanced to related
parties 0.4 0.5
Purchases of goods and services 0.1 0.1
Costs recharged at nil margin under transitional
service agreements - 0.2
Interest income and fees recognised on loans
to related parties 4.0 4.3
Amounts owed by related parties 147.9 182.9
Amounts owed to related parties 4.8 0.6
Sales of services to related parties during the year mainly
represent non-household wholesale charges to Water Plus that were
billed and accrued during the period. These transactions were on
market credit terms in respect of non-household wholesale charges,
which are governed by the wholesale charging rules issued by
Ofwat.
Charitable contributions advanced to related parties during the
year relate to amounts paid to Rivington Heritage Trust, a
charitable company limited by guarantee for which United Utilities
Water Limited is one of three guarantors.
At 31 March 2020 amounts owed by joint ventures, as recorded
within trade and other receivables in the statement of financial
position, were GBP147.9 million (31 March 2019: GBP182.9 million),
comprising GBP52.9 million (31 March 2019: GBP39.4 million) of
trade balances, which are unsecured and will be settled in
accordance with normal credit terms, and GBP95.0 million (31 March
2019: GBP143.5 million) relating to loans.
Included within these loans receivable were the following
amounts owed by Water Plus:
-- GBP93.5 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 2021, bearing a floating interest rate of LIBOR plus a
credit margin. This balance comprises GBP98.0 million outstanding
net of a GBP4.5 million allowance for expected credit losses;
-- GBPnil receivable being the GBP10.0 million 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, net of a GBP0.5 million allowance for expected credit losses
and GBP9.5 million of the group's recognised share of joint venture
losses as the loan note is deemed to be part of the group's
long-term interest in Water Plus. This is a zero coupon shareholder
loan with a total amount outstanding at 31 March 2020 of GBP12.5
million, comprising the GBP10.0 million receivable measured at fair
value, and GBP2.5 million recorded as an equity contribution to
Water Plus recognised within interests in joint ventures; and
-- GBPnil outstanding on a GBP32.5 million revolving credit
facility provided by United Utilities PLC, with a maturity date of
30 September 2021, bearing a floating interest rate of LIBOR plus a
credit margin.
A further GBP1.4 million of non-current receivables (31 March
2019: GBP1.4 million) was owed by other related parties at 31 March
2020.
The allowances for expected credit losses of GBP4.5 million and
GBP0.5 million, recognised against the revolving credit facilities
and zero coupon shareholder loan note respectively, together with
the GBP9.5 million share of joint venture losses recognised against
the interest-free shareholder loan note, result from the impacts of
the COVID-19 pandemic, which has resulted in Water Plus recognising
significant losses during the year giving rise to a significant
increase in credit risk. No allowances for expected credit losses
or share of joint venture losses were recognised against any of
these balances in the prior year.
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 GBP54.1
million, of which GBP32.1 million, related to guarantees to United
Utilities Water Limited.
At 31 March 2020, amounts owed to related parties were GBP4.8
million (31 March 2019: GBP0.6 million). Included within this
amount is GBP4.5 million due to Water Plus for the surrender of
consortium relief tax losses for the year ended 31 March 2020. The
amounts outstanding are unsecured and will be settled in accordance
with normal credit terms.
21. Events after the reporting period
As at the time of reporting, the developing and uncertain
situation in respect of the COVID-19 pandemic continues to be
closely monitored. Ofwat initiated a consultation during March 2020
aimed at identifying ways in which the non-household retail market
might be supported through the current challenging situation, and
this remains ongoing as at the date these financial statements were
approved. The outcome of this consultation will impact both
non-household retailers such as Water Plus, and wholesalers such as
UUW.
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 2020. 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:
Sir David Higgins
Steve Mogford
Stephen Carter
Mark Clare
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
21 May 2020 21 May 2020
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 SEAEFFESSEDI
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May 22, 2020 02:00 ET (06:00 GMT)
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