TIDMUU.
RNS Number : 1703G
United Utilities Group PLC
25 May 2017
United Utilities Group PLC
25 May 2017
FULL Year RESULTS FOR THE YEARED 31 MARCH 2017
Industry leading customer satisfaction, innovation and
operational performance
-- Record SIM scores resulting in upper quartile performance
-- Systems Thinking approach delivering industry leading innovation and operational performance
-- Sector leading status with Environment Agency and Dow Jones Sustainability Index
Investing for customers
-- GBP804m investment taking total AMP6 investment to GBP1.6bn over first two years
-- Accelerated investment delivering further operational and
customer benefits and contributing to a net ODI reward of
GBP6.7m
-- Announcing today additional GBP100m of new investment to improve resilience for customers
Strong financials
-- Underlying operating profit up 3% to GBP622.9m (reported
operating profit up 7% to GBP605.5m)
-- Total dividends of 38.87p, up 1.1%, in line with policy
-- Robust capital structure and effective pensions hedging
Key financials
Year ended
----------------------------- ------------------------------
Continuing operations 31 March 2017 31 March 2016
----------------------------- -------------- --------------
Revenue GBP1,704.0m GBP1,730.0m
----------------------------- -------------- --------------
Underlying operating GBP622.9m GBP604.1m
profit(1)
----------------------------- -------------- --------------
Reported operating profit GBP605.5m GBP567.9m
----------------------------- -------------- --------------
Total dividend per ordinary
share (pence) 38.87p 38.45p
----------------------------- -------------- --------------
RCV gearing(2) 61% 61%
----------------------------- -------------- --------------
(1) Underlying profit measures have been provided to give a more
representative view of business performance and are defined in the
underlying profit measure tables
(2) Regulatory capital value or RCV gearing calculated as group
net debt/United Utilities Water's shadow RCV (outturn prices)
Steve Mogford, Chief Executive Officer, said:
"We have delivered a strong performance for our customers,
shareholders and the environment in this second year of the 2015-20
regulatory period. This performance combined with our confidence in
delivering a net outperformance over the regulatory period has
enabled us to commit to a further GBP100m of additional investment
in the region. This will support our resilience projects bringing
additional customer benefits over the next three years.
"We have achieved our best ever customer satisfaction scores
under Ofwat's Service Incentive Mechanism (SIM) ending the year in
an upper quartile position amongst our peers. We introduced a
number of innovations enhancing our customer service offering. One
of the most successful, Priority Services, provides dedicated
support to customers experiencing personal or financial
difficulties.
"The acceleration of our investment programme continued
delivering the early benefit of operational efficiencies and means
we have de-risked a number of our Outcome Delivery Incentive (ODI)
measures. This contributed to another net ODI reward and improves
our likely cumulative outcome over the five-year period. Our
Systems Thinking approach is unparalleled in the sector and is
delivering a radically different way of managing our business.
"Our performance in the early part of this regulatory period
puts us in an industry leading position and demonstrates that we
are well placed to deliver further value for customers,
shareholders and the environment. This is supported by a robust
capital structure and good credit ratings."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622282
Robert Lee - Head of Investor Relations +44 (0) 7500 087704
Peter Hewer / Sam Chiene - Tulchan +44 (0) 20 7353
Communications 4200
A presentation to investors and analysts starts at 9.00am on
Thursday 25 May 2017, at the Auditorium, Deutsche Bank, Winchester
House, 1 Great Winchester Street, London, EC2N 2DB. The
presentation can be accessed via a live listen in conference call
facility by dialling: +44 (0) 20 7162 0025, access code 961929. A
recording of the call will be available for seven days following
Thursday 25 May 2017 on +44 (0) 20 7031 4064, access code
961929.
This results announcement and the associated presentation will
be available on the day at:
http://corporate.unitedutilities.com/investors.aspx
KEY OPERATIONAL PROGRESS
Customer service, innovation and operational performance remain
top priorities, building on the industry leading performance
delivered this year.
-- Sustained improvements in customer satisfaction - achieved
our best ever score as measured through Ofwat's qualitative service
incentive mechanism (SIM), with excellent results across the board
for billing, water and wastewater services and positioning us as a
leading company in the sector. We also achieved a 27 per cent
year-on-year reduction in complaints and a 55 per cent reduction in
issues not resolved at first contact. Our digital transformation
has enhanced our customer experience with further digital
propositions based on customer feedback to follow.
-- Effective acceleration and delivery of investment plan -
acceleration of our 2015-20 investment programme continues to
deliver early customer service, operational and environmental
benefits, enhance resilience and optimise performance under our
ODIs. The acceleration of our investment has been achieved with
continued highly effective and efficient capital delivery as
reflected in our Time: Cost: Quality index (TCQi) score which
remains high at over 90%.
-- Innovation through Systems Thinking - exploiting innovation
and our Systems Thinking approach is continuing to transform the
way we run our business, and is on track to deliver GBP100 million
of savings in our business plan. We are progressively moving
greater capability into our Integrated Control Centre facilitating
a more proactive and predictive approach to monitoring our assets
and networks. This central control reduces the level of reactive
work thereby improving performance and efficiency and helps
minimise the customer impact of any incidents.
-- Leading operational and environmental performance - in July,
we attained Industry Leading Company status, as measured through
the Environment Agency's (EA) annual assessment and expect to
retain this status when the performance for 2016 is published. On
pollution incidents, we have set industry leading standards against
this EA measure. We have delivered our best ever performance
against the Drinking Water Inspectorate's (DWI) metrics and expect
to compare favourably to our peers when the DWI publish their full
report for 2016 in July 2017. This is particularly pleasing given
the historical issues we have faced due to the legacy nature of our
asset base.
-- Strong environmental, social & governance (ESG)
credentials - we have retained our World Class rating in the Dow
Jones Sustainability Index for the ninth consecutive year, a very
good achievement in light of the ever evolving standards. In
addition, we were winners of the 'Communicating Integrated
Thinking' award in 2016 and a 'Credit Award for Excellence in
Treating Customer Vulnerability' in 2017.
-- Delivering shareholder value through regulatory
outperformance - the low cost of debt we have already locked-in
places us in a strong position to deliver our target for the
2015-20 period of minimising our cost of debt compared to Ofwat's
industry allowed cost. We are making good progress, implementing
initiatives to deliver over GBP400 million of efficiencies to meet
our totex allowance. Operationally, we delivered a good performance
on our ODIs in 2016/17 building on the performance in the previous
year.
-- Additional investment - making GBP100m of anticipated
outperformance available for additional investment over the next
three years to improve resilience for customers.
-- Non-household retail - the non-household retail market fully
opened on 1 April 2017. Our Water Plus JV with Severn Trent
benefitted from first mover advantage and has achieved a net gain
through the early switches in the market demonstrating it is well
placed to compete as the market evolves.
Financial overview
The group has delivered a strong set of financial results for
the year ended 31 March 2017.
-- Revenue - was down GBP26 million, at GBP1,704 million,
reflecting the accounting impact of our WaterPlus JV, which
completed on 1 June 2016, partly offset by our allowed regulatory
revenue changes.
-- Operating profit - underlying operating profit was up GBP19
million, at GBP623 million. This reflects our allowed regulatory
revenue changes, a reduction in infrastructure renewals expenditure
and lower total costs offset by the accounting impact of our
WaterPlus JV. Reported operating profit was GBP606 million, up
GBP38 million mainly as a result of reduced profit last year due to
costs associated with the water quality incident.
-- Capex - total regulatory capital investment in the year,
including GBP148 million of infrastructure renewals expenditure,
was GBP804 million, in line with company's plans to accelerate the
2015-20 investment programme. As announced today, we will also make
an additional GBP100 million of new investment available over the
remainder of the 2015-20 period to improve resilience for customers
and taking our five-year regulatory capex programme to cGBP3.6
billion. In addition, we expect to invest over GBP100 million in
non-regulated projects, subject to acceptable returns. This
investment relates primarily to solar power, in which GBP40 million
has been invested in the first two years of the 2015-20 period.
-- Profit before tax - underlying profit before tax was down
GBP19 million to GBP389 million, as the increase in underlying
operating profit was more than offset by a GBP36 million increase
in the underlying net finance expense. The increase in the
underlying net finance expense is mainly due to the impact of
higher RPI inflation on our index-linked debt. Reported profit
before tax was GBP442 million, reflecting fair value movements and
other adjusting items as outlined in the underlying profit measures
table.
-- Profit after tax - underlying profit after tax was down by
GBP12 million to GBP313 million. Reported profit after tax was
higher at GBP434 million, mainly reflecting a deferred tax credit
as a result of the UK Government's future planned reduction in the
mainstream rate of corporation tax.
-- Capital structure - the group has a robust capital structure
with gearing of 61% as at 31 March 2017 (measured as group net debt
to 'shadow' regulatory capital value). Our shadow RCV adjusts for
actual spend and was GBP10.7 billion as at 31 March 2017. This
gearing level is comfortably within our target range, of 55% to
65%, supporting a solid investment grade credit rating. United
Utilities Water Limited (UUW) has long-term credit ratings of A3
from Moody's, on stable outlook, and BBB+ from Standard &
Poor's, on positive outlook.
-- Financing headroom - the group benefits from headroom to
cover its projected needs into 2019, enhanced by the recent raising
of new finance. This headroom provides good flexibility in terms of
when and how further debt finance is raised to help refinance
maturing debt and support the delivery of our regulatory capital
investment programme.
-- Dividend - the board has proposed a final dividend of 25.92
pence per ordinary share (taking the total dividend for 2016/17 to
38.87 pence), an increase of 1.1%, in line with our policy of
targeting an annual growth rate of at least RPI inflation through
to 2020.
Outlook and PR19
We are encouraged by our continued strong operational and
environmental performance outcomes. Our progress in the first two
years of this regulatory period and our robust financial position
underpin our confidence that we can deliver our targets for both
customers and shareholders and exit the 2015-20 period in a leading
position amongst our peers.
We are engaged with customers, Ofwat and other stakeholders
ahead of the next regulatory review period which will set our price
and service package for the five year period to April 2025. We look
forward to the publication of Ofwat's draft methodology for PR19 in
July and final methodology in December this year which will
represent a further evolution of the framework adopted at PR14.
United Utilities has been actively engaged in the development of
this approach, contributing across the full range of working groups
and providing detailed proposals in key areas - such as the
development of access pricing arrangements for water resources
which will result in better outcomes for customers and the approach
to allocating RCV across more disaggregated price controls. We
support Ofwat in developing a progressive framework of regulation
in the sector whilst also recognising the importance of key pillars
of the historic approach such as maintaining protection of historic
regulatory capital values.
We believe that our strong track record of operational
performance and service delivery, leading environmental
performance, innovative approaches to customer service and
recognised strengths in transparency and reporting should provide a
strong underpin for our business plan. We believe we are also the
first - and so far only - UK water company to issue CPI linked debt
instruments in anticipation of the transition of price controls
away from the RPI measure of inflation.
Before finalising our business plan, it is anticipated that we
will make a number of additional submissions reflecting company
specific factors. These will include our approach to RCV
allocations for bioresources and water resources (in September 2017
and January 2018 respectively), where Ofwat will consider company
led proposals for the appropriate split. We also expect to provide
early evidence on company specific factors affecting our wholesale
and household retail operations in the North West ahead of business
plan submission, subject to confirmation of this approach in
Ofwat's methodology. Submission of the main business plan is
expected to be in September 2018.
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
themes.
Best service to customers
Customer service - sitting at the core of everything we do, our
strong focus on customer service has helped us deliver substantial
improvements in recent years, becoming the most improved company in
the 2010-15 period with a reduction of around 75% in the overall
number of customer complaints.
This year we re-energised our approach and have seen another
upturn in customer satisfaction. In 2016/17 we delivered our best
ever scores under Ofwat's qualitative Service Incentive Mechanism
(SIM) measure, placing us above the industry average for the full
year, and ending the year as a leading company in the sector.
Customer complaints in 2016/17 were considerably lower than last
year with a 27% year on year reduction and a 55% reduction in the
circumstance where an issue is not resolved at first contact.
We introduced a number of innovations over the year, setting new
benchmarks for the sector. One of the most successful, Priority
Services, provides more targeted support for customers experiencing
short or long-term personal or financial difficulties in their
lives, with tailored assistance for customers. Since its launch in
May 2016, we have seen more than 11,000 customers register for this
service, supplementing the wide range of initiatives we already
offer customers struggling to pay, in order to help them return to
regular payment.
Our new customer website was designed to improve accessibility
and ease of use following extensive research and customer
engagement, includes web chat services across extended hours, and
is mobile-enabled to accommodate customers' increasing use of
mobile devices to access day-to-day online services. Additionally,
we have recently launched the first fully interactive and real-time
customer App in the sector.
Improving customer service will continue to be a key area of
focus, and our new management team has identified a range of
opportunities to deliver further benefits for our customers.
Leading North West service provider - we are consistently ranked
third out of ten leading organisations in the North West, through
an independent brand tracker survey which is undertaken quarterly.
This covers key attributes such as reputation, trustworthiness and
customer service. We are behind only Marks & Spencer and John
Lewis, and ahead of seven other major organisations covering
utilities, telecoms, media and banking services.
Robust water supply - our customers benefit from our robust
water supply and demand balance, along with high levels of water
supply reliability. Our overall water quality continues to be good,
and although our water quality service index has slightly
deteriorated from a very good performance in the prior year, it
remains above our historical average and we have plans in place to
deliver improved performance going forwards. We have consistently
delivered a reliable water service, although we experienced some
water no-supply incidents in 2016/17. Whilst this is disappointing,
our Systems Thinking approach is helping us to respond to these
events and avoid them in future.
Reducing sewer flooding - we have continued to invest heavily in
schemes designed to reduce the risk of flooding of our customers'
homes, including incidence based targeting on areas more likely to
experience flooding and defect identification through CCTV sewer
surveys. Our plan for the 2015-20 period includes a target of
reducing sewer flooding incidents by over 40%, in line with
customers' affordability preferences, and we have made a good
start. Our wastewater network will continue to benefit from
significant investment going forward, as we aim to help mitigate
changing weather patterns likely to result from climate change.
Key performance indicators:
-- Outcome delivery incentives (ODIs) - we have 19 wholesale
financial ODIs and, as outlined last year, the risk is skewed to
the downside with ten attracting a penalty only.
Whilst a number of our ODI measures are susceptible to one-off
events and, on the whole, our ODI targets get tougher each year,
our performance in the first two years of this regulatory period
has now delivered a cumulative net reward of GBP9.2million,
exceeding our initial expectations. This gives us confidence to
narrow our target range for the cumulative net ODI outcome over the
2015-20 period to between plus GBP30 million and minus GBP50
million.
In 2016/17 we have achieved another net reward of GBP6.7
million, exceeding our initial expectations and demonstrating the
effectiveness of our planned acceleration of capital expenditure in
this regulatory period, alongside our Systems Thinking and
innovative approach to the way we operate.
We were particularly pleased this year with the significant
improvements made against our leakage targets and have continued to
perform well against private sewers and pollution incidents. Our
sewer flooding ODI remains challenging as the target becomes
increasingly tougher as we progress through this regulatory period.
This meant that we received a small penalty this year despite
having improved our overall performance compared with the prior
year. Our main areas of reward came through our good performance in
the areas of leakage, private sewers and pollution, with our main
penalty being on reliable water service and water quality
service.
-- Service incentive mechanism (SIM) - last year we stated our
target was to move towards the upper quartile in the medium-term,
and we are particularly pleased with the progress we have made this
year, which saw us ending the year as a leading company in our peer
group.
Qualitative: Ofwat has undertaken the four surveys for 2016/17
and United Utilities has improved its score to 4.42 points,
compared with 4.27 points in 2015/16, putting us in joint 6(th)
position for the year out of the 18 water companies, and joint
3(rd) position out of the 10 companies providing both water and
wastewater services. We ended the year with our highest ever score
of 4.56 in wave 4, which placed us in equal 3(rd) position in this
wave, and 2(nd) position out of those providing both water and
wastewater services. In particular, customers scored us highly for
our billing and wastewater services.
Quantitative: the quantitative assessment measures customer
contacts and performance is assessed on both an absolute and
relative basis. Whilst relative performance can only be assessed in
full following the end of each full financial year when the other
companies publish their respective results, on absolute performance
for 2016/17, our score of 77 points represents a marked improvement
on our 2015/16 score of 95 points, and of the 13 companies who
share data on quantitative scores, for the full year, this placed
us in 4(th) position out of the 13 and 1(st) of the 8 water and
wastewater companies in this data share.
Lowest sustainable cost
Power and chemicals - our asset optimisation programme continues
to provide the benefits of increased and more effective use of
operational site management to optimise power and chemical use and
the development of more combined heat and power assets to generate
renewable energy. In addition to the electricity we generate from
bioresources, we are developing other renewable energy facilities.
This is primarily in the area of solar, where we have invested
GBP45 million in the first two years of the 2015-20 period and
contributing towards our expected investment of over GBP100 million
across the five-year period. We have also substantially locked in
our power commodity costs across 2015-20, providing greater cost
certainty for the regulatory period.
Proactive network management - through our Systems Thinking
approach we are more proactive in the management of our assets and
networks. We aim to improve our predictive modelling and
forecasting through better use of sensors in our network and better
analysis of other data, such as weather forecasting, to enable us
to address more asset and network problems before they affect
customers, thereby reducing the level of reactive work and
improving our performance and efficiency.
Debt collection - our region suffers from high levels of income
deprivation and we offer wide-ranging schemes to help customers
struggling to pay, including our trust fund into which we paid a
GBP5 million contribution in 2016/17. Notwithstanding our
industry-leading debt management processes, deprivation remains the
principal driver of our higher than average bad debt and cost to
serve and we expect this to continue to be a challenging area for
us.
Reflecting our ongoing focus on bad debt through our new
customer facing management team and the penetration of our
affordability schemes, our household bad debt expense has reduced
to 2.5% of regulated revenue from 3.0% last year.
Pensions - United Utilities has taken progressive steps to
de-risk its pension provision. The group had an IFRS retirement
benefit surplus of GBP248 million as at 31 March 2017, compared
with a surplus of GBP275 million as at 31 March 2016. Further
details of the group's pension provision are provided in the
pensions section.
Ongoing formal consultations continue regarding proposed changes
to the group's pension schemes.
Capital delivery and regulatory commitments - we are strongly
focussed on delivering our commitments efficiently and on time, and
have a robust commercial capital delivery framework in place.
Across the 2015-20 regulatory period, we are working with a single
engineering partner and four design and construction partners to
deliver our regulatory capital investment programme of cGBP3.6
billion. We are involving our partners much earlier in project
definition and packaging projects by type, geography and timing in
order to deliver efficiencies. Projects are allocated on an
incentive or competitive basis leading to our partners presenting a
range of solutions, innovations and pricing.
We have continued the planned acceleration of our 2015-20
investment programme in order to improve services for customers and
deliver early operational and environmental benefits. Regulatory
capital investment in 2016/17, including GBP148 million of
infrastructure renewals expenditure, was GBP804 million, in line
with our expectations. This, combined with GBP799 million invested
in 2015/16, brings our total spend to around GBP1.6 billion of our
planned GBP3.6 billion capital investment across the 2015-20
period.
We are also driving more effective and efficient delivery of our
capital programme and applying a tougher measurement mechanism to
our Time: Cost: Quality index (TCQi) score for this regulatory
period. Despite this tougher approach, our TCQi score remains high
at 93% which represents a very good performance, improving from
what was already a good performance at 90% in 2015/16.
Key performance indicators:
-- Financing outperformance - The low cost of debt we have
already locked-in places United Utilities in a strong position to
deliver our target for the 2015-20 period of minimising our cost of
debt compared to Ofwat's industry allowed cost.
-- Total expenditure (totex) performance - although our totex
allowance for the 2015-2020 period is challenging, we are
implementing a range of initiatives and are confident of meeting
our target of delivering our promises to customers within the
cumulative 2015-20 wholesale totex final determination allowance.
Progress in the first two years has been good and we remain on
track to meet the five-year target.
-- Domestic retail cost to serve - overall, it will be very
challenging to meet the regulatory assumptions for domestic retail
costs. This is primarily due to Ofwat's price review methodology at
PR14 which made no allowance for inflation in the domestic retail
business and, in our view, made insufficient allowance for dual
service (water and wastewater) companies. The regulatory
assumptions for domestic retail costs become progressively tougher
as we move through the 2015-20 period. Our target is to minimise
our costs compared with Ofwat's revenue allowance and despite the
challenging target, we have delivered a good performance in 2016/17
outperforming this year's revenue allowance by around GBP14
million.
Responsible manner
Acting responsibly is fundamental to the manner in which we
undertake our business, and the group has for many years included
corporate responsibility factors in its strategic decision making.
Our environmental and sustainability performance across a broad
front has received external recognition. Earlier in the 2016/17
financial year, United Utilities retained its World Class rating in
the Dow Jones Sustainability Index for the ninth consecutive year,
again achieving industry leading performance status in the
multi-utility/water sector. Retaining 'World Class' status for this
length of time is a significant achievement, particularly as the
assessment standards continue to increase and evolve. In addition,
at the Finance for the Future Awards in October 2016, United
Utilities won the international Communicating Integrated Thinking
award, following on from the PwC 2015 Building Public Trust Awards
in which United Utilities was selected as joint winner for
Excellence in Reporting in the FTSE 100.
Leakage - we have a strong, year round, operational focus on
leakage, alongside our network resilience improvements and the
implementation of a range of initiatives, such as active pressure
management. This delivered a particularly good performance against
our leakage targets in 2016/17, delivering our largest ODI reward
in this area.
Environmental performance - this is a high priority for United
Utilities and we were encouraged to have been awarded Industry
Leading Company status in the Environment Agency's latest
performance metrics, as described in the KPIs section below.
Carbon footprint - we are committed to reducing our carbon
footprint and increasing our generation of renewable energy. Our
carbon footprint has reduced by 22% over the last 10 years. Our
renewable energy production in 2016/17 was 149 GWh, representing
18% of our electricity consumption in the year. This represents
good progress over the last few years, up from 13% in 2012/13, and
we are implementing plans to significantly increase self-generation
over the next few years.
Employees - we continue to work hard to engage all of our
employees in the transformation of the group's performance.
Employee engagement was high at 89% this year, broadly in line with
last year on a normalised basis as we amended the question
structure slightly. We remain focussed on maintaining high levels
of employee engagement.
We have been successful in attracting and retaining people and
have continued to expand our apprentice and graduate programmes for
2016/17. We now have a total of 64 graduates and 119 apprentices
across the business. Our investment in recruiting graduates and
apprentices is already benefitting the company, with 122 of them
now having secured permanent roles across our business.
Over the last year, we have continued our sustained focus on
health, safety and wellbeing. In this period we retained our Gold
award status with the Royal Society for the Prevention of Accidents
as well as the top place ranking on the Dow Jones sustainability
index. Following a four day audit, we were also awarded the UK
workplace wellbeing charter. Our contractor accident frequency rate
is at its lowest ever at 0.087 accidents per 100,000 hours. For the
same period, our employee accident frequency rate has increased to
0.196 accidents per 100,000 hours, compared with a rate of 0.104 in
2015/16. We recognise that we still have more to do, and health and
safety will continue to be a significant area of focus as we strive
for continuous improvement.
Communities - we continue to support partnerships, both
financially and in terms of employee time through volunteering,
with other organisations across the North West. Our Catchment Wise
programme helps to tackle water quality issues in lakes, rivers and
coastal waters across the North West, and our Beachcare employee
volunteering scheme helps 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 Community
Fund, offering grants to local groups impacted by our capital
investment programme.
Key performance indicators:
-- Leakage - Although leakage is included within our outcome
delivery incentives, we intend to continue publishing our leakage
position separately, with it being an important measure from a
corporate responsibility perspective. We delivered an excellent
performance in 2016/17 and have again met our regulatory leakage
target of 463 megalitres per day.
-- Environmental performance - On the Environment Agency's
latest annual assessment, published in July 2016, we were awarded
Industry Leading Company status across the range of operational
metrics. This indicates we were in second position amongst the ten
water and sewerage companies and aligns with our medium-term goal
of being a first quartile company on a consistent basis.
-- Corporate responsibility - United Utilities has a strong
focus on operating in a responsible manner and is the only UK water
company to have a World Class rating as measured by the Dow Jones
Sustainability Index. In 2016/17, United Utilities retained its
World Class rating for the ninth consecutive year.
FINANCIAL PERFORMANCE
United Utilities delivered a strong set of financial results for
the year ended 31 March 2017.
Revenue
Revenue was down GBP26 million, at GBP1,704 million, reflecting
the impact of our Water Plus JV, which completed on the 1 June
2016, partly offset by our allowed regulatory revenue changes.
With regard to Ofwat's revenue correction mechanism, relating to
the 2014/15 financial year, we have GBP9.5 million to return to
customers. As we have previously indicated, we propose to return
the GBP9.5 million to customers through revenue reductions of cGBP3
million in 2017/18, cGBP3 million in 2018/19 and cGBP3 million in
2019/20 to help aid a smoother bill profile.
Separately, consistent with Ofwat's annual wholesale revenue
forecasting incentive mechanism (WRFIM), we will also be reducing
2017/18 revenue by GBP7 million as actual volumes in 2015/16 were
higher than our assumptions increasing revenue by 0.4%.
Operating profit
Underlying operating profit at GBP623 million was GBP19 million
higher than last year. This reflects our allowed regulatory revenue
changes, a reduction in infrastructure renewals expenditure, an
improvement in our bad debt charges and a small reduction in the
remaining cost base, partly offset by the accounting impact of our
Water Plus JV. The JV completed on 1 June 2016 and, from that date,
its contribution is no longer included within operating profit and
is, instead, included within the share of profits of joint ventures
line in the income statement. However, as expected, due to start-up
costs, our share of 2016/17 losses of the Water Plus JV was around
GBP2 million.
Reported operating profit increased by GBP38 million, to GBP606
million, reflecting the increase in underlying operating profit,
along with a reduction in adjusted items. Adjusted items for
2016/17 amounted to GBP17 million, GBP10 million of which related
to restructuring costs. Adjusted items in the prior year amounted
to GBP36 million, GBP25 million of which related to the water
quality incident in summer 2015.
Investment income and finance expense
The underlying net finance expense of GBP237 million was GBP36
million higher than last year, mainly due to the impact of higher
RPI inflation on the group's index-linked debt, particularly on the
portion of index-linked debt with a three-month lag. Interest on
non index-linked debt of GBP108 million was GBP4 million lower than
last year, due to the lower rates locked in on our interest rate
swaps. The indexation of the principal on our index-linked debt
amounted to a net charge in the income statement of GBP81 million,
compared with a net charge of GBP38 million last year. As at 31
March 2017, the group had approximately GBP3.6 billion of
index-linked debt at an average real rate of 1.3%.
The higher RPI inflation charge compared with last year
contributed to the group's average underlying interest rate of 3.8%
being higher than the rate of 3.4% for the year ended 31 March
2016. The average underlying interest rate represents the
underlying net finance expense divided by average debt.
Reported net finance expense of GBP189 million was lower than
the GBP219 million expense in 2015/16. This GBP30 million decrease
principally reflects a change in the fair value gains and losses on
debt and derivative instruments, from a GBP26 million loss in
2015/16 to a GBP24 million gain in 2016/17. The fair value gain in
the current year is due to the net receipts on swaps and debt under
fair value option and gains on our electricity swap portfolio due
to an increase in the market price of electricity. Losses in the
prior year were largely due to a decrease in medium-term interest
rates, which impact our derivatives hedging interest rates. The
group uses these swaps to fix interest rates on a substantial
proportion of its debt to better match the financing cash flows
allowed by Ofwat at each price review. The group has fixed the
substantial majority of its non index-linked debt for the 2015-20
regulatory period.
Profit before tax
Underlying profit before tax was GBP389 million, GBP19 million
lower than last year, as the GBP19 million increase in underlying
operating profit was more than offset by the GBP36 million increase
in underlying net finance expense. This underlying measure reflects
the adjusting items, as outlined in the operating profit section
above, and other items such as fair value movements in respect of
debt and derivative instruments, as outlined in the underlying
profit measures table.
Reported profit before tax significantly increased by GBP89
million to GBP442 million, due in most part to fair value movements
and the increase in reported operating profit, as well as a GBP22
million profit on disposal of the non-household retail
business.
Tax
In addition to corporation tax, the group pays and bears further
annual economic contributions, typically of around GBP140 million
per annum, in the form of business rates, employer's national
insurance contributions, environmental taxes and other regulatory
service fees such as water abstraction charges.
In 2016/17, we paid corporation tax of GBP42 million, which
represents an effective cash tax rate on underlying profits of 11%,
which is 9% lower than the headline rate of corporation tax of 20%.
Consistent with prior years, the key reconciling item to the
headline rate was allowable tax deductions on capital investment.
We have expressed the effective cash tax rate in terms of
underlying profits as this measure excludes fair value movements on
debt and derivative instruments and thereby enables a medium-term
cash tax rate forecast. We would expect the average cash tax rate
on underlying profits through to the end of the current regulatory
period in March 2020 to be around 15%. The key risk to sustaining
this rate is any unexpected changes in tax legislation or practice
and, as necessary, we would actively engage with the relevant
authorities in order to manage this risk.
The current tax charge was GBP54 million in 2016/17, compared
with GBP53 million in the previous year. There were current tax
credits of GBP23 million in 2016/17 and GBP9 million in 2015/16,
following agreement of prior years' tax matters; in addition to UK
tax, the current year figure also included the release of a
provision in relation to agreed historic overseas tax matters.
For 2016/17, the group recognised a deferred tax charge of GBP28
million, compared with a charge of GBP19m for 2015/16. In addition,
in 2016/17 the group recognised a deferred tax charge of GBP7
million relating to prior years' tax matters, compared with a
charge of GBP6 million in 2015/16. In 2016/17, the group also
recognised a deferred tax credit of GBP58 million relating to the
enacted reduction in the headline rate of corporation tax from 18%
to 17% from 1 April 2020. This compares to a deferred tax credit of
GBP112 million in 2015/16 when the enacted reduction in the
headline rate of corporation tax from 1 April 2020 was reduced from
20% to 18%.
The total tax charge for 2016/17 was GBP9 million as compared to
a total tax credit of GBP44 million for 2015/16, the main
difference being the GBP54 million reduction in the deferred tax
credit relating to changes in tax rates. For both periods, the
total underlying tax effective rate was in line with the headline
rate (currently at 20%) and subject to any legislative or tax
practice changes, we would expect this to continue for the
medium-term.
Profit after tax
Underlying profit after tax of GBP313 million was GBP12 million
lower than last year, principally reflecting the GBP19 million
decrease in underlying profit before tax partly offset by lower
underlying tax on lower profits. Reported profit after tax was
higher at GBP434 million, compared with GBP398 million in the
previous year, as the GBP89 million increase in the reported profit
before tax was partly offset by the GBP53 million higher tax
charge.
Earnings per share
Underlying earnings per share decreased from 47.7 pence to 46.0
pence. This underlying measure is derived from underlying profit
after tax. Basic earnings per share increased from 58.3 pence to
63.6 pence, for the same reasons that increased profit after
tax.
Dividend per share
The board has proposed a final dividend of 25.92 pence per
ordinary share in respect of the year ended 31 March 2017. Taken
together with the interim dividend of 12.95 pence per ordinary
share, paid in February, this produces a total dividend per
ordinary share for 2016/17 of 38.87 pence. This is an increase of
1.1%, compared with the dividend relating to last year, in line
with the group's dividend policy of targeting a growth rate of at
least RPI inflation each year through to 2020. The inflationary
increase of 1.1% is based on the RPI element included within the
allowed regulated revenue increase for the 2016/17 financial year
(i.e. the movement in RPI between November 2014 and November
2015).
The final dividend is expected to be paid on 4 August 2017 to
shareholders on the register at the close of business on 23 June
2017. The ex-dividend date is 22 June 2017.
In light of the Financial Reporting Lab's report entitled
'Disclosure of dividends - policy and practice' which provided best
practice guidance, we enhance our dividend policy disclosure, as
outlined below.
-- Dividend policy - a growth rate target of at least RPI inflation each year through to 2020.
-- Policy period - the dividend policy aligns with the five-year
regulatory period which runs from 1 April 2015 to 31 March
2020.
-- Policy approval process - the dividend policy was considered
and approved by the United Utilities Group Board in January 2015,
as part of a comprehensive review of the 2015-20 regulatory final
determination in the context of a detailed business planning
process, with due regard for the group's financial metrics, credit
ratings and long-term financial stability, and is reviewed at least
annually.
-- Distributable reserves - as at 31 March 2017, the company had
distributable reserves of GBP3,184 million. The total external
dividends relating to the 2016/17 financial year amounted to GBP265
million. The company distributable reserves support over 12 times
this annual dividend.
-- Financing headroom - supporting the group's cash flow, United
Utilities adopts a funding/liquidity headroom policy of having
available resources to cover the next 15-24 months of projected
cash outflows.
-- Cash flows from subsidiaries - the directors consider that
the group's principal operating subsidiary, United Utilities Water
Limited, has sufficient resources to pay dividends to United
Utilities Group PLC for the duration of the current dividend policy
period to support the external payment of dividends to
shareholders.
-- Financial stability - the water industry has invested
significant capital since privatisation in 1989 to improve services
for customers and provide environmental benefits, a large part of
which is driven by legislation. Water companies have typically
raised borrowings to help fund the capital investment programme.
Part of total expenditure is additive to the regulatory capital
value, or RCV, on which water companies earn a return allowed by
the economic regulator, Ofwat. RCV gearing is useful in assessing a
company's financial stability in the UK water industry and is one
of the key credit metrics that the credit rating agencies focus on.
United Utilities has had a relatively stable RCV gearing level over
the last five years, always comfortably within its target range of
55% to 65%, supporting a solid A3 credit rating for UUW with
Moody's. RCV gearing at 31 March 2017 was 61% and the movement in
net debt is outlined in the cash flow section below.
-- Dividend sustainability - in approving the policy, the board
is satisfied that across the current regulatory period, the
projected dividend is adequately covered by underlying profit after
tax. Separately, the executive directors' long-term remuneration
plan is directly linked to a measure of sustainable dividends.
Whilst specific targets are not disclosed in advance, for
commercial sensitivity reasons, there is a major focus on the
creation of strong earnings that ensure the sustainability of
dividends.
-- Viability statement - the dividend policy is underpinned by
the group's long-term viability statement (contained within the
group's annual report and financial statements). Assurance
supporting this statement is provided by the review of: the group's
key financial measures; the key credit financial metrics; the
group's liquidity position; the contingent liabilities of the
group; and the key risks of the group together with the associated
mitigating actions.
-- Annual dividend approval process - the group places
significant emphasis on strong corporate governance, and before
declaring interim and proposing final dividends, the United
Utilities Group board undertakes a comprehensive assessment of the
group's key financial metrics.
-- Policy sustainability
2015-20
-- the policy is considered by the board to be robust to
reasonable changes in assumptions, such as inflation, opex, capex
and interest rates;
-- extreme economic, regulatory, political or operational
events, which could lead to a significant deterioration in the
group's financial metrics during the policy period, may present
risks to policy sustainability;
2020-25
-- a dividend policy for the 2020-25 period will be formulated
after Ofwat announces the outcome of the regulatory price review
(currently expected in December 2019).
Cash flow
Net cash generated from continuing operating activities for the
year ended 31 March 2017 was GBP821 million, compared with GBP686
million in the previous year. This increase mainly reflects a
switch between cash generated from operating activities and cash
used in investing activities largely due to the accounting
treatment of our Water Plus JV. The group's net capital expenditure
was GBP692 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 is based on capital work done in the period,
rather than actual cash spent.
Net debt including derivatives at 31 March 2017 was GBP6,579
million, compared with GBP6,261 million at 31 March 2016. This
increase reflects accelerated regulatory capital expenditure,
payments of dividends, interest and tax, the inflationary uplift on
index-linked debt and loans to joint ventures, partly offset by
operating cash flows.
Fair value of debt
The group's gross borrowings at 31 March 2017 had a carrying
value of GBP7,385 million. The fair value of these borrowings was
GBP8,603 million. This GBP1,218 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 increased from GBP483
million at 31 March 2016 due primarily to a decrease in credit
spreads.
Debt financing and interest rate management
Gearing, measured as group net debt divided by UUW's shadow
(adjusted for actual spend) regulatory capital value, was 61% at 31
March 2017. This is the same gearing as at 31 March 2016 and
remains comfortably within our target range of 55% to 65%.
UUW has long-term credit ratings of A3/BBB+ and United Utilities
PLC (UU PLC) has long-term credit ratings of Baa1/BBB- from Moody's
Investors Service (Moody's) and Standard & Poor's (S&P)
Ratings Services respectively. The split rating reflects differing
methodologies used by the credit rating agencies. Moody's has the
group's ratings on a stable outlook, whereas S&P has the
group's ratings on a positive 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 2017 amounted to GBP248
million. Over 2015-20 we have financing requirements totalling
around GBP2.5 billion to cover refinancing and incremental debt,
supporting our five-year investment programme, and we have now
raised over GBP1.7 billion of this requirement.
In April 2016, UUW signed a GBP250 million index-linked term
loan facility with the EIB to support the delivery of UUW's AMP6
investment programme. As at 31 March 2017, GBP75 million had been
drawn down. This is an amortising facility with an average loan
life of 10 years and a final maturity of 18 years from draw down
and is the first tranche of an anticipated GBP500m funding package
for AMP6 from the EIB, with the second tranche expected to be made
available for signature later in the AMP.
In June 2016, UUW's financing subsidiary, United Utilities Water
Finance PLC (UUWF), raised cGBP76 million of term funding, via the
issue of EUR30 million and HKD600 million private placement notes,
both with a 15-year maturity, off our EMTN programme. In September
2016, UUWF raised cGBP53 million of term funding, via the issue of
12-year and 20-year private placement notes, in RPI-linked form,
off the group's EMTN programme, at the group's best ever real
interest rates. In the second half of 2016/17, UUWF raised a
further cGBP172 million, via the issue of 15-year and 20-year
private placement notes, in index-linked form, off our EMTN
programme. In response to Ofwat's decision to transition away from
RPI inflation linkage, GBP100 million of this index-linked funding
was CPI-linked, these being the first ever CPI-linked notes issued
by a UK utility.
In addition, since September 2016, the group has agreed GBP100
million of new or replacement 5-year committed bank facilities and
extended a further GBP100 million for an initial term of 5-years.
The group has headroom to cover its financing needs into 2019.
Long-term borrowings are structured or hedged to match assets
and earnings, which are largely in sterling, indexed to UK retail
price inflation and subject to regulatory price reviews every five
years.
Long-term sterling inflation index-linked debt provides a
natural hedge to assets and earnings. At 31 March 2017,
approximately 55% of the group's net debt was in index-linked form,
representing around 34% of UUW's regulatory capital value, with an
average real interest rate of 1.3%. 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 20 years.
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. This is supplemented by fixing
substantially all remaining floating rate exposure across the
forthcoming regulatory period around the time of the price control
determination.
In line with this, the group has fixed interest costs for
substantially all of its floating rate exposure over the 2015-20
period, locking in an average annual interest rate of around 3.6%
(inclusive of credit spreads).
Liquidity
Short-term liquidity requirements are met from the group's
normal operating cash flow and its short-term bank deposits and
supported by committed but undrawn credit facilities. The group's
EUR7 billion EMTN programme provides further support.
Available headroom at 31 March 2017 was GBP699 million based on
cash, short-term deposits, committed bank facilities and the
undrawn portion of the signed EIB term loan facilities, net of
short-term debt as well as committed facilities and term debt
falling due within 12 months.
United Utilities believes that it operates a prudent approach to
managing banking counterparty risk. Counterparty risk, in relation
to both cash deposits and derivatives, is controlled through the
use of counterparty credit limits. United Utilities' cash is held
in the form of short-term money market deposits with prime
commercial banks.
United Utilities operates a bilateral, rather than a syndicated,
approach to its core relationship banking facilities. This approach
spreads maturities more evenly over a longer time period, thereby
reducing refinancing risk and providing the benefit of several
renewal points rather than a large single refinancing
requirement.
Pensions
As at 31 March 2017, the group had an IAS 19 net pension surplus
of GBP248 million, compared with a net pension surplus of GBP275
million at 31 March 2016. This GBP28 million reduction mainly
reflects the impact of a decrease in credit spreads. In contrast,
the scheme specific funding basis does not suffer from volatility
due to inflation and credit spread movements as it uses a fixed
inflation assumption via a blend of the inflation market hedge and
the inflation funding mechanism and a prudent, fixed credit spread
assumption. Therefore, the recent inflation and credit spread
movements have not had a material impact on the deficit calculated
on a scheme specific funding basis or the level of deficit repair
contributions.
Further detail on pensions is provided in note 11 ('Retirement
benefit surplus') of these condensed consolidated financial
statements.
Underlying profit
The underlying profit measures in the table following 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
---------------------- ------------------------------------------------
Water quality A significant water quality incident
incident occurred in the year ended 31 March
2016, the likes of which management
would not expect to occur on a frequent
basis. As such, this was not considered
part of the normal course of business.
---------------------- ------------------------------------------------
Flooding incidents Two significant flooding incidents in
the year ended 31 March 2016 caused
extensive damage to localised parts
of our infrastructure, resulting in
significant levels of remedial operating
expenditure and a large claim under
the group's insurance cover. Management's
view is that these were significant
and infrequent events and, as such,
were not part of the normal course of
business.
---------------------- ------------------------------------------------
Non-household The group has incurred significant costs
retail market since the year ended March 2015 in preparation
reform for the non-household retail market
opening to competition in April 2017.
This represents a one-off event and
as such, is not considered part of the
normal course of business.
---------------------- ------------------------------------------------
Restructuring The group has incurred restructuring
costs costs in the past in relation to a number
of discrete underlying 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
losses on debt can be both very significant and volatile
and derivative from one period to the next. These movements
instruments are determined by macro-economic factors
which are outside the control of management
and these instruments are purely held
for funding and hedging purposes, (not
for trading purposes). Taking these
factors into account, management believe
it is useful to adjust for this to provide
a more representative view of performance.
---------------------- ------------------------------------------------
Interest on swaps Net fair value losses on debt and derivative
and debt under instruments includes interest on swaps
fair value option and debt under fair value option. In
adjusting for the former, it is appropriate
to add back interest on swaps and debt
under fair value option to provide a
view of the group's costs of debt which
is better aligned to the return on capital
it earns through revenue.
---------------------- ------------------------------------------------
Net pension interest This item can be very volatile from
(income)/ expense one period to the next and it is a direct
function of the extent to which the
pension scheme is in an accounting deficit
or surplus position. Management believe
it is useful to adjust for this to provide
a more representative view of performance
which is better aligned to the return
on capital it earns through revenue.
---------------------- ------------------------------------------------
Capitalised borrowing The accounting standards allow for the
costs capitalisation of borrowing costs in
the cost of qualifying assets. Management
believe it is appropriate to adjust
for these significant costs to provide
a representative cost of borrowings
and current year performance which is
better aligned to the return on capital
it earns through revenue.
---------------------- ------------------------------------------------
Profit on disposal This relates to the disposal of the
of business group's non-household retail business
during the year ended 31 March 2017
which represents a significant one-off
event and, as such, is not considered
part of the normal course of business.
---------------------- ------------------------------------------------
Deferred tax The deferred tax impact from changes
credit-change to the corporation tax rate announced
in tax rate by HMRC represent both significant and
volatile impacts which are outside the
control of management. Management adjust
for this to provide a more representative
view of current year performance.
---------------------- ------------------------------------------------
Agreement of The agreement of prior years' tax matters
prior years' can be significant, volatile and often
tax matters related to the final settlement of numerous
prior year periods. Management adjust
for this to provide a more representative
view of current year performance.
---------------------- ------------------------------------------------
Tax in respect Management adjust for the tax impacts
of adjustments of the above adjusted items to provide
to underlying a more representative view of current
profit before year performance.
tax
---------------------- ------------------------------------------------
Operating profit
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Operating profit per published
results 605.5 567.9
Water quality incident - 24.8
Flooding incidents (net of insurance
proceeds recognised) 1.5 (0.6)
Non-household retail market reform 5.8 11.1
Restructuring costs 10.1 0.9
-------------
Underlying operating profit 622.9 604.1
------------- -------------
Net finance expense
GBPm GBPm
Finance expense (202.7) (224.4)
Investment income 13.7 5.0
------------- -------------
Net finance expense per published
results (189.0) (219.4)
Adjustments:
Net fair value losses on debt
and derivative instruments (24.3) 26.3
Interest on swaps and debt under
fair value option 15.4 16.5
Net pension interest (income)/expense (10.2) (3.1)
Capitalised borrowing costs (29.2) (21.3)
Underlying net finance expense (237.3) (201.0)
-------------
Profit before tax
GBPm GBPm
Share of profits of joint ventures 3.8 5.0
Profit before tax per published
results 442.4 353.5
Adjustments:
Water quality incident - 24.8
Flooding incidents (net of insurance
proceeds recognised) 1.5 (0.6)
Non-household retail market reform(1) 5.8 11.1
Restructuring costs 10.1 0.9
Net fair value (gains)/losses
on debt and derivative instruments (24.3) 26.3
Interest on swaps and debt under
fair value option 15.4 16.5
Net pension interest (income)/expense (10.2) (3.1)
Capitalised borrowing costs (29.2) (21.3)
Profit on disposal of business (22.1) -
Underlying profit before tax 389.4 408.1
------------- -------------
Profit after tax
GBPm GBPm
Underlying profit before tax 389.4 408.1
Reported tax (charge)/credit (8.5) 44.0
Deferred tax credit - change
in tax rate (58.2) (112.5)
Agreement of prior years' tax
matters (15.5) (3.4)
Tax in respect of adjustments
to underlying profit before tax 6.2 (10.9)
-------------
Underlying profit after tax 313.4 325.3
Earnings per share
GBPm GBPm
Profit after tax per published
results (a) 433.9 397.5
Underlying profit after tax (b) 313.4 325.3
Weighted average number of shares
in issue, in millions (c) 681.9m 681.9m
Earnings per share per published
results, in pence (a/c) 63.6p 58.3p
Underlying earnings per share,
in pence (b/c) 46.0p 47.7p
PRINCIPAL RISKS AND UNCERTAINTIES
Our strategy is to create sustainable value by delivering the
best service to customers, at the lowest sustainable cost and in a
responsible manner. In doing this, the group is exposed to a range
of internal and external risks of varying types which can impact
upon us and the delivery of our objectives and operations. To
understand and manage these risks, we maintain a risk management
framework which includes:
-- an enterprise-wide approach to risk management;
-- a well-established governance and reporting structure;
-- a risk assessment and management process which is aligned to ISO 31000:2009; and
-- a suite of tools, guidance material and training packages to
support consistency of approach.
Business areas and functions are responsible for the
identification, analysis, evaluation and management of risk
relative to their business environment including new and emerging
circumstances. All event types (including regulatory, legal, core
operations, service and hazard) are considered for their likelihood
of occurrence and both the financial and reputational impact should
that event occur. Each assessment takes into account a gross
position (assuming no controls or that all controls fail), a
current position benefitting from an analysis of the type and
effectiveness of existing controls and a targeted position where
further mitigation may be required if the current position is
evaluated as not meeting our objectives or obligations.
The nature and extent of the risk profile culminating from this
structured approach is reported to the group board twice a year,
illustrating individual event based risks that underpin ten
inherent risk categories that are regarded as the principal risks
(see below). From this initial overview, the report then focuses on
two categories of risk: i) the most significant group wide business
risks and ii) wholesale operational risks. These are represented by
the ten highest ranked risks (based on likelihood x 'full life'
financial impact) for each of the two categories and a further five
risks with potentially very high impact severity in their current
state (net of control effectiveness) with reputational impact noted
for awareness and management. The report also highlights risks that
fall outside these categories but are included due to potential
reputational impact or because they are notable new/emerging
circumstances.
This approach is in line with the principles of the UK Corporate
Governance Code and involves reporting to the group board for each
full and half year statutory accounting period allowing the board
to:
-- determine the nature and extent of the principal risks it is
willing to take in achieving its strategic objectives;
-- oversee the management of those risks and provide challenge
to executive management where appropriate;
-- express an informed opinion on the long-term viability of the company; and
-- monitor risk management and internal control systems and review their effectiveness.
Our risk profile currently consists of around 120 event-based
risks. By their nature, these will include all combinations of high
to low likelihood and high to low impact. Heat maps are typically
used in various managerial and group reports either as a method to
collectively evaluate the extent of multiple risks within a certain
profile or to evaluate the effectiveness of mitigation for a single
risk relative to the initial gross position.
Key features and developments
Our risk profile shows that, for each set of the ten highest
ranked risks (one set for each of group wide business risks and
wholesale operational risks), the majority fall into the principal
risk areas 'Political and regulatory', 'Water service' and
'Wastewater service'. Operationally, the dominance of the penalty
element of the outcome delivery incentive mechanism and the effect
following changes to the Environmental Sentencing Guidelines are
key features of this exposure. Reputationally, our core
operations/service provision (notably water service) and health
safety and environmental risks have the highest focus for
monitoring and reviewing control effectiveness based on the
potential impact should the risk event occur.
We aim for continuous improvement in both our governance and
approach to managing risk. Changes this year include the
introduction of a core risk team and additional sign-off processes
relating to operational risk. We have also developed a programme
focused on long term resilience of assets, overseen by the newly
formed wholesale resilience board. Associated with this is a focus
on asset health and operational hazard risk assessment in advance
of and beyond PR19. This should ensure that we fully understand the
long-term risk profile of our asset base and improve our capability
to deliver the most cost-effective and proportionate risk
management response. Other developments include an ongoing
transformation programme (with the Drinking Water Inspectorate) to
address some areas of concern arising from the Lancashire incident
in 2015, system optimisation in wastewater services through a
remote monitoring and control transformation project and in
domestic retail a customer service improvement plan underpinned by
a clear strategy, improved complaints handling, accurate data and
cultural change.
The introduction of non-household retail competition required
significant preparation. Ensuring we continue to operate
compliantly and in accordance with 'level playing field'
requirements remains a key area of focus.
Whilst most of our operations are in the UK, the potential
effects of 'Brexit' have been considered, assessed and reported to
the group board. Like many companies, a key issue is the level of
uncertainty that exists. Our assessment included sources of funds,
costs of goods and services, our ability to collect cash in the
event of an economic downturn and the effect of any potential
inflationary shift over current predictions. This area remains
under review.
Looking further ahead, the expected introduction of competition
in relation to certain wholesale activities and the possible
introduction of competition in the provision of household retail
activities at some future date all place risk on the group.
It is also important to acknowledge other potential significant
change in environment and societal conditions. Climate change is
expected to be one of the sector's biggest challenges having
significant and permanent implications on the water cycle and the
long-term sustainability of water and wastewater services including
water abstraction, supply and treatment capability, drainage and
sewer capacity and wastewater treatment and discharge efficiency
and effectiveness.
The principal risks (aggregated clusters of event-based risks),
which have been set out below reflect the categories of risks that
define business activity or contributing factors where value can be
lost or gained and could have a material impact on the business
model, future performance, solvency or liquidity of the group. In
each case the potential effect is highlighted together with the
extent of management/mitigation. To ensure relevance with the
current environment, issues or areas of uncertainty are also
illustrated.
1. Political and regulatory risk
The potential change in the regulatory environment and/or
frameworks, either through political or regulatory events, for
example following Brexit, may increase costs of administration,
reduce income and margin and lead to greater variability of
returns.
To manage and mitigate this risk we engage in relevant
government and regulatory consultations which may affect policy and
regulation in the sectors where we operate. We also consult with
customers to understand their requirements and proactively consider
all the opportunities and threats associated with any potential
change, exploiting opportunities and mitigating risks where
appropriate.
Current key risks, issues or areas of uncertainty include:
market reform including non-household and upstream competition and,
further ahead, the potential for the introduction of household
competition; a possible change from using the Retail Prices Index
to the Consumer Prices Index for regulatory indexation; and
Brexit.
2. Compliance risk
Reputational, brand and general damage arising from the
potential failure to meet all legal and regulatory obligations and
responsibilities (principally relating to the regulated business,
but also including non-regulated activity/commitment) can result in
additional workload, financial penalties, additional
capital/operating expenditure (from enforcement orders or legal
defence) and compensation following litigation. In more remote but
extreme circumstances, penalties of up to 10 per cent of relevant
turnover and ultimately revocation of our licence or the
appointment of a special administrator are possible.
To manage and mitigate this risk, legislative and regulatory
developments are continually monitored. Risk-based training of
employees is undertaken and we participate in consultations to
influence legislative and regulatory developments. Funding for any
material additional compliance costs in the regulated business is
sought as part of the price determination process. The group also
robustly defends litigation where appropriate and seeks to minimise
its exposure by establishing provisions and seeking recovery
wherever possible.
Current key risks, issues or areas of uncertainty include:
competition law and regulatory compliance whilst preparing for and
operating within a changing competitive market; level playing field
requirements in relation to non-household retail; current material
litigation; and new higher fine levels for environmental
offences.
3. and 4. Water and Wastewater Service risks
The potential failure of water or wastewater operational
processes or assets due to operational performance problems or
service or asset failures can lead to a failure to provide a secure
supply of clean, safe drinking water or an inability to remove,
treat and return water to the environment. This can cause public
health, community and environmental impacts, additional operating
or capital expenditure and/or increased regulatory scrutiny and
regulatory penalties. In more extreme situations the group could
also be fined for breaches of statutory obligations, be subject to
enforcement action, be held liable to third parties and sustain
reputational damage.
Management and mitigation for both Water and Wastewater Service
risks is provided through core business processes, including
forecasting, quality assurance procedures, risk assessments and
rigorous sampling/testing regimes. Ongoing system and network
integration improves service provision and measures of success have
been developed to monitor performance. Following the Lancashire
water quality incident in 2015 we are further enhancing our
approach to operational risk and resilience.
Current key risks, issues or areas of uncertainty include: water
quality; interruption to supply; structural integrity of major
assets; pollution; population growth; climate change; meeting
infrastructure investment requirements; and expected change to the
abstraction licensing regime.
5. Retail and commercial risk
The potential inability to provide good and fair service to
domestic customers and third party retailers. Poor service to
customers can result in financial penalties and an impact on
regulatory reputation. The opening of the market for retail
services to all non-household customers in England in April 2017
has generated both opportunities and risk for the group and its
associated business retail function in respect of income, margin
and debt. Breaches of legal and regulatory requirements could lead
to fines, penalties and reputational damage. Uncertainty remains in
respect of potential upstream reform from 2020.
To manage and mitigate this risk, for domestic retail there is a
transformation plan in place covering a wide range of initiatives
and activities to improve customer service, with a number of
controls in place to monitor achievement against the plan.
Similarly, within business retail we looked to retain existing and
acquire new commercial customers by striving to meet their needs
more effectively. We monitored competitor activity and targeted a
reduction in operating costs. Within our wholesale department
processes, systems, data and organisational capacity and capability
to deal with market participants and the central market operator
have been delivered. The new market requirements will require all
market participants to treat other participants equally (on a
'level playing field') whilst maintaining compliance with existing
regulations.
Current key risks, issues or areas of uncertainty include:
socio-economic deprivation in the North West; welfare reform and
the impact on domestic bad debt; competition in the water and
wastewater market and competitor positioning; and Market Reform and
the ability to treat other participants equally.
6. Financial risk
The potential inability to appropriately finance the business
due to the failure of financial counterparties could result in
additional financing cost, an adverse impact on the income
statement and potential reputational damage. Variability in
inflation (as measured by the UK Retail Prices Index) and changes
in interest rates, funding costs and other market risks could
adversely impact the economic return on the Regulatory Capital
Value. Increased pension scheme deficit could lead to a requirement
for the group to make additional contributions. In extreme but
remote cases adverse market conditions could affect our access to
debt capital markets and subsequently available liquidity and
credit ratings.
To manage and mitigate this risk, refinancing is long-term with
staggered maturity dates to minimise the effect of short-term
downturns. Counterparty credit, exposure and settlement limits
exist to reduce any potential future impacts. These are based on a
number of factors, including the credit rating and the size of the
asset base of the individual counterparty. The group also employs
hedging strategies to stabilise market fluctuation for inflation,
interest rates and commodities (notably energy prices). Sensitivity
analysis is carried out as part of the business planning process,
influencing the various financial limits employed. Continuous
monitoring of the markets takes place including movements in credit
default swap prices and movements in equity levels.
Current key risks, issues or areas of uncertainty include:
stability of financial institutions and the world economy; economic
uncertainty; inflation/deflation; and financial market conditions,
interest rates and funding costs.
7. Programme delivery risk
The potential ineffective delivery of capital, operational and
change programmes/processes resulting in failure to deliver capital
or change programmes against relevant time, cost or quality
measures could result in a failure to secure competitive advantage
or operating performance efficiency and cost benefits. There is
also the risk of increased delivery costs or a failure to meet our
obligations and customer outcomes which, depending on the nature
and extent of failure, could result in an impact at future price
reviews, failure of legal or regulatory obligations and subsequent
penalties. This could lead to negative reputational impact with
customers and regulators.
To manage and mitigate this risk, we have a developed and clear
view of our investment priorities which are built into our
programmes, projects and integrated business and asset plans. We
have created better alignment and integration between our capital
delivery partners and engineering service provider including
alignment with our operating model. Our programme and project
management capabilities are well established with strong governance
and embedded processes to support delivery, manage risks and
achieve business benefits. We utilise a time, cost and quality
index (TCQi) as a key performance indicator and enhance our
performance through a dedicated programme change office to deliver
change in a structured and consistent way. Supply chain management
is utilised to deliver end-to-end contract management which
includes contract strategy and tendering, category management,
security of supply, price and price volatility and financial and
operational service level performance.
Current key risks, issues or areas of uncertainty include:
security of supply; delivery of solutions; quality and innovation;
and new contract delivery partnerships for the 2015-2020 period
with a new approach to construction and design.
8. Resource Risk
The potential inability to provide appropriate resource (human,
system, technological or physical) required to support business
activity(including information, operational technology, skill sets,
systems and telecommunications) can lead to poor efficiency and
effectiveness of business activity, the inability to make
appropriate decisions and ultimately meet targets. This can also
affect the ability to recruit and retain knowledge/expertise or to
recover effectively following an incident. In remote but extreme
circumstances there is also the potential for higher levels of
regulatory scrutiny, financial penalties, reputational damage and
missed commercial opportunities.
To manage and mitigate this risk, developing our people with the
right skills and knowledge, combined with delivering effective
technology are important enablers to support the business to meet
its objectives. Employees are kept informed regarding business
strategy and progress through various communication channels.
Training and personal development programmes exist for all
employees in addition to talent management programmes and
apprentice and graduate schemes. We focus on change programmes and
innovative ways of working to deliver better, faster and more
cost-effective operations.
Current key risks, issues or areas of uncertainty include:
delivering required employee engagement; personal development and
talent management; technological innovation; asset management.
9. Security risk
The potential inability to protect people, information,
infrastructure and non-infrastructure from malicious or accidental
activity. Our resources, assets and infrastructure are exposed to
various threats (malicious or accidental) which could impact the
provision of vital services and/or harm people or commercial
businesses. In addition commercial or sensitive information could
be lost.
To manage and mitigate this risk, physical and technological
security measures combined with strong governance and inspection
regimes aim to protect infrastructure, assets and operational
capability. Recent initiatives include awareness training across
the business relating to seven key areas of security and the
implementation of a security governance model to oversee all
aspects of security and security strategy. Ongoing system and
network integration improves operational resilience and we maintain
robust incident response, business continuity and disaster recovery
procedures. We also maintain insurance cover for loss and liability
and the licence of the regulated business also contains a
'shipwreck' clause that, if applicable, may offer a degree of
recourse to Ofwat/customers in the event of a catastrophic
incident.
Current key risks, issues or areas of uncertainty include:
ownership and operation of National Infrastructure and Critical
National Infrastructure; cybercrime; and terrorism.
10. Health, safety and environmental risk
The potential for operational or natural hazards to affect
employees, contractors, the public or the environment. Working with
and around water, sewage, construction and excavation sites, plant
and equipment exposes people and the environment to man-made and
naturally occurring hazards. This could result in harm to people,
wildlife and natural habitats and lead to increased work down-time
and additional operational costs, for example environmental
clean-up. Depending on the circumstances, the group could be fined
heavily for breaches of statutory obligations, be held liable to
compensate third parties and sustain severe reputational
damage.
To manage and mitigate this risk, we have developed a strong
health, safety and environmental culture where 'nothing we do at
United Utilities is worth getting hurt for'. This is supported by
strong governance and management systems which include policies and
procedures which are certified to OHSAS 18001 and ISO 14001.
Current key risks, issues or areas of uncertainty include:
extreme weather conditions; excavation, tunnelling and construction
work; working with substances hazardous to human health; working
with water and wastewater; and driving and vehicle movement.
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. Two cases of particular
note are as follows, however, based on the facts currently known to
us and the provisions in our statement of financial position, our
directors remain of the opinion that the likelihood of these having
a material adverse impact on the group's financial position is
remote.
-- In February 2009, United Utilities International Limited
(UUIL) was served with notice of a multiparty 'class action' in
Argentina related to the issuance and payment default of a US$230
million bond by Inversora Eléctrica de Buenos Aires S.A. (IEBA), an
Argentine project company set up to purchase one of the Argentine
electricity distribution networks which was privatised in 1997.
UUIL had a 45 per cent shareholding in IEBA which it sold in 2005.
The claim is for a non-quantified amount of unspecified damages and
purports to be pursued on behalf of unidentified consumer
bondholders in IEBA. UUIL has filed a defence to the action and
will vigorously resist the proceedings given the robust defences
that UUIL has been advised that it has on procedural and
substantive grounds.
-- In March 2010, Manchester Ship Canal Company (MSCC) issued
proceedings seeking, amongst other relief, damages alleging
trespass against United Utilities Water Limited (UUW) in respect of
discharges of water and treated effluent into the canal. Whilst the
matter has not reached a final conclusion, the Supreme Court has
found substantively in UUW's favour on a significant element of the
claim and the High Court has upheld UUW's position on the remainder
of the proceedings. MSCC have now instigated further heads of claim
against UUW in order that they may continue to challenge UUW's
rights to discharge water and treated effluent into the canal.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking
statements with respect to the operations, performance and
financial condition of the group. By their nature, these statements
involve uncertainty since future events and circumstances can cause
results and developments to differ materially from those
anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial
report and the company undertakes no obligation to update these
forward-looking statements. Nothing in this financial report should
be construed as a profit forecast.
Certain regulatory performance data contained in this financial
report is subject to regulatory audit.
This announcement contains inside information, disclosed in
accordance with the Market Abuse Regulation which came into effect
on 3 July 2016 and for UK Regulatory purposes the person
responsible for making the announcement is Simon Gardiner, Company
Secretary.
LEI 2138002IEYQAOC88ZJ59
Classification - Full Year Results
Consolidated income statement
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Revenue 1,704.0 1,730.0
------------ ------------
Employee benefit expense (note
3) (151.9) (146.9)
Other operating costs (note
4) (435.1) (485.8)
Other income 4.2 3.6
Depreciation and amortisation
expense (364.9) (363.7)
Infrastructure renewals expenditure (150.8) (169.3)
------------ ------------
Total operating expenses (1,098.5) (1,162.1)
------------ ------------
Operating profit 605.5 567.9
Investment income (note 5) 13.7 5.0
Finance expense (note 6) (202.7) (224.4)
------------ ------------
Investment income and finance
expense (189.0) (219.4)
Profit on disposal of business
(note 10) 22.1 -
Share of profits of joint ventures 3.8 5.0
Profit before tax 442.4 353.5
Current tax charge (31.5) (44.3)
Deferred tax charge (35.2) (24.2)
Deferred tax credit - change
in tax rate 58.2 112.5
------------ ------------
Tax (note 7) (8.5) 44.0
Profit after tax 433.9 397.5
------------ ------------
All of the results shown above
relate to continuing operations.
Earnings per share (note 8)
Basic 63.6p 58.3p
Diluted 63.5p 58.2p
Dividend per ordinary share
(note 9) 38.87p 38.45p
Consolidated statement of comprehensive income
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Profit after tax 433.9 397.5
Other comprehensive income
Remeasurement (losses)/gains on defined
benefit pension schemes (note 11) (76.7) 160.1
Tax on items taken directly
to equity (note 7) 17.3 (26.5)
Foreign exchange adjustments 3.7 3.0
------------
Total comprehensive income 378.2 534.1
------------ ------------
Consolidated statement of financial position
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 10,405.5 10,031.4
Intangible assets 187.7 162.4
Interests in joint ventures 75.2 35.1
Investments 9.0 8.7
Trade and other receivables 112.3 2.5
Retirement benefit surplus (note
11) 247.5 275.2
Derivative financial instruments 731.0 765.5
11,768.2 11,280.8
------------ ------------
Current assets
Inventories 22.4 29.3
Trade and other receivables 303.9 367.4
Current tax asset 7.1 -
Cash and short-term deposits 247.8 213.6
Derivative financial instruments 76.7 0.1
Assets classified as held for
sale (note 10) - 15.6
------------ ------------
657.9 626.0
Total assets 12,426.1 11,906.8
------------ ------------
LIABILITIES
Non-current liabilities
Trade and other payables (589.3) (530.5)
Borrowings (note 12) (7,058.4) (6,508.8)
Deferred tax liabilities (1,031.5) (1,062.0)
Derivative financial instruments (235.5) (255.8)
------------ ------------
(8,914.7) (8,357.1)
------------ ------------
Current liabilities
Trade and other payables (323.0) (341.7)
Borrowings (note 12) (326.1) (469.2)
Current tax liabilities - (12.3)
Provisions (26.5) (15.1)
Derivative financial instruments (14.2) (5.9)
------------ ------------
(689.8) (844.2)
------------ ------------
Total liabilities (9,604.5) (9,201.3)
------------ ------------
Total net assets 2,821.6 2,705.5
------------ ------------
EQUITY
Share capital 499.8 499.8
Share premium account 2.9 2.9
Cumulative exchange reserve (2.0) (5.7)
Merger reserve 329.7 329.7
Retained earnings 1,991.2 1,878.8
------------ ------------
Shareholders' equity 2,821.6 2,705.5
------------ ------------
Consolidated statement of changes in equity
Year ended 31 March 2017
Share Share Cumulative Merger Retained Total
capital premium exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 499.8 2.9 (5.7) 329.7 1,878.8 2,705.5
Profit after tax - - - - 433.9 433.9
Other comprehensive
income/(expense)
Remeasurement losses
on defined benefit
pension schemes
(note 11) - - - - (76.7) (76.7)
Tax on items taken
directly to equity
(note 7) - - - - 17.3 17.3
Foreign exchange
adjustments - - 3.7 - - 3.7
Total comprehensive
income - - 3.7 - 374.5 378.2
----------------------------- -------- -------- ----------- -------- --------- --------
Dividends (note
9) - - - - (263.1) (263.1)
Equity-settled share-based
payments - - - - 3.4 3.4
Exercise of share
options - purchase
of shares - - - - (2.4) (2.4)
----------------------------- -------- -------- ----------- -------- --------- --------
At 31 March 2017 499.8 2.9 (2.0) 329.7 1,991.2 2,821.6
----------------------------- -------- -------- ----------- -------- --------- --------
Year ended 31 March 2016
Share Share Cumulative Merger Retained Total
capital premium exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2015 499.8 2.9 (8.7) 329.7 1,610.7 2,434.4
Profit after tax - - - - 397.5 397.5
Other comprehensive
income/(expense)
Remeasurement gains
on defined benefit
pension schemes
(note 11) - - - - 160.1 160.1
Tax on items taken
directly to equity
(note 7) - - - - (26.5) (26.5)
Foreign exchange
adjustments - - 3.0 - - 3.0
Total comprehensive
income - - 3.0 - 531.1 534.1
----------------------------- -------- -------- ----------- -------- --------- --------
Dividends (note
9) - - - - (258.7) (258.7)
Equity-settled share-based
payments - - - - 2.3 2.3
Exercise of share
options - purchase
of shares - - - - (6.6) (6.6)
----------------------------- -------- -------- ----------- -------- --------- --------
At 31 March 2016 499.8 2.9 (5.7) 329.7 1,878.8 2,705.5
----------------------------- -------- -------- ----------- -------- --------- --------
Consolidated statement of cash flows
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Operating activities
Cash generated from operations
(note 15) 1,018.1 905.5
Interest paid (161.0) (168.7)
Interest received and similar
income 4.9 1.9
Tax paid (42.4) (53.1)
Tax received 1.2 -
Net cash generated from operating
activities 820.8 685.6
------------
Investing activities
Purchase of property, plant and
equipment (672.4) (634.2)
Purchase of intangible assets (52.4) (66.1)
Proceeds from sale of property,
plant and equipment 4.1 1.4
Grants and contributions received 29.0 17.3
Loans to joint ventures (109.0) -
Investment in joint ventures (13.5) -
Proceeds from disposal of business
(note 10) 3.3 -
Dividends received from joint
ventures 5.4 4.6
Proceeds from investments 0.9 0.2
Net cash used in investing activities (804.6) (676.8)
Financing activities
Proceeds from borrowings 736.2 693.0
Repayment of borrowings (448.7) (474.1)
Dividends paid to equity holders
of the company (note 9) (263.1) (258.7)
Exercise of share options - purchase
of shares (2.4) (6.6)
Net cash (used in)/generated
from financing activities 22.0 (46.4)
------------ ------------
Net (decrease)/increase in cash
and cash equivalents 38.2 (37.6)
Cash and cash equivalents at
beginning of the year 182.1 219.7
------------ ------------
Cash and cash equivalents at
end of the year 220.3 182.1
------------ ------------
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year
ended 31 March 2017 have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Conduct
Authority.
The accounting policies, presentation and methods of computation
are consistent with those applied in the audited financial
statements of United Utilities Group PLC for the year ended 31
March 2016 and are prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union (EU).
The condensed consolidated financial statements do not include
all of the information and disclosures required for full annual
financial statements and do not comprise statutory accounts within
the meaning of section 434 of the Companies Act 2006, but are
derived from the audited financial statements of United Utilities
Group PLC for the year ended 31 March 2017, for which the auditors
have given an unqualified opinion.
The comparative figures for the year ended 31 March 2016 do not
comprise the group's statutory accounts for that financial year.
Those accounts have been reported upon by the group's auditor and
delivered to the registrar of companies. The report of the auditor
was unqualified and did not include a reference to any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006.
Going concern
The directors have a reasonable expectation that the group has
adequate resources for a period of at least 12 months from the date
of approval of the condensed consolidated financial statements and
have therefore assessed that the going concern basis of accounting
is appropriate in preparing the condensed financial statements and
that there are no material uncertainties to disclose. This
conclusion is based upon a review of the resources available to the
group, taking account of the group's financial projections together
with available cash and committed borrowing facilities as well as
consideration of the group's capital adequacy, consideration of the
primary legal duty of United Utilities Water Limited's economic
regulator to ensure that water and wastewater companies can finance
their functions, and any material uncertainties. In reaching this
conclusion, the board has considered the magnitude of potential
impacts resulting from uncertain future events or changes in
conditions, the likelihood of their occurrence and the likely
effectiveness of mitigating actions that the directors would
consider undertaking.
2. Segmental reporting
The board of directors of United Utilities Group PLC (the board)
is provided with information on a single segment basis for the
purposes of assessing performance and allocating resources. The
board reviews revenue, underlying operating profit, operating
profit, assets and liabilities, regulatory capital expenditure and
regulatory capital value gearing at a consolidated level. In light
of this, the group has a single segment for financial reporting
purposes and therefore no further detailed segmental information is
provided in this note.
3. Employee benefits expense
Included within employee benefits expense were GBP10.1 million
(31 March 2016: GBP0.9 million) of restructuring costs.
Employee benefits expense is stated net of GBP4.0 million (31
March 2016: GBPnil) of costs recharged under transitional service
agreements at nil margin to Water Plus, a joint venture established
between the group and Severn Trent PLC during the year.
4. Other operating costs
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Hired and contracted services 101.5 107.5
Property rates 91.6 86.3
Power 68.7 65.3
Materials 67.7 67.2
Charge for bad and doubtful
receivables 29.9 39.2
Regulatory fees 28.6 27.9
Cost of properties disposed 8.6 10.5
Legal and professional
expenses 6.5 5.8
Operating leases payable 4.4 5.0
Loss on disposal of property,
plant and equipment 3.3 5.4
Third party wholesale charges 3.0 15.1
Impairment of property,
plant and equipment 0.2 11.4
Impairment of assets classified
as held for sale - 2.7
Amortisation of deferred
grants and contributions (6.7) (6.9)
Compensation from insurers (12.3) (20.1)
Other expenses 40.1 63.5
435.1 485.8
------------- -------------
As a result of two significant flooding incidents caused by
Storms Desmond and Eva in December 2015, there were GBP13.8 million
(31 March 2016: GBP19.5 million) of expenses incurred, comprising
GBP11.1 million (31 March 2016: GBP7.0 million) of operating costs,
GBP2.5 million (31 March 2016: GBP1.1 million) of infrastructure
renewals expenditure, and a GBP0.2 million (31 March 2016: GBP11.4
million) impairment of property, plant and equipment. Insurance
compensation of GBP12.3 million (31 March 2016: GBP20.1 million)
relating to the flooding incidents has been recognised and the
group expects there to be further recovery of the flooding incident
costs under its insurance cover in the year ending 31 March 2018,
as further remedial work is undertaken.
In addition, there were GBP5.8 million (31 March 2016: GBP11.1
million) of market reform restructuring costs incurred in preparing
the business for competition in the non-household retail market and
GBPnil (31 March 2016: GBP24.8 million) of costs relating to a
large water quality incident, largely comprising customer
compensation payments included within other expenses.
Total other operating costs are stated net of GBP14.5 million
(31 March 2016: GBPnil) of costs recharged to Water Plus at nil
margin under transitional service agreements.
5. Investment income
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Interest receivable 3.5 1.9
Net pension interest income
(note 11) 10.2 3.1
13.7 5.0
------------- -------------
6. Finance expense
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Interest payable 227.0 198.1
Net fair value (gains)/losses
on debt and derivative
instruments (24.3) 26.3
------------- -------------
202.7 224.4
------------- -------------
Interest payable is stated net of GBP29.2 million (31 March
2016: GBP21.3 million) borrowing costs capitalised in the cost of
qualifying assets within property, plant and equipment and
intangible assets during the year. Interest payable includes an
GBP80.7 million (31 March 2016: GBP37.9 million), non-cash,
inflation uplift charge in relation to the group's index-linked
debt.
Net fair value (gains)/losses on debt and derivative instruments
includes GBP15.4 million income (31 March 2016: GBP16.5 million)
due to net interest on swaps and debt under fair value option.
7. Tax
During the year ending 31 March 2017 there was a deferred tax
credit of GBP58.2 million (31 March 2016: GBP112.5 million)
reflecting the substantive enactment of the reduction in the
headline rate of corporation tax from 18 per cent to 17 per cent
from 1 April 2020 (31 March 2016: 20 per cent to 18 per cent
similar headline rate reduction). There was a current tax credit of
GBP22.5 million (31 March 2016: GBP9.0 million) and a deferred tax
charge of GBP7.0 million (31 March 2016: GBP5.6 million) relating
to agreed matters in relation to prior years, primarily being the
release of a provision in relation to agreed historic overseas tax
matters. In addition, the current period profit on disposal of the
non-household retail business during the current period was
non-taxable.
After adjusting for the above tax credits and the non-taxable
item, the total effective tax charge for the current and prior
years was in line with the headline rate of corporation tax,
currently 20 per cent (31 March 2016: 20 per cent). The split of
the total tax charge between current and deferred tax relates to
ongoing timing differences in relation to tax deductions on pension
contributions, capital investment, and unrealised gains and losses
on treasury derivatives.
The tax adjustments taken to equity primarily relate to
remeasurement movements on the group's defined benefit pension
schemes.
8. Earnings per share
Basic and diluted earnings per share are calculated by dividing
profit after tax by the weighted average number of shares in issue
during the year. The weighted average number of shares in issue as
at 31 March 2017 for the purpose of the basic earnings per share
was 681.9 million (31 March 2016: 681.9 million) and for the
diluted earnings per share was 683.0 million (31 March 2016: 683.0
million).
9. Dividends
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Dividends relating to
the year comprise:
Interim dividend 88.3 87.3
Final dividend 176.8 174.8
----------- -----------
265.1 262.1
----------- -----------
Dividends deducted from shareholders'
equity comprise:
Interim dividend 88.3 87.3
Final dividend 174.8 171.4
----------- -----------
263.1 258.7
----------- -----------
The proposed final dividends for the years ended 31 March 2017
and 31 March 2016 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 2017 and 31 March 2016 respectively.
The final dividend of 25.92 pence per ordinary share (2016:
25.64 pence per ordinary share) is expected to be paid on 4 August
2017 to shareholders on the register at the close of business on 23
June 2017. The ex-dividend date for the final dividend is 22 June
2017.
The interim dividend of 12.95 pence per ordinary share (2016:
12.81 pence per ordinary share) was paid on 1 February 2017 to
shareholders on the register at the close of business on 16
December 2016.
10. Disposal of non-household retail business
On 3 May 2016 the Competition and Markets Authority approved the
formation of a joint venture, Water Plus Group Limited, between
United Utilities PLC and Severn Trent PLC. On 1 June 2016 the group
completed the disposal of its non-household water and wastewater
retail business, principally comprising billing and customer
service activities, to Water Plus. This resulted in a GBP22.1
million profit and GBP3.3 million of cash proceeds on disposal of
the business, together with a GBP15.6 million disposal of assets
that had been classified as held for sale. The formation of the
joint venture resulted in an increase in interests in joint
ventures of GBP39.1 million, comprising GBP25.6 million of shares
in the joint venture received on disposal of the non-household
retail business, and GBP13.5 million of equity contributed during
the year. The group's GBP2.0 million share of the joint venture's
losses for the period was subsequently recognised, which included
GBP5.2 million of initial set up costs not expected to be incurred
in future years.
11. Retirement benefit surplus
The main financial assumptions used by the company's actuary to
calculate the defined benefit surplus of the United Utilities
Pension Scheme (UUPS) and the United Utilities PLC Group of the
Electricity Supply Pension Scheme (ESPS) were as follows:
Year ended Year ended
31 March 31 March
2017 2016
%pa %pa
Discount rate 2.55 3.40
Pensionable salary growth
and pension increases 3.40 3.20
Price inflation 3.40 3.20
Mortality in retirement is assumed to be in line with the
Continuous Mortality Investigation's (CMI) S2PA (31 March 2016:
S1NA) year of birth tables, with scaling factor of 108 per cent for
males and 102 per cent for females (31 March 2016: one-year age
rating for males in the UUPS only), reflecting actual mortality
experience; and CMI 2015 (31 March 2016: CMI 2014) long-term
improvement factors, with a long-term annual rate of improvement of
1.75 per cent (31 March 2016: 1.75 per cent).
The net pension expense before tax in the income statement in
respect of the defined benefit schemes is summarised as
follows:
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Current service cost 19.7 22.3
Curtailments/settlements 3.1 1.1
Administrative expenses 2.7 2.7
Pension expense charged
to operating profit 25.5 26.1
Net pension interest credited
to investment income (note
5) (10.2) (3.1)
----------- -----------
Net pension expense charged
before tax 15.3 23.0
----------- -----------
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
2017 2016
GBPm GBPm
At the start of the year 275.2 79.2
Expense recognised in the
income statement (15.3) (23.0)
Contributions paid 64.3 58.9
Remeasurement (losses)/gains
gross of tax (76.7) 160.1
----------- -----------
At the end of the year 247.5 275.2
----------- -----------
The closing surplus at each reporting date is analysed as
follows:
31 March 31 March
2017 2016
GBPm GBPm
Present value of defined
benefit obligations (3,615.5) (2,970.4)
Fair value of schemes'
assets 3,863.0 3,245.6
---------- ----------
Net retirement benefit
surplus 247.5 275.2
---------- ----------
In the year ended 31 March 2017 the discount rate has decreased
by 0.85 per cent, which includes a 0.6 per cent decrease in credit
spreads and a 0.25 per cent decrease in swap yields over the year.
The GBP76.7 million remeasurement loss has largely resulted from
the impact of the decrease in credit spreads during the year,
partially offset by growth asset gains, the reduction in swap
yields and the favourable impact of changes in mortality during the
year. Further details on the approach to managing pension scheme
risk are set out in the audited consolidated financial statements
of United Utilities Group PLC for the year ended 31 March 2016.
Member data used in arriving at the liability figure included
within the overall IAS 19 surplus has been based on the finalised
actuarial valuation as at 31 March 2016 for the group's ESPS
scheme, and the preliminary results of the actuarial valuation as
at 31 March 2016 for the group's UUPS scheme.
12. Borrowings
New borrowings raised during the year ended 31 March 2017 were
as follows:
-- On 9 June 2016 the group issued EUR 30.0 million fixed interest rate notes due June 2031.
-- On 13 June 2016 the group issued HKD 600.0 million fixed interest rate notes due June 2031.
-- On 15 June 2016 the group drew down the remaining GBP75.0
million against its existing GBP250.0 million term RPI index-linked
loan facility signed in March 2015 with the European Investment
Bank. This loan is structured on an amortising basis with final
repayment in June 2034.
-- On 17 June 2016 the group drew down GBP75.0 million against
its new GBP250.0 million term RPI index-linked loan facility signed
in April 2016 with the European Investment Bank. This loan is
structured on an amortising basis with final repayment in June
2034.
-- On 30 September 2016 the group issued GBP20.0 million RPI
index-linked notes due October 2028 and GBP26.5 million RPI
index-linked notes due September 2036.
-- On 9 December 2016 the group issued GBP38.0 million RPI
index-linked notes due December 2031, GBP20.0 million CPI
index-linked notes due December 2031, GBP29.0 million RPI
index-linked notes due December 2036 and GBP20.0 million CPI
index-linked notes due December 2036.
-- On 10 February 2017 the group issued GBP60.0 million CPI
index-linked notes due February 2037.
The notes were issued through private placement under the Euro
medium-term note programme.
13. Fair values of financial instruments
The fair values of financial instruments are shown in the table
below.
31 March 31 March
2017 2016
Fair Carrying Fair Carrying
value value value value
GBPm GBPm GBPm GBPm
Available for sale financial
assets
Investments 9.0 9.0 8.7 8.7
Financial assets at fair
value through profit or
loss
Derivative financial assets
- fair value hedge 591.1 591.1 583.8 583.8
Derivative financial assets
- held for trading 216.6 216.6 181.8 181.8
Financial liabilities at
fair value through profit
or loss
Derivative financial liabilities
- held for trading (249.7) (249.7) (261.7) (261.7)
Financial liabilities designated
as fair value through profit
or loss (375.5) (375.5) (338.0) (338.0)
Financial instruments for
which fair value does not
approximate carrying value
Financial liabilities in
fair value hedge relationships (2,544.6) (2,522.4) (2,293.0) (2,373.0)
Other financial liabilities
at amortised cost (5,682.8) (4,486.6) (4,830.1) (4,267.0)
---------- ---------- ---------- ----------
(8,035.9) (6,817.5) (6,948.5) (6,465.4)
---------- ---------- ---------- ----------
A decrease in underlying interest rates on index-linked debt
during the year is the principal reason for the reduction in the
difference between the fair value and carrying value of the group's
borrowings.
The group has calculated fair values using quoted prices where
an active market exists, which has resulted in 'level 1' fair value
liability measurements under the IFRS 13 'Fair value measurement'
hierarchy of GBP1,766.1 million (31 March 2016: GBP2,149.5 million)
for financial liabilities in fair value hedge relationships and
GBP937.9 million (31 March 2016: GBP1,309.9 million) for other
financial liabilities at amortised cost.
The GBP755.4 million reduction (31 March 2016: GBP1,213.5
million reduction) 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 2017. 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 2016.
14. Net debt
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
At the start of the year 6,260.5 5,924.0
Net capital expenditure 691.7 681.6
Dividends (note 9) 263.1 258.7
Interest 156.1 166.8
Loans to joint ventures 109.0 -
Inflation uplift on index-linked
debt (note 6) 80.7 37.9
Tax 41.2 53.1
Other 4.4 1.5
Fair value movements (9.9) 42.4
Cash generated from operations
(note 15) (1,018.1) (905.5)
----------- -----------
At the end of the year 6,578.7 6,260.5
----------- -----------
Net debt comprises borrowings, net of cash and short-term
deposits and derivatives.
Fair value movements includes net fair value gains on debt and
derivative instruments of GBP24.3 million (31 March 2016: GBP26.3
million net fair value losses) less net receipts on swaps and debt
designated at fair value of GBP14.4 million (31 March 2016: GBP16.1
million).
15. Cash generated from operations
Year ended Year ended
31 March 31 March
2017 2016
GBPm GBPm
Operating profit 605.5 567.9
Adjustments for:
Depreciation of property,
plant and equipment 336.2 332.5
Amortisation of intangible
assets 28.7 31.2
Impairment of property,
plant and equipment 0.2 11.4
Impairment of assets classified
as available for sale - 2.7
Loss on disposal of property,
plant and equipment 3.3 5.4
Loss on disposal of intangible
assets 0.5 -
Amortisation of deferred
grants and contributions (6.7) (6.9)
Equity-settled share-based
payments charge 3.4 2.3
Other non-cash movements (3.0) (3.8)
Changes in working capital:
Decrease in inventories 6.9 11.2
Decrease/(increase) in trade
and other receivables 71.1 (14.1)
Decrease in trade and other
payables (0.6) (4.1)
Increase in provisions 11.4 2.6
Pension contributions paid
less pension expense charged
to operating profit (38.8) (32.8)
---------- ----------
Cash generated from operations 1,018.1 905.5
---------- ----------
16. Commitments and contingent liabilities
At 31 March 2017 there were commitments for future capital
expenditure contracted but not provided for of GBP336.9 million (31
March 2016: GBP447.3 million).
Following a review undertaken during the year, the group has
determined that the possibility of any outflow in respect of
performance guarantees issued is remote and, as such, there are no
contingent liabilities to be disclosed in respect of these (31
March 2016: GBP9.8 million).
A contingent liability exists in relation to the equalisation of
Guaranteed Minimum Pension (GMP), which is expected to have a
widespread impact for defined benefit pension schemes operating in
the UK. At this stage it is not possible to quantify the impact of
legislative changes proposed by the UK Government in this area.
17. Related party transactions
The related party trading 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
2017 2016
GBPm GBPm
Sales of services 404.3 1.2
Purchases of goods and services 0.7 0.7
Costs recharged at nil margin under 18.5 -
transitional service agreements
Interest income and fees recognised 2.6 -
on loans to related parties
Amounts owed by related parties 163.5 2.9
Amounts owed to related parties 12.1 -
Sales of services to related parties during the year mainly
represent non-household wholesale charges and were on the group's
normal trading terms.
At 31 March 2017 amounts owed by joint ventures, as recorded
within trade and other receivables in the statement of financial
position, were GBP163.5 million (31 March 2016: GBP2.9 million),
comprising GBP41.5 million of trade balances, which are unsecured
and will be settled in accordance with normal credit terms, and
GBP122.0 million relating to loans. Included within these loans
receivable were the following amounts owed by Water Plus:
-- GBP100.0 million outstanding on a GBP100.0 million revolving
credit facility provided by United Utilities Water Limited, which
is guaranteed by United Utilities PLC, with a maturity date of 30
September 2019, bearing a floating interest rate of LIBOR plus a
credit margin;
-- GBP9.0 million receivable being the fair value of amounts
owed in relation to a GBP12.5 million unsecured loan note held by
United Utilities PLC, with a maturity date of 28 March 2027. This
is an interest-free shareholder loan with a total amount
outstanding at 31 March 2017 of GBP12.5 million, comprising the
GBP9.0 million receivable held at fair value, and GBP3.5 million
recorded as an equity contribution to Water Plus recognised within
interests in joint ventures; and
-- GBP9.7 million outstanding on a GBP19.6 million unsecured
amortising loan note held by United Utilities PLC, with a final
maturity date of 30 November 2017, bearing a floating interest rate
of LIBOR plus a credit margin. Repayments received on this loan
note represent part of the proceeds received on disposal of the
group's non-household retail business (see note 10).
A further GBP3.3 million (31 March 2016: GBP2.5 million) of
non-current receivables was owed by other related parties at 31
March 2017.
No expense or allowance has been recognised for bad and doubtful
receivables in respect of the amounts owed by related parties (31
March 2016: GBPnil).
During the year, United Utilities PLC provided guarantees in
support of Water Plus in respect of certain amounts owed to
wholesalers. The aggregate limit of these guarantees was GBP42.5
million, of which GBP24.0 million related to guarantees to United
Utilities Water Limited.
At 31 March 2017, amounts owed to joint ventures were GBP12.1
million (31 March 2016: GBPnil). The amounts outstanding are
unsecured and will be settled in accordance with normal credit
terms (31 March 2016: GBPnil).
18. Events after the reporting period
There were no events arising after the reporting date that
required recognition or disclosure in the financial statements for
the year ended 31 March 2017.
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 2017. 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;
-- 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; and
-- the directors 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 performance,
business model and strategy.
The directors of United Utilities Group PLC at the date of this
announcement are listed below:
Dr John McAdam
Steve Mogford
Stephen A Carter
Mark Clare
Alison Goligher
Russ Houlden
Brian May
Sara Weller
This responsibility statement was approved by the board and
signed on its behalf by:
____________________ _____________________
Steve Mogford Russ Houlden
24 May 2017 24 May 2017
Chief Executive Officer Chief Financial Officer
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEUFALFWSESI
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May 25, 2017 02:01 ET (06:01 GMT)
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