REG - United Utilities Grp - Final Results <Origin Href="QuoteRef">UU.L</Origin> - Part 2
26/05/2016 07:06
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353.5 341.6
Adjustments:
Water quality incident 24.8 -
Flooding incidents (net of insurance proceeds recognised) (0.6) -
Business retail market reform1 11.1 -
Restructuring costs 0.9 11.0
Net fair value losses on debt and derivative instruments 26.3 104.7
Interest on swaps and debt under fair value option 16.5 4.0
Net pension interest (income)/expense (3.1) 7.0
Capitalised borrowing costs (21.3) (20.9)
Underlying profit before tax 408.1 447.4
Profit after tax £m £m
Underlying profit before tax 408.1 447.4
Reported tax credit/(charge) 44.0 (70.4)
Deferred tax credit - change in tax rate (112.5) -
Agreement of prior years' UK tax matters (3.4) (0.7)
Tax in respect of adjustments to underlying profit before tax (10.9) (22.2)
Underlying profit after tax 325.3 354.1
Earnings per share
£m £m
Profit after tax per published results (a) 397.5 271.2
Underlying profit after tax (b) 325.3 354.1
Weighted average number of shares in issue, in millions (c) 681.9m 681.9m
Earnings per share per published results, in pence (a/c) 58.3p 39.8p
Underlying earnings per share, in pence (b/c) 47.7p 51.9p
1 Relates to market reform restructuring costs incurred preparing the business
for open competition in the business retail market
Underlying operating profit reconciliation
The table below provides a reconciliation between group underlying operating
profit and United Utilities Water Limited (UUW) historical cost regulatory
underlying operating profit (non-GAAP measures) as follows:
Continuing operationsUnderlying operating profit Year ended31 March 2016£m
Group underlying operating profit 604.1
Underlying operating loss not relating to UUW 7.2
UUW statutory underlying operating profit 611.3
Revenue recognition (0.2)
Capitalised borrowing costs 2.8
Other differences (including non-appointed business) (8.3)
UUW regulatory underlying operating profit 605.6
PRINCIPAL RISKS AND UNCERTAINTIES
As a business our strategy is to deliver value by providing the best service
to customers, at the lowest sustainable cost and in a responsible manner. In
doing so the group is exposed to a range of internal and external risks of
varying types which can impact upon these objectives. We therefore maintain a
risk management framework to continually identify, assess and manage risks.
All parts of the group use the same risk management framework ensuring
consistency of approach and supporting risk management and monitoring. The
framework includes: an embedded governance and reporting process; an
assessment and management process which is aligned to ISO 31000: 2009; and a
central database, tools and guidance to further support consistency, embedment
and continuous improvement.
Leaders within the group's individual business areas and functions are
responsible for the assessment and management of risk including the
identification and escalation of new/emerging circumstances and the monitoring
and reporting on risk and control effectiveness. All event types (strategic,
financial, operational, compliance and hazard) are considered in the context
of their potential impact on the delivery of our business objectives. The
assessment is based on the likelihood of an event occurring and the financial
and reputational impact should the event occur. The assessment takes into
account a gross position (without controls or assuming that all controls
fail), a current position benefiting from existing controls and a targeted
position where further mitigation is required to meet objectives or
obligations.
The resulting risk profile is reported to the group board twice a year. The
report covers four areas: the ten highest ranked risks (based on likelihood x
impact); a further five risks included due to the potential severity of their
impact; risks that fall outside these categories but are included due to
potential reputational impact or new/emerging circumstances; and a summary of
all of the event-based risks within the profile relative to ten principal
risks (see below) that could seriously affect the performance, future
prospects or reputation of the business.
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 200 event-based risks. By their
nature, these will include all combinations of high to low likelihood and high
to low impact. Heat maps are typically used in various managerial and group
reports either as a method to 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
Regulatory, operational, compliance and delivery risks remain key features of
the group's risk profile. The introduction of outcome delivery incentives by
Ofwat after PR14 creates a regime of potential penalties and rewards based on
meeting targets for the delivery of operational and capital programmes. In the
context of customer service and operational performance, the Lancashire water
quality incident in the summer of 2015 reinforced the requirement to
consistently deliver clean, safe drinking water and to further mitigate risks
to a continuous service through implementing greater resilience in the asset
base.
Market Reform and the introduction of non-household retail competition in
April 2017 requires significant preparation so that the group's retail and
wholesale functions are in a position to compete successfully while continuing
to operate compliantly and in accordance with the 'level playing field'.
Looking further ahead, the expected introduction of competition in sludge and
water resource activities and the further promotion of the existing inset
regime and the UK Government's consideration (announced November 2015) of
legislation to enable household retail activities to become competitive at
some future date all place risk on the group. Climate change is also
recognised as one of the sector's biggest challenges with significant and
permanent implications on the water cycle and the long-term sustainability of
the water and wastewater service including: water abstraction; supply and
treatment capability; drainage and sewer capacity; and wastewater treatment
and discharge efficiency and effectiveness.
Principal risks
The principal risks (aggregated clusters of event-based risks), 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 magnitude of the potential effect is highlighted together with
the extent of management/mitigation. To ensure relevance with the current
environment, issues or areas of uncertainty associated with each principal
risk are also illustrated.
1. Regulatory Environment and Framework Risk
The potential change in the regulatory environment and/or frameworks either
through political or regulatory events 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, household
competition; and a possible change from using the retail prices index to the
consumer prices index for regulatory indexation.
2. Corporate governance and legal compliance risk
The 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.
Management and mitigation of this risk includes the continual monitoring of
legislative and regulatory developments. 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; current material litigation (see below); and new higher
fine levels for environmental offences.
3. Water Service risk
The inability to provide a secure and resilient supply of clean safe drinking
water due to operational performance problems or service or asset failures can
lead to 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.
4. Wastewater service risk
The inability to remove, treat and return wastewater to the environment in an
effective, resilient and compliant manner due to operational performance
problems or service or asset failures can lead to 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 risk 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: population growth;
climate change; meeting infrastructure investment requirements; expected
change to the abstraction licensing regime; Catchment management; and raw
water quality.
5. Security Risk (Cyber or Physical)
The inability to protect people, information and assets from malicious or
accidental activity which could impact the provision of vital services and/or
harm people or commercial business.
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: cybercrime;
terrorism; and other criminality relating to assets or operations
6. Resource Risk (Human, technological and physical)
The inability to support/deliver effective and efficient business activity can
impact the ability 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.
Management and mitigation of this risk focuses on developing our people with
the right skills and knowledge, combined with delivering effective technology
to enable and 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; and asset management
7. Financial risk
The inability to appropriately finance the business due to capital, credit,
market, funding, liquidity or tax-related risk could result in additional
financing cost, an adverse impact on the income statement, the economic return
on the regulatory capital value (RCV) and our pension schemes with a
requirement for the group to make additional contributions and potential
reputational damage. In extreme but remote cases adverse market conditions
could affect our access to debt capital markets and subsequently available
liquidity and credit ratings.
Management and mitigation relates to the following. 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; financial market conditions; interest rates and funding
costs; and Brexit
8. Programme delivery risk
The ineffective or inefficient delivery of capital, operational and 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, regulatory or statutory penalties and negative reputational impact
with customers and regulators.
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: supply chain
security of supply; delivery of solutions; quality and innovation; new
contract delivery partnerships for the 2015-2020 period with a new approach to
construction and design; and price volatility.
9. Revenue risk
The inability to maintain revenues and margin due to customer service
provision can be caused by financial penalties issued by the regulator through
components of the service incentive mechanism for household customers and loss
of revenue associated with commercial churn for non-household customers using
five megalitres and above per annum. The proposed opening of the market for
retail services to all non-household customers in England from 2017 generates
both opportunities and risk associated with market share, scale and margin
erosion. There is also much uncertainty surrounding the form of upstream
reform which is now anticipated to materialise after 2019.
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 look to retain existing and acquire new commercial
customers by striving to meet their needs more effectively. We monitor
competitor activity and target 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
are being prepared. 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; Brexit; proposed new Business Retail joint venture with Severn;
Trent; and market Reform and the ability to treat other participants equally.
10. Health, safety and environmental risk
The potential harm to employees, contractors, the public or the environment
due to working with and around water, sewage, construction and excavation
sites, plant and equipment could result in the group could be fined for
breaches of statutory obligations, be held liable to third parties and sustain
reputational damage.
Management and mitigation involves the development of 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: excavation,
tunnelling and construction work; working with water and wastewater;
chemicals; all weather conditions; and driving and vehicle movement.
Material Litigation
There continue to be two ongoing pieces of material litigation worthy of note,
as outlined below. 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 UUW's 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 UU's position
on the remainder of the proceedings. We await to see whether MSCC pursue a
further claim to introduce additional matters for determination.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking statements with respect
to the operations, performance and financial condition of the group. By their
nature, these statements involve uncertainty since future events and
circumstances can cause results and developments to differ materially from
those anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial report and
the company undertakes no obligation to update these forward-looking
statements. Nothing in this financial report should be construed as a profit
forecast.
Certain regulatory performance data contained in this financial report is
subject to regulatory audit.
Consolidated income statement
Year ended Year ended
31 March 31 March
2016 2015
£m £m
Revenue 1,730.0 1,720.2
Employee benefit expense (note 3) (146.9) (145.1)
Other operating costs (note 4) (485.8) (424.3)
Other income 3.6 3.3
Depreciation and amortisation expense (363.7) (352.6)
Infrastructure renewals expenditure (169.3) (148.2)
Total operating expenses (1,162.1) (1,066.9)
Operating profit 567.9 653.3
Investment income (note 5) 5.0 1.0
Finance expense (note 6) (224.4) (317.8)
Investment income and finance expense (219.4) (316.8)
Share of profits of joint ventures 5.0 5.1
Profit before tax 353.5 341.6
Current tax charge (44.3) (47.1)
Deferred tax charge (24.2) (23.3)
Deferred tax credit - change in tax rate 112.5 -
Tax (note 7) 44.0 (70.4)
Profit after tax 397.5 271.2
All of the results shown above relate to continuing operations. Earnings per share (note 8)
Basic 58.3p 39.8p
Diluted 58.2p 39.7p
Dividend per ordinary share (note 9) 38.45p 37.70p
Consolidated statement of comprehensive income
Year ended Year ended
31 March 31 March
2016 2015
£m £m
Profit after tax 397.5 271.2
Other comprehensive income
Remeasurement gains on defined benefit pension schemes (note 10) 160.1 250.5
Tax on items taken directly to equity (note 7) (26.5) (50.1)
Foreign exchange adjustments 3.0 (3.1)
Total comprehensive income 534.1 468.5
Consolidated statement of financial position
31 March2016 31 March2015
£m £m
ASSETS
Non-current assets
Property, plant and equipment 10,031.4 9,716.3
Intangible assets 162.4 144.9
Interests in joint ventures 35.1 31.7
Investments 8.7 8.6
Trade and other receivables 2.5 2.5
Retirement benefit surplus (note 10) 275.2 79.2
Derivative financial instruments 765.5 681.6
11,280.8 10,664.8
Current assets
Inventories 29.3 40.5
Trade and other receivables 367.4 353.3
Cash and short-term deposits 213.6 244.0
Derivative financial instruments 0.1 1.0
Assets classified as held for sale (note 11) 15.6 -
626.0 638.8
Total assets 11,906.8 11,303.6
LIABILITIES
Non-current liabilities
Trade and other payables (530.5) (480.0)
Borrowings (note 12) (6,508.8) (6,067.3)
Deferred tax liabilities (1,062.0) (1,123.8)
Derivative financial instruments (255.8) (196.6)
(8,357.1) (7,867.7)
Current liabilities
Trade and other payables (341.7) (381.2)
Borrowings (note 12) (469.2) (578.1)
Current tax liabilities (12.3) (21.1)
Provisions (15.1) (12.5)
Derivative financial instruments (5.9) (8.6)
(844.2) (1,001.5)
Total liabilities (9,201.3) (8,869.2)
Total net assets 2,705.5 2,434.4
EQUITY
Share capital 499.8 499.8
Share premium account 2.9 2.9
Cumulative exchange reserve (5.7) (8.7)
Merger reserve 329.7 329.7
Retained earnings 1,878.8 1,610.7
Shareholders' equity 2,705.5 2,434.4
Consolidated statement of changes in equity
Year ended 31 March 2016
Share capital£m Share premium account£m Cumulative exchange reserve£m Merger reserve£m Retained earnings£m Total£m
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 10) - - - - 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
Year ended 31 March 2015
Share capital£m Share premium account£m Other reserve£m Cumulative exchange reserve£m Merger reserve£m Retained earnings£m Total£m
At 1 April 2014 499.8 2.9 158.8 (5.6) 329.7 1,230.3 2,215.9
Profit after tax - - - - - 271.2 271.2
Other comprehensive (expense)/income
Remeasurement gains on defined benefit pension schemes (note 10) - - - - - 250.5 250.5
Tax on items taken directly to equity (note 7) - - - - - (50.1) (50.1)
Foreign exchange adjustments - - - (3.1) - - (3.1)
Total comprehensive (expense)/income - - - (3.1) - 471.6 468.5
Dividends (note 9) - - - - - (249.4) (249.4)
Transfer of other reserve - - (158.8) - - 158.8 -
Equity-settled share-based payments - - - - - 2.9 2.9
Exercise of share options - purchase of shares - - - - - (3.5) (3.5)
At 31 March 2015 499.8 2.9 - (8.7) 329.7 1,610.7 2,434.4
Consolidated statement of cash flows
Year ended31 March2016 Year ended
31 March2015
£m £m
Operating activities
Cash generated from operations (note 15) 905.5 941.7
Interest paid (168.7) (175.6)
Interest received and similar income 1.9 1.0
Tax paid (53.1) (61.9)
Tax received - 1.3
Net cash generated from operating activities 685.6 706.5
Investing activities
Purchase of property, plant and equipment (634.2) (665.7)
Purchase of intangible assets (66.1) (63.4)
Proceeds from sale of property, plant and equipment 1.4 2.0
Grants and contributions received 17.3 18.1
Purchase of investments - (0.8)
Proceeds from investments 0.2 -
Dividends received from joint ventures 4.6 4.9
Net cash used in investing activities (676.8) (704.9)
Financing activities
Proceeds from borrowings 693.0 411.2
Repayment of borrowings (474.1) (19.1)
Dividends paid to equity holders of the company (note 9) (258.7) (249.4)
Exercise of share options - purchase of shares (6.6) (3.5)
Net cash (used in)/generated from financing activities (46.4) 139.2
Net (decrease)/increase in cash and cash equivalents (37.6) 140.8
Cash and cash equivalents at beginning of the year 219.7 78.9
Cash and cash equivalents at end of the year 182.1 219.7
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year ended 31 March
2016 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 2015 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 2016, for which the
auditors have given an unqualified opinion.
The comparative figures for the year ended 31 March 2015 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
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 £0.9 million (31 March 2015:
£11.0 million) of restructuring costs.
4. Other operating costs
Year ended31 March2016£m Re-presented*Year ended
31 March2015£m
Hired and contracted services 107.5 93.4
Property rates 86.3 80.5
Materials 67.2 58.5
Power 65.3 69.1
Charge for bad and doubtful receivables 39.2 52.9
Regulatory fees 27.9 29.2
Third party wholesale charges 15.1 10.8
Impairment of property, plant and equipment 11.4 -
Cost of properties disposal 10.5 0.6
Legal and professional expenses 5.8 4.8
Loss on disposal of property, plant and equipment 5.4 5.1
Operating leases payable 5.0 4.4
Impairment of assets classified as held for sale (note 11) 2.7 -
Loss on disposal of intangible assets - 0.5
Amortisation of deferred grants and contributions (6.9) (7.7)
Compensation from insurers (20.1) -
Other expenses 63.5 22.2
485.8 424.3
* The comparatives have been re-presented to allocate £7.0 million
accommodation, £3.4 million movements in other provisions, and £2.1 million
research and development to categories which better reflect the underlying
nature of these costs. In addition, a separate category for third party
wholesale charges has been presented, which were previously within other
expenses.
During the year there were £19.5 million (31 March 2015: £nil) of expenses
incurred as a result of two significant flooding incidents caused by Storms
Desmond and Eva, comprising an £11.4 million impairment of property, plant and
equipment, £7.0 million of operating costs and £1.1 million of infrastructure
renewals expenditure. Insurance compensation of £20.1 million relating to the
flooding incidents has been recognised to the extent that the group considers
the recovery to be 'virtually certain' at 31 March 2016. The group expects
there to be further substantial recovery of the flooding incident costs under
its insurance cover in the year ending 31 March 2017, though at this stage it
is not practicable to estimate the value of this.
In addition, there were £24.8 million (31 March 2015: £nil) of costs, largely
comprising customer compensation payments included within other expenses,
incurred in relation to a large water quality incident, and £11.1 million (31
March 2015: £1.1 million) in relation to market reform restructuring costs
incurred preparing the business for open competition in the business retail
market.
5. Investment income
Year ended31 March2016£m Year ended
31 March2015£m
Interest receivable 1.9 1.0
Net pension interest income (note 10) 3.1 -
5.0 1.0
6. Finance expense
Year ended31 March2016£m Year ended
31 March2015£m
Interest payable 198.1 206.1
Net fair value losses on debt and derivative instruments 26.3 104.7
224.4 310.8
Net pension interest expense (note 10) - 7.0
224.4 317.8
Interest payable is stated net of £21.3 million (31 March 2015: £20.9 million)
borrowing costs capitalised in the cost of qualifying assets within property,
plant and equipment and intangible assets during the year. Interest payable
includes a £37.9 million (31 March 2015: £46.6 million) non-cash inflation
uplift charge in relation to the group's index-linked debt.
Net fair value losses on debt and derivative instruments includes £16.5
million income (31 March 2015: £4.0 million) due to net interest on swaps and
debt under fair value option.
7. Tax
During the year ended 31 March 2016, there was a deferred tax credit of £112.5
million (31 March 2015: £nil) reflecting the staged reduction in the headline
rate of corporation tax to 18 per cent from 1 April 2020. In the year ending
31 March 2017, there will be a further deferred tax credit currently estimated
at around £56.0 million reflecting the further rate reduction from 18 to 17
per cent, from 1 April 2020, recently announced in the 2016 Chancellor's
Budget but which is not expected to be substantively enacted until around July
2016.
After adjusting for the above current year deferred tax credit of £112.5
million, 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 2015: 21 per cent). The split of the total tax charge between current
and deferred tax was due to ongoing timing differences in relation to tax
deductions on 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 2016 for the purpose
of the basic earnings per share was 681.9 million (31 March 2015: 681.9
million) and for the diluted earnings per share was 683.0 million (31 March
2015: 683.3 million).
9. Dividends
Year ended31 March2016£m Year ended
31 March2015£m
Dividends relating to the year comprise:
Interim dividend 87.3 85.6
Final dividend 174.8 171.4
262.1 257.0
Dividends deducted from shareholders' equity comprise:
Interim dividend 87.3 85.6
Final dividend 171.4 163.8
258.7 249.4
The proposed final dividends for the years ended 31 March 2016 and 31 March
2015 were subject to approval by equity holders of United Utilities Group PLC
as at the reporting dates, and hence have not been included as liabilities in
the consolidated financial statements as at 31 March 2016 and 31 March 2015
respectively.
The final dividend of 25.64 pence per ordinary share (2015: 25.14 pence per
ordinary share) is expected to be paid on 1 August 2016 to shareholders on the
register at the close of business on 24 June 2016. The ex-dividend date for
the final dividend is 23 June 2016.
The interim dividend of 12.81 pence per ordinary share (2015: 12.56 pence per
ordinary share) was paid on 1 February 2016 to shareholders on the register at
the close of business on 18 December 2015.
10. 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 ended31 March2016%pa Year ended
31 March2015%pa
Discount rate 3.4 3.1
Pensionable salary growth and pension increases 3.2 3.0
Price inflation 3.2 3.0
The net pension expense before tax in the income statement in respect of the
defined benefit schemes is summarised as follows:
Year ended31 March2016£m Year ended
31 March2015£m
Current service cost 22.3 18.1
Curtailments/settlements 1.1 5.5
Administrative expenses 2.7 2.6
Pension expense charged to operating profit 26.1 26.2
Net pension interest (income) (note 5)/expense (note 6) (3.1) 7.0
Net pension expense charged before tax 23.0 33.2
The reconciliation of the opening and closing net pension surplus included in
the statement of financial position is as follows:
Year ended31 March2016£m Year ended
31 March2015£m
At the start of the year 79.2 (177.4)
Expense recognised in the income statement (23.0) (33.2)
Contributions paid 58.9 39.3
Remeasurement gains gross of tax 160.1 250.5
At the end of the year 275.2 79.2
The closing surplus at each reporting date is analysed as follows:
31 March2016£m 31 March2015£m
Present value of defined benefit obligations (2,970.4) (3,054.5)
Fair value of schemes' assets 3,245.6 3,133.7
Net retirement benefit surplus 275.2 79.2
In the year ended 31 March 2016 the discount rate has increased by 0.3 per
cent, which includes a 0.7 per cent increase in credit spreads offset by a
decrease in swap yields over the year. The £160.1 million remeasurement gain
has largely resulted from the impact of the increase in credit spreads during
the year, partially offset by the impact of an increase in inflation. 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 2015.
Included within the above is the impact of pension assumption amendments
resulting from a review undertaken during the year. To align with market
practice the discount rate is now based on an AA 'corporate bond' curve rather
than a broader AA 'non-gilt' curve that was previously used. This has resulted
in a 0.2% increase in the discount rate during the year and a 0.2% increase in
credit spreads. In addition, the allowance for inflation risk premium has been
removed from the basis of the inflation rate assumption to better align with
the risk management strategy, which has increased
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