REG - United Utilities Grp - Final Results <Origin Href="QuoteRef">UU.L</Origin> - Part 2
25/05/2017 07:06
- Part 2: For the preceding part double click ID:nRSY1703Ga
The accounting standards allow for the 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 of business This relates to the disposal of the 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 credit-change in tax rate The deferred tax impact from changes to the corporation tax rate announced 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 prior years' tax matters The agreement of prior years' tax matters can be significant, volatile and often 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 of adjustments to underlying profit before tax Management adjust for the tax impacts of the above adjusted items to provide a more representative view of current year performance.
Operating profit Year ended Year ended
31 March 2017 31 March 2016
£m £m
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 £m £m
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 £m £m
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 reform1 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 costsProfit on disposal of business (29.2)(22.1) (21.3)-
Underlying profit before tax 389.4 408.1
Profit after tax £m £m
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
£m £m
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
£m £m
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
£m £m
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
£m £m
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
£m £m £m £m £m £m
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
£m £m £m £m £m £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 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
£m £m
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 £10.1 million (31 March 2016:
£0.9 million) of restructuring costs.
Employee benefits expense is stated net of £4.0 million (31 March 2016: £nil)
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
£m £m
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 £13.8 million (31 March 2016: £19.5 million)
of expenses incurred, comprising £11.1 million (31 March 2016: £7.0 million)
of operating costs, £2.5 million (31 March 2016: £1.1 million) of
infrastructure renewals expenditure, and a £0.2 million (31 March 2016: £11.4
million) impairment of property, plant and equipment. Insurance compensation
of £12.3 million (31 March 2016: £20.1 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 £5.8 million (31 March 2016: £11.1 million) of market
reform restructuring costs incurred in preparing the business for competition
in the non-household retail market and £nil (31 March 2016: £24.8 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 £14.5 million (31 March 2016:
£nil) 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
£m £m
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
£m £m
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 £29.2 million (31 March 2016: £21.3 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 £80.7 million (31 March 2016: £37.9 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
£15.4 million income (31 March 2016: £16.5 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 £58.2
million (31 March 2016: £112.5 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 £22.5
million (31 March 2016: £9.0 million) and a deferred tax charge of £7.0
million (31 March 2016: £5.6 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
£m £m
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
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