26th May 2011 07:00
United Utilities Group PLC
26 May 2011
Full Year RESULTS FOR THE YEAR ENDED 31 MARCH 2011
£m Year ended
(continuing operations)
31 March 2011 31 March 2010 (restated)*Underlying operating profit*** 596.4 706.3Underlying profit before 329.2 482.6taxation***Underlying profit after 239.2 346.5taxation***Underlying earnings per 35.1 50.8share****(pence)Revenue 1,513.3 1,573.1Operating profit 580.2 767.8Profit before taxation***** 327.1 408.7Profit after taxation 354.5 347.0Basic earnings per 52.0 50.9share****(pence)Total dividends per ordinary 30.0 34.3share (pence)
** The vast majority of the group's non-regulated activities are treated as discontinued and the group has adopted IFRIC 18 hence the 2009/10 results have been restated
*** Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit measure tables
**** Earnings per share and underlying earnings per share calculations are explained in the earnings per share section
***** Excludes the impact of the transfer of private sewers since this was not included in the 2009 price review
* Underlying operating profit of £596 million: reflects 2009 price review
* Smoother capital delivery profile for 2010-15 period: over £600 million invested in the year
* Met regulatory leakage target despite extreme winter weather
* Strong focus on operational performance
* Substantial financing outperformance already secured
* Targeting total operating expenditure outperformance of at least £50m, or 2%, over 2010-15 period*****
* Final dividend of 20 pence per share, in line with policy
Steve Mogford, Chief Executive Officer, said:
"We have made good progress in the early part of the new regulatoryperiod and have continued to drive further performance improvements. Despite ayear of extreme weather conditions, we have demonstrated resilience, continuedto serve our customers and, thanks to the extraordinary efforts of ouremployees, met our leakage target."We have continued to make high levels of investment in our waterand wastewater assets, providing further benefits for customers, shareholdersand the environment. Capital spend in the year was over £600 million, as weaim for a smoother investment profile to support efficient delivery and reducerisk.
"We are implementing a programme of actions to deliver efficiencies over the 2010-15 period and have already secured substantial financing outperformance. In respect of operating expenditure, we are targeting total outperformance over the five years of at least £50 million, or two per cent of the regulatory allowance, and have achieved approximately £10 million of outperformance in 2010/11.
"The board has proposed a final dividend for 2010/11 of 20 pence per share, providing a total dividend for the year of 30 pence. The group has a robust capital structure and a sustainable dividend policy which targets growth of two per cent per annum above RPI inflation through to 2015.
"Looking ahead, our aim is to become the UK's leading water company. We are focused on providing the best service, at the lowest sustainable cost and in a responsible manner, for the long-term benefits of our customers, our shareholders and the environment."
For further information on the day, please contact:
Gaynor Kenyon - Communications Director +44 (0) 7753 622282
Darren Jameson - Head of Investor Relations +44 (0) 7733 127707 Peter Hewer / Tom Murray - Tulchan Communications +44 (0) 20 7353 4200
A presentation to investors and analysts starts at 9.00 am on Thursday 26 May 2011, 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. A recording of the call will be available for seven days following 26 May 2011 on +44 (0) 20 7031 4064, access code 894755.
This results announcement and the associated presentation will be available on the day at: http://www.unitedutilities.com
BUSINESS REVIEW
Financial overview
The group has delivered a sound set of financial results for the year ended 31March 2011, following the regulatory price review. Revenue from continuingoperations fell by £60 million to £1,513 million, principally reflecting areal price decrease in the regulated business. Underlying operating profitdecreased by 16% to £596 million and underlying profit before taxation waslower by 32%, at £329 million.United Utilities has reshaped its portfolio over the last fewyears, from a group with a wide-ranging set of activities and interests, suchas telecommunications, business process outsourcing, gas and electricitydistribution, metering and international utility operations, into a focusedregulated UK water and wastewater business. The group completed itsnon-regulated disposal programme in November 2010 and the residualnon-regulated activities now represent less than 3% of total underlyingoperating profit. In light of this, from 2011/12, United Utilities will have asingle segment for financial reporting purposes.United Utilities has a robust capital structure and the completionof the non-regulated disposal programme has had a beneficial impact ongearing. Gearing, measured as group net debt to regulatory capital value, iscomfortably within Ofwat's assumed range of 55% to 65% and supports a solidinvestment grade credit rating. United Utilities Water PLC (UUW) has along-term credit rating of A3 from Moody's Investors Service with a stableoutlook. The group benefits from headroom to cover its projected financingneeds into 2013 and this provides good flexibility in terms of when and howfurther debt finance is raised to help fund the regulated capital expenditureprogramme.
In line with its policy, the board has proposed a final dividend of 20 pence per ordinary share. Taken together with the interim dividend of 10 pence per ordinary share, which was paid in February, this provides a total dividend of 30 pence for the 2010/11 financial year. Thereafter, the intention is to continue with the policy of targeting dividend growth of RPI+2% per annum through to 2015.
REGULATED ACTIVITIESFinancial highlights
* Regulated revenue lower by 4% at £1,477 million, reflecting impact of price
review
* Regulated underlying operating profit down by 17% to £580 million
Revenue from regulated activities was lower by 4% at £1,477 million,principally reflecting the impact of the 2009 price review, which includes a4% nominal price decrease for 2010/11. Customers are benefiting from lowerprices alongside significant investment in United Utilities' water andwastewater infrastructure, which helps meet strict environmental standards anddeliver an improved service. As anticipated, regulated revenue was a littlelower in the second half of 2010/11 compared with the first half, reflectingseasonality.Underlying operating profit for the year, at £580 million, was 17% lower thanlast year. This was primarily a result of the regulated price reduction andexpected increases in depreciation, infrastructure renewals expenditure andproperty rates, partly offset by a reduction in power costs. Other operatingexpenses were impacted by increases in legal provisions on existing claims andseveral small non-recurring items. In line with the planned phasing of thecapital investment programme, infrastructure renewals expenditure anddepreciation were higher in the second half of 2010/11 compared with the firsthalf of the year. Reported operating profit, at £571 million, was impacted byone-off costs of £9 million which principally reflect business restructuring.This reported profit was lower than 2009/10, primarily as a result of theaforementioned revenue and cost movements, as well as a one-off pensionscredit in the prior year of £77 million.United Utilities has made changes to its approach to revenue recognition, witheffect from 1 April 2010, which it believes best reflect the likelihood ofcash collection. This revised approach is consistent with IAS 18 `Revenue' andreflects better information regarding which customers are not likely to pay.The effect has been to reduce both revenue and the bad debt charge in theincome statement, with a minimal impact on operating profit. The bad debtcharge for the year was £31 million, compared with £55 million last year.Approximately £18 million of this movement relates to the group's revisedapplication of revenue recognition, with around £6 million reflecting anunderlying improvement. This is an encouraging performance given the tougheconomic climate.Regulatory capital investment in the year, including £130 millionof infrastructure renewals expenditure, was £608 million, compared with £441million in the first year of the 2005-10 regulatory period. This level ofspend is in line with the planned capital investment profile for the 2010-15period, as management has sought to deliver a smoother investment profile tosupport efficient delivery of outputs and reduce risk.
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
Operational performance is a top priority for United Utilities and the company aims to deliver improvements in this area and outperform its regulatory contract. The business also has a range of key performance indicators to enhance the visibility of its performance and help drive improvements.
Best service to customersActions:Customer experience - UUW has established a customer experienceprogramme to help deliver improved customer service. The business now offersadditional contact options for customers, such as an online account managementfacility, to provide more choices as to when and how they can contact thecompany. A priority is to improve customer data management to ensure thisprovides a single view of the customer to help improve the efficiency andquality of service.Customer initiatives - Supporting this customer experienceprogramme, the business has increased staff training, better aligned staffincentive mechanisms, put new service level arrangements in place,substantially reduced work queues and backlogs, and proactively contactscustomers to keep them informed of progress in respect of their enquiries.This is delivering an improved customer experience and reduces unnecessary andrepeat calls, thereby improving efficiency. Although UUW has made goodprogress in the area of customer service, the business recognises that itneeds to reduce further the number of customer complaints and an encouragingperformance in 2010/11 saw UUW achieve an 85% reduction in customer complaintsassessed by the Consumer Council for Water (CCW), compared with the previousyear. Nonetheless, customer service remains a significant area of continuedmanagement focus.Safe, clean drinking water - UUW has an action plan to ensure safe,clean drinking water through maintaining and improving the robustness of itswater treatment processes, refurbishing service reservoir assets, ongoingmains cleaning and optimising water treatment to reduce discoloured waterevents. UUW continues to supply a high quality of drinking water, with a meanzonal compliance water quality performance of 99.96%, which compares with99.94% the previous year, and is focused on maintaining these high levels.Water supply and demand balance - To help ensure a continuous watersupply to its customers, UUW's action plan includes innovation and investmentin remote monitoring to better manage and control the company's water supplysystem. UUW also has investment projects to optimise water pressures andimprove network resilience. In addition, the company is improving its responseto burst mains to help keep the water flowing, supported by `wet' repairs towater mains where the supply remains on through the repair process. Thecompany is now close to opening the West East Link, a significant capitalproject designed to improve further the water supply and demand balance in itsregion and enhance network resilience to climate change. The project, costingover £120 million, is a 55 kilometre water pipeline connecting Merseyside andGreater Manchester. It will use gravity to transport water from GreaterManchester to Merseyside, with the option to pump water in the otherdirection, thus providing more resource flexibility. It has a capacity of over100 megalitres per day, which equates to over half of Liverpool's averagedaily demand. It will increase integration of UUW's network, which isimportant given the potential supply and demand issues that are likely toarise through climate and demographic change. In addition to improved securityof water supply for customers, a key benefit is that it will facilitate themaintenance of critical assets and will replace the need to use temporarymains pipes during maintenance and cleaning activities.Wastewater - The company has a range of actions to help support theserviceability of its wastewater assets. To help reduce sewer flooding, theseactions include incident based targeting to focus on areas more likely toexperience flooding, effective intervention in cleaning and rehabilitation orrefurbishment of sewers and advising customers about items not suitable forsewer disposal. The plan also includes an improved approach to risk assessmentto identify and reduce the risk profile of the company's wastewater treatmentworks.Key performance indicators:* Serviceability - Long-term stewardship of assets is critical andUUW improved its position in the area of wastewater non-infrastructure inOfwat's 2009/10 serviceability assessment (Ofwat defines serviceability as thecapability of a system of assets to deliver a reference level of service tocustomers and to the environment now and in the future). All four assetclasses (water infrastructure, water non-infrastructure, wastewaterinfrastructure and wastewater non-infrastructure) are now rated "stable" andthe business expects to retain this position for 2010/11. The aim is to retaina "stable" rating for all four asset classes, which is aligned with Ofwat'starget.
* Service incentive mechanism (SIM) -Although Ofwat has only just introduced this new measure, which has replaced the overall performance assessment (OPA) measure, UUW's indicative assessment suggests that the company is in the fourth quartile. The aim is to move to the first quartile in the medium-term.
Lowest sustainable costActions:
Staff and pensions - The group reduced staffing levels in 2009/10 and placed its pension provision on a more sustainable footing. These measures are helping UUW in meeting its regulatory efficiency targets.
Asset optimisation - The company's asset optimisation programme is progressing well, providing 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 (CHP) assets to improve energy efficiency. The company's wastewater treatment optimisation programme is targeting approximately £9 million of annual savings by 2013.
Proactive approach - The business is introducing a more proactive approach to asset and network management, with the aim of improving its modelling and forecasting to enable it to address more asset and network problems before they occur, thereby reducing the level of reactive work and improving efficiency.
Power hedging - United Utilities has increased its power hedgingand has now substantially locked in its power requirements through to 2014/15,securing outperformance. Power unit costs for 2010/11 are approximately 20%lower compared with 2009/10 and the business expects to benefit from thisreduced cost level through 2011/12. Although power rates beyond 2011/12 havebeen secured at higher levels than those for 2011/12, this still deliversadditional outperformance versus the regulatory contract.Debt collection - The business is adopting a more proactiveapproach to debt collection. It has a detailed action plan in place, whichincludes enhancing systems to improve customer segmentation analysis and toobtain better data on customers who have changed address, coupled with a moreproactive debt follow up strategy. To support this, a proportion of its debtcollection function which was previously off-shored has now been brought backin-house. In addition, the company is planning to use more local authoritycollection agreements. The bad debt performance for 2010/11 has beenencouraging.
Lean principles - Supporting the company's efficiency drive is its lean principles approach to doing business. Systems and processes continue to be streamlined and the business is rationalising its infrastructure and has in-sourced its IT provision to provide greater control of its IT assets and applications.
Leakage management - The performance of the business in meeting itsregulatory leakage target for 2010/11 was exemplary, given the extreme winterweather. Winter temperatures were well below the long-term average and fell aslow as minus 15 degrees Celsius on several occasions. It was the coldestDecember in the UK for over 100 years. The freeze and subsequent thaw resultedin a significant increase in leakage levels. Strong management focus andoutstanding commitment from employees enabled the business to meet its 2010/11regulatory leakage target of 464 megalitres per day and, importantly, withminimum customer disruption.Capital delivery - The business has utilised previous experience toimprove the terms and conditions of its supplier contracts and has a robustcommercial capital delivery framework in place for the 2010-15 period.Contractor performance is aligned with the company's business plan throughappropriate incentive arrangements. Good progress in the delivery of outputshas been achieved in the first year of the new regulatory period, reflecting asmoother and more efficient investment profile than that experienced in the2005-10 period.Sludge processing - A new £100 million sludge processing centre isbeing developed at the company's Davyhulme wastewater treatment works inManchester. Sludge will arrive from seven feeder treatment works and will beprocessed using advanced thermal hydrolysis technology. The new facility willprovide a range of benefits including energy self-sufficiency for the wholesite, greater sludge disposal flexibility, with a wider choice of landdisposal due to the advanced stage of the treated product, and improved sludgecondition to enhance the efficiency of incineration. There will also be theoption to pump the treated sludge to UUW's Shell Green sludge processingcentre in Widnes. The project is scheduled to be completed in early 2013.
Key performance indicators:
* Relative efficiency - UUW has sustained its relative efficiency bandings as assessed by Ofwat for a number of years, at band B for the water service and band C for the wastewater service. This places UUW in the third quartile and the business aims to move to the first quartile in the medium-term.
* Leakage - UUW met its economic level of leakage rolling targetfor the fifth consecutive year in 2010/11, despite extreme winter weatherconditions, reflecting strong management focus and the outstanding commitmentof the workforce. The aim is to meet its regulatory leakage target, as set
byOfwat, each year.Responsible mannerActions:Corporate responsibility - Sustainability is fundamental to themanner in which United Utilities undertakes its business and the group has formany years included corporate responsibility (CR) factors as a strategicconsideration in its decision making. One example of the company's actions isits partnership with environmental regeneration charity, Groundwork, whereevery £1 invested by the company leverages £3, which helps fund communityschemes in socially and economically deprived areas where United Utilities iscarrying out capital works. This has contributed to United Utilities achievingthe highest platinum plus ranking in Business in the Community's (BITC) CRindex and being recognised as BITC's Company of the Year for 2010, as well asbeing rated `World Class' in the Dow Jones Sustainability Index. UnitedUtilities' CR policy sets out its commitment to environmental, social andeconomic improvements and this is communicated in a way that enables allemployees to recognise how their roles and responsibilities contribute tomaintaining and improving sustainability performance.
Sustainable catchment management programme - United Utilities owns approximately 57,000 hectares of land in the North West which it holds to protect the quality of water entering its reservoirs. The company has developed a sustainable catchment management programme which will help to enhance biodiversity and protect and improve water quality.
Renewable energy - United Utilities has a detailed carbon and renewable energy plan, which contributes both to sustainability and reduces costs. In 2010/11 the company generated 111 GWh of renewable electricity, principally from sludge processing. This represents approximately 14% of the group's total electricity consumption.
Environmental performance - This is a high priority for the companyand UUW has more than halved the number of major pollution incidents over thelast few years. Wastewater treatment works compliance remains high at 97.8%, asimilar performance to the previous year. UUW is working more closely with theEnvironment Agency, through its agreed protocol, to help minimise theoccurrence and environmental impact of pollution incidents. This includes thesharing of resources, knowledge and expertise. The company is also enhancingits telemetry and flow monitoring equipment to provide early identification ofincidents to enable prompt action to be taken to minimise the potentialimpact. Recognising that environmental performance is wide-ranging, thecompany will be measuring itself against an Environment Agency (EA) compositemeasure as detailed in the key performance indicators below.
Key performance indicators:
* Environmental performance - The EA computes a composite measurewhich incorporates a broad range of areas including pollution. UUW was rankedtenth out of ten water and sewerage companies for 2008/09, but improved tosixth position for 2009/10 (EA's latest assessment) and has reduced the numberof major pollution incidents this year, which will contribute to theassessment for 2010/11. The company aims to move from this average relativeposition to the first quartile in the medium-term.
* Corporate responsibility - United Utilities has a strong focus on corporate responsibility and is the only UK water company to have a `World Class' rating as measured by the Dow Jones Sustainability Index. The group aims to retain this `World Class' rating each year.
Outperformance of regulatory contract
* Financing outperformance - United Utilities has secured £300million of financing outperformance over the 2010-15 period, based on an RPIinflation rate of 2.5% per annum. A 1% per annum increase in RPI above thislevel would increase financing outperformance by more than £100 million acrossthe five-year period. The aim is to raise future financing, as required, atinterest rates that will deliver further outperformance when compared withOfwat's allowed cost of debt of 3.6% real. UUW has recently agreed a new £200million index-linked loan with the European Investment Bank at an average realinterest rate of 1.2%, which secures additional financing outperformance ofaround £20 million through to 2015.* Operating expenditure outperformance - The business is targetingtotal operating expenditure outperformance over the 2010-15 period of at least£50 million, or approximately 2%, compared with the regulatory allowance. Thisis in addition to the base operating expenditure efficiency targets set byOfwat, which equate to a total of approximately £150 million over the fiveyears. UUW has made good progress in 2010/11 and has achieved operatingexpenditure outperformance of around £10 million.* Capital expenditure outperformance - UUW is deliveringsignificant efficiencies in the area of capital expenditure and, although itis striving for outperformance, expects broadly to meet Ofwat's revisedallowance after adjusting, through the regulatory methodology, for the impactof lower construction output prices.
Outperformance assumptions:
Operating expenditure - Ofwat's final determination provided UUWwith a total operating expenditure allowance of £2.5 billion in 2007/08prices. Based on the RPI inflation assumptions (year average) in the tablebelow, this increases the allowance to around £2.9 billion in outturn prices.The company is targeting total outperformance of at least £50 million againstthis allowance (excluding the cost implications relating to the transfer ofprivate sewers, which was not included in the final determination). This wouldrepresent a good achievement for UUW, since it did not outperform on operatingexpenditure in the previous two five-year regulatory periods.Year average 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 (actual) (actual) (actual)RPI assumption* 3.0% 0.5% 5.0% 4.25% 3.0% 3.0% 3.25%
* Based on forecasts from a selection of relationship banks until December 2012 and then November 2010 HM Treasury independent forecasts thereafter
Capital expenditure - Ofwat's final determination provided UUW witha total capital expenditure allowance of £3.6 billion in 2007/08 prices. UUWis delivering significant capital expenditure efficiencies and expects todeliver its outputs for approximately £3.4 billion, in outturn prices, despitecost pressures. However, the regulatory methodology means that the capitalexpenditure allowance will be adjusted at the next price review to reflect themovement in the construction output price index (COPI). Based on theassumptions below (year average), this would reduce the regulatory allowanceto approximately £3.4 billion which is broadly in line with UUW's forecast(excluding the cost implications relating to the transfer of private sewers,which was not included in the final determination). This would represent asignificant achievement since actual capital expenditure is more directlyimpacted by RPI rather than COPI. Under Ofwat's capital expenditure incentivescheme (CIS), companies are incentivised to deliver outperformance through theretention of around one third of any outperformance.Year average 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 (actual) (actual)COPI assumption* (0.5)% (6.0)% (2.7)% 1.4% 3.0% 4.0% 4.0%
* Construction output price index (COPI) assumptions informed by independent forecasts
Political and regulatory developments
United Utilities is actively involved in political and regulatory developments that relate to the UK water sector and has a proactive programme to regularly engage with the key parties.
Private sewers - The UK Government has now tabled before parliamentregulations to transfer the ownership of and responsibility for private sewersto the English and Welsh water and sewerage companies from 1 October 2011.This is a significant asset base and UUW expects the length of its sewernetwork to increase by around 80%. This should provide long-term benefits forboth customers and the industry, although it will inevitably result inadditional cost and operational workload and an increase in customer contacts.However, the company has been preparing for this for some time andmobilisation activities are underway to help ensure a smooth transfer.Although the assets are expected to be transferred at zero value,future enhancement capital expenditure should provide the opportunity forfurther growth in the regulatory capital value (RCV). Whilst final details ofthe transfer are still to be determined, UUW currently estimates that it willincur additional operating expenditure totalling around £55 million over theremainder of the 2010-15 period. Capital expenditure is estimated to beapproximately £125 million across the same period, of which around £90 millionis expected to be infrastructure renewals expenditure (IRE) and the balanceenhancement expenditure.For private sewers expenditure in 2011-15, under Ofwat's regulatoryframework, United Utilities expects, as a minimum, that shareholders willreceive appropriate returns on the enhancement capital expenditure (subject toOfwat's assessment of efficiency) and IRE (subject to Ofwat's application ofthe capital expenditure incentive scheme). In addition, the company willreview regularly whether an enhanced outcome for shareholders can be achievedthrough the submission of a request for an Interim Determination of K. Forexpenditure beyond 2015, United Utilities expects shareholders to receiveappropriate returns on all private sewers expenditure provided that the moneyis spent efficiently.The same regulations will provide for the transfer of privatepumping stations. There are estimated to be several thousand of these in theUUW's region. As they require to be surveyed and may need remedial work forhealth and safety and performance reasons, the transfer date for pumpingstations is expected to be by 1 October 2016. UUW expects to incur capitalexpenditure of approximately £10 million by 2015 in respect of the adoption ofprivate pumping stations, with the majority expected to be adopted in thefirst year of the subsequent regulatory period. This estimated spend isincluded within the aforementioned £125 million total capital expenditurespend over the remainder of the 2010-15 period.Regulatory reviews - It has been a busy year for water issues inthe political and regulatory arenas. Against a backdrop of Defra's review ofOfwat, Ofwat's own reviews and consultation on price limits, as well asplanned White Papers on the Natural Environment and on Water, United Utilitieshas been closely engaged in developments with the aim of helping to shape theoutcomes for the benefits of customers, shareholders and other stakeholders.The business sought to focus the debate onto areas such as how thesector can help address climate change and sustainability issues by reformingwater abstraction and water trading arrangements. United Utilities hasemphasised to politicians and regulators that the sector has a busy changeagenda with the transfer of private sewers and that benchmark competition hasalready delivered significant environmental and customer service benefits. Thecompany is encouraged that its calls for less regulation are being consideredand is seeking incentives to encourage the industry to innovate more. The UKGovernment's planned Water White Paper, which is now scheduled to be publishedin autumn 2011, is expected to cover these issues.
NON-REGULATED ACTIVITIES
United Utilities completed its c£600 million non-regulated disposalprogramme in November 2010 and the remaining proceeds were received in thesecond half of 2010/11. The vast majority of the non-regulated activities aretreated as discontinued in the 2010/11 financial statements. The residualelements of the previously reported non-regulated activities operatingsegment, which have not been classified as discontinued operations, no longerform a reportable segment as defined by International Financial ReportingStandard No. 8 and have therefore been included within "All other segments".These principally include UUW's non-appointed activities and the group'sholding in AS Tallinna Vesi (Tallinn Water), which was not sold as part of thenon-regulated disposal programme.
In the year, the non-regulated activities treated as discontinued, produced profit after taxation of £104 million, of which £89 million related to profit on disposal after taxation.
ALL OTHER SEGMENTS
All other segments have delivered an underlying operating profitduring the year of £16 million, which compares with an underlying operatingprofit of £6 million last year. This includes UUW's non-appointed activities,United Utilities Property Services (UUPS) and the contribution from thegroup's 35.3% holding in Tallinn Water, partly offset by certain centralcosts. Despite the continuing difficult conditions in the UK property market,UUPS has generated a small profit contribution.The reported operating profit for the segment was £9 million. Thisreflects one-off costs of approximately £7 million, principally in relation torestructuring within the group's support services function, elements of whichare reported in central costs.
Outlook
United Utilities has a robust capital structure and a sustainable,well defined dividend policy which provides clarity for shareholders throughto 2015. The aim of the new management team is to deliver further operationaland customer service improvements and to outperform the regulatory contract,with substantial financing outperformance already secured. The company isimplementing a range of efficiency and performance improvement initiatives andis confident of achieving its operating expenditure outperformance targetsover the 2010-15 regulatory period. The business is benefiting from itsdetailed capital investment planning, which has facilitated a smoothtransition into the new regulatory period. Good early progress has been madeand the investment profile has been better smoothed to reduce risk and supportefficient delivery of outputs. In respect of recent political and regulatorydevelopments, United Utilities will continue to work with all key parties tohelp achieve the optimal outcome for all its stakeholders.
FINANCIAL PERFORMANCE
Revenue
United Utilities has delivered a sound set of financial results for the yearended 31 March 2011, following the recent regulatory price review. Grouprevenue from continuing operations fell by £60 million to £1,513 million,reflecting a real price decrease in the regulated business. Revenue from allother segments was £48 million, representing just 3% of group revenue.
Operating profit
Underlying operating profit decreased by 16% to £596 million, primarily as aconsequence of the reduction in revenue alongside increases in depreciation,infrastructure renewals expenditure and property rates. Reported operatingprofit fell by 24% to £580 million, reflecting one-off restructuring costs of£16 million in the year and impacted by a one-off credit relating to pensionsof £87 million last year which increased 2009/10 operating profit. Underlyingoperating profit from all other segments was £16 million, representing lessthan 3% of group underlying operating profit.
Investment income and finance expense
Investment income and finance expense of £253 million was £106 million lowerthan the previous year, principally reflecting £19 million of net fair valuegains on debt and derivative instruments, compared with £137 million of netfair value losses in 2009/10. The impact of credit spreads on debt accountedfor at fair value through profit or loss has contributed to the net fair valuemovement on the prior year.The underlying net finance expense for continuing operations of £267 millionwas £44 million higher than the previous year. This reflects an increase inthe group's average annual underlying interest rate from around 4.8% to 5.7%.The group has just over £2 billion of index-linked debt and the increase inthe finance expense primarily reflects an increase in inflation.During the year, indexation of the principal of index-linked debt amounted toa net charge in the income statement of £103 million, compared with a netcharge of £31 million in the previous year primarily due to the effects of RPIdeflation in the prior year on the index-linked debt with an eight month lag.The indexation charge does not represent a cash flow during the year and ismore than matched by an inflationary uplift to the regulatory capital value.
Partially offsetting this increase, the group has benefited from fixing the majority of its remaining debt for the 2010-15 financial period, with a net effective nominal interest rate of approximately 5%, around 1% lower than the previous year.
Profit before taxationUnderlying profit before taxation was £329 million, 32% lower than the prioryear, principally reflecting the revenue impact from the regulatory pricereview, an increase in infrastructure renewals expenditure in line with theplanned investment profile, an increase in the underlying net finance expenseand a higher depreciation charge as a result of growth in the commissionedasset base. This underlying measure adjusts for the impact of one-off items,principally from restructuring within the business, and fair value movementsin respect of debt and derivative instruments. Reported profit before taxationfrom continuing operations decreased by 20% to £327 million principally as aresult of the £87 million one-off pensions credit in the prior year and ahigher depreciation charge, partly offset by a decrease in the reportedfinance expense this year.
Taxation
The current taxation charge relating to continuing activities was£35 million in the year and the current taxation effective rate was 11%,compared with 5% in the previous year. The current year charge includes a £29million credit following agreement with HMRC of prior years' taxation matters,without which the effective taxation rate would have been 19%. The prior yearcurrent taxation charge included a £47 million credit in relation to theagreement with HMRC of prior years' taxation matters, without which theeffective taxation rate would have been 16%.The group has recognised a net deferred taxation credit of £62million in 2010/11. This includes an £11 million charge in relation to theagreement with HMRC of prior years' taxation matters and a £99 million creditto reflect both the change enacted on 27 July 2010 to reduce the mainstreamrate of corporation taxation from 28% to 27% and the subsequent change enactedon 29 March 2011 to reduce the mainstream rate of corporation taxation furtherto 26% from 1 April 2011. This compares with a net deferred taxation chargerelating to continuing operations of £42 million in the prior year, whichincluded a £7 million credit in relation to the agreement with HMRC of prioryears' taxation matters.An overall taxation credit of £27 million relating to continuingoperations has been recognised for the year ended 31 March 2011. Excluding theimpact of the reduction in the corporation taxation rate and the impact of theprior year taxation adjustments, the total taxation charge relating tocontinuing operations would be £89 million or 27% compared with a £115 millioncharge or 28% last year.The group made a cash taxation payment relating to continuingoperations during the year of £47 million. In the previous year, the group'snet taxation payment was just £1 million as it received a cash taxation inflowof £51 million, following agreement with HMRC of prior years' taxationmatters.
Profit after taxation
Reported profit after taxation was £355 million compared with £347million in the prior year. Underlying profit after taxation was £239 million.This is based on the underlying profit before taxation figure less anunderlying taxation charge of £90 million, which includes an adjustment forthe deferred taxation credit in relation to the change in the mainstream rateof corporation taxation.Earnings per shareBasic earnings per share relating to continuing operationsincreased from 50.9 pence to 52.0 pence principally reflecting theaforementioned taxation credits, partly offset by the reduction in profitbefore taxation in the current period. Underlying earnings per share reducedfrom 50.8 pence to 35.1 pence. This underlying measure is derived fromunderlying profit before taxation less underlying taxation. This includes theadjustment for the deferred taxation credit in 2010/11 associated with thereduction in the corporation taxation rate and the impact of the agreement ofprior years' taxation matters.
Dividend per share
The board has proposed a final dividend of 20.0 pence per ordinary share in respect of the year ended 31 March 2011. Taken together with the interim dividend of 10.0 pence per ordinary share paid in February, this produces a total dividend per ordinary share for 2010/11 of 30.0 pence, consistent with the group's policy. From 2011/12, United Utilities intends to continue with its dividend policy of targeting a real growth rate of RPI+2% per annum through to 2015.
The final dividend is expected to be paid on 1 August 2011 to shareholders on the register at the close of business on 24 June 2011. The ex-dividend date is 22 June 2011.
Cash flow
Net cash generated from continuing operating activities for theyear ended 31 March 2011 was £575 million, compared with £750 million lastyear. This reflects the impact of the regulatory price review and a taxationpayment of £47 million in 2010/11, compared with a small net taxation paymentof £1 million in the prior year. The group's net capital expenditure oncontinuing operations was £491 million, principally in the regulated water andwastewater investment programmes. This excludes infrastructure renewalsexpenditure which is treated as an operating cost under InternationalFinancial Reporting Standards.Net debt including derivatives in respect of continuing operationsat 31 March 2011 was £4,778 million, compared with £4,906 million at 31 March2010. Expenditure on the regulatory capital investment programmes and paymentsof dividends, interest and taxation have been more than offset by operatingcash flows and the £268 million of cash proceeds from the non-regulateddisposals.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatorycapital value) decreased to 59% at 31 March 2011, compared with 64% at 31March 2010. This reflects growth in the regulatory capital value coupled witha reduction in group net debt following the disposals of non-regulatedactivities. Taking account of the group's pensions deficit, and treating it asdebt, gearing would be 61%.
At the year end, United Utilities Water PLC had long-term credit ratings of A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB- from Moody's Investors Service and Standard & Poor's Ratings Services respectively. The split rating reflects differing methodologies used by the credit rating agencies.
Cash and short-term deposits at 31 March 2011 amounted to £255million. During 2010/11, UUW agreed a new £200 million index-linked loanfacility with the European Investment Bank with an average real interest rateof 1.2% and an average term of approximately 11 years. This is an amortisingloan with an initial four year capital repayment holiday, followed bysemi-annual instalments with a final maturity in 18 years. The group alsorenewed £50 million of existing bilateral committed bank facilities in the2010/11 financial year. Subsequent to the year end, the group renewed afurther £100 million of bank facilities. United Utilities now has headroom tocover its projected financing needs into 2013.The group has access to the international debt capital marketsthrough its €7 billion euro medium-term note programme which provides for theperiodic issuance by United Utilities PLC and United Utilities Water PLC ofdebt instruments on terms and conditions determined at the time theinstruments are issued. The programme does not represent a funding commitment,with funding dependent on the successful issue of the debt securities.
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.
Very long-term sterling inflation index-linked debt is the group'spreferred form of funding as this provides a natural hedge to assets andearnings. At 31 March 2011, approximately 46% of the group's net debt was inindex-linked form, representing around 27% of UUW's regulatory capital value,with an average real interest rate of 1.8%. The long-term nature of thisfunding also provides a good match to the company's long-life infrastructureassets and is a key contributor to the group's average term debt maturityprofile which is in excess of 25 years.Where nominal debt is raised in a currency other than sterlingand/or with a fixed interest rate, to manage exposure to long-term interestrates, the debt is generally swapped to create a floating rate sterlingliability for the term of the liability. To manage exposure to medium-terminterest rates, the group fixed interest costs for a substantial proportion ofthe group's debt for the duration of the current five-year regulatory periodat around the time of the price review. The group does not undertake anyspeculative trading activity.
Liquidity
Short-term liquidity requirements are met from the group's normal operating cash flow and its short-term bank deposits. The group has a €2 billion euro-commercial paper programme and further liquidity is provided by committed but undrawn credit facilities.
In line with the board's treasury policy, United Utilities aims to maintain ahealthy headroom position. Available headroom at 31 March 2011 was £700million based on cash, short-term deposits and medium-term committed bankfacilities, net of short-term debt. This headroom is sufficient to cover thegroup's projected financing needs into 2013.
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 (generally no longer than three months) money market deposits with either prime commercial banks or with triple A rated money market funds.
United Utilities operates a bilateral, rather than a syndicated,approach to its core relationship banking facilities. This approach spreadsmaturities more evenly over a longer time period, thereby reducing refinancingrisk and providing the benefit of several renewal points rather than a largesingle refinancing requirement.
Pensions
The group's net pension deficit at the year end has decreased by£76 million, compared with the position at 31 March 2010. This deficitreduction principally reflects the additional contributions paid into the fundin the year, partially offset by the impact of revised actuarial assumptionsused to measure the liabilities when compared with 2009/10. As at 31 March2011, the group's net pension obligations stood at £195 million.The group has sought to adopt a more sustainable approach to thedelivery of pension provision and in the second half of 2009/10 amended theterms of its defined benefit pension schemes, the details of which wereincluded in last year's annual report and financial statements. UnitedUtilities has also reduced its future pension obligations as a result of thesale of non-regulated activities. Further detail is provided in note 8("Retirement benefit obligations") of these condensed consolidated financialstatements. The group will continue to evaluate its pensions investmentstrategy to de-risk further its pension provision.
Going concern
The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group.
Underlying profit
In considering the underlying results for the period, the directors have excluded fair value movements on debt and derivative instruments and one-off items. Reported operating profit and profit before taxation from continuing operations are reconciled to underlying operating profit, underlying profit before taxation and underlying profit after taxation (non-GAAP measures) as follows:
Continuing operations Regulated All other GroupOperating profit for the year ended activities
segments
31 March 2011
£m £m £mOperating profit per published results 571.0 9.2 580.2One-off items* 9.1 7.1 16.2 ----- ----- -----Underlying operating profit 580.1 16.3 596.4 ----- ----- ----- Continuing operations Regulated All other GroupOperating profit for the year ended activities
segments
31 March 2010 (restated)
£m £m £mOperating profit per published results 761.7 6.1 767.8One-off items* 15.8 10.0 25.8Impact of changes to pension schemes (76.7)
(10.6) (87.3)
----- ----- -----Underlying operating profit 700.8 5.5 706.3 ----- ----- ----- Continuing operations RestatedUnderlying net finance expense Year ended 31 Year ended 31 March 2011 March 2010 £m £mFinance expense (255.9) (365.3)Investment income 2.8 6.2 ----- -----Net finance expense (253.1) (359.1)Net fair value (gains)/losses on debt and
(19.2)
derivative instruments
136.5
Adjustment for interest on swaps and debt under
5.7
fair value option
(22.2)
Adjustment for net pension interest expense 3.8 21.6Adjustment for capitalisation of interest costs
(4.4) (0.5)
----- -----Underlying net finance expense (267.2) (223.7) ----- ----- Continuing operations RestatedProfit before taxation Year ended 31 Year ended 31 March 2011 March 2010 £m £mProfit before taxation per published results 327.1 408.7One-off items* 16.2 25.8Impact of changes to pension schemes - (87.3)Net fair value (gains)/losses on debt and
(19.2)
derivative instruments
136.5
Adjustment for interest on swaps and debt under
5.7
fair value option
(22.2)
Adjustment for net pension interest expense 3.8 21.6Adjustment for capitalisation of interest costs
(4.4) (0.5)
----- -----Underlying profit before taxation 329.2 482.6 ----- ----- Continuing operations RestatedProfit after taxation Year ended 31 Year ended 31 March 2011 March 2010 £m £mUnderlying profit before taxation 329.2 482.6Reported taxation 27.4 (61.7)Deferred taxation credit (99.0) -Agreement of prior years' UK taxation matters (17.8) (53.7)Taxation relating to underlying profit before (0.6)taxation adjustments (20.7) ----- -----Underlying profit after taxation
239.2 346.5
----- -----
* principally relates to restructuring and other reorganisation costs within the business
PRINCIPAL RISKS AND UNCERTAINTIES
The group maintains an internal control framework that assesses, throughout the year, the nature and magnitude of internal and external risks to the achievement of business goals. Managers are required to employ both proactive and reactive mitigation measures in a prioritised manner to reduce exposures and ensure ongoing resilience should a risk materialise. The executive management team regularly reviews signficant risks so that the board can determine the nature and extent of those risks it is willing to take in achieving its strategic objectives. The audit committee regularly reviews the framework's effectiveness and the group's compliance with it.
Government market reform agenda
The government is introducing a White Paper later this year which may implement some or all of the recommendations contained in the 2009 Cave report which include:
* extending competition to all non-domestic customers and splitting off the company's retail operations to facilitate the same;
* facilitation of abstraction licence trading to tackle over abstraction;
* reform of the special merger regime to allow mergers of water companies where these would be in the customer's interest; and
* reform to the inset appointment regime with regulated access and supply frameworks.
The group has been fully engaged in the government and Ofwatconsultations on the Cave review and other aspects of competition. Arelatively small proportion of the group's profits derive from the retailingof water and wastewater services to non-household customers. However, UnitedUtilities recognises that reforms to the pricing rules that govern access tothe group's water network and greater upstream competition could put at risk agreater proportion of the group's profits. Equally, if competition isexpanded, there would also be opportunities for the group to participate in awider market in England and Wales.
Capital investment programmes
The core business requires significant capital expenditure, particularly in relation to new and replacement plant and equipment for water and wastewater networks and treatment facilities.
Delivery of capital investment programmes could be affected by a number of factors including adverse legacy effects of earlier capital investments (such as increased maintenance or corrective costs) or amounts budgeted in prior capital investment programmes proving insufficient to meet the actual amount required. This may affect the group's ability to meet regulatory and other environmental performance standards.
Capital investment programmes are regularly monitored to identify the risk of time, cost and quality variances from plans and budgets and to identify, where possible, any appropriate opportunities for out-performance and any necessary corrective actions.
Service incentive mechanism
For the 2010-15 period Ofwat has introduced a new comparativeincentive mechanism to reward or penalise water companies' serviceperformance, replacing the Overall Performance Assessment (OPA). The ServiceIncentive Mechanism (SIM) compares companies' performance in terms of thenumber of `unwanted' contacts received from customers and how well they dealwith those contacts. Depending upon UUW's relative performance under SIM itcould receive a revenue penalty (up to one per cent of turnover) or reward (upto half a per cent of turnover) when price limits are next reset in 2014.The group has been monitoring and measuring customer satisfactionfor a number of years and results have been improving consistently. To buildon this success and in preparation for the change to SIM, a dedicated projectteam has been set up to ensure our processes, behaviours and systems provideconsistent and excellent service to our customers. The company's focus is onensuring right first time service delivery to its customers, thus avoiding theneed for `unwanted' contacts. Where `unwanted' contacts do arise, then thereis a clear focus on identifying the root causes. These actions are intended toensure that the company's performance under SIM is optimised therebymitigating the risk of a penalty at the next price setting.
Serviceability assessment
The group is required to maintain the serviceability of its waterand wastewater assets, ensuring they continue to deliver a level of serviceand performance at least as good as in the past. Where serviceability fallsbelow required reference levels of performance, Ofwat would deploy a stagedapproach to regulatory action to secure corrective action by UUW and couldmake financial adjustments at the next price setting. Or, if performance wasto decline, the group may incur additional operating or capital expenditure torestore performance.The various indicators of performance are closely and routinelymonitored by management. The company's capital investment programme istargeted to seek to maintain stable serviceability of the company's water andwastewater assets. Similarly, operational practice is intended to ensurestable serviceability. Where adverse trends develop and there is a risk ofserviceability deviating from stable, then corrective action can be identifiedand taken.
The adoption of private sewers
In 2008, the government announced its intention to transfer sewersand pumping stations currently owned by private individuals and businesses tosewerage undertakers. The transfer is expected on 1 October 2011 for privatesewers and by October 2016 for pumping stations. No allowance has been made inprice limits for the costs associated with the transfer. Therefore, any costsincurred will represent an unbudgeted increase in operating and capitalexpenditure compared with the Ofwat allowance in the 2010-15 pricedetermination.
We will seek to mitigate the impact of the costs associated with the transfer when price limits are next reset, either at an interim determination or the next periodic review.
Pension scheme obligations
The group participates in a number of pension arrangements. Theprincipal schemes are defined benefit schemes, although these have been closedto new employees since October 2006. The assets of these schemes are held intrust funds independent of group finances, with the funds being welldiversified and professionally managed. The group's current schemes had acombined IAS 19 deficit of £195 million as at 31 March 2011, compared with adeficit of £271 million as at 31 March 2010.Increases to pension fund deficits may result in an increasedliability for the group, the size of the liability depending upon a number offactors, including levels of contributions and actuarial assumptions. In the2009 water price review, Ofwat took account of broadly 50 per cent of thepension deficit shown in UUW's final business plan for the regulated businesswhen setting its overall price controls. In response to the size of itsongoing pension risks and pension costs the group introduced a series ofchanges for employees in its defined benefit (DB) schemes. These changes,which came into force on 31 March 2010, should result in reduced costs andrisks, including deficit, associated with DB liabilities in future. Inconjunction with the trustees, the group continues to monitor and to look toreduce the investment strategy risks for the pension schemes, including thegroup's exposure to investment risks.
Failure to comply with applicable law or regulations
The group is subject to various laws and regulations in the UK andinternationally. Regulatory authorities may from time to time, make enquiriesof companies within their jurisdiction regarding compliance with regulationsgoverning their operations. In addition to regulatory compliance proceedings,the group could become involved in a range of third party proceedings relatingto, for example: land use, environmental protection and water quality. Amongstothers, these may include civil actions by third parties for infringement ofrights or nuisance claims relating to odour or other matters. Furthermore, theimpact of future changes in laws or regulations or the introduction of newlaws or regulations that affect the business cannot always be predicted and,from time to time, interpretation of existing laws or regulations may alsochange or the approach to their enforcement may become more rigorous. If thegroup fails to comply with applicable law or regulations, in particular inrelation to its water and wastewater licences, or has not successfullyundertaken corrective action, regulatory action could be taken that couldinclude the imposition of a financial penalty (of up to 10 per cent ofrelevant regulated turnover) or the imposition of an enforcement orderrequiring the group to incur additional capital or operating expenditure toremedy its non-compliance. In the most extreme cases, non-compliance may leadto revocation of a licence or the appointment of a special administrator.The group endeavours to comply with all legal requirements inaccordance with its business principles and robust processes are in place toseek to mitigate against non-compliance. The group continually monitorslegislative and regulatory developments and, where appropriate, participatesin consultations to seek to influence their outcome, either directly orthrough industry trade associations for wider issues. The group seeksappropriate funding for any additional compliance costs in the regulatedbusiness as part of the price determination process.
Events, service interruptions, system failures, water shortages or contamination of water supplies
The group controls and operates water and wastewater networks andmaintains the associated assets with the objective of providing a continuousservice. In exceptional circumstances, a significant interruption of serviceprovision such as prolonged drought or catastrophic damage, such as a damburst could occur resulting in: significant loss of life; and/or environmentaldamage; and/or economic and social disruption. Such circumstances might arise,for example, from water shortages; the failure of an asset or an element of anetwork or supporting plant and equipment; human error; an individual'smalicious intervention; or unavoidable resource shortfalls. The group could befined for breaches of statutory obligations or held liable to third parties,or be required to provide an alternative water supply of equivalent quality,which could increase costs. The group is also dependent upon the ability toaccess, utilise and communicate remotely via electronic software applicationsmounted upon corporate information technology hardware and communicatingthrough internal and external networks. The ownership, maintenance andrecovery of such applications, hardware and networks are not wholly under itscontrol.The group operates long-standing, well tested and appropriatelyresourced incident response and escalation procedures. The processes continueto be refined, alongside related risk management and business continuityprocedures which complement the governance and inspection regimes for keyinfrastructure assets such as aqueducts, dams, reservoirs and treatment works.These recognise that possible events can have varying causes, impacts andlikelihoods. Sustainability of our water supply is also managed throughregional aqueduct networks which will be enhanced by the completion of theWest East Link pipeline. While the group seeks to ensure that it hasappropriate processes and preventative controls in place, there can be nocertainty that such measures will be effective in preventing or, whennecessary, managing large-scale incidents to the satisfaction of customers,regulators, government and the wider stakeholder community. The group alsomaintains insurance cover in relation to losses and liabilities likely to beassociated with such significant risks, although potential liabilities arisingfrom a catastrophic event could exceed the maximum level of insurance coverthat can be obtained cost effectively. The licence of the regulated businessalso contains a `shipwreck' clause that, if applicable, may offer a degree ofrecourse to Ofwat in the event of a catastrophic incident.
Material litigation
NOSS Consortium (NOSS), of which North West Water InternationalLimited, a wholly owned subsidiary of United Utilities Group PLC, is a member,is party to arbitration proceedings in Thailand in relation to a 1993 contractwith the Bangkok Metropolitan Administration (BMA) to build a wastewatertreatment plant and network in central Bangkok. NOSS has total claims againstthe BMA of approximately six billion baht (c. £120 million). The BMA hascounter claimed for approximately three billion baht (c. £60 million);however, based upon the facts and matters currently known, the counterclaimappears to lack substance. After considerable delay, the arbitration is nowproceeding.In February 2009, United Utilities International Limited (UUIL) wasserved with notice of a multiparty `class action' in Argentina related to theissuance and payment default of a US$230 million bond by Inversora El©ctricade Buenos Aires S.A. (IEBA), an Argentine project company set up to purchaseone of the Argentine electricity distribution networks, which was privatisedin 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 purportsto be pursued on behalf of unidentified consumer bondholders in IEBA. UUIL hasfiled a defence to the action and will vigorously resist the proceedings,given the robust defences that UUIL has been advised that it has on proceduraland substantive grounds.In March 2010, Manchester Ship Canal Company (MSCC), issuedproceedings seeking, amongst other relief, damages alleging trespass againstUUW in respect of UUW's discharges of water and treated effluent into thecanal. The respective legal rights of MSCC and UUW relating to the dischargesare unclear. UUW has filed a Defence and Counterclaim in support of itsbelieved entitlement to make discharges into the canal without charge andawait MSCC's response. The claim will continue to be vigorously defended.
The group faces the general risk of litigation in connection with its businesses. In most cases, liability for litigation is difficult to assess or quantify;
recovery may be sought for very large and/or indeterminate amounts and theexistence and magnitude of liability may remain unknown for substantial periodsof time. The group robustly defends litigation where appropriate and seeks tominimise its exposure to such claims by early identification of risks and compliance with its legal and other obligations. Based upon the facts and matterscurrently known and the provisions carried in the group's statement of financialposition, the directors are of the opinion that the possibility of the disputesreferred to in this risk section having a material adverse effect on the group'sfinancial position is remote.
There has been no change to the nature of related party transactions in the 2010/11 financial year which has materially affected the financial position or performance of United Utilities.
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 Restated* Year ended Year ended 31 March 31 March 2011 2010 £m £mContinuing operations ----- -----Revenue 1,513.3 1,573.1 ----- ----- Employee benefits expense:- excluding pension schemes curtailment gains arising onamendment of pension obligations and restructuring costs (142.8) (156.3)- pension schemes curtailment gains arising on amendmentof pension obligations (note 8) -
87.3- restructuring costs (3.1) (25.8) ----- -----Total employee benefits expense (145.9) (94.8) ----- ----- Other reorganisation costs (13.1) -Other operating costs (355.4) (321.8)Other income 2.2 5.1Depreciation and amortisation expense (290.5)
(280.1)
Infrastructure renewals expenditure (130.4) (113.7) ----- -----Total operating expenses (933.1) (805.3) ----- ----- Operating profit 580.2 767.8 Investment income (note 2) 2.8 6.2Finance expense (note 3) (255.9) (365.3) ----- -----Investment income and finance expense (253.1) (359.1) ----- ----- Profit before taxation 327.1 408.7 Current taxation charge (34.6) (19.5)Deferred taxation charge (37.0) (42.2)
Deferred taxation credit - change in taxation rate 99.0
- ----- -----Taxation (note 4) 27.4 (61.7) ----- -----
Profit after taxation from continuing operations 354.5
347.0
Discontinued operationsProfit after taxation from discontinued operations (note 103.7
56.55) ----- -----Profit after taxation 458.2 403.5 ----- ----- Earnings per share from continuing and discontinuedoperations (note 6)Basic 67.2p 59.2pDiluted 67.2p 59.2p Earnings per share from continuing operations (note 6)Basic 52.0p 50.9pDiluted 52.0p 50.9p Dividend per ordinary share (note 7) 30.00p
34.30p
* The comparatives have been restated to reflect the requirements of IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations' and the adoption of IFRIC 18 `Transfers of Assets from Customers'.
Consolidated statement of comprehensive income
Year ended Year ended 31 March 31 March 2011 2010 £m £m Profit after taxation 458.2 403.5 Other comprehensive incomeActuarial losses on defined benefit pension schemes (note (44.7) (125.4)8)Deferred taxation on actuarial losses on defined benefit 11.6 35.1pension schemesRevaluation of investments 1.1
3.4
Reclassification from other reserves arising on disposal of financial asset investment (note 5)
(6.6)
(36.6)
Net fair value (losses)/gains on cash flow hedges (0.2)
0.9
Deferred taxation on net fair value losses/(gains) on 0.1
(0.5)
cash flow hedgesReclassification from other reserves arising on disposal 1.8
-
of subsidiaries (note 5) Reclassification from cumulative exchange reserve arising on disposal of subsidiaries (note 5)
(26.1) -Foreign exchange adjustments 0.7 6.4 ----- -----Total comprehensive income 395.9 286.8 ----- -----
There is no taxation impact on the items of other comprehensive income except where stated in the table above.
Consolidated statement of financial position Restated* 31 March 31 March 2011 2010 £m £mASSETSNon-current assetsProperty, plant and equipment 8,274.9 8,159.6Goodwill 5.0 2.5Other intangible assets 93.9 208.6Investments 2.3 7.7Trade and other receivables - 56.5Derivative financial instruments 363.3 378.5 ----- ----- 8,739.4 8,813.4 ----- ----- Current assetsInventories 47.6 74.8Trade and other receivables 296.8 451.0Cash and short-term deposits 255.2 301.5Derivative financial instruments 2.0 18.3 ----- ----- 601.6 845.6 ----- ----- Total assets 9,341.0 9,659.0 ----- ----- LIABILITIESNon-current liabilitiesTrade and other payables (249.8) (182.9)Borrowings (5,203.6) (5,307.9)Retirement benefit obligations (note 8) (195.0) (271.3)Deferred taxation liabilities (1,293.1) (1,355.4)Provisions (9.3) (8.3)Derivative financial instruments (84.6) (102.3) ----- ----- (7,035.4) (7,228.1) ----- ----- Current liabilitiesTrade and other payables (433.0) (594.4)Borrowings (109.7) (168.3)Current income taxation liabilities (70.5) (89.0)Provisions (14.5) (45.5)Derivative financial instruments (0.4) (25.8) ----- ----- (628.1) (923.0) ----- ----- Total liabilities (7,663.5) (8,151.1) ----- ----- Total net assets 1,677.5 1,507.9 ----- ----- EQUITY Share capital 499.8 499.8Share premium account 1.3 0.9Retained earnings 691.0 492.7Other non-distributable reserves 485.4 514.5 ----- -----Shareholders' equity 1,677.5 1,507.9 ----- -----
* The comparatives have been restated to reflect the adoption of IFRIC 18 `Transfers of Assets from Customers'.
Consolidated statement of changes in equityYear ended 31 March 2011 Other non-distributable reserves Share Cumulative Share premium Retained Treasury exchange Merger Other Revaluation capital account earnings shares reserve reserve reserves reserve Total £m £m £m £m £m £m £m £m £mAt 1 April 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 Profit after taxation - - 458.2 - - - - - 458.2Other comprehensive incomeActuarial losses on definedbenefit pension schemes(note 8) - - (44.7) - - - - - (44.7)Deferred taxation on actuariallosses on defined benefitpension schemes - - 11.6 - - - - - 11.6Revaluation of investments - - - - - - 1.1 - 1.1Reclassification from otherreserves arising on disposalof financial asset investment(note 5) - - - - - - (6.6) - (6.6)Net fair value losses oncash flow hedges - - - - - - (0.2) - (0.2)Deferred taxation on netfair value losses on cashflow hedges - - - - - - 0.1 - 0.1Reclassification from otherreserves arising on disposalof subsidiaries (note 5) - - - - - - 1.8 - 1.8Reclassification fromcumulative exchange reservearising on disposal ofsubsidiaries (note 5) - - - - (26.1) - - - (26.1)Foreign exchange adjustments - - - - 0.7 - - - 0.7 ----- ----- ----- ----- ----- ----- ----- ----- -----Total comprehensiveincome/(expense) for the year - - 425.1 - (25.4) - (3.8) - 395.9 ----- ----- ----- ----- ----- ----- ----- ----- -----Transactions with ownersDividends (note 7) - - (225.8) - - - - - (225.8)New share capital issued - 0.4 - - - - - - 0.4Shares disposed of fromemployee share trust - - (0.1) 0.1 - - - - -Equity-settledshare-based payments - - (0.1) - - - - - (0.1)Exercise of share options - - (0.8) - - - - - (0.8) ----- ----- ----- ----- ----- ----- ----- ----- -----At 31 March 2011 499.8 1.3 691.0 - (3.1) 329.7 - 158.8 1,677.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- Year ended 31 March 2010 Other non-distributable reserves Share Cumulative Share premium Retained Treasury exchange Merger Other Revaluation capital account earnings shares
reserve reserve reserves reserve Total
£m £m £m £m £m £m £m £m £mAt 1 April 2009 499.8 0.7 420.2 (0.3) 15.9 313.0 36.6 158.8 1,444.7 Profit after taxation - - 403.5 - - - - - 403.5Other comprehensive incomeActuarial losses on definedbenefit pension schemes - - (125.4) - - - - - (125.4)Deferred taxation on actuariallosses on defined benefitpension schemes (note 8) - - 35.1 - - - - - 35.1Revaluation of investments - - - - - - 3.4 - 3.4Reclassification from otherreserves arising on disposalof financial asset investment(note 5) - - - - - - (36.6) - (36.6)Net fair value gains oncash flow hedges - - - - - - 0.9 - 0.9
Deferred taxation on net fair value gains on cash flow hedges - - - - - - (0.5)
- (0.5)Foreign exchange adjustments - - - - 6.4 - - - 6.4 ----- ----- ----- ----- ----- ----- ----- ----- -----Total comprehensiveincome/(expense) for the year - - 313.2 - 6.4 - (32.8) - 286.8 ----- ----- ----- ----- ----- ----- ----- ----- -----Transactions with ownersDividends (note 7) - - (226.2) - - - - - (226.2)New share capital issued - 0.2 - - - - - - 0.2Shares disposed of fromemployee share trust - - (0.2) 0.2 - - - - -Capital reorganisation* - - (16.7) - - 16.7 - - -Equity-settledshare-based payments - - 2.4 - - - - - 2.4 ----- ----- ----- ----- ----- ----- ----- ----- -----At 31 March 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 ----- ----- ----- ----- ----- ----- ----- ----- -----
* The increase in the merger reserve during the year ended 31 March 2010 is due to the redemption of the remaining £16.7 million of B shares in April 2009.
Consolidated statement of cash flows
Restated Year ended Year ended 31 March 31 March 2011 2010 £m £m Operating activities
Cash generated from continuing operations 784.6
945.5
Interest paid (165.8)
(201.0)
Interest received and similar income 3.1
6.5Taxation paid (46.5) (51.2)Taxation received - 50.5 ----- -----
Net cash generated from operating activities (continuing 575.4 750.3 operations)
-----
-----
Net cash generated from operating activities (discontinued 13.7
51.7operations) ----- ----- Investing activities
Proceeds from disposal of discontinued operations (note 5) 268.4
-
Transaction costs, deferred consideration and cash (97.9)
-
disposed
-----
-----
Proceeds from disposal of discontinued operations net of 170.5 transaction costs, deferred consideration and cash
-
disposed
Purchase of property, plant and equipment (475.4)
(500.4)
Purchase of increased shareholding in joint venture (5.0)
-
Purchase of other intangible assets (20.2)
(33.9)
Proceeds from sale of property, plant and equipment 9.8
3.9Purchase of investments - (0.8) ----- -----Net cash used in investing activities (continuing (320.3)
(531.2)
operations)
-----
-----
Net cash (used in)/generated from investing activities (52.7) 78.5(discontinued operations) ----- ----- Financing activities
Proceeds from issue of ordinary shares 0.4
0.2Proceeds from borrowings 94.1 265.0Repayment of borrowings (88.0) (337.9)Dividends paid to equity holders of the company (225.8)
(226.2)
Return to shareholders on capital reorganisation -
(16.7)
-----
-----
Net cash used in financing activities (continuing (219.3)
(315.6)
operations)
Net cash used in financing activities (discontinued (4.8)
(2.6)
operations)
-----
-----
Effects of exchange rate changes (discontinued operations) (1.3) 13.5
-----
-----
Net increase/(decrease) in cash and cash equivalents 35.8
(96.5)
(continuing operations)
-----
-----
Net (decrease)/increase in cash and cash equivalents (45.1)
141.1
(discontinued operations)
-----
-----
Cash and cash equivalents at beginning of the year 253.7
209.1
-----
-----
Cash and cash equivalents at end of the year 244.4
253.7
-----
-----
Cash generated from continuing operations
Restated Year ended Year ended 31 March 31 March 2011 2010 £m £m
Profit before taxation (continuing operations) 327.1
408.7
Adjustment for investment income and finance expense 253.1
359.1
-----
-----
Operating profit (continuing operations) 580.2
767.8
Adjustments for:Depreciation of property, plant and equipment 258.3
254.1
Amortisation of other intangible assets 32.2
26.0
Loss on disposal of property, plant and equipment 2.7
3.0
Loss on disposal of other intangible assets 2.8
-
Equity-settled share-based payments (credit)/charge (0.1)
1.7
Other non-cash movements - pension schemes curtailment gains arising on amendment of pension obligations
-
(87.3)
Changes in working capital:Decrease/(increase) in inventories 2.1
(1.6)
(Increase)/decrease in trade and other receivables (20.1)
12.1
Decrease in provisions and payables (73.5)
(30.3)
-----
-----
Cash generated from continuing operations 784.6
945.5 ----- -----Segmental reporting
The group now has one operating division for management purposes, being regulated activities. This forms the basis on which the operating segment information, presented in accordance with IFRS 8 `Operating Segments' is reported.
During the year, the group completed its non-regulated disposalprogramme and in accordance with IFRS 5 `Non-current Assets Held for Sale andDiscontinued Operations', the results of the relevant disposal groups havebeen reclassified from the previously reported non-regulated activitiesoperating segment to discontinued operations in the consolidated incomestatement and the comparative information has been restated accordingly (note5).
The segmental information presented has been restated to reflect the changes in the group. The elements of the previously reported non-regulated activities operating segment which have not been classified as discontinued operations no longer form a separately reportable segment as required by IFRS 8 and are therefore included within `all other segments'. Segmental information in respect of discontinued operations is included in note 5.
The regulated activities segment is as previously reported and includes the results of the regulated businesses of United Utilities Water PLC.
The `all other segments' category includes the results of United Utilities Property Services Limited, United Utilities Group PLC, the remaining non-regulated businesses not classified as discontinued and other group holding companies.
The disclosure correlates with the information provided to the board of directors of United Utilities Group PLC (board) for the purposes of assessing performance and allocating resources. The board reviews revenue, underlying operating profit and operating profit by segment, but assets and liabilities are reviewed at a consolidated level. Investment income and finance expense and taxation are managed on a group basis and are not allocated to operating segments.
Regulated All other GroupContinuing operations activities segments £m £m £mYear ended 31 March 2011Total revenue 1,477.3 48.0 1,525.3Inter-segment revenue (0.4) (11.6) (12.0) ----- ----- -----External revenue 1,476.9 36.4 1,513.3 ----- ---- ----Underlying segmental operating profit 580.1 16.3 596.4Restructuring costs (2.1) (1.0) (3.1)Other reorganisation costs (7.0) (6.1) (13.1) ----- ----- -----Segmental operating profit 571.0 9.2 580.2Investment income ----- ----- 2.8 Finance expense (255.9) -----Profit before taxation 327.1 -----Segmental reporting Regulated All otherContinuing operations activities segments GroupRestated £m £m £mYear ended 31 March 2010Total revenue 1,538.2 40.8 1,579.0Inter-segment revenue (0.8) (5.1) (5.9) ----- ----- -----External revenue 1,537.4 35.7 1,573.1Underlying segmental operating profit 700.8 5.5
706.3
Restructuring costs (15.8) (10.0)
(25.8)
Pension schemes curtailment gains arising onamendment of pension obligations 76.7 10.6
87.3 ----- ----- -----Segmental operating profit 761.7 6.1 767.8 ----- -----Investment income 6.2Finance expense (365.3) -----Profit before taxation 408.7 -----NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year ended 31 March 2011 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority.
The accounting policies, presentation and methods of computationhave been prepared on a basis consistent with the United Utilities Group PLCfull financial statements which are prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) as adopted by the European Union (EU)that are effective for the year ended 31 March 2011.
The comparatives for the consolidated income statement and consolidated statement of cash flows for the year ended 31 March 2010 have been restated to reflect the disclosure of the results of the non-regulated businesses disposed of during the year as discontinued operations in accordance with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations'(note 5).
The adoption of the following standards and interpretations, at 1 April 2010, has not had a material impact on the group's financial statements:
IFRIC 18 `Transfers of Assets from Customers'
The interpretation applies to all agreements in which an entityreceives from a customer an item of property, plant and equipment (PPE) (orcash to construct or acquire an item of PPE) that the entity must then use,either to connect the customer to a network, or to provide the customer withongoing access to a supply of goods or services, or to do both. Itsapplication is retrospective and has been applied to transfers of assets fromcustomers received on or after 1 July 2009. Hence, restatement of theinformation presented for the year ended 31 March 2010 is required.The impact in the year ended 31 March 2011 in respect of transfersof assets from customers which were not previously accounted for is to recordPPE of £59.8 million (2010: £36.8 million) with a credit of the same amount todeferred revenue within current and non-current trade and other payablescombined. The assets will be depreciated over their useful life and thedeferred revenue released over the same period.Certain transfers of assets from customers were previouslyrecognised immediately within revenue and operating expenses and havetherefore been reclassified to deferred revenue and PPE thereby reducing bothrevenue and operating expenses, as they would otherwise have been reported, by£3.6 million in the year ended March 2011 (2010: £2.5 million).
As a result of the adoption of this interpretation, the group has presented a restated consolidated income statement and consolidated statement of financial position for the year ended 31 March 2010.
IFRS 3 `Business Combinations'
This revised standard, issued in January 2008, is effective for periods commencing on or after 1 July 2009 and was endorsed by the EU on 12 June 2009. It will have a material impact on the group's financial statements only if it enters into any relevant transactions in the future.
`Improvements to IFRSs (2009)'
This is a collection of amendments to 12 standards as part of theInternational Accounting Standards Board (IASB) programme of annualimprovements with no material impact on the group's financial statements. Theimprovements were issued in April 2009, are effective for periods commencingon or after 1 January 2010 and were endorsed by the EU on 23 March 2010.
The condensed consolidated financial statements do not include all of the information and disclosures required for full annual financial statements, do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006 and should be read in conjunction with the group's annual report and financial statements for the year ended 31 March 2011.
The comparative figures for the year ended 31 March 2010 do notcomprise the group's statutory accounts for that financial year. Thoseaccounts have been reported upon by the group's auditors and delivered to theregistrar of companies. The report of the auditors was unqualified and did notinclude a reference to any matters to which the auditors drew attention by wayof emphasis without qualifying their report and did not contain a statementunder section 498(2) or (3) of the Companies Act 2006.
Going concern
The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group.
2. Investment income Restated Year ended Year ended 31 March 31 March 2011 2010Continuing operations £m £m Interest receivable 2.8 6.2 ----- -----3. Finance expense Restated Year ended Year ended 31 March 31 March 2011 2010Continuing operations £m £m Interest payable (271.3) (207.2)Net fair value gains/(losses) on debt and 19.2 (136.5)derivative instruments ----- ----- (252.1) (343.7)Expected return on pension schemes' assets 102.2
83.8
Interest cost on pension schemes' obligations (106.0)
(105.4)
-----
-----
Net pension interest expense (note 8) (3.8) (21.6) ----- ----- (255.9) (365.3) ----- -----The group has fixed interest costs for a substantial proportion ofthe group's net debt for the duration of the regulatory pricing period and hashedged currency exposures for the term of each relevant debt instrument. Thegroup has hedged its position through the use of interest rate and crosscurrency swap contracts where applicable. The economic underlying net financeexpense for the continuing group of £267.2 million (2010 restated: £223.7million) is derived by excluding from financing expense fair value gains orlosses on debt and derivative instruments, adding back the interest payableelement of fair value with respect to swaps and fair value option debt,including investment income, including capitalised borrowing costs andexcluding the net pension interest expense in relation to the group's definedbenefit pension schemes. Restated* Year ended Year ended 31 March 31 March 2011 2010Continuing operations £m £m Finance expense (255.9) (365.3)Net fair value (gains)/losses on debt and (19.2)
136.5
derivative instrumentsInterest on swaps and debt under fair value 5.7
(22.2)
option
Investment income (note 2) 2.8
6.2
Adjustment for capitalised borrowing costs (4.4)
(0.5)
Adjustment for net pension interest expense 3.8
21.6
(note 8)
-----
-----
Underlying net finance expense (267.2)
(223.7)
-----
-----
* The comparatives for the year ended 31 March 2010 have beenrestated to include capitalised borrowing costs within the calculation as thedirectors believe this provides a fairer presentation of underlying netfinance expense.4. Taxation Restated Year ended Year ended 31 March 31 March 2011 2010Continuing operations £m £m Current taxationUK corporation taxation 61.8 65.7Foreign taxation 1.9 0.9Prior year adjustments (29.1) (47.1) ----- ----- 34.6 19.5 ----- -----Deferred taxationCurrent year 25.7 48.8Prior year adjustments 11.3 (6.6) ----- ----- 37.0 42.2Change in taxation rate (99.0) - ----- ----- (62.0) 42.2 ----- ----- Total taxation (credit)/charge for the (27.4) 61.7year ----- -----The deferred taxation credit for the year ended 31 March 2011includes a credit of £99.0 million to reflect both the change enacted on 27July 2010 to reduce the mainstream rate of corporation taxation from 28 percent to 27 per cent and the subsequent change enacted on 29 March 2011 toreduce the mainstream corporation taxation rate further to 26 per centeffective from 1 April 2011. There will be a further phased reduction in themainstream rate of corporation taxation to 23 per cent by 1 April 2014. Thetotal deferred taxation credit in respect of this further reduction isexpected to be in the region of £150.0 million.
The prior year adjustments relate to agreement of prior years' UK taxation matters.
5. Discontinued operations and disposal of investments
Discontinued operations
During the year, the group completed its non-regulated disposalprogramme, which, including the prior year disposals, achieved a totalenterprise value of £579.2 million. In accordance with IFRS 5 `Non-currentAssets Held for Sale and Discontinued Operations' the relevant disposal groupsare therefore classified as discontinued operations in the consolidated incomestatement and consolidated statement of cash flows.
The businesses included in the group's non-regulated disposal programme and the related transactions were as follows:
* the principal non-regulated water interests in the United Kingdom and Europe to Veolia Water UK PLC on 9 November 2010;
* United Utilities Australia Pty Limited and related entities to a consortium led by Mitsubishi Corporation on 22 October 2010;
* the 50 per cent holding in its non-regulated gas and electricity meter ownership business, Meter Fit, to its existing joint venture partner, Marlin Acquisitions Limited on 1 October 2010; and
* the other non-regulated businesses, including its electricityoperations and maintenance business in the north west of England, its gas andelectricity metering installation contract with British Gas Trading and itsDerbyshire municipal solid waste (MSW) preferred bidder position and other MSWrelated interests.
The group has retained its holding in AS Tallinna Vesi (Tallinn Water) and its economic interests in the Middle East.
The results of the discontinued operations up until the point of disposalduring the year ended 31 March 2011 and comparative year, which have beendisclosed separately in the consolidated income statement, as required by IFRS5, are as follows: Year ended Year ended 31 March 31 March 2011 2010 £m £m Revenue 353.4 863.5 Employee benefits expense:- excluding pension schemes curtailment gains arising on (88.6)
(206.1)
amendment of pension obligations and restructuring costs - pension schemes curtailment gains arising on amendment
- 5.0of pension obligations- restructuring costs (3.8) (4.9) ----- -----Total employee benefits expense (92.4)
(206.0)
Other reorganisation credits 7.0
-Other operating costs (223.5) (580.7)Other income (2.4) (2.0)Depreciation and amortisation expense (6.3) (24.7) ----- -----Operating profit 35.8 50.1 Investment income and finance expense (7.0)
(10.4)
Profit on disposal of investments -
36.6
Evaluation and disposal costs relating to discontinued (5.0) (10.8)operations ----- -----Profit before taxation 23.8 65.5 Current taxation charge (1.8) (2.5)Deferred taxation charge (7.4) (6.5) ----- -----Taxation (9.2) (9.0) ----- ----- Profit after taxation 14.6 56.5 -----Profit on disposal of discontinued operations after 89.1
taxation
-----
Total profit after taxation from discontinued operations 103.7
-----The total assets and liabilities disposed in the year and the profit ondisposal were as follows: £m -----Total proceeds* 268.4 ----- Property, plant and equipment (176.7)Goodwill (17.9)Other intangible assets (119.6)Investments (6.6)
Non-current trade and other receivables
(59.4)
Inventories
(11.7)
Current trade and other receivables
(203.1)Cash and short-term deposits (50.0)Trade and other payables 230.8Joint venture debt 228.7Provisions 17.9
Retirement benefit obligations (note 8)
7.3Deferred taxation assets (4.0) -----Net assets disposed of (164.3) -----
Transaction and other costs of disposal
(45.9)
Reclassification from other reserves arising on disposal of financial asset
6.6
investment
Reclassification from other reserves arising on disposal of subsidiaries
(1.8)
Reclassification from cumulative exchange reserve arising on disposal of
26.1
subsidiaries
-----
Profit on disposal of discontinued operations after taxation
89.1
-----
* Total fair value of proceeds comprised cash of £268.4 million.The enterprise value of £447.1 million incorporates cash considerationreceived added to the market value of the net debt disposed of which at thedate of disposal totalled £178.7 million. Combined with the cash considerationreceived from the disposal of investments in the prior year of £132.1 million,the non-regulated disposal programme achieved a total enterprise value of£579.2 million.
Disposal of investments
As reported in the consolidated financial statements of United Utilities Group PLC for the year ended 31 March 2010, during the prior year the group disposed of its 11.7 per cent economic interest in Manila Water Company (MWC) and of its 15.0 per cent economic interest in Northern Gas Networks Holdings Limited (NGN).
MWC NGN Total £m £m £mYear ended 31 March 2010Proceeds 46.3 85.8 132.1Carrying value of investment (46.3) (85.8) (132.1)
Reclassification from other reserves arising on disposal of 36.6 -
36.6
financial asset investment
----- -----
-----
Profit on disposal of investments 36.6 -
36.6 ----- ----- -----6. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit after taxation by the following weighted average number of shares in issue:
Basic Diluted million millionYear ended 31 March 2011 681.6 681.9Year ended 31 March 2010 681.5 682.0The difference between the weighted average number of shares used in the basicand diluted earnings per share calculations arises due to the group'soperation of share-based payment compensation arrangements. The differencerepresents those ordinary shares deemed to have been issued for noconsideration on the conversion of all potential dilutive ordinary shares inaccordance with IAS 33 `Earnings per Share'.
The basic, diluted and underlying earnings per share for the current and prior year are as follows:
Restated Year ended Year ended 31 March 31 March 2011 2010From continuing and discontinuedoperationsBasic 67.2p 59.2pDiluted 67.2p 59.2p From continuingoperationsBasic 52.0p 50.9pDiluted 52.0p 50.9p Restated Year ended Year ended 31 March 31 March 2011 2010 £m £m Profit after taxation - continuing and discontinued 458.2
403.5
operations
Adjustment for profit after taxation from discontinued (103.7) (56.5) operations
-----
-----
Profit after taxation - continuing operations 354.5 347.0 ----- -----7. Dividends Year ended Year ended 31 March 31 March 2011 2010 £m £mDividends relating to the year comprise:Interim dividend 68.2 76.1Final dividend 136.3 157.6 ----- ----- 204.5 233.7 ----- ----- Year ended Year ended 31 March 31 March 2011 2010 £m £mDividends deducted from shareholders'equity comprise:Interim dividend 68.2 76.1Final dividend 157.6 150.1 ----- ---- 225.8 226.2 ----- -----The proposed final dividends for the years ended 31 March 2011 and31 March 2010 were subject to approval by equity holders of United UtilitiesGroup PLC and hence have not been included as liabilities in the consolidatedfinancial statements at 31 March 2011 and 31 March 2010 respectively.The final dividend of 20.00 pence per ordinary share (2010: final dividend of23.13 pence per ordinary share) will be paid on 1 August 2011 to shareholderson the register at the close of business on 24 June 2011. The ex-dividend datefor the final dividend is 22 June 2011.The interim dividend of 10.00 pence per ordinary share (2010: interim dividendof 11.17 pence per ordinary share)was paid on 2 February 2011 to shareholders on the register at the close of business on 17 December 2010.
8. Retirement benefit obligations
The main financial assumptions used by the actuary to calculate the defined benefit obligations of the United Utilities Pension Scheme (UUPS) and the United Utilities Group PLC section of the Electricity Supply Pension Scheme (ESPS) were as follows:
Year ended Year ended 31 March 31 March 2011 2010 %pa %pa Discount rate 5.50 5.70Expected return on assets - UUPS 5.65 6.20Expected return on assets - ESPS 6.10 6.30Pensionable salary growth 3.35 3.30Pension increases 3.35 3.30Price inflation 3.35 3.30
The main financial assumptions used by the actuary to calculate the defined benefit obligations of the Northern Gas Networks Pension Scheme (NGNPS) prior to the date of disposal were as follows:
Year ended 31 March 2010 %paDiscount rate 5.70Expected return on assets 6.10Pensionable salary growth 4.30Pension increases 3.30Price inflation 3.30The net pension (expense)/income before taxation for continuingoperations in the income statement in respect of the defined benefit schemesis summarised as follows: Restated Year ended Year ended 31 March 31 March 2011 2010 £m £mContinuing operationsCurrent service cost (11.9) (16.5)Curtailments/settlements- arising on reorganisation* (3.4) (9.3)- arising on amendment of pension obligations - 87.3Past service cost - (2.8) ----- -----Pension (expense)/income (charged)/credited (15.3) 58.7to operating profit ----- -----Expected return on schemes' assets 102.2
83.8
Interest on schemes' obligations (106.0)
(105.4)
-----
-----
Net pension interest expense charged to (3.8) (21.6)finance expense (note 3) ----- ----- Net pension (expense)/income (19.1) 37.1
(charged)/credited before taxation
-----
-----
* Curtailments arising on reorganisation of £2.7 million (2010restated: £9.3 million) are included within restructuring costs within totalemployee benefits expense and £0.7 million (2010: £nil) are included withinother reorganisation costs.
The net pension income/(expense) credited/(charged) before taxation for discontinued operations in the income statement in respect of defined benefit pension schemes is summarised as follows:
Year ended Year ended 31 March 31 March 2011 2010 £m £mDiscontinued operationsCurrent service cost (3.5) (9.5)Curtailments/settlements- arising on reorganisation 3.0 (7.9)
- arising on amendment of pension obligations -
5.0
-----
-----
Pension expense charged to operating profit (0.5)
(12.4)
-----
-----
Expected return on schemes' assets 6.9
10.3
Interest on schemes' obligations (6.6)
(11.9)
-----
-----
Net pension interest income/(expense)credited/(charged) to investment income and 0.3
(1.6)
finance expense
Curtailment/settlement arising on disposal andcredited to profit on disposal of discontinued 7.3
-operations (note 5) ----- -----Net pension income/(expense) credited/(charged) 7.1 (14.0)before taxation ----- -----
Employee related pension costs have been charged to operating profit within discontinued operations where the employing entity has been included as a discontinued operation. Pension interest income/(expense) has been included within discontinued investment income and finance expense where the underlying pension obligation has been disposed of during the year. Curtailments/settlements arising on the transfer of employees' pension obligations with businesses disposed of during the year are included within the profit on disposal of discontinued operations (note 5).
The reconciliation of the opening and closing net pension obligations included in the statement of financial position is as follows:
Year ended Year ended 31 March 31 March 2011 2010 £m £m At the start of the year (271.3) (213.1)
(Expense)/income recognised in the income statement - continuing operations
(19.1)
37.1
Income/(expense) recognised in the income statement - discontinued operations
7.1
(14.0)
Contributions paid 133.0
44.1
Actuarial losses gross of taxation (44.7) (125.4) ----- -----At the end of the year (195.0) (271.3) ----- -----The closing obligation at each reporting date is analysed asfollows: Year ended Year ended 31 March 31 March 2011 2010 £m £m Present value of defined benefit (1,912.9) (2,182.2)obligationsFair value of schemes' assets 1,717.9 1,910.9 ----- -----Net retirement benefit obligations (195.0) (271.3) ----- -----9. Related party transactions
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
The following trading transactions were carried out with thegroup's joint ventures: Year ended Year ended 31 March 31 March 2011 2010 £m £mGroupSales of services 44.2 92.9Purchases of goods and services 9.5 4.8 ----- -----
Included within the table above are amounts relating to entities disposed of during the year ended 31 March 2011.
Amounts owed by and to the group's joint venturesare as follows: Year ended Year ended 31 March 31 March 2011 2010 £m £mGroupAmounts owed by related parties 2.7 19.2Amounts owed to related parties - 0.9 ----- -----
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled in accordance with normal credit terms. The group has issued guarantees of £5.9 million (2010: £126.8 million) to its joint ventures.
A £0.3 million provision has been made for doubtful receivables in respect of the amounts owed by related parties (2010: £0.4 million). No expense has been recognised for bad and doubtful receivables in respect of the amounts owed by related parties (2010: £0.3 million).
10. Contingent liabilities
The group has entered into performance guarantees as at 31 March 2011, where a financial limit has been specified of £104.5 million (2010: £201.2 million).
11. Events after the reporting period
There were no events arising after the reporting date that require recognition or disclosure in the financial statements for the year ended 31 March 2011.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The responsibility statement below has been prepared in connection with the company's full annual report for the year ended 31 March 2011. Certain parts thereof are not included within this announcement.
Responsibility statement
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
* the management report, which is incorporated into the directors' report,includes a fair review of the development and performance of the business andthe position of the company and the undertakings included in the consolidationtaken as a whole, together with a description of the principal risks anduncertainties that they face.This responsibility statement was approved by the board on 25 May 2011 andsigned on its behalf by:Steve Mogford Russ HouldenChief Executive Officer Chief Financial Officer25 May 2011 25 May 2011
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